© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen thank you for standing by. Welcome, and thank you for joining the ElringKlinger Group Full Year 2022 Analyst Conference. At our customers’ request, this conference will be recorded. [Operator Instructions] After the presentation by Dr. Stefan Wolf, CEO; and Mr. Thomas Jessulat, CFO, there will be a question-and-answer session with participants who are present with us here in Frankfurt.
I would now like to turn the conference over to Dr. Stefan Wolf, CEO.
Yes. Thank you very much. Also a warm welcome from me. For the ones that are here in presence, very nice that a couple of people showed up. I always think it’s important to interchange also personally again after this long COVID period. But also, of course, a very warm welcome to everybody that is with us online today. And we would just like to inform you about the fiscal year 2022. The figures are going to be done by Mr. Jessulat, my colleague, our CFO. And I will just show you a couple of strategic issues and outlooks with regard to what we are up to in the years to come.
Yes, strategic overview. First of all, the good news is that the automotive market remains a growing market. After now in 2022, with 82.4 million units that were produced worldwide by car manufacturers, we are walking towards 97 million in 2030. Of course, those are estimations, but I think it’s pretty realistic.
One thing I would like to point out. You see here on this slide, 2019 with 89 million units worldwide, but we had 94 million units in 2018. So that means that it takes us until 2028 to reach the volumes that we had before corona and before the small recession that we had in 2019. But still, things are growing. We are in growing markets, and that’s good.
So, looking at the transformation in our sector, in the mobility sector. You see here global light vehicles produced, battery electric cars and fuel cell electric cars, and also hybrid cars which of course have a combustion engine, which is good for us. In 2030, you saw the 97 million cars, units that we see – or we expect in 2030. And out of those 97 million cars, 70 million are with new propulsion systems. That means battery electric, fuel cell electric or hybrid. So that shows the growth potential that we have here with our new products that I will explain later.
Yes. Of course, we are in a transformation process in our industry. And also at ElringKlinger, we are in a transformation process. We still have of course our classical business, the gaskets, the heat shields, the plastic housing parts. And of course, we have to manage the demand here in the classical business. And we try to become even a stronger market position with regard to those products that are still going into the combustion engine in the years to come. And I think we are going to be very successful here because I see a further consolidation in that business. A lot of our competitors do not have the focus on the gasketing, do not have the focus on the products that we produce in our classical business. So that capacities, from my point of view, are going to be reduced in the future, and the demand is still there, so that gives us good opportunities to really earn good money in those class classical business units.
We also, of course, started already a couple of years ago to develop new products in our classical business units. So, special gaskets, also heat shields, plastic housing parts. We have done this transformation and developed parts for applications in battery electric cars and fuel cell electric cars. You see some of those products here. We have displayed here. They come, as I said, from the classical business units. And we have already parts in series production from the classical business units that go into electromobility, in electric cars. And of course, our new business units, we add new technologies that go into the e-mobility sector, and that really gives us a good growth potential in the future. I will show that later.
Here, you see the classical business. Of course, we have to manage this classical business because if I look at the cylinder head gasket, the demands are going to go down in the future. By the way, the cylinder head gasket is the only product that we have that cannot be used in an electrical car, that is really linked 100% to the combustion engine. But it’s less than 10% that we – of our sales that we make with cylinder head gaskets. So we can easily overcompensate that if the demands are going down. You see here, demands are going back. We are going to look into consolidation where it is possible, put demand together. Maybe we have factories where we just produce then all the cylinder head gaskets and not in 5 factories, but in 1 factory, so that we can use synergies with regards to the products that still go into the internal combustion engine.
And I’m convinced that we will build combustion engines in lower numbers, but we will build them until 2050, 2060, maybe even 2070 in this world. And then ElringKlinger is still supplying those parts because somebody has to supply those parts, and we’re probably going to be the specialist that still can do it. And that is a position that we work on. Of course, here, you see from our classical business units, products that go into, for example, the left – here on the left, you see an electrical drive unit. We have here elastomer gaskets in there, metal elastomer gaskets. We have pure battery pack with plastic parts also with gaskets. We are working on a housing part made out of metal for lithium ion battery pack in the underbody of a car. So every business unit, old business unit, has a lot of potential with regards to those new technologies.
And of course, the new technologies that is very important for us. Here, fuel cell technology. We started 20 years ago with bipolar plates, and we developed full fuel cell stacks. We have also complete fuel cell systems. And with regards to fuel cell technology but also battery technology, our strategy is to have complete systems, but also to have components. So that, for example, we supply stacks, fuel cell stacks. And you see a fuel cell units right here, this box, this fuel box, that’s a fuel cell unit. We complete systems, and fuel cell stacks. And also components like bipolar plates. If for example, the customers develop their own fuel cell system, then they need those components, the same, of course, with a battery technology. We started more than 10 years ago with cell connector system, cell contacting system for lithium ion battery. That was the BMW i3, one of the first pure electrical cars that we had on the market here in Germany. We did the cell connecting system. And we, of course, develop this technology further on so that we are also able to supply complete systems, battery systems, battery modules and the same in the drivetrain technology, electric drivetrain systems that we also supply right now in series production. Or for those applications, the auto-starter or disk carrier is provided by the business units.
Metal Sealing Systems & Drivetrain Components, you also see those products here on this table from my point on the right, those are those products that we supply already in series production into electrical car applications. One thing that is very important for us, there is a program on the EU level, a funding program for R&D and for the development of new technologies. It’s called IPCEI, important project of common interest in the EU, in Europe. And we got here, IPCEI funding in a volume of €33.8 million and that, we get that until the end of 2026 in different installments. And this is for battery housing, for battery cell house design, and we managed to do this design.
Compared, you see left – on the left, the state of the art. And on the right, you see our design. And we were able to decrease the material required for those components by about 25%. And that also, of course, lowers the CO2 footprint by about 40%. So a very innovative project. We are not the only ones in this IPCEI project. There’s a lot of other companies. And the idea of the EU, it’s also sponsored by the Federal Republic of Germany and also by the state where the company is located. That means for us, Baden-Württemberg, so it’s a co-funding state, federal level and also EU.
And the idea is to bring companies together that develop a complete battery system, here in this case, battery system. So that we have – that we secure to have all that here in Europe with European companies, and that this does not go abroad to China or to the U.S. or whatever. So that’s the idea of this project. We are in that, and we are happy to get those €33.8 million for that highly innovative product. Yes, you see the broad product portfolio that we have for future technologies.
On the left, you see internal combustion engine parts like gaskets and shieldings. We try to improve here our technology to help, that we see less fuel consumption in internal combustion engines, which works pretty well. Also our lightweighting components, like one back here that you see here near the back, a dashboard that helps to reduce weight in the car because a lot of times, we substitute metal by plastic. And those plastic parts’, also of course lower weight, reduces the fuel consumption in combustion engines, and that reduces CO2 emissions. And then, of course, our fuel cell technology, the battery technology and the drivetrain technology that is a 0 CO2 emission because that is of course pure electrical driving. And here, we have very good products and very good solutions on hand that are well respected and accepted by the customer.
Of course, we have the clear goal to become CO2-neutral in the company group, in the ElringKlinger company group, by 2030. We have a lot of things that we do. We install – we use green energy. We want to be worldwide on green energy until 2030. We are already, since 2021, on green energy in Germany. And here, as I said, we want to be set up the production to be CO2 neutral by 2030. That means we have to decrease that by 2.5% every year. And by the way, also for a lot of investors, it’s in the meanwhile, very important to have this, let’s say, sustainability issue and to have the CO2 emission reduction issue so that they invest because that is one of the criteria that they sometimes have, that the company has to work on that thing.
And also, it’s also important with regard to the customers because in a lot of projects, new projects we get from the customers, before we quote on business, we get a questionnaire that we have to fill out. And they want to see, what are you doing with regard to sustainability? What are you doing with regard to reduce – reduction of CO2 emissions? So that’s why we have a strong focus on that because sometimes they decide if you can quote for a project or if you cannot quote for projects. So it’s also not only the capital market and the investors, but also our customers that have a clear focus on that topic, and that is why this is for us so important. And we’re working on that really intensively.
Yes. We have installed new departments for digitalization. We want to make this company as digital as possible. That means the digital business platforms, we have – our business model will be adapted to this digitalization issue. And of course, we are trying to educate our people so that they become also people that are designated and dedicated to digitalization. And we want to be, in the near future, digital-intelligent company. And as I said, we are working on that.
Well, you see here, we have a broad spectrum of systems and components. In the above, you see fuel cell stack, battery pack and EDU, electric drivetrain unit. And on the lower picture, you see the components like bipolar plates or cell connecting systems. So that’s our strategy. We have systems, but we also supply components.
A couple of orders that we got over the last years with regard to e-mobility since 2021. We produced an electric drivetrain unit for a high-end sports car model that is produced in the U.K. This is a real nice project. It’s a niche project, of course, it’s not a high number, but highly profitable. We have also an order for a European all-electric sports car model, mass market production that is fuel cell business. We manufacture that in the – in Dettingen our headquarter.
We have orders for prototypes for battery systems. I’m pretty sure that we get this also for series production. You might all have read that and seen that. There is a Swiss-German manufacturer by the name of Piëch, the son of Ferdinand Piëch, the famous Ferdinand Piëch from Volkswagen. He designed a new real fancy sports car which is driven with battery electric, and we do this battery system, supplied prototypes already. And I’m pretty sure we go into series production.
A very good success is we have just received an order for cell contacting systems in 2021 already. This is a mid-triple-digit million euro range. Contract runs 9 years. It’s a global manufacturer of battery systems. And they just built a factory in Germany, we supply it in Germany. And the end customer is a premium OEM here in Germany. We are in the ramp-up phase, and this is going to start the latest in the second half of 2023. So a real nice order. We have quite a lot of prototype orders, a lot of development contracts for fuel cell applications, be it in the commercial aviation. We have this joint venture with Airbus since 2020, where we developed a fuel cell system for passenger plane. We have a lot of maritime applications in both our ships or – and also intra-logistics vehicles where we do fuel cells. So that’s quite nice. We have right now a capability of up to 10,000 stacks per year in our factory in Dettingen, which of course will be amended, the capacity, once we have the orders on hand.
Very nice new order that we just received a week or 10 days ago, is we have received the order for the series production for metallic bipolar plates for a fuel cell system of an international car manufacturer. It’s going to be sales in 5 years in the mid-triple-digit million range and about €500 million, €550 million in 5 years. They develop and design right now their own fuel cell system, but they buy the bipolar plates that you need for a fuel cell stack. They buy that from a supplier, and the supplier is ElringKlinger.
It was quite a lot of work, but we convinced them that our technology is the best. By the way, in this business, you have to convince by innovation and by technology. If you do not convince by innovation and technology, you do not get the order. And here, I think at the beginning, we were 6 or 7 suppliers that they were talking to and they finally decided for us because they said, "You have the best technology in those bipolar plates."
Other orders that we have on hand, cross-car beam that’s behind the dashboard. It’s a global OEM, nice. Order starts – the production starts in 2023. We have structural plastic components, something like you see back there on the table. That is also for a global OEM. We have – for an American OEM we have a front-end module which is also made out of plastic, reduction of weight. And we have metal elastomer gaskets also for a global OEM that also goes into a pure battery electrical car. So, again, an example that our classical products are also used in those new applications in pure electrical cars.
So we see, with our systems and also of course with our components, based on the orders that we have on hand that I just showed you, we see a strong sales growth for the group. And this is expected both by systems but also a lot by components. Those components are really – they really like that. Because you have to see, this global OEM that just gave us the auto series production, mid triple million sales. It would be just too expensive for them to produce the bipolar plates by themselves. It’s basically the same story that we have with the cylinder head gaskets, no OEM produces cylinder head gaskets for their internal combustion engine because the numbers are so low that they have no scale effects. They could not utilize a full line, a stamping press and mounting equipment, just for their own demand. And of course, if Daimler would start to produce cylinder head gaskets, no other car manufacturer will buy from them the cylinder head gaskets. That’s why suppliers are doing that. And with the bipolar plate, it’s the same story. They could never utilize a line, which is pretty expensive. You need a 500,000-, 600,000-tonne press to stamp those bipolar plates. They could never operate that economically. That’s why they get those parts from suppliers, and we are here leading in bipolar plate. Our technology is worldwide the best for bipolar plates. That’s what they tell us and why we get those orders.
Yes. We have a vision, very ambitious, very ambitious. We’re going to reach – we want to reach €3 billion sales in 2030. We had €1.8 billion in the fiscal year 2022. A lot of that strong growth, of course, is coming from fuel cell battery technology and drivetrain, but also structural lightweighting also will contribute to this growth. And we will have an under-proportional growth by the parts for the combustion engine, but still, we will earn a lot of money because of this consolidation that I just described before that we see in those old technologies. Sustainability. I said it before, we understand this as one of our key priorities based on investors but also based on the customers that are very much focused on that.
And one thing I would like to mention, we have this aftermarket business, Mr. Jessulat will show that later, around about €250 million last year in sales. We are the leading company with regards to aftermarket parts for combustion engines, the brand Elring. – we. Only Elring, the brand of the aftermarket, is the Cadillac in the world. Everybody wants to have Elring parts because they say, "Well, those are the originals. They supply it to the OEs. And so we get those parts that go to the OE, we get that in the free aftermarket." That’s why this is running really well. We have around about – EBIT margins of about 20% in the aftermarket, so really good.
And of course, our Engineered Plastics subsidiary based in Bietigheim here in Germany, but also with activities in China and in the U.S. That is Teflon business, and that’s about 40% automotive and the rest is general industry, but also medical industry, which is highly profitable. Medical industry is much easier than automotive, yes. I have to say that. It’s much easier to deal with the customers, the prices are better, the margins are better. So this is also a good growth story that we have here in the Engineered Plastics business, and that contributes quite a bit also to the margin in the group.
Yes. You see the product transformation here is really ongoing. If we look at the current sales split on the left side above this little picture. You see in 2022, we had about 80% of our sales were related to the internal combustion engine and 20% were non-internal combustion engine business. But if you look at the new orders that we have on hand, and here, of course, this bipolar plate order from this international car manufacturers, included new orders from 2021 until February 2023, we have in those new orders, 75% are non-internal combustion engine and only 25% are internal combustion engines.
So you see the change. You see this transformation. Also on this next little slide, sales projection, you see how those new things, our new technologies are ramping up – are really ramping up until 2030. So that I am convinced, based on this picture and based on what’s behind this, what you see here, that our vision and – our ambitious vision to reach €3 billion in 2030 seems to be not unrealistic.
Yes. That’s from my side. I would propose that Mr. Jessulat shows the figures, then I give you an outlook of the market and what we expect for 2023. And after that, we go into the question and answers.
Yes. Dr. Wolf, thank you very much. As we can see here on this slide, ElringKlinger had an order intake in 2022 in the amount of €1.874 billion, and we came to order backlog towards end of December ‘22 of €1.462 billion, which represents a 5% increase over the previous year. Starting with €1.6 billion in sales for 2021, we had, in particular, organic growth in the amount of €120 million, and we had also foreign exchange effects in the amount of €54 million. So that in total, we came up at almost €1.8 billion in sales, which represents an increase of 10.7% to the previous year.
As we can see here, we could expand revenues across the major segments and also across the different business units of ElringKlinger. And if we go through this, we see lightweighting, we could increase from €500 million to €575 million. Lightweighting is one strategic column for us in terms of further growth. We have seen, over the past couple of years, a good growth. And we will see also further potential here in the – yes, we have to say, meanwhile, largest business unit of ours.
In the BU, Metal Sealing Systems & Drivetrain Components, the same. We could increase sales from €448 million to €497 million. And also in the metal forming and assembly technology, we could increase from €269 million to €293 million. E-Mobility declined a little bit based on some interactions in supply in one – most of the plants where we supply a drive system, from €59 million to €42 million.
Aftermarket is the business unit that has really a specific demand situation, as Dr. Wolf pointed out. We could increase from €215 million to €251 million in sales in 2022. And also we could increase sales in Engineered Plastics from €125 million to €133 million. When we look at the global distribution of sales, then we see that starting from Germany in 2012, the share of business in Germany declined from 30% to 20% to the expense of North America, where we could increase from 18% to 26%, and the rest of Europe stayed fairly the same.
When we look at the diversified customer base of ElringKlinger, when we see that, essentially, we do not have a very significant exposure to individual customers. And we see here, for example, in North America – for North American OEMs, 8% to the maximum and 9% for German OEMs. Tier 1 and other customers were essentially very distributed and developed in a very good way over the years. Yes. Then we come to the cost inflation, here in the walk from the operating EBIT in 2021 to 2022. Then we see that we had in 2021, the divestment of the Austrian subsidiary, so we have to deduct it by €11 million. And we have had an increase in the raw material cost of €11 million that went against sales growth and we have to say the organic, let’s say, operating leverage in this period. When we walk through this, it’s very important to understand that the €11 million here in terms of raw materials have an early increase in 2022 relative to compensation from the customers that happened a little bit later in the year.
So that means, is this €11 million really lasting when we go into 2023? Yes, we have to say it to some extent, but not in full. And this is important when we see we do the walk from ‘22 to ‘23, which of the components here are really the lasting components. And €11 million from raw materials is – a fraction of that will be also a burden for 2023. But what we see here, with the additional energy and logistics costs, then we see that the – this is a cost type that was hitting the ElringKlinger group pretty hard in 2022. And this is a topic that still needs to be negotiated with customers going forward.
We have seen, on the other side also, that energy cost and logistic costs also went down to some extent. But when we look into 2023 coming out of 2022, then really energy and logistics cost is more what I’m concerned about relative to material cost, yes, when we look really at the cost increases from an incremental point of view. HR-related items. Okay, this is essentially restructuring at a site in Germany where we are in the process of closing one plant location here in Germany and we had to record some cost in 2022 in regard to that.
Ramp-up costs, the €11 million here for ‘22, this is a start-up cost in several plants. The one plant is in Texas, it’s a new plant for lightweighting. And we have also, in Germany, a new plant, also for lightweighting business that is going to be starting up in the period between ‘23 and ‘24. So this is, in my opinion, for some further extent, it will be a burden, but this is going out essentially with the growth that we will see here mainly in the lightweight business. So we came – here, with this walk to the operating EBIT of €61 million, and we see that overall, we had impairments on assets and immaterial assets in the amount of €103 million, which brings us to the reported EBITDA of 2022 in the amount of minus €42 million.
And the EBITDA development, you see here on the left side. EBITDA is important for us in order to being able to generate cash and to be able to invest in the new technologies. And we see here that, at €174 million, burdened by the items that I have explained, we are a little bit below the previous years, but significantly below 2021. As we will have to streamline the group going forward, certainly, in regard to the strategic mission of ElringKlinger, we decided to report, starting from 2023, an adjusted EBIT. And I go through this. We are starting with the reported EBIT, and we add or subtract the amortization of intangible assets from purchase price allocation as we have done in the past. And we will exclude also in the adjusted EBIT changes in the scope of consolidation and impairment on goodwill as well as impairment on assets, write-ups, gains, losses from the disposal of entities, restructuring, restructuring-related expenses and other that may not be so obvious at this point but which could occur.
This is pretty much in line with the usual reporting of the adjusted EBIT. And again, for 2022, this is not included, 2022 is going to be reported here as the comparable period to the 2023 reporting that we will do, which we have initiated beginning of 2023. Just so you – for you to know. When we look at the earnings situation here, we see on the left side, based of the impairments. I was talking about, minus €56 million in EBT relative to €101 million less year earnings per share comes up to minus €1.41. And dividend payment as a policy, in regard to continuation here in regard to dividend policy, we decided, together with the Supervisory Board, for a proposal of a dividend of €0.15 for the period 2022.
Yes. If we come to the other financial KPIs here, investments, CapEx is fairly in line, 2022 with 2021. It’s still a very disciplined approach that we follow because, again, we have to prepare for future investments in the new business fields that we have just seen before. Working capital, we came up with 25.3% from the amount a little bit higher from the percentage relative to sales is in line essentially with previous year. And the main driver is here inventory. And within inventory, the main driver is, by 50% approximately, price and then to some extent, foreign exchange, and to some extent, really quantities in terms of material, more quantities that we have on the balance sheet.
Here, of course, this is for us an important topic because we think we can improve here. I say we target more a level of 20% going forward and try to achieve that step by step. But ‘22 has been a pretty difficult year because we have seen those effects and also, of course, limitations in the supply chain. On the right side, as a result mainly of that, and as a result of the burdens that we have seen, we have a free cash flow, €15 million for 2022, which compares with €72 million for 2021. We have, as ElringKlinger gone through a path of consolidation, when we look at our debt situation here. So net debt at the end of 2022 comes up to €364 million. And the net debt to EBITDA as a financial KPI is 2.1 at the end of the year. And of course, here also, we want to improve, we want to stay below 2. And there is a little bit of way to go, not only from an indebtedness of the company, but in particular, of course, in regard to the quality of earnings. But we have seen here a level that is more and more possible, of course, for ElringKlinger to do investments also with that type of financing, which is, again, crucial to make the next steps in terms of our further industrialization.
Yes, when we see here on the left side, the maturities of our debt. Then we see in 2023, there is no repayment that is going to be due. In 2024, we have roughly €100 million. So we have pretty much a calm situation in regard to refinancing and the times of these that we see today. And the next significant amount is our syndicated loan that is going to be due in 2026. And afterwards, the last portion of the Schuldschein of 10 years that we have done a couple of years ago.
Yes. So equity ratio comes up to 43.8%, which is pretty much within the limits that we have, 40% to 50% is our target. And when we look at the performance of the business, then we see in the OE segment here, of course, the impairment is an impairment here in terms of goodwill and also in terms of assets on the OE segment side. And therefore, we have, based on €1.4 billion here in sales, minus 7.9% in 2022. But we see on the other side, in the aftermarket here, €251 million with €20 million of EBIT and also Engineered Plastics, €133 million in sales and €14.9 million. So those elements give ElringKlinger a pretty good internal cash flow in order to be able to finance CapEx and also to pay down debt to some extent. When we look at the Other segment here, it’s not really playing a significant role anymore, so I’ll go over that.
So when we look at that and see what’s on the financial agenda of ElringKlinger for this year and also the years to come, then it’s essentially the preparation and the execution of further growth in our top line. This is very important that we get orders on board in the strategic fields of e-mobility and lightweight, and that we align the group structure with this strategy. And this is on the one side, of course, consolidation of efforts; and on the expansive side, in terms of growing the other business units to really balance this way relative to the development of demand in ICE technology versus the new technologies.
Then on the next slide, we will continue to be very disciplined in terms of cost and CapEx in order to really improve earnings quality over the next couple of periods. And we will also continue to address the high-cost items that we have – that we still have in some areas with our customers. So this is something that we have done significantly in the year 2022, I think with good success. But this will be continued also in 2023.
Yes, like Dr. Wolf said, pushing digitization. Here, we aim at the digitization of our factories. We see here the digital and seamless factory from an information flow and also from a material flow. So there is a lot of potential for ElringKlinger that we can get out of this process, but we also have to be careful that we are not overdo digitization in terms of a cost perspective. So this is also an item that needs to be in line with the general activity. And then on the right side, this is something that we said already here, focus on working capital management, in particular the new business that we bought that on with parameters that drive us towards the 20% working capital of sales and to free further cash flows out of this position so that we can reduce debt furthermore, and also to shorten the balance sheet to the extent possible.
Yes. That’s from my side. Thank you very much. And I hand back to Dr. Wolf.
Thank you, Mr. Jessulat. So let’s look at markets and outlook. What we see for 2023, the economic environment, of course, remains challenging. The global GDP expectations for 2023 are, let’s say, modest. We thought last year, middle of 2022, all the experts said in 2023 we’re going to have a big recession. Here in Europe and also in Germany, they expected GDP to go down by around about 4% to 4.5%. Now the German government expects minus 0.3%, 0.4% in GDP. That means stagnation. But overall, we see that inflation is a problem. We see that, of course, the increase of interest rates of several central banks, that is going to be a problem. And so we also expect a modest growth for the GDP in 2023.
We still have a lot of uncertainties. The war between Ukraine and Russia is still not over and we do not know when it’s going to be over. We also have other areas in this world where we see geopolitical uncertainties. The cost for raw material has gone down, but it’s still on a very high level. Energy is on a very high level, especially here in Germany. And of course, transportation costs are also high. They are, all three costs, now way above 2018, 2019. So that really burdens the company.
The supply chain situation is a little bit better. With regard to semiconductors, it seems to be better than it was in 2021 and ‘22. But still, it is not as it was before. It’s still very vulnerable, the situation with regard to supply chain. So uncertainties. So we have to be careful, and that’s also why Mr. Jessulat said that we are very much looking on costs and try to save costs and reduce cost to be here on the safe side.
Yes. The global growth in manufacturing, car manufacturing, we expect 15.1 million in North America after 14.3 million in 2022, but still way above the 16.3 million in 2019. The same situation in Europe 2019, we had 19.5 million units. Now we are heading towards 16.1 million units in 2023. And you see here on this picture that, from my point of view, a very important information. The only big market or big area that generated growth from 2019 until 2023, what is expected, is China, from 24.7 million to 26.6 million. So – and it also shows, if you look at the figures down there with 89 million in 2019 and now 85.1 million units in 2023, that out of those 85.1 million units, China is responsible for 26.6 million. That shows the importance and the dominance of this market in the car industry and in the supplier industry.
This is the most important market for us, and that’s also why ElringKlinger has a very strong focus on China. Of course, other Asian countries, also Europe and North America, of course. But I think this picture shows very, very clearly what’s happening in our industry, China becomes stronger and stronger, and they are basically dominating the car and the supplier market, that’s pretty clear.
Yes. Our goals, as you know, sales always, we want to generate organic growth substantially above market level. I’m pretty sure that we will achieve that. In 2023, we expect approximately 5% EBIT margin on group level. The operating free cash flow, of course, positive. And we want to, of course, be better than in 2022, so we’re going to increase free cash flow with regard to – if we compare in ‘22, that was €14.8 million. So we want to increase that, of course.
The return on capital employed, we expect of 7% to 8%. Net debt to EBITDA, the rate, Mr. Jessulat talked about that already, we want that to be below 2. We want to further improve our net working capital here, especially with materials, but also with parts that we buy for our aftermarket kits there, we still have potential to become a little bit better here. We are going to spend not more than 5% to 7% of group revenues in CapEx. But this year, we still be very reluctant with regard to CapEx. Could be less. This year in 2023, R&D costs, 5% to 6% of group revenue and equity ratio between 40% and 50% of total assets. We always reach that. This year, July 1, I’m 26 years with ElringKlinger in the company, and we’ve never been under 40% in those 26 years. So I expect that to stay here. We were at 42.8% – 43.8% in 2022. So, those are our goals.
And if you look at the overall view on ElringKlinger, we have a clear focus on technology. If you have innovations, if you are leading in technology in our industry and especially with regards to those new propulsion systems like battery electric cars, fuel cell electrical cars, also lightweight, all that, everything we do, you have to be number one technologically, then you are successful. And that is why we have such a strong focus on technology, and we want to be always the innovator in our industry. Of course, we still have a clear view and also focus on the internal combustion engine business that still exists. And we have good possibilities here to earn good money because there is a further consolidation going on in that business. And nobody is really investing in business for the internal combustion engine, but we do it in a very, let’s say, intelligent way. Not too much, but keep us on a very high technical standards so that we are better than our competitors.
Of course, we have our new product portfolio to transform product portfolio, also a strong focus on that. I talked about sustainability before, important for investors, but also important for customers. So, that’s key priority for us in the group to focus on sustainability, and that’s not only CO2 reduction, that’s much more than only CO2 reductions. Part of CO2 reductions, part of it is sustainability and that’s much more, what we are up to here. We have our key financial performance indicators. We always work on that, and we sharpen them. We really look into that. Sometimes, we have new ones. So, we basically lead the company group on those facts, on those financial – key financial performance indicators. Everybody knows that in all the business units and the corporate units, and they act with regard to that. And of course, we want to grow profitably by those systems, as I described, but also with components in the new business units and new business areas.
So far from my side here, the financial calendar, we are here in Frankfurt today, March 28th, with the full figures for 2022. We have Q1, May 9, 2023. We have our Annual General Meeting on May 16, 2023. We decided to do it again in a digital format, so no presence, the legislator opened the possibility also after Corona to do it in a digital format. That’s what we do. We decided for that. We have August 3th, Q2 figures and then November 7th, Q3 figures. So, that’s the financial calendar.
Yes. So far from my side, thank you very much. And Mr. Jessulat and me, we are more than happy to take your questions.
Can you hear me okay? I don’t know if this is working. Christoph Laskawi, Deutsche Bank. Thank you for taking my questions. The first one will be on the margin guidance and the bridge to ‘23. Mr. Jessulat, you already elaborated a bit on that raw mats probably are not the same headwind, so we can expect potentially that being neutral or a slight positive. Energy and wages, should we expect a similar-sized headwind as in ‘22, or should it be smaller? Could it potentially be even flat? And then just on the HR cost of €11 million, I expect that to be completely gone in ‘23, right? So, if we build the bridge, that should be a net positive into ‘23. And then the second, building book of the questions, the outperformance in ‘23 overproduction. Historically, you have achieved 500 basis points plus. Is the substantial outperformance pointing to the same range, or should it be even higher? And could you elaborate on the startup productions which are driving that, sort of projects which are coming up, and should those be a margin positive because they are mix positive, or not? Thank you.
Yes. Thank you for your question. Like I said during the presentation, if we look at the EBIT bridge, then we would have to take into account that the material costs as a net effect in 2022 is really having an early impact in ‘22 from a cost side and delayed compensation that was not stretching over the full year. But the compensations that we negotiated with the customers have a lasting impact to a very large extent, so really high double-digit percentage. So most of it, what we have negotiated, is really lasting in terms of sustainable improvement here. We have to say, on the other side, during those negotiations, we changed the structure of our customer contracts to a large extent. And in the past, we had floating prices mostly for LME type of things in a different way, somewhere between 10% and 50%. And now we are in all important commodities to us for indexed cost types, we have to say, we are in a high-double digit percentage amount. So, it’s 80% roughly in terms of what we have now has a floating price relative to index. so raw material is in some segments for 2023, is giving me a little bit of a headache. In particular, when I look at chemicals and when I look at rubber type of material, that is giving us still some concerns. Plastic remains on a high level, but we don’t think that plastic is going to be going up furthermore. So, there is going to be an impact from material between, from a cumulative basis from ‘21 to ‘23, yes, but it’s a low-double digit figure, I think. When we look at energy and logistics costs, and we see logistics cost has come down in some areas, but in some areas, it stayed high. So, this is a burden that we still have that is going to be negotiated as further cost types with our customers also in 2023. And when we look at energy costs, we all know that gas prices have come down, which is of course, the manufacturing cost for some of the commodities used by us, but also our internal processing costs. So, energy is really more of a concern here. And this is also a type that needs to be negotiated. HR-related items is a ‘22 item for the topics on hand, so this is not going to be lasting. And ramp-up cost is maybe another important item to talk about because we have several plans in the starting phase. And those plans are, from a production perspective, running at idle right now, but they go into the revenue cycle in ‘23 into 2024. So, there is a portion of that, that will stay. But there is also a lot of products, in particular, lightweight, but also e-mobility that go into the revenue cycle this year. So, we see at least a portion of that gone for ‘23, but it’s mostly gone in 2024. Plus also, of course as we realize more revenues in the business units that we ramp up, and of course, we will generate more contribution margin, which is, in my opinion, at the end ‘24 going forward, is more than those €11 million, is a really significant double-digit amount where we will see some improvement by those products going into revenue cycle. The second point, labor cost, is we have had an expectation for 2023. The agreement did not come to that expectation. But still, starting from 1st of June, we will have those increases, and we will also have the second part of the inflation component that is going to be paid out. So, that is certainly an impact that will hit us in 2023 for sure. And that is also going to be part of the package that would need to be negotiated in ‘23 with the customers. On the third point, part of that, I think I explained already the outperformance drivers is really revenue cycle related to new products. This is the main driver for losses going out of the group and for getting more contribution margin in there. For example, on the cell contacting system here, we are right now preparing for the ramp-up in Q3. And in Q4, we are going to be in a revenue cycle for that. So, as part of that is in ‘23. Most of that is going to be a very steep incline, is going to be in 2024. So, it’s a little bit of mix, but there are some cost effects that we think we will have in this year. And this is also the reason why we are on the lower end of what we have seen here on the earnings quality level in 2001. We are a little bit below the 6% that we have seen. And if you say, okay, this is a lasting for 2023, lasting lower-double digit amount, then it’s essentially based on those items that I just described.
Michael Punzet, DZ Bank. I have two questions with regard to the development in the fourth quarter. First one is on the financial results. This was extremely negative. Maybe you can elaborate, what’s the reason for that? And also the Engineered Plastics business posted only a margin of 6.7%. After the first nine months, you have 17.2%, so what’s happened there?
When we look at the fourth quarter financial results, it’s a 13 – wait a minute, it’s €16.5 million. And this is mainly based on your reversals of foreign exchange effects. We have a high coverage, we have to say, of swaps against intercompany loans, mostly U.S. dollar but also against the Swiss franc. But those were some technical effects here relative to the rolling of those instruments. And the second question on the Engineered Plastics business, this is items around provision for losses to some extent for expectation that we had in the plan for material cost that may come into play or not. But here, we have been thinking in the group, in some areas, we have been thinking from a planning perspective with higher material costs that may not come. So, I think this is going to be isolated item relative to those effects. Yes. In Q4, by the way, there is also a mid-single digit impairment in the gross margin. When you look at gross margin quality, it’s important to note that for Q4, there was a mid-single digit amount in there. Thank you.
Jürgen Pieper, Metzler. There is – I have one question on your customer list. There is no concrete Chinese name in your key customer list. So, what are the largest names here in Asia? And is there the distribution between ICE business and e-mobility business similar to here, or is this still more traditional business?
Most of that is traditional business. And we have all the major Chinese customers like Chery, Geely, Brilliance, Great Wall. But that’s all combustion engine products. But we started about 0.5 years ago – nine months ago, we started a new subsidiary for EKPO, ElringKlinger Plastic Omnium, EKPO Fuel Cell Technologies, in China. It’s located at our location in Suzhou, close to Shanghai. And we are working on component business. And I don’t think that we are going to be successful with the systems in China. They are producing their own battery packs. They are producing their own fuel cell systems. Of course, fuel cell stacks that they produce are far behind our technology, but I think we have good potential for components. The bipolar plates, for example, from us or they buy cell connecting systems from us. But as of today, I would say almost 100% of the business in China is internal combustion engine.
Yes. Let me add something to that. The typical product that goes in China is innovative sealing applications. For example, EDUs in terms of shaft seals for high-RPM EDUs, where we have a very good position in China, coming out of Engineered Plastics. And then we have also applications in China in regard to EDU sealing in terms of the metal-elastomer application type of thing. And we have also battery seals in terms of metal-elastomer application in China. What Dr. Wolf is saying from the amount is really, of course, not the high amount here. But we see that the there is innovative sealing solutions needed that, even in the Chinese market, we can make some headwind there in regard to the placement of new products. But like not with the big dollar items, except for lightweight. Yes.
Maybe to add this, that it’s a general trend in China. You have to be innovative and you have to have a technology that is not available from a Chinese supplier. Everything that is available from Chinese suppliers, they are consequently changing their supply bases, just eliminating international suppliers, and they go to Chinese – pure Chinese suppliers. So, you win the battle in the future in China with Chinese customers if you have technology that is not available from Chinese competitors, and that is our focus. That’s why we are focused on those products that Mr. Jessulat just mentioned, but also in bipolar plates and cell connecting systems and so on, because we are, here, better than the Chinese suppliers. And that is a clear trend, that is a clear new direction that Chinese car manufacturers, they want to buy Chinese if it’s possible. And of course, you saw the figures that I showed. This market is very important for our industry. It’s the most important market for our industry. And I still see a lot of potential there. I am going to – I am sure that within a couple of years, we will see 30 million units in China. Frank Biller?
A couple of questions here. Frank Biller, LBW. The one question is about your chart here, product transformation. When looking at this chart until 2030, it seems to me that you are heading for outperformance of 4% to 5% per annum. And when looking at the percentage rate in ICE drivetrains and BEV automotives, it seems to me that you are underperforming the market despite a very high magnitude in orders for the new electric business. So, the chart seems to be that it’s 60% in electric mobility and the market should be at a 73% range here with these charts you presented on Page 3. So, what is behind there? Is it the content per vehicle going down for you, or is it just a cautious assumption here of your side? The other question is dividend policy here, so a stable dividend in 2022. So, what is your dividend strategy behind it? Are you more looking on the net earnings and here a ratio, or is it more on the free cash flow side here? And what we should assume here for the future? And the other thing on this new definition on adjusted EBIT, what you are guiding here, so 5%, what is calculated from today’s perspective, what is as an adjustment already seeable here for 2023, of course, yes.
Yes. Thank you for your question. On the adjusted EBIT, a lasting topic would be depreciation on purchase price allocation, and there is not going to be anything left that we have had in the past. It would be really a new start in regard to that. There is no lasting component. There is of course, cost types that we internally specify and really in a tight way, according to IFRS, for example, restructuring. Now, there is an internal ruling in regard to that and it’s not a very wide interpretation that we would have. When we look at your first question here in terms of the scenario, yes, this is – in our perspective, it should be really a robust scenario that takes into account maybe a more negative development also in regard to ICE that may happen. It needs to be robust in a way that this growth that we see here is a significant number when we talk about non-ICE. And the target that we have here is that the growth in the new products, those strategic products carries us towards the target of the €3 billion, which is a comfortable situation to see the further decline of ICE, at least in Europe, down the road. So, it’s a little bit of a scenario thinking in here, and we want to have a robust plan in regard to what we go for here in terms of the known ICE share, and this is a little bit of a background of that. It is not also 100% when you look at the run down towards 2030 and 2035, maybe in terms of ICE, it’s not one-to-one an S&P [ph] figure.
And I assume that you took the 97.1 million units in 2030 on Page 3, and then you took the 70.7 million units on Page 4, and you just divided that. But you have to see, that in those 70.7 million units, there are 26.6 million units, hybrid, and hybrids have an internal combustion engine. So, you have to add those 26.6 million to the internal combustion engines, yes, so that – the ratio is not – you cannot take – you have to take out the 26.6 million units. Well, we just wanted to have this year continuity. We take that decision every year in spring, and we of course discuss it with the Supervisory Board, also of course with the majority shareholder, pretty clear. They have 52% of the shares. So and we would just would like to get back into – we had a pretty stable continued annuity. Until, I think 3 years ago, we had 3 years with no dividend, but we want to get back into that. Also, one of our things that we have to fulfill is to earn money and to let the shareholders contribute. Because the founder family, they give a lot of the dividend in two trusts. And those two trusts, they have of course, obligations, social things. And that’s why one of our clear focus is also to achieve good EBIT, to achieve good and remarkable free cash flows, to be able to pay a dividend also with regards to those obligations that are in those two trusts of the family. So, focus is on EBIT and free cash flow. Further questions? It does not seem to be the case. So, thank you very much for attending our conference here, also the ones that were here digital with us, so all the best. The one thing that the ones that just dialed in are missing is the wonderful buffet that we have out there that is provided by Commerzbank. Thank you very much also for Commerzbank that we can have this analyst conference every year here in this wonderful building. And so thank you very much to Commerzbank, all the best to you. You know the dates for our quarterly reports and the calls. And so then I am looking forward to hearing you in those calls. And of course, looking forward, I hope seeing you here next year again. Thank you very much.
Ladies and gentlemen, the conference has now concluded and you may disconnect your telephones. Thank you for joining and have a pleasant day. Goodbye.