Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Sogefi Nine-Month 2018 Results 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, Chief Executive Officer of Sogefi. Please go ahead, sir.
Hello. Good evening, everybody. Laurent Hebenstreit, Chief Executive Officer of Sogefi. I am today with Yann Albrand, our Chief Financial Officer, and Stefano Canu, Investor Relations, to present to you the nine-month results for 2018. Welcome to everyone. You have the presentation which is online, so I will follow through the slides. Let's start with page three, which is the nine-month 2018 highlights. We are happy to report that revenues at constant exchange rates are up by 3.3% at EUR 1.2 billion, outperforming the market. The market was at +0.8%. Basically, we are outperforming the market in all regions. In Europe, we are close to the market, as we will see in more details. Overall, that shows that our guidance of moderate outperformance was cautious as far as the top line was going.
On the EBITDA, we are reporting an EBITDA at EUR 153.1 million at 12.6% on sales versus 13% in nine-month 2017. These numbers are including the exchange rates impact, on which Yann Albrand will be available for comments if you have questions. The EBIT is coming up at EUR 63.7 million at 5.2% on sales, compared with 5.7% in 9-month 2017, and the net result is coming at EUR 23.1 million versus EUR 27.9 million in the 9 months 2017. The free cash flow is coming at EUR 22.7 million negative compared with the positive of EUR 32.5 million, which is mainly due to unfavorable working capital, on which I will comment later, and investments in India, where you know that we bought the share of minority shareholder for our filtration and Air and Cooling activity, and the investment in Morocco. The debt-to-EBITDA ratio is stable at 1.4. The numbers are presented according to IFRS 15.
Looking on page four, if we look at the Q3 activities, we have a different set of numbers compared with what we had before. You remember that at the end of the six months, we had a higher growth on suspensions than on filtration and than on Air and Cooling. If you look on Q3, we have a reversal of this. At constant exchange rate, we have Air and Cooling growing 5%, filtration growing 4%, and suspensions growing 1.5%. So all three business units grow above the market. Same observations at the 9 months. We are at constant exchange rates. We have growth of 0.7% for Air and Cooling, 3.1% for filtration, and 5.3% for suspensions. Revenues by geographical area, moving on to page five.
What is, of course, here important is the impact of exchange rates, not so much in Europe, because in Europe at constant exchange rate over nine months, we have a growth of -0.4 compared with the market, which is -0.4 . Looking on the third quarter, the reference market is down 6% and we are down 3%. We are better than the market underlying. In Q3, we are growing 13.2% in North America, where the reference market is at 2%. In South America, we are growing 22% at constant exchange rate versus the market at 2.5%, which reported due to the devaluation of the peso and the Brazilian real translates into minus 15.6%. In Asia, we are growing at constant exchange rate at 8.6%.
Overall, in terms of growth for reference market of 2% down, Sogefi's been growing 3.5% at constant exchange rates, so a satisfactory growth rate above what I had predicted, a moderate outperformance. Moving on to page six. The results came in with a reduction both of absolute and percentage terms of EBITDA after the positive effect of EUR 6.6 million related to the final settlement of the Systèmes Moteurs claim. Let me stop a bit on that. This information is already known, but I would like to emphasize that it's a very positive event for Sogefi, as it eliminates substantial risks that we had in the past. This is an event of the third quarter with a positive impact in terms of P&L and neutral impact in cash over time.
Exchange rate impact was EUR 6.4 million negative on the EBITDA. The higher steel prices impacted suspensions for EUR 9 million. As we did in the previous quarters, this is impacted in our P&L. That means there are EUR 9 million that we have not been able to translate to our customers. What I would like to say that we had some successes in the third quarter, which we expect to recover money in the fourth quarter or in the first quarter of next year, depending how the negotiations on the application dates are going. Here, I would say we see some positive as far as the negotiations with the customers for the foreseeable future. On the net income, we are coming in at EUR 23.1 million versus EUR 27.9 last year.
Let's move now to page seven, which I would say the more significant element of the third quarter, which is the unfavorable working capital. Let me explain what happened. In the third quarter of last year, we had done a very good job in terms of getting paid by our customers and aligning our supplier payments. We didn't do as good as a job during the third quarter of this year as we had a deterioration of EUR 18 million between our suppliers and customers. This is a temporary effect. We look forward to recuperate a good deal of it in the fourth quarter. The cash out relating to the start of the new plant in Morocco accounted for approximately EUR 12 million during the nine months. The plant will start operating in Q4.
I had mentioned before the purchase of the minority shareholders of the Indian subsidiary, which was EUR 16.7 million negative. On top of that, Yann will comment that we had lower factoring at the end of September 2018 than at the end of September 2017. The difference is between EUR 97.6, whereas last year we had EUR 104.7, which, of course, impacts the cash as we report it. If we take a broader view above, I would say, the immediate financial results, Sogefi continues to have a well-balanced client mix. We are happy with the growth at Daimler, which is crossing the 110% threshold on our sales. I had mentioned that growing with the premium car manufacturers was one of our orientations. We're also happy with the growth at Volkswagen and Audi. BMW, we have booked some interesting businesses, but this is coming into the out years.
It's not for these nine months or the end of this year. Again, taking a broader look at our strategic positioning in terms of future growth. We've identified different segments whereas we apply different strategies. We are number two in Europe on stabilizer bars. We are number two worldwide on manifolds. We are number one in the aftermarket in France. We are number four worldwide in the oil filters, whereas we are challengers on most of the other categories, and we are implementing a harder strategy on the fuel filters due to the evolution of the business, which I will talk more about later. On page 11, you see that we have refocused our performance drivers on four elements and taken as element number three, pricing power.
Due to our difficult experience with the increase of steel, where we had more increases than we expected, we've been putting more emphasis on pass-through negotiations on raw materials and exchange fluctuations, which is key to the profitability of Sogefi going forward. As far as Shopfloor is going, I confirm that we are aiming at around EUR 16 million of cost reduction this year, of which 75% will translate into the P&L, both in terms of direct labor and in terms of scrap reduction. Moving on to page 12, we confirm our targets over the next five years to get EUR 75 million of cost reduction, of which 75% should percolate into the P&L as we are preparing for our budget for next year.
On page 13, we have a sample of the digital initiatives which we are launching, which range from automated guided vehicles in Noyon to 3D printing in Orbey, as well as cobots, which are directly productivity elements, both in Orbey, in Wujiang, and in Sant'Antonino di Susa. These initiatives will bear fruit next year. Moving on to page 14, we remind you of two important initiatives, which is a plant in Mexico, whose growth is mainly related to suspension, and the plant in Morocco, which is dedicated to filtration. Moving to page 15, we are pleased to confirm the choice of Romania for the location of our suspensions Eastern Europe plant. The project is ongoing now, and we are in negotiations with the Romanian government to obtain grants for this important investment.
Taking again a broader look at the electrification as we need both to manage the short term but also what is coming up in terms of trends. I would like to take you to page eight. We have revised our forecast for the out years in terms of evolution of the technology. We see in 2027, roughly the same numbers of cars, which is 110 million cars compared with 92 this year. This is close to our prior forecast. There is no significant deviation. What we are seeing is a revision of the electric vehicles to around 10 million instead of 15, and a revision of hybrid from 17 to 30. Still, that means that both hybrid and EV will each capture half of the growth of the market. Hybrid vehicles having internal combustion engines, that means overall that ICE is forecasted to keep growing.
For the next 10 years, we see the market continuing to grow. Of course, diesel is declining. Actually, for 2017, we had a forecast of 15 million, but the year finished at 17, we had a higher starting point where we now point to a lower ending point at 11 instead of 12 in 2027. We are preparing ourselves for this decline, as well as capitalizing on the growth on the gasoline and the growth on the hybrid. Moving on to page 19, we confirm that even if all scenarios predict an increase of EV, the total ICE powertrain could remain flat or a substantial part of the market. Hybrid powertrain is a first step towards a world of multiple powertrains.
The rise of electric vehicle is depending on key factors, which are becoming more apparent month after month compared with, I would say, the general enthusiasm for EV, which we had seen last year. The rise of hybrid battery electric vehicles and fuel cell electric vehicles offer opportunities for solutions. I would like to remind on page 20 the three press release which we've made so far. One on Volvo for hybrid with an engine coolant pump, which is specifically developed for hybrid engine. The award of a battery pack cooling manifold for Renault-Nissan, which is distributing the coolant for the battery pack. Last but not least, a coolant module for a German sports car, which distributes the coolant to the battery, electric motor, and the power electronics. Now moving on to the various powertrains. On page 21, we've recapped the list of new products we are having.
Moving on to page 22, we recapped the new products we have on the battery electric vehicle, whereas on filtration, we only have the high performance cabin air filter, which is remaining for battery electric vehicle. On fuel cell electric vehicles, we are taking a closer look to this market. We see that we'll be able to provide more parts on the fuel cell electric vehicle than we expected and certainly more value. Hydrogen manifold is a very interesting topic for which we are in discussion. I hope to be able to announce some positive news on this. On the filtration side as well, we see more clearly what the filtration needs will be for the fuel cell electric vehicle. Basically, the air coming in for the fuel cell needs to be clean. That's the purpose of the air filters.
Needs to be deionized, and then there needs to be a water separation, which could be either on the filtration side or on the Air and Cooling side. This is a subject where we expect news in the next months. Moving on to the one point before last, which is page 24 on solutions ventures. We are pleased to announce that we have one joint development agreement going on with a startup related to fine particle emissions. We are actually working on the second development agreement with another startup on another subject. This initiative is moving on, and we look forward to more opportunities there for next year. On 2018 outlook, moving on to page 25. Despite the current uncertainties of the global market, the group confirms the expectation that it will outperform the market at constant exchange rates.
We will remove the moderately outperform which we had before. The group expects to achieve full year net result in line with that of 2017, despite the increases in the cost of raw materials and the adverse impacts of exchange rates. We are confirming our guidance, which we had given at the end of the first six months. We also want to highlight that the group expects to have a positive free cash flow in the fourth quarter, and we might be recuperating some of the working capital that we didn't have in the third quarter. This is what I wanted to tell you with this presentation, and together with Yann Albrand, we'll be happy to answer any questions you may have. Thank you for your attention.
Excuse me. This is Chorus Call, call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receipt of an asking questions. Anyone who has a question may press star and one at this time. The first question comes from Monica Bosio with Banca IMI. Please go ahead.
Good evening, everyone, thanks for the indication on the factoring. I would have a few questions. The first one is on the growth of your reference market. Over the nine months, your reference market had a growth of 0.8%. I was wondering if you can give us some indication on the growth by year-end. It could be even lower than 0.8, I don't know. Some flavor on 2019. The second question is on the impact of the commodities. In the first nine months, the impact was negative for EUR 9 million. Maybe you told, but I lost that part. You are expecting to recover a part of the commodity rise in the fourth quarter. Can you just quantify the impact of the rise of the raw materials in the third quarter?
How much of the total increase over the year are you expecting to recover by the last quarter? The third question is on the tax rate. It seems to me that it was quite high in the third quarter, if you can give us an explanation and an indication by year-end. The very last is on Mexico and Morocco. Morocco will be operative in 2019, if I remember well. Can you give us an indication of the revenue contribution of Morocco and of Mexico for the next year? Thank you very much.
Hello, Monica. Thank you very much for your questions. On the reference markets, what we see for the full year, is a reference market of going up 0.7%.
0.7?
Yes.
Hello?
Yes, 0.7%.
Okay.
On the commodities, we had communicated the impact on our P&L of EUR 6 million at the end of the first semester, and EUR 9 million for the nine months. Basically the additional impact.
EUR 3 million.
is EUR 3 million. What we expect to recuperate in the fourth quarter could be upwards from EUR 2 million.
Okay.
Did I answer your first two questions?
Yes.
We hand over to Yann for the tax rate.
Thank you.
Hi, Monica.
Hello.
It is true that at the end of the first nine months, we had a high tax rate, which is in the region of 41.6%, so above what we expected. Actually, what happened, we have three elements. One is Morocco, which is a startup. Until we have the country up and running, we are not going to activate losses, deferred tax losses.
It impacts our tax rate. The second one is India. India, as you understood, we had to adjust the purchase price of India, there is no tax impact on this. This went through the financial results for EUR 1.8 million. The third one is, there is one country in which we are incurring losses, which is Brazil, in which we have lost EUR 5 million. We are aiming at going for breakeven in Brazil next year. Without these three elements, two of which, Morocco and India, will vanish next year, the tax rate would have been 35%. In terms of full year vision, we are now shooting for a tax rate for the whole year in the region of 41%.
41%. Okay. Thank you.
On your last question concerning Morocco, we expect next year more than EUR 20 million of sales for next year. Concerning Mexico, it is a bit early to say because we are looking at different options, based on what the outcome will be for the implementation of the new agreements in North America between the U.S., Mexico, and Canada. For the time being, the messages we get from our customers is that our Mexican location is fine, and we have no sign of either volume reduction or production transfer out of Mexico into the U.S. We are carefully reviewing the situation. That's why it's a bit early to tell you the final expectation for Mexico.
Okay. Thank you very much. Very clear. Thank you.
The next question comes from Martino De Ambroggi with Equita. Please go ahead.
Thank you. Good evening, everybody. The first question is on the guidance at EBITDA level. In the last call, you mentioned to be able to generate an EBITDA in excess of what they recorded in the second half of last year, which means roughly more than EUR 197 million. Do you confirm this figure for the visibility that you have right now?
At the end of Q3, we are at EUR 153 million. We now plan to land in the region of EUR 200 million for the full year, including the EUR 6.6 from the claims.
Including the EUR 6.6. Always on the guidance, you are reiterating the flattish net profit for the full year, which means roughly EUR 27 million. Last time, I remember you mentioned non-recurring cost that I estimated around EUR 5 million for, I suppose, the plant that you recently announced to be sold. During the last call, you still didn't include, I suppose, the EUR 6.6 million for the claim settlement. Just to understand, you are confirming this figure, this figure, the previous quarter didn't include the EUR 6.6 million of the jumbo settlement.
The previous figure did include an amount for the settlement of the claim. The final settlement was more favorable. Now the new guidance in the region of EUR 200 million includes the full amount of the settlement, that's to say EUR 6.6. That's for the EBITDA. For the net, we confirm our guidance that the net, including the impact of the settlement and including the sale of the plant, will be in the region of the net results of last year.
Okay. The last question is on projections. Now you have solved the issue of the jumbo claims. I was wondering what your attitude on, one, M&A going forward, if you are actively looking at something. Two, a buyback, if it's something you could take into account. Three, a business plan presentation, if and when eventually you are planning such an event.
Thank you, Martino. As far as M&A, as has been communicated by Rodolfo De Benedetti and by Monica Mondardini, we are actually looking at different opportunities for the three business units. We are looking on a regular basis to, I would say, three or four different files. So far, none of them has been convincing enough. The three criteria on which we are searching is the customer. Do we, through this potential deal, enrich our customer portfolio or move ahead in our target of growing with premium car manufacturer while keeping a balanced portfolio, which is nice. The second criteria which we are looking at is the geography. You know that today, Sogefi is very strong in Europe, which is a good thing. That in North America, we are quite balanced compared with the car production.
That in Asia, 10% of our sales were basically 60% of the world car production. This is certainly the area where we have the highest opportunity. The third dimension for which we are looking actually at M&A is, of course, technology. Technologies are evolving, we are looking at different options in terms of accelerating our growth, especially where we are challengers or where we are leaders to have a stronger position. For the time being, we have nothing to announce on the M&A side, it continues to be one of our important activities. We are looking at different files. Either they are coming on the market, or it is subjects which we are initiating by ourselves because we believe that could create synergies for Sogefi. This is the answer in your first point.
Answering your second question on the buyback, which is a perfectly legitimate question. As you understood, in the third quarter, our working cap was not so great, certainly it was not the time. We have a good target of recuperation for the fourth quarter. I would say we first need to stabilize our cash generation, we'll be able to look in quiet way to see if share buyback is a good option. Certainly at the value as it is today, it is an interesting option. First, let's fix the cash generation from the operations, before we look at it. In terms of business plan, we do not have a date for a business plan presentation. I think we have given you a bit more guidance than we did before, both for the end of the year.
That's what we did at the end of the semester. We are doing the same. If we don't go for a full business plan presentation, the question will be whether we give you some more guidance when we present our results in February for the full year and give guidance for next year. We got your message.
Okay. Thank you. If I may, just a follow-up on the free cash flow. What do you consider a satisfactory free cash flow or as you mentioned, a stabilized free cash flow before thinking about a buyback?
You see that this year we had some massive effects like India, for instance. We had an important element with Morocco. We don't have this every year. Last year we had a strong free cash flow. This year we are aiming at a lower number due to the development we had in the first nine months. We'll probably be able to tell you something on this in February.
Okay. Thank you.
The next question comes from Roland Könen with Value Holdings. Please go ahead.
Yes, good afternoon from my side. First question would be an add-on question on the free cash flow and on the purchase of the minorities in India. Could you give me a hint where to find this number in the free cash flow statement? Because nearly the same numbers of the free cash flow from investing we see than last year. This is EUR 25 million in intangibles and EUR 66 million in intangible assets. The second question would be on the depreciation in the third quarter. If my calculations are right, these depreciations are EUR 3 million higher than last year. What are the reasons? I have in mind that you told us in the Q2 call that you are working on specific operations, but could not be more precise on this. Maybe you could be more precise in this call. Thanks a lot.
Okay. Roland, it's Laurent speaking. I will just answer the last point. As far as the operation we are talking about is we are looking at the disposal of a plant in France, which is supplying air ducts. This is part of our Air and Cooling business units. The base technology for this plant is the blow molding technology. You have two ways to do ducts. You can do them by blow molding, which is for hollow parts, is a typical technology, or you could do them by injection. What we are looking at disposing is this plant in France, which is in the Vosges region. The name of the plant location is called Fraize, F-R-A-I-Z-E. Where are we in the process? We have found a potential buyer, which is a Turkish company called Özler. This company is specialized in blow molding.
This company has an interest in taking over this plant and putting there some new business of blow molding based on the competency that we have developed. As for us, we are concentrating on the air intake manifold and on the cooling, which is basically the pumps, the water outlet housing, the valve, and the injected ducts. We look forward to sell this plant, and that's the operation we intend to close at the end of the year. This is for the operation which is ongoing. Now I would like to hand over to Yann to answer your three remaining question, which is the free cash flow, the purchase of minority, and the depreciation in the first quarter.
The purchase of minority shareholders, it's a quite simple operation. We had a minority shareholder with 30% of our Indian subsidiary. They had a put option. They exercised it at the end of October of last year. Therefore, we have done a valuation for this business, which is a booming business. This business is growing by 24% this year. It has an EBITDA in the region of 20%. It's a solid business. We bought the 30% for an amount of EUR 16.8 million. A part of that amount hit our result this year because we had factors for EUR 15 million in the 2017 year-end results. Since the business improved in 2018, it improved the valuation of the business and the value of the business. In terms of D&A, you're right. In Q3, we have EUR 3 million more D&A than we had last year.
The reason is quite simple. As we are investing more per year, this at a point translates into more D&A. There is also a secondary impact, which is that we've moved to IFRS 15 this year. IFRS 15 has a strong impact on Sogefi. In a way, tooling used to go through the gross margin. Now it is capitalized and amortized over four years. You will see recurringly more D&A than we used to have before the implementation of IFRS 15. IFRS 15 has no cash impact. It is just an accounting matter.
Okay, that's clear. The year 2017 was recalculated, the most part of the delta of EUR 3 million, comparing with 2017, coming from the investments you told me.
It's more tangible CapEx and more intangible CapEx over the last few years.
Okay, the nearly EUR 30 million in depreciation is more or less a run rate for the next quarters then?
You might get EUR 1 million more in Q4.
Okay. Thanks a lot. That is clear.
Gentlemen, there are no more questions registered at this time.
Well, thank you very much. If there are no more questions for today, I would like to thank very much all the participants. I wish you a good evening, and we look forward to have you again online for the results of the full year, which will be announced in February. Thank you very much. Have a good evening, everybody.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.