Hello everybody. Welcome to our conference call, Q3 2019. I will start with a short overview about the key figures. Then I will hand over to Wilfried Trepels. He will give you more details on the financials. Let's start with our key figures. On the left side, you see the development in Q3. On the right side, on the top 9 months year to date. On the top line, we see still a very positive development in Q3, +12% compared to last year to date, +14%. That's, I think, a very positive development. Also in Q3 is continuing, even if the environment is becoming more challenging, we are still able to achieve double-digit growth. Where we are not satisfied is the development on the EBIT side. We see in Q3 we are 4% behind last year.
Year to date, only 4% above last year. We expected this year much more. The reason for that, we will go into details in a few minutes. Also, still not where we want to be is on the operating and free cash flow side. Year to date, free cash flow is -EUR 203 million, a high negative figure. Here we are still working on reducing our working capital. Also here we explain in a few minutes what are our actions to bring this down to reasonable levels.
On the bottom line, you see because of this negative free cash flow, increasing inventory and also receivables, our net working capital ratio increased to 48.1%, far above our target, which is still valid, to bring these net working capital down to 30% or even below. Days inventory outstanding, 22 days higher than last year. Also because of this negative free cash flow, our equity ratio is down to 54%. Now I will hand over to Wilfried, who will give you more details on all the financials.
Good afternoon. First of all, about the revenue and earnings situation. The revenue in Q3 increased nicely by 12.4%. We have had strong growth in all of our reported regions. Again, we see a very sustainable above average growth for our compact equipment in the ag business, +23%. We come to the gross profit development. The gross profit increased under proportionally by +3.5%. On the other hand side, revenue grew by 12.4%. This is a quite disappointing situation. We lost gross profit margin of 2.2 points. We enforced the cutbacks in production programs, which impacted productivity significantly in the production plants. The expected increase in profitability in the U.S. was not realized within the planned timeline.
Unfavorable product and customer mix for new equipment sales came on top. This is with regards, number one, to the growth in the U.K. and Asia, where gross profit margins are below average. Secondly, we have seen an increase of the key account business where volume beats margin. Number third here, what we are going to report is the EBIT. The EBIT is consequently because of this development in gross profits, 3.8% behind. We lost 1.5% margin. The positive message here is that operating costs increased below average. Their share of revenue decreased by 0.7%. Negative is that the decrease in gross profit margin could not be compensated. Side note here, last year we reported 9.9% EBIT margin for Q3. Here you see now in our income statement on the left-hand side at the bottom, 10.1%.
This change is due to a change in accounting, is the reason for this development with respect to valuation of raw materials and components. The key word here is material overhead. The effect is EUR 4.8 million. The earnings per share are down by 5.1%. The financial result is compared to prior year, negative by EUR 1.6 million. The major part is due to higher net debt, which is EUR 1 million roundabout. The minor part is due to the initial application of IFRS 16, and the effect is roundabout EUR 0.6 million. The tax rates decreased slightly year on year to 28.6%. This is due to higher percentage of capitalized deferred tax assets on current losses, and the basis here for is a better planning, which we are now doing here. Coming on the next slide to the business development by region and business segments.
First of all, revenue was EUR 337.6 million plus 10%. Also for FX effect is almost 10% above prior quarter three 2018. We have seen here also in the last three months, a continued above-average growth in England, France, Germany, Austria, Czech Republic, Spain, and Italy. We were gaining, in particular, with dumpers, wheel loaders, telehandlers, and compaction equipment market shares. The revenue generated, again, to be underlined with Weidemann and Kramer branded products, we achieved plus 23% in the ag sector. The EBIT looks a little bit different to last year. Also the development when we look at the margin, the EBIT was clearly lower than prior year at EUR 36 million. Quarter three 2018 was EUR 47.9 million.
This is due to, among other things, a drop in productivity. We have seen also a certain effect in consolidation. I have to say a few words more to this here. We have changed our strategy that we keep inventory in the production companies instead of delivering all the stuff to the sales companies. Here we see, therefore, a certain swap between the region Europe and the consolidation. You find that in our quarterly report on page 15. This is the intercompany profit elimination. We are decreasing the inventory in the sales companies, which has a positive effect on the intercompany profit elimination. Coming now to the revenues in Americas, also here top line fully intact, plus 18%, almost, plus 13% FX adjusted. We see a continued strong growth in worksite technology, especially here, with generators and light towers.
We have gained significantly market shares here with compact equipment, which we import from Europe. The EBIT is not what it should be. It improved versus prior year. We are now in the quarter -1.9 compared to -3.6. This is clearly behind our expectations, and it is still affected by cutbacks in production program and initial difficulties in rolling out new processes in the U.S., especially also in the area of logistics. The revenue Asia is +32%, also the same number FX adjusted. We need to state that despite the rise in revenues, the earnings did not improve, as you can see, due to a strong price pressure in China, among other things. Also an indication for this pricing pressure is that also the sale of equipment to OEM partners is also below our planned figures.
Coming now on the next slide to inventory receivables and trade receivables and trade payables. We see here EUR 663 million, quite a disappointing number here. We need to say that the target still for the end of the year is to become this number down below EUR 600 million. We have a couple of measures in place for the moment, but also in direction to the year 2020. We have the production significantly adjusted. For example, we are doing a four-day week in December, and we are closing one plant on the 6th of December this year. Furthermore, we have this change in strategy, which I already mentioned, that we are keeping the inventories in the production companies instead of delivering it into the sales companies. We have here a very clear responsibility on the managing directors who are producing the stuff worldwide.
Third point, which I would like to mention, is that we have done the analysis phase with a lot of workshops to implement a new software tool from SAP. This is IBP. IBP is an automated alignment of sales and inventory and production plan. We will start the implementation January, and we are hoping to start in June live with this program. In the meantime, we have developed other tools which are giving us much better transparency for the development of inventories. This is in place since last week, so that we are not further blind here until we have IBP in place. The second point I would like to mention here is that we are still keeping our target for next year to achieve 125 days of inventories to reduce the significant high number of 173 days today.
This would mean roundabout for end of 2020, that we have a target inventory of EUR 500 million. Last not least, the words to the unfinished machines that was an issue during the year. This is no longer a big issue. We have seen on the top roundabout 1,000 machines. I reported end of June 690. We are now down to 500 units, and our internal target is to limit these numbers of machines to 2 to 3 days production output. Coming now to the trade receivables. Also here, the development is not in our favor. We see 78 days. The explanation is still the same as it was in the other quarters. We have higher numbers due to a higher share of sales with higher payment terms in the U.S.
We hope that we are able to install a new financial facility here to helping finance this kind of sales. If we are able to bring this in place during the next couple of weeks, we hope to bring the accounts receivables down by around about EUR 40 million, which would get us then down to 70 days instead of 78 days. The last word to the trade payables. Also, the actual situation here works against us. We have two developments. One development is, of course, that we have had a prior year-level effect, where we were financing the pre-buy engines stock building. The other point is, which I need to mention, is that we are, of course, reducing the material inflow of raw materials and components. Coming now to the free cash flow, which is a clear consequence out of this development.
First of all, the sum of inventories, trade receivables, and trade payables and net working capital was almost EUR 900 million, as high as it never was 48% of sales. We see still a very severe situation here. It is clearly the outcome of what I have told you on the slide before, and we reported in our outlook that we will be significantly above prior year to be expected for the end of the year. What does it mean? We believe that we are able to bring that down by EUR 100 million or EUR 120 million roundabout, and that then at the end of the year, we would have net working capital in percent of sales of around about 41%. The cash flow, and here I jump over to the free cash flow.
I said last time when we met and reported Q2, I said that we want to achieve a red zero for the free cash flow at the end of the year. Due to the development in the third quarter, we cannot reach our targets of a balanced free cash flow at the end of the year 2019. Where will we come out? Depending on the development of stock and accounts receivables, I am estimating for the end of the year a free cash flow which is now above EUR 200 million, that this will be at the end of the year minus EUR 40 million or probably minus EUR 50 million. We will see. On the next slide, there we see the consequences of this high net working capital. The net financial debt and gearing jump to EUR 530 million, respectively 42%.
We are hoping to bring that down to EUR 360 million at the end of the year so that we come out with a gearing of probably 30%. When we look on the right-hand side of the slide, you see almost 2.0 regarding net financial debt to EBITDA. We hope to bring that down up to the end of the year to 1.5, which is absolutely not our target. Our target is that we will achieve next year, again, numbers which are around one. The equity ratio, where we have always been proud to have it at around about 70%, is decreasing, of course, by this financing situation which I have reported, and we are now down to 54% as a consequence. Just to remind you, the IFRS, the first application of IFRS 16 has around about one percentage point impact, so this is not significant.
Here, I would say not so much to report about this. You know the numbers. I have already talked about the dividend payout, which happened in May, beginning June. There is nothing specific to discuss here. I would like now to hand over back to Martin, who will talk about the outlook for 2019.
Thank you. Coming to the outlook, you see on top on the left and the right side, the development of the business indexes for construction and on the right side for Ag. They are coming continuously down, especially in agriculture. It's now already in the minus. What we see is that the market is getting more and more challenging. We hear it also from the supplier side that they are receiving reductions from many OEMs. The market is more challenging already also in Q3. If you see also the reports from a lot of our competitors, which are reporting much lower revenues. The positive is seeing that we are still in double-digit growth. We feel quite confident that we reach our upper end of our revenue guidance, maybe also slightly above. Here we feel quite well.
The revenue development in October makes us here quite confident. The negative side is what we already released officially, that we are reducing our guidance on the EBIT side down from 9.5 to 10.2, now to 8.3 and 8.8. This is really the disappointing issue here. Strong growth. We were not able to realize here also a more positive development on the margin side. The issues Wilfried already explained. It's the mismatch what we have between sales and production alignment, where we have done a lot now in the last couple of months. As Wilfried already mentioned, a lot of tools and new KPIs are now available so that we are absolutely confident that we get this internal issue in the next couple of months really in line. What we are doing or slowing down also a little bit is on the investment side.
We are expecting now investments roughly at EUR 90 million, maybe also a little bit lower. Originally, we had planned around EUR 100 million. If we look on our development also in order income also, we see a slight decrease in order income in the last few months, but it's still single digit, so nothing really dramatic. I think a part of it is also because customers are realizing now that the issues with long delivery times is not a real issue anymore. It's not necessary to place their orders such early. We see no real fall back or fall off the cliff of some markets. Instead, it's opposite on some markets. For example, if you take U.K., there is already a slowdown of the market in the last three quarters.
Of course, a lot of uncertainties also due to Brexit, we are still growing here very fast and also above average double-digit. The good message is that I think our product, our offering is still very well received. We are really able to gain market shares. We are, with our offering, really attractive and highly competitive on the market. The disappointing is that we were not able to turn this also in a stronger EBIT result. As I already mentioned, and as Wilfried explained, the tools are now, I think, really in place, and we will see here further improvement in the next few months. Last but not least, also in U.S. Yes, we are behind our expectations, but we are also better than last year. We expected more, that we are pushing here faster the market development.
On the other hand, we have really changed everything in U.S. in the last one and a half years. We have brought two factories together in one. We have reduced the vertical integration. We outsourced manufacturing to suppliers. We outsource products. We have sold one product range now, what we announced a few weeks ago. We sold the trowel business to a company, Husqvarna, to have more focus on our core products. I think that everything is done in the right way, but the results are lacking behind. We are still confident that we are going in the right direction. That was it from our side, and we are now open for your questions. Thank you.
Thank you. We will now start the Q&A session, and I would like to ask the operator to give a short introduction.
Thank you, sir. Ladies and gentlemen, to ask a question over the telephone today, please press star one. We will pause for just one moment. We take our first question today by Jonas Blum from Warburg Research. Please go ahead.
Yes, good afternoon, gentlemen, and thanks for taking my questions. Just a couple ones from my side. First of all, I'm aware that you can't give us a guidance yet for 2020, but could you give us some color here on your outlook? What's your impression, especially for Europe? You said order intake is down a bit. Could you specify it for certain regions and also with regards to your customer mix, should we expect lower margins also year-over-year from that effect? Secondly, I was also wondering if you might have already realized some pressure with regards to customers, perhaps trying to renegotiate since they saw your inventory overhang. That's the second one. The third one just regards your North Americas business.
When should we expect your operations there to smoothen again in terms of inefficiencies and the cutbacks and also the implementations of new processes? When do you expect this to be finalized? Should we expect margins to pick up here again? Thanks a lot.
Thank you for your questions, Mr. Blum. First of all, to the outlook. That's quite difficult to give a clear outlook for 2020. What I can say is, actually the outlook, we see it positive also for 2020. As I already mentioned, we have really many products which are received very well. One example is, we already mentioned it in the last calls, is our new dumper concept, the Dual View, which really is received extremely well, not only in U.K., also in all other markets. We have really a lot of interest in our products. Here we are not comparable with the competition. We are achieving here good margins, and this is one example. We are still at the beginning in zero emission. We are beginning next year in Q1, or the end of Q1, with our zero emission excavator in mass production.
Also here, the requests from our customers is also quite promising. We have done a lot also in U.S., bringing our products to a more competitive cost base. One example here also, the generator business, which was in the last years before always a very low margin business and also this has improved significantly. We don't see at the moment a big pressure or an increased pressure in prices. It's always for sure a discussion about prices, especially if we speak with key accounts. We had also already negotiations with some key accounts, with big construction companies, also for next year to define the contracts. We were also able to get some increases here from our customers. Not the normal ones, what we get from an end user for sure, but also here we get some increases.
On the other hand, we see on the purchasing side, really a big shift. Last year, one year ago, we had still a very high pressure on price increases. Now this really has changed. We are expecting and also budgeting for next year decrease in purchasing prices. We are already starting to implement the first new price contracts, but we will see the effects not before next year. Here we see a much easier situation now on the supply chain side. Coming to U.S., as I already mentioned, I think we have changed really nearly everything. Probably some changes were too fast for the whole organization, though they need some time. We have introduced new systems, warehouse management systems, which we had not before and so on, but we are lagging behind. What we expect roughly also for U.S. next year is an EBIT margin around minimum 3%.
We are lagging, let's say probably 12 months behind our expectations. The targets are still valid. Let's say for next year, U.S., roughly an EBIT margin of 3% for United States.
Great. Thanks a lot.
Thank you. We move on to a question from Charlotte Friedrichs from Berenberg Bank. Please go ahead.
Hello. Thank you for taking my question. Kind of leading on from the previous question, can you also give us an outlook on your operations in APAC? You mentioned that pricing pressure in China is being difficult right now. Do you expect to see any major improvements there in 2020?
No, we are here on the conservative side. We expect here no any major improvement in APAC in 2020. We see also here improvements, that we can improve our cost base, because also here on the supplier side, there are some opportunities now to decrease also step by step the costs, but we see no major increase. We expect for next year a slight negative margin. It will have not a real big impact on our total results. It takes longer than we expected, and especially what we have not expected in China was that the prices are on some products, not on every product, but on some products really where the market price is heavily reduced in a growing market environment, what is really some kind of unusual, but that was not expected.
We are for next year planning no significant improvement in China, but we'll see. Also, we expect no significant negative impact from China.
Okay, understood. You mentioned a little bit on current trading already. You've been speaking to your key accounts on 2020. Can you give us a bit of an idea? That seems to be quite positive, the sentiment that you're getting there.
Let's say it's difficult to answer. Till now we really get more positive, or in other words, we don't really receive negative signs from our customers. They have still a good order book, and they are still willing to buy. In August, we got also the first order from the biggest rental company in Europe. It was the first batch what we already received in August. This was also a surprise for us because normally, we don't get these orders so early. I think also this is a positive sign that this big rental key account is already deciding and placing orders beginning August for 2020. On the other hand, we see every week, we and also our customers here every week, that the environment is getting more and more difficult, that the economic outlook for the whole industry and globally is slowing down.
There are still uncertainties. So far, we don't see any market falling from the cliffs or some negative comments from our customers. Also, the U.S. guys are still confident. As I said, so far, at the moment, we are positive for 2020. Cautious but positive.
Okay, my last question would be around the production reductions that you've mentioned this year. Do you think you're also going to need to keep production a little bit lower than would be possible for 2020 in order to reduce inventories, or is that not an issue for next year?
Let's say we have now really in Q4 now, we are with all of our manufacturing plants on the level, what we need for 2020. There is no further decrease really necessary in the plants. All these organizational changes are done. It's also a mixed picture. In some factories, we will see no increase next year. On some factories, we still see a further increase also next year. It's a mixed picture, but actually, we don't see any further necessary alignment of production, because this was already done now finally with the last steps in Q3.
I would like to add some information here. We are in the middle of the budget process now. As Martin said, we are at a level with the productions which is sufficient to achieve a further inventory reduction next year. We have keep really an eye on that production and sales for the budget process is in alignment, and that we do not get the same faults as we have done or as we have gotten in 2018.
Okay, perfect. About restructuring costs next year, anything big to expect there, or you should be pretty much done, right?
Yeah.
Okay, perfect.
Yes.
Thank you so very much for taking my questions.
No worry.
Thank you. As a quick reminder, that is star one to pose your question today. We now move on to Mark Gabriel from Bankhaus Lampe. Please go ahead.
Yeah. Hello, everybody. I have three questions, if I may. First of all, on the unfinished machines, what do you expect here by the end of the year? Currently, you said that it's 500. What's the target for the end of the year? That's my first question. The second question is, as far as I can remember, you have already announced some two years ago that you would be optimizing the software for the supply chain management system. Now it comes a little bit surprising that you now have to implement another tool from SAP. What went wrong here two years ago? The last question is, why didn't you provide the dealership in the U.S. with external debt financing instead of taking over the pre-financing by yourself?
That seems to be at least what you've written, that you are now seeking for collaboration with external financing partners. What's here the reason? Thanks.
Okay. To your first question, unfinished machines, as I said, is no longer a big issue. 500 or 440 could be the number for the end of the year. Regarding your questions, sales and production alignment and the software tools here. The first software tool which we have implemented was a self-made one, and that was keeping production and sales in a certain alignment. Unfortunately, this was not covering the inventory development, so the calculations were really manually done. That's the reason why we have set up a new thing, which we have now available end of this year, which is now keeping everything together. That means we are starting a balance sheet, and we have then the planned orders from the sales companies in the production companies. We have the plan, the sales plan, and the cost of sales.
We have the production figures also implemented in this tool so that we can now see the development of the next month. That was not possible before. Possible before was just to see what are the results out of it, but there was not possibility to make a forward-looking statement, really. Now we have this in place for the next 18 months. That gives us really the transparency, what we need to see where something is going wrong. We have drilled that down really to product and to assembly lines in the production. This is much more detailed, and the awareness is clearly there to use that. Also this is coming out of SAP Analytics, which is then at the end of the day, also handmade this program.
What we are aiming for, what we are looking for is really an integrated system, and an integrated system only can be an SAP tool because we are basically running SAP in all countries, almost all countries, let's say 98%. This would then mean really an integration, what we haven't had before. Three steps. First step, not all information is in there, no forward-looking statements. Now we can say we have everything together. We are able to make forward-looking statements, and the third one will be then integrated software beginning of June next year. Your third question was regarding the dealership financing. Yes, we are doing that, but we are growing there quite nicely. That means that when you have payment terms, in some cases up to 60 months, you can imagine how fast your balance or your volumes, your portfolio, your financing portfolio is growing.
We need to look for further potential here. The existing ones are more or less at the end of their capacity. Yeah, that's the reason for it.
Okay.
That answers your question.
Yeah. Thank you.
Welcome.
Thank you. At this time, there are no further questions in the queue.