Dürr Aktiengesellschaft (DUE) Earnings Call Transcript

Welcome to the Durr Conference Call. Ralf Dieter, CEO; and Carlo Crosetto, CFO, of Durr AG represent the DURR Group's preliminary figures of 2019, followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Durr AG.

Yes, thank you, operator, and ladies and gentlemen, good afternoon, or good morning for those of you in the U.S., and welcome, everybody. It is a great pleasure to present to you Durr's preliminary figures for 2019, and I am joined by my colleague, Carlo Crosetto, here for the last time. As you know, Carlo has decided to leave us on February 29th, which is I think on Saturday.

Tomorrow, basically.

Basically tomorrow. I will be taking over his duties on an interim basis, until Mr. Heinrich, our new CFO, is finally on board. He will be assuming his position effective August 1, 2020, at the latest. So, now to our results. Our year-end closing is already stable enough to be able to give you the key figures today, and I start, as always, by summarizing the highlights and providing an overview of our results for 2019. Carlo then will give you more insight into our financials, and I then represent our new midterm strategy, share our divisions' performance with you, and give you our initial outlook for 2020, and also, a first indication how we see 2021. Let's start on Page 3. In 2019, we achieved many milestones. Incoming orders and sales reached all-time highs. Q4 was very strong, especially in light of the weak economic environment. Our results for 2019 are above our revised guidance of November 2019. The operating EBIT margin reached 6.7%, which is only a slight decline over the previous year, and only a slight miss of our first guidance from February 2019, and the guidance was [ 7.027.5 ]%. Cash flow was clearly above our expectations, and services exceeded the EUR 1.1 billion mark for the first time in our history, and increased 8% year over year. At HOMAG, we will be implementing the previously announced measures in 2020. HOMAG's order intake stabilized in the second half of 2019, and he plan measures should [indiscernible] their effect in 2021. Last but not least, we are pushing our industry [ 4.0 ] activities strongly throughout the whole group. Looking at 2020, we expect sales and reported earnings growth and a further cash flow increase, but we also see a more challenging and [ unsecure] business environment ahead of us. For '21, as a first indication, we expect an EBIT margin before extraordinary effects between 7.0% and 7.5%, after an estimate of 6.2% to 6.7% for 2020. Let's turn to Page 4 and have a look at our results. Here, the incoming orders and sales increased in 2019 by 4% respectively 1%. EBIT before extraordinary effects declined only by 4%, and operating cash flow was up by 6%. On Page 5, we provide an overview of our Q4 performance, which was strong. Incoming orders increased by 3%. The operating EBIT margin was up by 0.6 percentage points, and operating cash flow by 21%. Net income was impacted by extraordinary costs of EUR 50 million. Page 6 compares the Durr Group's targets for 2019 and the figures actually achieved. And we reached our revised targets in 2019, and surpassed our EBIT margin and cash flow goal. Order intake, on Page 7, reached more than EUR 4.0 billion for the first time. Order intake was outstanding in North America, underpinned by several contracts awarded in the EV sector in particular. And by contrast, order intake was down in China and Germany. HOMAG's China business improved from a lower level, and the emerging markets total contributed 41% of total new orders, down from 46% in 2018. Carlo will now take you through our financials. Carlo?

Yes, thank you, Ralf. Yes, good morning or good afternoon, also from my side. Ladies and gentlemen, before I start with the next page, so Page 8, I wanted to actually refer to Page 31 of this presentation. Here we give an overview of the impact of IFRS 16, which was obviously applied in the preparation of these financials so you can see all these effects there. These changes [ often ] have a greater impact on the comparability of the figures regarding EBITDA, cash flow, and then financial status, but obviously little or no impact on net profit and free cash flow. So if we move now back to Page 8, I will then continue with the flow. The cost of sales increased by 2%, while sales rose by just 1%. It should, however, be kept in mind that it includes higher extraordinary expenses in 2019 that we did not have at the same level, of course, as in 2018. Gross operating profit was down in 3 out of 5 divisions, meaning that the gross margin shrank by 0.7 percentage points to 21.4% overall. We also scaled back R&D expenses after the sharp increases in the previous years. However, just to be clear, there was really no cuts in spending on important innovations, such as digitalization and software applications. Our SG&A costs rose, particularly as a result of the higher selling expenses. The 7% increase, which you see here, was due to the full-year consolidation of MEGTEC, as well as higher expenditure on trade fair activities and our open house event, which took place last year and also takes place every two years, so you need to keep that in mind. Our reported EBIT of [ EUR 196 million ] included extraordinary expenses of EUR 67 million, compared to last year's figures of EUR 41 million only. I will describe these extraordinary items in detail later, further on. The financial result decreased by EUR 7 million, mainly due to IFRS 16 effects of EUR 3 million, and due to a one-off expense of EUR 5 million for the purchase of a previously-leased real estate asset here in Bietigheim-Bissingen. At 26%, our tax rate reached the same low level as in the previous year. With EUR 130 million, our earnings after tax came in at the top end of the guidance range of between EUR 115 million and EUR 130 million that we had defined and communicated back last November. So, given these financials, earnings per share reached EUR 1.79, compared to EUR 2.27 in 2018. As mentioned before, on Page 9 you can find the detailed overview of the extraordinary effects of these last two years. The breakdown will also help you better understand the reported EBIT and operating EBIT guidance we will be giving for this year's financials. For 2020, we estimate total extraordinary effects of EUR 40 million, and this EUR 40 million include our EUR 70 million purchase price allocation effects. We plan in nearly every division certain streamlining or improvement measures. Let's now move on to Page 10. Net financial status declined by EUR 25 million on a comparable basis, so from minus EUR 74 million to minus EUR 99 million, to be precise. After a very strong fourth quarter, the cash flow from operating activities widened by 6% in the full year. This improvement was stronger than we had been expecting back in November 2019. As you can also see in the chart, our cash flow was influenced by a full-year basis, an increase of EUR 65 million in net working capital. In the fourth quarter alone, we were able to reduce net working capital by EUR 146 million, and we assume that the net working capital will show a slight increase in 2020, probably. Accordingly, cash flow should continue to improve in the year 2020. Page 11 deals in detail with the comparison of our net working capital. Like for like, our net working capital increased at a similar volume as in 2018. And within net working capital, inventories declined by EUR 26 million, as expected. In 2020, we plan to reduce inventories even further. The overview on Page 12 of our work in progress in comparison to progress billings shows a reduction of our payment balance by EUR 63 million to minus EUR 12 million. In other words, the net prepayment overhang of our [ customer ] is nearly gone. We now consider a level between minus EUR 50 million and plus EUR 50 million, so this range, to be normal in the future. Although the total balance is now close to zero, so slightly negative, as mentioned on many previous occasions, we are not planning to refinance our customers' factories. Page 13 shows further key financial items. Equity grew by EUR 51 million to about EUR 1 billion for the first time. The equity ratio shrank to 26.9%, particularly due to the inclusion of leasing activities, which caused our total assets to rise by more than EUR 19 million. The increase in capital employed was also due to the inclusion of leasing activities. Our cash position, including time deposit, increased to EUR 822 million, as a result of the schuldschein bonded loan issued last summer. Just to remind you, with the sustainability schuldschein, Durr was the first company ever to issue a schuldschein whose coupon is linked to Durr Group's sustainability rating, a sign that we are taking sustainability quite seriously. Return on capital employed dropped to 17%, down from 24% in the previous year. This was due to both higher capital employed, as well as a lower EBIT. However, at 17%, we're still far above our cost of capital and compare well with other peer group. Page 14 shows CapEx of EUR 103 million, which represents an increase by EUR 20 million -- EUR 28 million, excuse me -- compared to 2018. The sole reason for the increase was basically the inclusion of leasing activities, and otherwise, it would be probably pretty much the same. A key item of the 2019 CapEx agenda was the modernization of our IT systems, with the goal of digitalizing our process even further. And across the group, we expect CapEx to remain around EUR 95 million to EUR 105 million also in the coming years. I will now hand back to Ralf Dieter, who will outline our midterm strategy, the division performance, and of course provide you with our outlook for the year 2020.

Yes, thank you, Carlo. Let's turn to Page 15, ladies and gentlemen. Our midterm strategy is the roadmap for profitable growth and for raising earnings to top level in the international mechanical and plant engineering sector. The strategy is linked to four medium-term key figure targets, first, higher profitability. The EBIT margin is to increase, step by step, to at least 8% by 2023. We consider this level to be adequate, in view of the increased weighting of mechanical engineering business in our portfolio. Second, sales growth. Organic sales growth is expected to average 2% to 3% per year, and thus match the expected growth in production output and demand in our markets and industries. Third, attractive return on capital. We are looking for return on capital employed of at least 25%, underpinned by high EBIT contributions from mechanical engineering and low capital employed in plant engineering. Fourth, increase in the proportion of service business. Service business, with its higher margins, is to account for up to 30% of group sales, and we are close to that already. An efficient service business secures the group's earnings and increases customer satisfaction. In order to achieve our goals and expand our leading position in the world market, we are continuing to push ahead with digitization via digital@Durr as a central strategic element. In addition, we are positioning ourselves to optimum effect in four strategic fields: global presence, innovation, efficiency, and life cycle services. We have also defined four [indiscernible] supporting functions that are particularly important for the successful implementation of our midterm strategy: so sustainability, mergers and acquisitions, finance organization, and people development. On Page 16, we describe the four pillars of our strategy in more detail, first global presence. Our business is international, and we have a global footprint with 112 locations in 34 countries. Strong localization reduces our risk to trade tariffs and gives us better market proximity in addressing our [ loan ] customers' needs. To mention here is especially the local engineering. This means that we will be adapting products even more closely to meet the specific requirements of the individual reach in the markets and producing them on a local basis. This is accompanied by a global strategy for R&D and supply chain management. Each location is to contribute its own strengths to the group network in the best possible way. Centers of competence for specific technologies and products have been installed in the U.S., Germany, China, and India. And with respect to production, we will be realigning our specialized product hubs that manufacture and assemble our products for the global market on a cost-effective, or cost-efficient, basis. Looking ahead over the next few years, Asia offers the greatest growth potential for us. For this reason, we are systematically aligning our organizational structures and product strategy to meet the needs of this market. Whereas we already have a strong footprint in China and India, we will be additionally expanding our position in the growth markets of Southeast Asia. Innovation is a pillar of our market leadership, and the group's R&D agenda has two drivers. Our innovations aim to enable sustainable production processes and unleash added value by means of production efficiency. In this way, we are addressing our customers' two most important requirements. Our product development activities aim at achieving lower energy and resource consumption, reduced emissions, and lower unit costs in production. A further aspect is the flexibilization and modulization of factories. What the latter means is that we are developing scalable production systems that can be simply adjusted to the market demand. Efficiency is the third pillar of our strategy. We constantly adjust and digitize our processes to boost productivity. One key aspect of this implies harnessing the synergies within the group, and this includes uniform processes, shared services, the use of economies of scale, and end-to-end IT applications. Efficiency as a strategic field also includes an ongoing portfolio analysis on the contribution made by our business activities and identifying the areas in which adjustments are necessary. We will perform a further optimization in the course of 2020. Let's have a look at the fourth strategic pillar. The service business has strategic relevance in two aspects, as it generates higher margins than new business and directly strengthens customer loyalty. In order to achieve a sustained share of service business of around 30% of group sales, we are increasingly aligning our service activities to the entire lifecycle of the machinery and systems we install. In doing so, we have three main thrusts: installed bases, expansion of spare part business, and brownfield modernization and expansion. Page 17 shows how our service business performed in 2019. So, its revenues rose by a significant 8% and exceeded the EUR 1.1 billion mark for the first time. Service margins remained at a very satisfactory level, and looking ahead to 2020, service business is expected to grow in the low-single-digit volume, due to an unexpected weaker utilization at our customers' factories. Let us now move to Page 18, which presents an important area of our future business, namely, alternative drives. We have brought together a few statements made by some of the OEMs. Their goals for the next few years are very ambitious, and new production facility must be installed or existing ones must be modernized and rendered more flexible for these goals to be reached. And in 2030, about 60% of all vehicles produced worldwide are to be fitted with alternative drives. And on Page 19, that's [indiscernible] the order intake that we have specially generated with EV manufacturers. Order intake rose by 44% to EUR 387 million, accounting for around 10% of group order intake. The traditional OEMs are being joined by new producers in China and the United States that have never built conventional vehicles before but want to gain market share with EVs. Over 20 such EV pioneers, including names such as Byton, Tesla, and Lucid, ordered production technology from Durr in 2019. Before providing a brief overview of our specific range for EV production on Page 20, I would like to put into proper perspective the so far relatively low order intake for battery production. In this area, we are only offering certain applications, like gluing, for which we hold specific expertise. We have several projects in the pipeline, as batter production plans are also being planned in the West. On Page 20, you can see that in addition to painting systems, we offer further technologies required for the production of electric vehicles, such as final vehicle assembly. Assembly can be automated to a greater extent, as the drive train fitted to electric vehicles is not as complex compared with their conventional counterparts. So, Durr has already installed automated assembly systems for well-known EV OEMs. Demand is likely to increase as EV production volumes start rising. One key point in the assembly of electric vehicles is the marriage station. This is when the battery is automatically fitted to the underbody, using Durr technology. Up to 36 screws are perfectly positioned at the screw-in point and fully automatically closed. Durr also offers systems for fitting batteries [ with coolant ] and gluing and sealing of battery packs and battery systems. Electromobility also poses new challenges for testing technology on finished vehicles, particular with respect to safety. Using Durr testing systems, it is possible to make sure that the high-voltage systems in electric vehicles do not causes any risks. And Durr subsidiary, Schenck RoTec, provides support for the production of electric motors. One example is the specially developed eTENO balancing system that measures and eliminates imbalances in the electric rotors for [ eDrives ]. Schenck RoTec also offers their Centrio spin tests, then, for material testing for electric motors. In this way, it is possible for OEMs to determine the maximum rotational loads to which their drives may be exposed. The automotive industry requires additional battery production capacity to achieve large volumes in electromobility. Here as well, the Durr Group offers technologies for different steps along the production chain. Its subsidiary MEGTEC has a system for coating electrodes for lithium-ion batteries. The process is unique, in that is simultaneously coats both sides of the base material, the metal for it, with [ cutout and anode ] material. So, Durr supports the production of battery models with high-precision application technology. One example is insulation can painting, a coating system for the thermal and electrical insulation of battery cells. A solution made by Durr is also available for battery bonding, in which the coated battery cells are arranged contiguous to each other and bonded together in a battery module, after which a thermal paste known as the gap filler is applied to dissipate the heat generated when the battery is charged and discharged. And in the final step, the battery cover is also glued on to the module. Let us now turn to the performance of the individual divisions, and as usual, I will start with Paint and Final Assembly Systems, on Page 21. This division again a healthy growth in order intake in 2019 of 3%, despite the distortion in the automotive industry. With order intake coming to EUR 509 million, Q4 was the strongest quarter for the year. Full-year sales rose by 1%. Book-to-bill came in at 1.1. EBIT improved by 11% to EUR 62 million, as expected, due to the positive effects of our FOCUS 2.0 optimization program. At 6.9%, the EBIT margin was particularly strong in Q4, and for 2020, we forecast an ongoing margin increase at the operational level, but as already mentioned, we expect one or the other streamlining measures. Automotive Fitting and Testing System with sales 2019 of EUR 179 million, and with EBIT of EUR 16.3 million, has been transferred to Paint and Final Assembly systems as of 1st of January, 2020. This was done in order to bundle automotive final assembly-related activities and increase synergies in front of the customer. Turning to Page 22, order intake for application technology rose another 1% in 2019, and at EUR 641 million reached another record. The fact that EBIT dropped by 16% to EUR 57 million was partly due to lower sales and mainly due to the inclusion of an extraordinary expense of EUR 6 million in connection with a legal dispute. Adjusted for extraordinary expenses, the EBIT margin came to 10.7%, thus reaching the target corridor of 10% to 11%. With higher sales in the non-automotive business, we were able to reduce the losses within our Industrial Painting Technology. We expect stable business for the division in 2020, although Spare Part business is likely to contract slightly, due to potentially lower utilization of some of our customer plants. In connection with Clean Technology Systems, on Page 23, it is important to bear in mind that the MECTEC/Universal Group was consolidated for the first full year in 2019. The year before, it was only consolidated from October 5th, and the sharp 74% rise in new orders is primarily due to this effect. But, however, Clean Technology Systems on a comparative basis also posted organic growth in order intake in the high single digits. And in fact, like-for-like sales rose at a rate in the low double digits. The division's earnings achieved a clear turnaround. Despite the purchase price allocation expenses, EBIT climbed to EUR 12 million, with the EBIT margin widening to 3.1% and an operating EBIT margin of 5.9%. Both [indiscernible] have lived up to our expectations, and by contrast, the restructuring-related loss of EUR 15 million had arisen in the previous year, so in 2018. The integration of the MEGTEC/Universal Group has been largely completed and has progressed very well. We expect a further increase in earnings in 2020, although business will temporarily tend to remain flat. So, Page 24 outlines performance of Measuring and Process Systems. The division posted a 6% increase in order intake to EUR 426 million in '19, although performance in the fourth quarter was muted. By contrast, sales dropped by 10%. One reason for this was the moderate order intake in the fourth quarter of 2018 and parallel the extraordinary high sales realization. In tandem with high R&D expenses for digitization, the substantial decline in sales caused EBIT to contract by 35% to EUR 39 million. At 9.4%, the EBIT margin did not quite reach the target corridor of 10% to 11%. However, it did reach a very good figure of 12.4% in the fourth quarter. The outlook for the division for 2020 must be seen in the light of the move of Automotive Fitting and Testing to the division Paint and Final Assembly Systems. And looking forward, the division will be composed only of the activities of the Schenck Group, including the Schenck Technology and Industrial [indiscernible]. Now let's have a look at Woodworking Machinery and HOMAG on Page 25. HOMAG noticed a pronounced decline in demand in its business within the furniture industry in 2019. This particular impacted system business with integrated production lines. The division's order intake dropped by 9% to EUR 1.220 million, but was only slightly down on the previous year's figure in the second half of the year. In China, demand was initially, again, weak. But however, a large order could be placed in the third quarter and caused full-year order intakes to rise. HOMAG was able to keep its sales nearly stable at EUR 1.79 million -- sorry, EUR 1 billion. In response to the challenging market environment, structure overcapacities and process shortcomings, we announced a package of measures in the fourth quarter of 2019 aimed at achieving significant efficiency improvements in this division. The package entails non-recurring expenses of EUR 40 million, of which around EUR 37 million arose in the fourth quarter of '19. Further, EUR 9 million [ stemmed ] from purchase price allocations effect for the HOMAG group brings the extraordinary effect for HOMAG to a total of EUR 45 million in '19. EBIT dropped by 57% to EUR 37 million, primarily as a result of the extraordinary effects, translating into an EBIT margin of 2.9%, down from 6.6% in the previous year. Operating EBIT fell by 13%. The main reasons for this were lower revenues, a changed sales mix, as well as shortfalls in capacity utilizations, higher costs, and partially inefficient processes. The operating EBIT margin came to 6.5%, down from 7.3% in the previous year. Page 26 describes these efficiency measures. Once implemented, they will result in the reduction of about 7% in assembly and lead times per year. The major aspect is a change in our operational approach, aimed at overcoming historical [indiscernible] processes with a lot of interfaces in inefficiencies. We will be introducing a seamless ERP process across all functions, from order to cash, and the efficiency improvement of our sales and spare part logistics will also generate additional benefits. All in all, we expect optimization effects and cost savings of around EUR 20 million from 2021 onwards. On Page 27, we again set out the reasons why we are convinced that HOMAG will be able to widen its worldwide market share from currently around 30%, in several steps, to as much as over 40% over the next few years. This will of course result in a disproportionately increase in sales. The main drivers here are China, with the expansion of local production, intensified service business, the strengthening of our leadership in digitization, the product standardization that we have initiated, and improvement in production processes. Now coming to our group outlook on Page 28, as things currently stand, we expect sales of EUR 3.9 billion to EUR 4.1 billion in 2020. This means that sales will probably be higher than in '19. Order intake is expected to come to EUR 3.8 billion to EUR 4.1 billion. Adjusted for extraordinary effects, the group EBIT margin should come to 6.2% to 6.7%, which means that we plan slightly lower operational results. The reported group EBIT margin is expected to reach 5.2% to 5.7%, which will represent an increase compared to the previous year. And at this stage, we project extraordinary costs of around EUR 40 million in 2020, of which around EUR 17 million will come from PPA effects. We expect rising cash flows in tandem with a stable capital spending in 2020, and net working capital should increase only slightly. A detailed outlook can be found on Pages 45 and 46 of this presentation. And please bear in mind that the EBIT outlook in these divisions will be affected by some streamlining measures. And the outlook for 2020 is based on the assumption that the overall economic situation will not deteriorate any further, and that political conflicts will not cause any further instabilities. The effects of the corona epidemic have been taken into account in the outlook as far as they can be estimated, in the light of the current situation of today. The epidemic looks to impact earnings negatively in the first quarter; however, the board of management currently assumes that the negative earnings effects from corona can be offset for the most part in the further quarters of the year, provided that the situation largely returns to normal in the second quarter. At this point, we would like to provide an initial indication for '21, as we believe that the efficiency improvement measures that we have introduced should have a more positive impact from that year onward. So, accordingly, we project an EBIT margin before extraordinary effects of 7.0% to 7.5% for 2021, up from an estimated range of 6.2% to 6.7% for 2020. So, ladies and gentlemen, thank you very much for your attention so far, and I would like now to hand over to [indiscernible], and we are happy to answer your questions.

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] One moment, please, for the first question. And the first question is from [indiscernible] from [indiscernible].

My first question would be on the statement from the coronavirus. And of course, it's very difficult for you to quantify any full-year impact or scenario, but can you help us understand what the current situation for you looks like? During the first weeks of February, by about how much your output in your own plants and in the old Durr, and also at HOMAG are down? And also, how bad has this really -- of any your particular plants has been affected more significantly than others during the last weeks?

Mr. [indiscernible], thank you for this question. As I think I mentioned, we are in daily contact. The situation is as follows: in all our -- so in all [indiscernible] and in Durr, we presumed [indiscernible] production again, was it two weeks ago after -- 17th of February exactly, after. So, we had this Chinese New Year, and then the additional time of closure. But it's not fully production yet, because we have about 40%, 50% of the people could come to work, and now it's increasing. The expectation is now that in the first week of March, we will be more fully loaded again with all of these people, and production should normalize in the course of March. So, our customers on the OEM side also started production again, and you could see also some press releases. Like, BMW said they are full production and no problems. But we anticipate today -- and it's not easy to calculate, but we have a rough calculation about that. And as I said before, we -- if things go back to normal in March, April, then we have good hope that we can recover most of the, let's say losses in terms of revenue and profit, during the course of the year. But from today perspective, we estimate it's about EUR 50 million to EUR 70 million we are losing in terms of sales and about EUR 10 million EBIT, so in that range, 8 to 12, something like that.

Okay, great, that's very clear.

But these numbers we'll use, you will see in the first quarter, no? [indiscernible]. It's very imprecise, although we tried, because we were not surprised that you're asking this and we did our best to calculate it.

But the assumption is that we -- as things go back to normal, as Mr. Dieter was saying, that we should recover most of these revenues and profit development in the course of the year. And this has already been included, what we know today, in the current guidance. But of course, we don't know what's going to happen tomorrow or after tomorrow.

It can be one week a totally different situation, but who knows? Yes.

Thanks for the detailed, clear answer. On the HOMAG restructuring and streamlining, I think you've booked the charges in Q4, which suggests that you've made progress on agreeing with employees and reducing the capacities. Can you also give us, let's say, a slightly softer comment on how satisfied you are with the progress of the other aspects of the streamlining? I think you also wanted to -- that you were [indiscernible] to change processes and overall efficiency. Can you just give us an update as how the HOMAG organization has responded to all the changes, redundancies, and new ways of doing things?

As you know, HOMAG has gone through a lot of changes since we took over. When we took over, it was really a bunch of companies, and then we just had one HOMAG as a first initiative, which was already changing a lot. So, people can -- for the new process, we could get now enough support so the people are now convinced that this would be a better way of work. But they also know that it's a very difficult job to do this besides their normal job, but we have to do it, and they are committed to do so, so I'm quite optimistic on that. Also what is very good that even the plan [indiscernible], which we published to be [indiscernible], the people there are working. We had not too much friction about that, and we are in good negotiations with the working councils and the unions to find -- how do you call it in English -- social solutions for the people to have a smooth situation as an outcome. And so, that looks quite promising in terms of the [indiscernible] executing on plan.

The next question is from William Turner of Goldman Sachs.

I just have a couple of questions. My first question is on your medium-term guidance of a return on capital employed of 25%. If you kind of break down that return and you assume that you guys manage to achieve an 8% margin, or even a 9% margin, and that your tax rate is similar to what it is now, that guidance of 25% implies that you have to improve the efficiency of your capital base. Can you just talk to us how you expect to be able to do that? Are you assuming in the future that the net worth and capital turns may return to how it was in the past, where customers kind of financed their own projects?

Yes, William, this is Carlo here. I can try to answer. I mean, we don't break down our return on capital employed target for midterm into division. But just to give you an indication, I mean, yes, if you look at the Paint and Final Assembly System, you know, we have been averaging below 100% but still significant, and fourth quarter alone, we were 66%. Application Technology was doing also about 25%, and we had this special effect about this legal case that has affected us by roughly EUR 5 million or EUR 6 million. So, it should be possible, as the business continues to improve, as it's been doing in the past, to maintain this. Our Clean Technology System, when we're doing more than 25% return on capital employed, was having even negative return on capital employed, and now we're showing a positive return on capital employed. And HOMAG return on capital employed number has been affected by this one-off hit that we've taken in 2019 and, you know, in '18, which was not necessarily the best year in terms of return on capital employed. They were about 20%. So, you know, this should give you an indication that 25% return on capital employed -- of course, we can argue about weighting and mixing -- the different division should be achievable in 2023. That's roughly what we say. So, I don't think that's unrealistic; let's put it this way.

Okay, and so you don't think it's a return to an environment where [indiscernible] like 2014, 2015, especially in Paint and Final Assembly, you were getting paid quite large, substantial prepayments up front from customers.

Yes, I mean, I did mention before, I was going through the balance between, you know, cash received and work in progress that we were still having a negative number last year. But it's obviously not in the range of EUR 200 million, EUR 300 million we saw in the past. You know, our customers are also fighting hard on cash and investment. But as we keep saying, you know, we are not going to finance the factories of our customer. What is true, however, is that the machinery base is going to get bigger, and that our service business is getting bigger, and obviously, that requires different working capital. So that's why we have adjusted the range from minus EUR 50 million to plus EUR 50 million. But to your specific question, we don't see that the advance is going to go back to EUR 200 million to EUR 300 million, like we had in the booming years in China.

And then, just my last question was on the R&D. You touched on it at the beginning of the call [indiscernible]. Can you just discuss what it was that was cut in the R&D cost line?

Yes, I mean, the main R&D reduction are around HOMAG, but it was not that we have cut any specific important R&D activities. We have obviously focused on the R&D activities that we believe make more sense. So, it's basically, we looked at the efficiency within R&D, so that's where the main cut is coming from.

And to add on that, in HOMAG we have all the too many different machine types, which we are redeveloping in [indiscernible] systems, so we don't need so much R&D for all these kind of different types, so we are focusing more, as Carlo said. So it's not that these don't do something. We just do things more efficient and more clever on that side.

And the next question is from Philippe Lorrain, Barenberg. Your line is no open.

A couple of questions on my side from the operating cash flow angle. You guys saw a slight improvement there. Could you remind us when the expenses for restructuring at HOMAG are going to be cash effective? Is it in 2020? And also, for 2021, the extraordinary expenses that you are targeting, are they all going to be cash effective that year, or are we going to see some spillover effect into 2021 in terms of cash [indiscernible] in order to understand a bit better how the development comes from one year to the other?

Yes, I mean, the overall restructuring measure that we've booked in 2019 have basically had hardly any effect in '19 in terms of cash flow, so the majority of the cash flow impact will be in year 2020. It is likely that the smaller amount will have a spillover in 2021. I think at this stage, it's difficult to predict, but the majority of the cash flow impact should be in 2020 for the [indiscernible].

Okay, perfect, so I understand that actually, then, the cash flow generation in 2020 would be much, much better if we had put basically the cash expenses in line with the actual incurred expenses for the P&L in each of the periods.

Yes

Okay, that's the first one. Then the second question that I had was mostly on the one-off that you expect for 2020. So I think about the EUR 17 million PPA, but rather on the EUR 23 million of non-PPA one-off costs, what are these costs, actually, that you expect there? And could you break that down roughly by division so we can get a sense of what's the adjusted EBIT margin that you expect there?

Yes, I mean, as Ralf Dieter and I have mentioned on the call, we will have small adjustments for operation improvement reasons in 2020 that have not been announced, and for this reason, I'm not in a position to actually give you more information than what you already know, because it has other implications. So, it's just something we have budgeted for and that you should be aware, but we're not in a position or at liberty to give you a breakdown for different reasons.

And it's many activities, not one big bunch or one big topic, yes, so it's seven, eight, nine topics.

But these extraordinary items will be, let's say, significantly lower than they were in 2019, obviously.

Okay, but it seems in total like [ ATP ] is going to be impacted by that, I would say, like as a first guess. It looks like probably HOMAG are going to see some impact as well, and [ TTS ]. Am I wrong with that kind of assumption?

As I said, I'm not going to tell you in which division. It's not that I don't want to tell you; I just can't. But it's going to be spread -- if these are the division you were talking about or others, I cannot comment.

It's part of the guidance, and we will, I think, talk about this when we have -- when we [indiscernible] in the quarterly calls, yes.

And then the final one is just like, do you have any update on the Tesla project in Brandenburg, where the paint shop has not been attended, and if you can announce anything?

We are working on that project, but it's not only paint shop. It's also big final assembly project, and final decisions have not been made yet because, also, Tesla is waiting for the final decision to build this plant or not. But before [indiscernible] and we can't talk about it. But at the same time, we're also looking at China on this new paint job, which looks pretty good for us. Of Tesla, as you have heard, they also expand in China.

The next question is from Richard Schramm, HSBC.