Good afternoon. This is the Chorus Call conference operator. Welcome. Thank you for joining the Sogefi third quarter 2019 results and perspectives conference call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Laurent Hebenstreit, CEO of Sogefi. Please go ahead, sir.
Thank you very much. Here is Laurent Hebenstreit speaking, and together with Yann Albrand, Sogefi Chief Financial Officer, and Stefano Canu, Investor Relations for Sogefi. Welcome to all of you to the third quarter 2019 results and perspectives presentation here from Milan. We will do the presentation in two parts. We first speak about the third quarter 2019 results, and then in the second part, we'll talk about the perspectives. You have in the documents, which by now has been posted on the internet, in annex, the nine months results, which of course, Yann and myself would be happy to answer any questions you may have on the whole of the document. Let's go now to page three of the document, please.
As we start on the highlights for the third quarter, I would like to indicate that the figures are at constant accounting principles and excluding the positive impact of the claim we had last year. Remember that there was a quality claim in the past, which we resolved in the third quarter of last year with a positive impact of EUR 6.6 million in the P&L, which impacted both EBITDA and then all the lines below. This year has been neutralized in order to have a like-for-like comparison. Let's start with the top line. The top line, Sogefi overperformed the market by 290 basis points during the third quarter. EBITDA came out at 12% of sales to be compared with 11.3% in 2018. That's the first interesting comparison, is the year-on-year, like-for-like, an interesting comparison.
The other interesting comparison, we should compare with first quarter at 10.6, second quarter at 11.6, then third quarter coming up at 12%, which is consistent with the message which we shared with you in April at the end of the first quarter, when we say that Sogefi from now on, despite strong headwinds, will show quarter after quarter improvement in profitability. This translates as well in EBIT, as the EBIT of the third quarter came out at 13,000,003.5% on sales, to be compared with 2.9% in Q1 and 3.4% in Q2. Net results came out at EUR 1.4 million, versus EUR 0.9 million in prior year. Last but not least, positive free cash flow, EUR 4.5 million positive, while in the third quarter of last year, we had a cash consumption of EUR 8.6 million.
The actual cash consumption was higher because we also had the cash out for the purchase of the Indian subsidiary minority. If we neutralize this effect, it's still a swing from -EUR 8.6 to a +EUR 4.5, which means the positive cash flow kind of supports the profitability numbers that we've seen before. In terms of debt now, excluding IFRS, net debt came out at EUR 264.6 to be compared with EUR 360.5 million at the end of 2018. We now move to page four, in terms of the top line split of revenues by geographical area, we have a contrasting picture. Let's start with the negative information. The negative information is that in North America, although the market was in production only down by 0.4%, Sogefi was down at constant exchange rate by -4.6%. There are different impacts there.
I would just like to highlight that the strike at General Motors started in September 15th of 2019, and therefore had an impact at the end of the first quarter. There were as well other effects. Now, turning on to the positive elements. First of all, China, because the reference market in Q3 was only down 5.5%, which is better than what we had before. In there, Sogefi came out at -16%. In itself, it's not a good number, but compared with where Sogefi was in first quarter and second quarter, this confirms what I was sharing with you in the previous calls, that we have new products coming up in all the three business units, starting in production. For instance, in Air and Cooling, we have the new coolant pumps, which is starting for Volvo. In suspensions, we have new businesses starting with BMW and with BorgWarner.
The number in itself is not very good, but the trend is confirming that now Sogefi is kind of regaining traction, although we have unfavorable client mix as we still have a large share of our business done with Ford and PSA, which are underperforming the Chinese market. Moving now to Europe. 60% of the sales of Sogefi is in Europe, so it's very important and our overperformance on the market mainly comes from Europe, because we are overperforming 240 basis points in Europe, which is great. Turning to the next page, on page five, revenues by business unit. I would say the number which is kind of surprising here is to see the overperformance of filtration, because filtration at constant exchange rate had 5.1% growth versus the market is an impressive number. What I suggest is that you look at page 22, which is a nine-month cumulative on filtration.
If you do this, you'll see that filtration over nine months is at 1.1%, which is quite good. That means as well that part of what we see in Q3 is a normalization of Q2, especially in aftermarket, especially in the OE segment where sales were low in Q2, they are high in Q3, but if you should take it cumulative, this is more normalized. The other numbers for the BU are closer to the variations of the market. Going to page six on the sales by client. This is a standard Sogefi slide, so we've kept it for Q3.
Here again, I encourage you to look at page 23, which is a cumulative, which is more meaningful. I'll be happy to answer any questions you may have, because the numbers for Q3 are not really representative of our activity with customers. We still have a well-balanced customer portfolio, I think the nine months numbers are more representative of what's going on with our customers. I would like now to ask Yann, our CFO, to take us through the numbers.
Thank you, Laurent. Moving on to slide seven. As Laurent mentioned earlier, 2018 and 2019 results are comparable. The two things we did was first to take out the positive impact of the settlement on the claim, so EUR 6.6 million in terms of EBITDA and EBIT last year. Second thing, as you all know, on January 1st, IFRS 16, which is related to leasing, was implemented. Therefore, in order to present comparable figures, we have adjusted prior year figures with the same accounting principle. Like for like, as Laurent mentioned earlier, EBITDA profitability increased from Q3 2018 at 11.3%- 12% in Q3 2019. No EBIT changes in terms of restructuring. Roughly the same amount of restructuring as in Q3 of last year. Moving on to slide eight, same like for like, with EBIT profitability increasing from 3.2%- 3.5%.
It is worth mentioning that EBIT was 2.9% in Q1, 3.4% in Q2, increasing to 3.5% in Q3. A small recovery showing since the beginning of the year. Financial results weighing less than last year, from EUR 7.3 million- EUR 6.6 million, as a result of which net income increased from EUR 0.9 million- EUR 1.4 million. It is worth mentioning, I know I always get questioned on this, we still had a high level of tax expense in Q3, EUR 4.4 million. We had EUR 6 million in Q3 of last year. This is due, as in prior periods, to the fact that we take a prudent approach, first to start-up operations such as Morocco, and then, with regard to the accounting of deferred tax effects, we are pretty cautious. Page nine, gross fixed costs. Usually in prior quarters, we reported on total fixed costs.
Total fixed costs include, on top of gross fixed costs, restructuring, R&D capitalization, and indirect taxes. We deemed it was more transparent to talk about the gross fixed costs, which are personal costs plus other direct costs. You can see that gross fixed costs were EUR 68.5 million in Q3 of last year, down to EUR 66.7 in Q3 2019, a EUR 1.8 million saving quarter-on-quarter. In terms of percentage, you can see it was 18.3% last year, down to 18% in Q3 2019. When you look at what it was in Q1 and Q2, fixed costs accounted for 19.1% in Q1, 18.3% in Q2, 18% in Q3. Again, nice improvements over the year. If you move to page 10, you have a comparison quarter-by-quarter since the inception of the year.
You can see we still are at a low level of sales, EUR 371 million in Q3 versus roughly EUR 390 million in the previous two quarters. What's worth mentioning is that material costs, which was one of our biggest issues last year, went down from 54.1% - 53.1% in Q2 and Q3. We are aiming at lowering this part in the next few quarters. Direct labor, let's say, quite unchanged. Gross fixed cost, I mentioned, you can see 19.1%, 18.3%, 18%, moving in the right direction. The level of the others is largely due to one-off costs, which are some cleanups we've done in Q3. As a result of which, as you can see, both EBITDA and EBIT increased quarter by quarter since the beginning of the year. If I move to slide 11, it's a slide we didn't show so far.
This is the evolution of steel prices since 2016. This explains what happened, what hit our results in 2017 and 2018. You have two curves there. The yellow one at the bottom is the evolution of the index on which our pass-through agreements with the car makers are based. On top of which, you have the red curve. The red curve is the evolution of the price we pay. The difference between the two curves is what we call supply-demand. What happened in 2016, the index started moving, on top of which the main impact in the steel price increases was that supply-demand hit us a lot. Steel makers wanted to recover their margins, and therefore, on top of material cost increases, they increased their prices.
You can see what happened in 2017 and 2018, which was a very significant impact of supply-demand, which as you can guess, was not easy to pass through to our car makers because our clients said we had agreements based on the index, and therefore they pushed back any demand regarding the supply demands. As you can see, on the curve at the top, the price is slightly moving down. It is mainly based on the evolution of the index. There might be an evolution of supply-demand to be seen, but what is worth mentioning is that the total price we are paying in terms of steel is going in the right direction and should help us in the coming quarters. Cash flow.
Cash flow, again, we have restated Q3 cash flow, which as Laurent mentioned, included a cash out of EUR 16.7 million for purchase of our minority shareholders in our Indian subsidiary. Like for like, excluding this cash out of Q3 2018, you can see that we ended Q9 2019 with a +EUR 4.5 million cash flow versus a cash burn of EUR 8.6 million last year. Again, quite a good quarter, in terms of cash generation. Laurent, you want to take over from the perspectives?
Sure. Thank you, Yann. Moving on to page 14. Perspectives start, of course, in the next quarter. In the next quarter, again, we have contrasting informations. As according to IHS, we see Europe worsening -2.3%, while Q3 was okay at 0.1. It wasn't great, but it was okay. We see also a worsening in Q4 in North America, sorry, at -9.9%. These are the, I would say the so-called bad news, especially for Sogefi which is large in Europe and significant in North America. The positive light in the situation in South America, which is seen by IHS by going down only 0.8, which would be good news for South America. China, which would see a decline in the fourth quarter of only -1.1, which would be, given what has happened in the past, good news.
In order to understand this, that's why we put all those numbers here. This is the third quarter was the fifth quarter of reduction in car sales and car production. It's important for everyone who follows automotive and Sogefi stock particularly to understand that in these circumstances, Sogefi was hard hit, and had poor results both in Q4 2018 and in Q1 2019. Despite the headwinds in Q2 we improved. We improved further in Q3. I will give you the guidance as the cherry on the cake for this presentation later. It's important in the Q4 what happens with General Motors. I just said before that the strike started on the 15th of September. It has been the UAW GM longest strike since 1970, which could stop this weekend.
The votes are going on in the GM plant in the U.S. till Friday, 4:00 P.M., which is today, U.S. time. To quote Michigan Radio, I would say, it's looking like UAW will ratify the contract. As we speak, there are still 15 plants who have not yet voted. Results outlook seems positive, but it's not yet done. Moving on to the sales by region on page 15, taking on a broader picture. Sogefi is still mostly a European company with 60% of sales. We are well-balanced in North America. We still have our issue in South America, where car production is 4% and Sogefi sales is 10%, we are overexposed to region which is unstable in terms of macroeconomics and therefore in terms of car sales and production.
What I would like to highlight, and that's why we put it in the center of the slide, is Sogefi sales in Asia is 9% of our sales, and it's 52% of the world car production. As we look at the perspectives of Sogefi, this is certainly the region where we see the highest growth potential for the future. Moving on to page 16. The bottom part of this slide is not new, which is basically where Sogefi is and how we differentiate by product our strategy. The products where we harvest, like in the fuel filters. Products where we are challengers, which we have many of them. A few products where Sogefi has leadership position, and therefore we are developing our leadership. What's good to know is that, in each of the business units, since the beginning of the year, we've had interesting awards.
As far as filtration is concerned, we got a nice order for oil filtration with the start of production in 2022. As far as Air and Cooling, we've been awarded by a premium German OEM to supply air intake manifold, which will start in production in 2020 in France. Also some success with the German OEM for stabilizer bar for battery electric vehicle. I had mentioned in prior presentations that the electrification of the cars, whether it is hybrid or battery electric vehicle, have, of course, a significance for suspensions parts, coil-over bars, and we are happy to report that we've been awarded a stabilizer bar for battery electric vehicle, which has a positive impact for the activity of suspension. This will start in 2020 in our new plant in Romania.
Continuing in terms of shaping the perspectives of the company, we've put on the left side of the graph, the increase in the capital spending, which is, of course, meant to improve the competitiveness of the company and the profitability of the company. We had a kind of winning streak from 2015- 2017, moving up the CapEx from EUR 51 million- EUR 68 million, which in ratio to our sales is still a reasonable number. At the same time, getting the return capital employed up to 18%, which is quite good in the automotive industry. We've been hard hit, of course, in 2018 with, as we've said, the impact of steel, which has cost us EUR 12 million, and the poor fourth quarter with the effect of the volumes starting in the third quarter and amplifying the fourth quarter.
For 2019, we plan to continue investing around EUR 60 million, which will continue to improve our competitiveness, focusing on Mexico, on Morocco. The dates you have on the right are the dates where we have invested tangible CapEx in those plants. China, where we have now the three BUs, which are represented with the plants which are getting more and more competitive. Last but not least, Romania, where we are very happy with our plans for Air and Cooling in Romania. We are also making good progress on suspension in preparing the plant for start production next year. One of the first products that this suspensions plant in Romania will produce is stabilizer bars for the E-Class and the C-Class of Mercedes-Benz, where Sogefi has been awarded 100% of the front and rear bars. This will be important.
Important as well, next year, although it's not on the map here, is the start of production for the S-Class. Mercedes-Benz has awarded Sogefi for 100% of the front and rear stabilizer bars with a new technology, which is variable wall thickness tubes. This will start next year. It's very important because you know that the S-Class is a reference in terms of comfort and ride and handling in the automotive industry, and this will start next year. Our colleagues in the suspension were busy preparing this launch in France and this launch in Romania coming up. Coming now to the outlook. The first point is there are stronger headwinds ahead because, we see recently looking at IHS, a decline of 5.5% in the fourth quarter. Stronger headwinds than we had in Q3.
Noting that prior IHS forecast was at -1%. It shows clearly a trend in terms of the evolution of the market. Having said that, which is the second part of the guidance, is the last quarter compared to the previous year will be in line with the evolution of the market. Nobody knows if it will be what IHS says or less or more. The guidance of Sogefi is that we will be in line compared with last year with the evolution of the market, and we are happy to say that we see, we forecast our EBIT margin to slightly improve in comparison with the fourth quarter of 2018. Having said that, I would like to thank you very much for your attention. Yann and myself will be happy to take your questions.
Excuse me. This is the Chorus Call conference operator. We will now begin question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Monica Bosio of Banca IMI. Please go ahead.
Good afternoon, everyone. Thanks for taking my question. The first one is on Europe, on the performance on the third quarter. Can you please elaborate a little bit more on the reason behind the overperformance? I was wondering if this better trend was due to the aftermarket activities. The second and third questions are related to 2020. Okay, the exit in 2019 is worse than expected. That's not particular news for us.
The real question is, what about 2020? I know it's very early, but we would appreciate if you can give us some indication on what do you expect in terms of revenues, or if you see a downside risk on the IHS estimates that are calling for a +0.3% in the car production. Even in the context of a deteriorative scenario or in a context of a downside risk versus the current estimates, do you see a potential for room for EBIT margin improvement? Thank you. Sorry for the length.
Thank you very much, Monica. Laurent speaking. Hello. Good to have you on the line. Thank you very much for your questions. As far as your first question on Europe, I would like to take you to page 21 of the presentation where you will see that if you look at the cumulative units for Europe, the reference market is at -4.3%, and Sogefi at constant exchange rate is at -1.6%. We are overperforming 270 basis points. If this is true over nine months, that means that there is a trend. It's not just a one-off. This is the first point. Why this is going on? Some of it is linked to aftermarket. I was mentioning about the OES timing effect, which we should not overestimate. We should not project this all alone.
What I would say in Europe is that despite the fact that our sales are going down, which is not good, I would prefer the sales to go up. Sogefi has done a good job in both improving the profitability in terms of margins, but as well in terms of reducing the costs. That's leading really to your next question, because the decisions we are taking at Sogefi are of course geared towards the immediate needs, but also geared towards how we see the future. What I would like to tell you on 2020 is not pretty, I must say. I'm in line with what Volkmar Denner from Bosch has communicated, which is that one scenario could be that the sales and production of cars in 2020, 2021, 2022, 2023, 2024, up to 2025 could remain more or less constant.
Could remain that?
More or less constant.
Okay.
No growth.
Yeah. Okay.
No growth for five years would be a completely new situation for the automotive. I've been in this industry for 30 years. If you track the numbers since the creation of the car, there have been cycles, but there has not been a period of five years of the stagnation of the volumes. We are really undergoing a revolution in the automotive sector, and more on this will come in future communication from Sogefi. I don't want to spoil the whole call with this matter, but I believe that Volkmar Denner is right on the money that 2020 in terms of sales and car production could be flat versus 2019. That means that working internally at Sogefi, of course, you know us now for four years. We are of course looking at this and working in a prudent way compared with the scenario for 2020.
Okay. Thank you very much for the answer. Thank you.
Okay. The third question, Monica, was on-
On the margin.
On the margin.
Yes.
If we consider that the view of Volkmar Denner is right, that means it could be some kind of stagnation of the volume. That means that all the capacities which have been created for producing raw materials, they will not be more loaded than they are, because supply-demand, we have to give some money to our supplier for supply and demand, because in some cases, there was growth in the demand in 2017 compared to 2016, and in the first half of 2018, compared with 2017, if you come back to the curve of Yann. What we see with the steel, we see the same in plastics, as although the magnitude is that, with what is now the fifth quarter growth in Q3, the fifth quarter recession, and probably it will be the sixth quarter with Q4.
Of course, it's an environment which for steel and plastics, which are the main components of the raw material, it is not an environment where it's easy for the suppliers to increase the prices because the demand is not growing. On this scenario, if this is the case, then the actions which have been taken by Sogefi, because we've been so hard hit by the steel increase and by some plastics increase, could bear some fruit. I want to remain prudent on that because we don't control the macroeconomics. We are here to take a hypothesis, be prudent with the macroeconomics, and work from there.
Okay. I'm sorry. There is a lot of noise in the office. Just to sum up, in a segment scenario, if I have understood well, you are not seeing any pressure from the raw materials. Is it correct?
You saw on the curve which Yann has commented.
Yeah. Okay.
We see on steel, very slow, very limited, nothing to do with the increase we've had. We don't see an increase. We see a small decrease that has helped us in the second and the third quarter. This is what we are seeing for the time being, which is in line with the depression of the demand, because so much of the steel is being in cars.
Okay, fine.
If there is a reduction in the volume of cars, of course, the steel makers, after the sixth quarter of recession, they have a problem, no?
Okay.
Same for us, because a big chunk of the plastic is going in the car.
Yeah. Okay. Thank you.
Yeah.
The next question is from Martino De Ambroggi of Equita. Please go ahead.
Good afternoon. Thank you. The first question is on the fourth quarter guidance, just because the perimeter changed, and we have some accountancy reclassification. Just to be sure and not misunderstand. Sales in your scenario will be down like the market, 5.5% around EUR 360. Am I right?
Martino, what we project for the time being is a prudent stance. As Laurent mentioned, IHS is projecting a market decrease of 5.5%, and for the time being, we project, I'll say in Q4, with roughly the same trend.
Okay. Starting from EUR 390 reclassified last year. Still on the last quarter guidance for EBIT margin, slight improvement. Just to be sure, last year, the figure I have in mind is 1.1% of EBIT margin. Is this the threshold you see an improvement?
It is correct. EBITDA on a comparable basis, was EUR 37.3 million in Q4, that's to say 9.7% EBITDA. EBIT was EUR 4.3, that's to say 1.1%. We say we probably should do better than in Q4 of last year, despite the tough market environment.
Okay. Anyway, not well above 2%. This is the range you're guiding. Okay, perfect. Just to be sure. The second question is on 2020. Okay. I understand your answer. Looking at what recently Michelin, Renault, and others commented that they expect -3%, -4% of volumes for the global market next year. I'm not telling you what you think about it, but if this is the case, do you believe to be able to outperform as it happened in the first nine months of this year, and why?
It is early to give you an answer. We usually start the year by saying that our sales evolution will be in line with the market.
Okay.
For the last four years, as the year evolves, we can confirm or not, the fact that we could over-perform. This is very dependent on the success of the models on which we are. If some of the models, because Sogefi doesn't have 100% of the market, we have some market share that some customers. If the models on which we are have commercial success, then we'll outperform the market. That's what's happening, basically.
Yeah. That's very clear. I was referring to new clients, new platforms, new platforms conquered.
That's a good question. The new platforms, if we refer to, just for suspensions, for instance, to the large MRA2 platform, it's a business which is worth a lifetime, more than EUR 400 million. This is the single largest order from Sogefi. This will start slowly at the end of 2020 with the S-Class, and then we'll start the ramp-up in 2021 with the C-Class. S-Class will start in Douai, France. C-Class and E-Class will ramp up slowly because you know Mercedes-Benz, they don't ramp up like crazy. They ramp up safely. C-Class and E-Class will ramp up in 2021, and then we will see 2022, and then 2023 as the full volume, and then the better loads of our plant in Romania, going forward in those years. We are in the industry. We are not in consumer goods.
We ramp up the products as the car manufacturers ramp up, and whether it's on engines for filtration or for air cooling, or whether it is for chassis, it is slow. It is slow to come. That's why the work we've been doing on technology and on growing with the premiums, this is something which will, in terms of significant volume impact, come in the out years. I mean 2022, 2023. Some of it is starting next year, some of it is starting the year after. This takes time.
Okay. Two quantitative questions on-.
Maybe one positive thing I could say is, you remember we had a press release on a German premium sports car where Sogefi has developed together with the car manufacturer the coolant module. We can now say it officially is the Porsche Taycan. Porsche Taycan, as you know, is starting now at the end of the year. They have very good order portfolios. Again, depending how the car goes and how successful it is in production, this could be a substantial positive win for Sogefi in 2019. As it is the first electric car of Porsche, there are still uncertainties, and that's why we probably will start the year with saying that we see Sogefi sales growing in line with the market. Unless we have confirmation until then that these models are really cranking up the volumes.
Yeah. Two quantitative questions on startup costs and the raw materials benefit following the renegotiations you finalized. Could you quantify Q3 year-to-date and what could be going forward to these two items?
Sure. One startup cost, which was significant in Q3 as well as in the first six months we had shared with you, was a ramp-up of our filtration plant in Morocco. I'm very happy to share with you that we've now started in production a new product, an additional product, which will ramp up slowly in volume in Q4 and be significant in terms of sales for next year.
In that case, this is an element which is a market share gain for Sogefi and therefore will be a positive structural element in terms of getting rid of this cost and moving into absorption of fixed costs in the plant in Morocco. We have a couple of others, but this one is probably the most significant element. We're talking here of an additional sales filtration of around EUR 20 million next year just for that product. On the raw material side.
Sorry to interrupt you. In my notes, I have that the startup cost in the first half were EUR 4 million for the Morocco and other plants. What is the total amount in Q3? If it's something you want to share with us.
Let me looking around just to check if we have the number handy or not.
Okay.
It was an additional EUR 2 million. Right. Around EUR 2 million.
Okay. Thank you.
Our filtration team did an outstanding job in resolving the issue we had there, and we are now on a much better track. Still a very competitive product and price, but it's been an important milestone at the start of the year. With regard to your other question on raw materials, you've seen the nice trend between Q1, Q2, and Q3, and we do expect a further reduction in Q4.
Okay. That is already factored in the guidance, I suppose.
Yes, it is. Of course.
Okay. Thank you.
The next question is from Alexandre Raverdy of Kepler. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. The first one, can you please quantify the GM strike impact both on the top line and on the EBIT? The second one, could you please be more specific on the factors driving the lower outperformance in Q4 versus the first nine months? I just want to understand to what extent this is due to the GM strike or to other factors, or maybe I missed something. Thank you very much.
Okay, thank you, Alexandre. Hello. The GM strike for Sogefi is mainly impacting the Air and Cooling activity, where we are the number one supplier for air intake manifolds at GM. We're very happy with this good strategic position. The hit in terms of sales for us is around EUR 4 million per month.
Okay. Thank you.
On EBIT, our team is doing a good job to fix the costs as much as possible. Of course, the full cost of the strike is something that we're going to try to address with General Motors in order to see how much we can get some compensation for that. I would say for Sogefi, it's something which is significant, but it's not the materiality which it could have for some other suppliers in the auto industry. I'm not sure I got your second question. I heard lower outperformance in sales in Q3. Could you tell me more on what the background of the question?
Yeah, sorry. I just wanted to understand, you plan to perform in line with the market in Q4. You outperformed over the nine months. I just wanted to understand which factors or which regions drove the lower outperformance in Q4 versus the first nine months.
Okay. First of all, Sogefi, we are trying as much as possible to be careful in the guidance we are giving. This is the first element. We try to be prudent on the guidance. The second element, as you said, is the strike, the GM strike, which is, of course, something we need to take into account. Basically, again, the unknowns, if you compare the Q3 by customer and the nine months by customer, you see very important fluctuations. We are in the automotive and let's say the world. We are in the revolution. In this revolution, there are many surprising things which happen in the short term. The revolution is not five years from now. The revolution is now.
We've entered this revolution, and therefore, there are some models which are going up, there's some models which are going down, there are some engines which are going up, there are some engines which are going down. Give you an example with diesel. six months ago, the consensus was diesel is dead. Now, what we're seeing is both through data and also through consumers' pulse, is that the CO2 matter is becoming so important that the fact that diesel engines now have the same level of NOx emissions as gasoline engines, the same level of fine particles emissions, but have 15% less CO2 emissions, is becoming a factor to which people are sensitive. An opinion poll in France has shown, being asked, what is for you your main personal preoccupation? 62% of the people said the protection of the environment came out first.
The second was the evolution of the social system with the retirement age, and the third was the buying power. We're already in a change of perception of the consumers on the matters of the environment. In an interesting way, the quality of the diesel in terms of CO2 consumption compared with gasoline, is making a comeback in some cases. You have Volkswagen cars, where if you want to order a diesel engine, you have to wait four months because the guys, they have reduced their production capacity, and now they have more orders. That's why we are careful in our outlook on sales, because there are things which are going on on some models and on some engines, which are very hard to predict.
Okay.
Maybe I can add some flavor. Maybe we are too prudent in Q4.
No one knows where the market is going. IHS in recent quarters was not prudent enough. Now we want to be prudent. We don't want to be hit by a reversal of the market. When IHS came up with a 5.5% decrease of the market, I don't say we are taking that for granted, but we do as if this was happening, and we are doing everything to adjust to a decreasing market.
Okay.
Not sure it will hit us as IHS is predicting, but we are trying to adjust Sogefi to be able to live with the decreasing market.
Understood. Thank you very much.
I could add one more thing. Of course, we are quite happy with the trend of the improvement of profitability in Q3 and the trend of cash Q2, Q3. Now, having said that, profitability is still low by any standards. As Yann said, when you have low profitability, you don't want to build your plans on too much optimism. One of the reasons why we've been able to buck the trend and go with the industry is one of the few suppliers in the world whose profitability and cash are improving Q3 compared with Q2, is because we've been very careful in planning and very prudent.
Okay. Understood. Thank you very much again.
The next question is from François Robillard of Intermonte. Please go ahead.
Hi, everyone. Thank you for taking my question. First question on the client portfolio mix in Q3. It was a slide you said was maybe not representative. If you could just go back to that slide and tell us why it's not that representative, given that the mix of premium OEMs is going down. Is it due to the same factor you explained after the first half results because of the Renault-Daimler common contract? Second question, 6% of your top line last year and three of your plants are located in the U.K. It's this time again for the U.K. to exit before the end of the year, maybe.
Could you please just give us an update on what's your vision of potential strategic decisions you could take concerning your U.K. operations going forward? The final one. Yes, last time you told us that you use IHS guidance because it was broadly in line with your internal projections. Is it still the case for Q4 and also for 2020 based on your projected client production and what IHS is showing? Thank you.
Hello. Thank you very much for your question. If you go to page six. If we start from the bottom, we see that BMW is also relatively flat year-to- today. This is mainly due to, I would say, shifts inside the product portfolio at BMW, which pluses and minuses, which are compensating. I confirm that with the new orders which we've been booking and on which we are working, our target mid to long term is to grow BMW to 10% of our sales. Although this is not yet showing, this will need a couple of years so that you see the different coming. The next one, of course, is Daimler. At Daimler, there are two effects. One is that within these numbers, we have cars, and we have trucks.
The activity in Daimler, especially in Q3, have been turning down due to very strong competition with Traton, with Scania and MAN. Part of what you see in terms of decline is linked with the heavy duty activities. The other element is linked, as we said last time, and you correctly remind this to everyone, is that we declare in the Renault accounts all the intake manifolds we do for the joint engine Renault-Daimler, and therefore this bumps up the Renault numbers.
On the premiums, the German premiums, BMW, Daimler, we confirm that we are on track to grow significantly over the years, and our goal with Daimler, as it is with BMW, is to reach 10% of our sales. PSA, I would say the activity is representative. What is going on at Ford is really a Q3 phenomenon, because if you look at the nine months, it's completely inverted actually. This is really not representative with the data for Ford. It's just due to mix effects and geographic effects. That's okay for the first question?
GM, Laurent mentioned the first impact of the UAW strike and another impact which is throughout all the U.S. car makers, is that all American car makers are starting to be strongly hit.
By the China-U.S. war. That's to say, they sell very little in China, and this used to be a very large market for them.
Mm-hmm. In terms of exporting some of the cars.
Yeah.
Okay. On the Volkswagen, Audi?
Volkswagen, Audi, this is some old contracts running out. The new contracts which we have taken are not going yet. This is to come. I've repeatedly said that our goal mid, long-term is to get BMW and Volkswagen to 10% of our sales. At Volkswagen, Audi, Porsche group, we are more focusing on the premium, on the Porsche, which I had mentioned, as well as on Audi, rather than on the mass market at Volkswagen for the time being.
Although we got a nice order from Volkswagen for suspension, so stabilizer bars, we are still a very small player at Volkswagen on a worldwide basis because Volkswagen is number one in Europe. We are 50% in Europe, so the numbers mean that we are small at Volkswagen, and our growth focus is really on the German premiums, BMW, Daimler, and to a certain extent, but to a lesser extent, Audi and Porsche.
Okay.
To a lesser extent than BMW and Daimler. Is that okay for the page six?
Yes. Okay.
Let's move now to the U.K. We have not put it again. You have it, I think, in the last presentation, where we put the sales by country. The sales in the U.K. is 5% of the sales of Sogefi. This is significant. This is not something which is of paramount importance to the economics of Sogefi. Having said that, you are right. We have three plants in the U.K. Since the beginning of the year, we've created the full-time position of Chief Risk Officer. At Sogefi last year, the function of Chief Risk Officer was shared with internal audit. We've split that. Therefore, we have a weekly call, which is led by our Chief Risk Officer to prepare for, of course, the Brexit scenarios with the three plants in the U.K.
Thanks.
To your question on possible scenarios, there are two answers. Short term, as everyone, we are trying to get ready for something which doesn't happen. We've been piling up additional stocks on top of the one we usually have. The teams have been made ready to absorb additional logistic problems. This is short-term reaction, as all the companies in the U.K., you prepare, and you stop. Nothing happens. You prepare, you stop, you never see the worst coming. The worst, anyway, is coming because the impact of Brexit, people don't realize it. Whatever happens, whether there's a hard Brexit, a soft Brexit, or no Brexit at all.
The damage is done. Yeah.
The damage is done. The damage on the U.K. car industry has been done by the uncertainties over the past two years. Investments in the automotive four years ago were GBP 2.6 billion, GBP 2.7 billion a year. Last year, they were, for 2018, EUR 600 million. In the first half of the year, EUR 10 million. That means that no one is creating new capacity, and when you read the announcement from the car makers, they do as everyone. That is to say, they don't want to be faced with uncertainty. It means that all the allocations of new production are going elsewhere. It means that no matter what happens in terms of Brexit, there will be an impact on the car industry in the U.K., and therefore, there will be an indirect impact on Sogefi because our clients are moving elsewhere.
You might follow your clients in that case.
Well, we are looking at the different scenarios. In the four years since I've come, we have not closed one plant. Why? Because in the beginning, there was some good activity, and since the reduction in volume, and you've seen it in the headcounts, what we have been doing is we've been doing a lot of productivity in the plant, a lot of cost-cutting, by putting in place Sogefi Excellence System. We'd rather shrink rather than close, because closing is very expensive, it's very traumatic, it's very difficult for all the stakeholders.
At this point, we are working out the scenarios. How much can we continue to shrink and flex, and whether or not, at some point, we need to take another decision. This is too early to assess. These are very important decisions which we want to consider when we have all the facts and the data on the table.
Okay. Thank you.
François, you had another question.
Yes.
By comparison with the IHS projection. Again, we are very cautious because we have our internal projections, which are based on the EDI, that is to say, on the electronic data transmission from the car makers. These are reliable short term. That is to say, Q4 is quite reliable. Next year, I wouldn't bet too much on it.
For the time being, we listen to what the market is saying in terms of market outlook for 2020. We are trying to be more cautious than the market, because we don't want it to be hit by headwinds without being prepared, and therefore, we base our next year budgets more on cautious assumptions than on uncertain data, which might prove wrong in the coming months.
Okay, thank you.
As a reminder, if you wish to ask a question, please press star and one on your telephone. The next question is from Renato Gargiulo of Fidentiis. Please go ahead.
Yes, good afternoon. Well, my question is on net debt. Could you please provide a guidance or an indication about your expected full year net debt? Related to this, on working capital, last year I remember that you experienced some issues with some car makers on payments. How is the current situation? Do you foresee any more issues? Lastly, on factoring, can we assume this level of factoring for the full year? Thank you.
Hello. While Yann is pulling up the numbers, just general comments. As Q4 will be most probably the sixth quarter of recession in terms of sales and production of cars, you can imagine that the pressure at the car makers is building up, which shows then in the press release of some of the car manufacturers who come up with hard revisions, both on sales, on profitability, and on cash. The pressure is, of course, increasing, coming from the customers on cash. This is for just the general picture now. Maybe, Yann, you can share some indications.
In terms of full year debt, we see it roughly in line with the level we had at the end of Q3. In terms of factoring, that should be made up with less factoring there, and we have a few EUR million less than end September. To your question on the car makers, we are very cautious there because as Laurent already said, the industry is in turmoil at present. Some car makers have financial difficulties. We expect we might have trouble getting paid at the end of the year, especially there's a specific market we are very cautious about, which is China, where people are not ashamed to pay you six months later than projected. This is something we follow very closely, but on which there's not much to be done if the client decides to pay you on January 1st instead of December 31st. It will happen.
Okay. Thank you. Thank you very much.
The next question is from Roland Konen of Value- Holdings. Please go ahead.
Yes, good afternoon from Germany. Most of my questions have already been answered, so just one left. Could you please elaborate a bit on your restructuring costs for the full year 2019? I guess in the Q2 call, you guided something about EUR 10 million. Now you have, after three quarters, EUR 5.7. Most of that will come in Q4. Is this correct, or do you have some less restructuring costs in 2019? Thanks a lot.
Hello. [Foreign language] Yann is putting together the numbers.
I've got the numbers.
You're ready. Go ahead.
Restructuring costs year to date are EUR 5.7 million in 2019. It used to be EUR 4.2 last year. Last year, on a full year basis, we spent EUR 8.3 million, and we probably are going to spend EUR 1 million more, but not much more.
Okay. Thanks.
For any further questions, please press Star and One on your telephone. Mr. Hebenstreit, Mr. Albrand, there are no more questions registered at this time. Excuse me, there's a follow-up question from Martino De Ambroggi, Equita. Please go ahead.
Yeah, thank you. Just a quick question on CapEx, because based on the worsening environment, do you confirm the increase for the full year, not only the tangible, but also the intangible, EUR 10 million increase that you had in your previous call?
Yann is putting together the numbers. What we say on the CapEx is one of the main drivers of the CapEx for this year is the CapEx for the suspensions plant in Romania, which we didn't have last year, of course.
The tangible CapEx, as Laurent already said, we are shooting for roughly EUR 60 million this year. Roughly the same amount as last year. Last year, we closed roughly at EUR 58 million. Out of the 60, we have EUR 12 million or EUR 13 million from Romania, which is the first tranche of the new investment in Romania.
The total investment in Romania is closer to EUR 45 million. It's a big plant, and a big investment for Sogefi. As Yann said, this is the first step this year, and of course, we continue next year.
In terms of intangible assets, it's more an accounting issue, because it's what we do capitalize, and we plan to capitalize roughly EUR 30 million this year instead of EUR 35 last year. We probably are going to capitalize less than last year because of the evolution of the market.
Okay, thank you.
Once again, for any further questions, please press star and one on your telephone. Gentlemen, there are no more questions registered at this time.
Okay, thank you very much for participating to this Q3 2019 results and perspectives conference call. We look forward to talk to you again once we present the results for the full year. Thank you very much. Bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.