Good afternoon, ladies and gentlemen. Martin Lehner speaking. Welcome to our conference call. We will present you now our Q3 results 2018. We will start with a short overview. Then Wilfried will go into the details of the financial figures, and I will end with the outlook. Let's start with the look on the key figures. In Q3 2018, we increased our revenues by 10%. The EBIT margin was 9.9% and after extraordinary items adjusted, slightly below last year. If we look on the nine months basis, revenue grows by 9% and adjusted EBIT margin by 11%. The operational cash flow is after nine months at minus EUR 26 million. That's a big difference compared to last year. We will go into these later more details. We are still struggling with unfinished machines and with the supply chain. Therefore, the operational cash flow is affected.
There is also an additional effect on pre-buy engine we already mentioned in the last call. These pre-buy engine will be used next year for the production. Then the working capital is coming down again. So far, after nine months, net working capital ratio is 1.1% points above last year. The inventory outstanding is with two days higher than last year on 152 days. Equity ratio is at nearly 66%. Some words to our progress regarding our Strategy 2022. We have a very good development so far in China with the expansion of our dealer network. Very important for our success in China is also the financing solutions we have to offer to our dealers. Here we have concluded a partnership with Deutsche Leasing. That's very important for our sales activities in China.
Already mentioned in the last call, we are also working to simplify and reduce complexity in our organization. Here we are on track. We have integrated our European logistic function into the European light equipment production plant, and we are right on track closing our U.S. logistic company and transferring the logistic function to the U.S. sales company, till end of the year. Also, the reorganization of our purchasing and procurement organization is completed. Very positive for us also for China and for the Asian market is the OEM partnership we signed with John Deere a few weeks ago regarding mini and compact excavators. We are already starting beginning 2019 to deliver the first product to the John Deere organization in China. We also have finished our restructuring of our production plant.
We have closed and also sold our plant in Norton Shores and moved the production to our Menomonee Falls plant close to Milwaukee. In Asia, we have closed our plant in Manila. The last products were produced in October, and production has moved now to our new plant in China. On the product side, we have a very good feedback on our new Dual View Dumper, which we showed in INTERMAT in spring this year in Paris. Production has already started. First machines are shipped, and the feedback so far is extremely positive, and we are now pushing our production to ramp up as fast as possible to fulfill the customer requests. Last but not least, Wacker Neuson was also a founding partner of a new Construction Equipment Forum.
The first meeting was a few weeks ago in Hanover, and this Construction Equipment Forum name is to connect the construction industry in the whole global value chain. Now Wilfried will give you further details on the financials.
Good afternoon, ladies and gentlemen. I would like to start with the revenue and earnings situation. As you see on this slide here, we have an increase in revenues of 9.8%, respectively 10.4% at FX adjusted. We have good demand in our core markets. On the other hand, we have limited material availability, which had also a negative impact of the number of sales. I come to this in a minute. If you look to the left-hand side to the chart, you see the numbers there. Besides the increase of sales quarter-to-quarter, we have seen a decline in the quality of earnings. The gross profit was down by 1.3 percentage points, again, limited material availability impacted the production sites, and the result was low productivity.
Furthermore, we are doing the restructuring in both areas, in both regions, in the U.S., in Norton Shores, and on the Philippines. That means we are moving from the Philippines down to China, and this is also burdening our gross profit situation. However, the EBIT margin is 9.9% compared to 10.6% quarter-on-quarter. This is a decrease of 0.7 percentage points. If we now have a look to the chart on the left-hand side at the bottom, you see the EUR 415.8 million and the EUR 117.4 million gross profit, which was resulting in a 28.2% margin. Compared to the quarter in 2017, where it was 29.5%, we are missing this 1.3%, and this is EUR 5.5 million, round about. If we now look to the EBIT line, we would add these numbers, we would end up instead of having 9.9%, 11.2%.
That would be the number if we wouldn't have had the issues mainly on the material side and on the restructuring side. Furthermore, the selling expenses increased. Why are we doing that? Because we are preparing ourselves for further growth in this and next year. The earnings per share are down by 4.9%. Why? Because of the development which I have already explained. We have, in addition to this, on the financial result, also lower numbers than the previous year due to negative FX effect when it comes to the intercompany calculation of accounts payables in our subsidiaries. Let's now turn the slide to the business development by region and business segment. The revenue in Europe is +10% due to a strong momentum, particularly in England, where we have increased our market shares significantly for excavators and dumpers.
This will continue with over-proportional development in 2019. France and Austria was good. Poland was extremely good by +55%. We have had enormous success in Poland. The recovery momentum is continuing in Southern Europe. In Spain, we are +32% compared to previous year, and Italy +11%. Last not least, in Europe, we are benefiting from the good development in the export factor, +21%, also based on our newly signed agreement with John Deere in Europe or for Europe. Besides this, I think we should also mention the potential, what we have here, and unfortunately, we have not been able to lift this potential. We were talking about EUR 25 million additional sales, which might come from the unfinished product. Around about 1,000 machines are standing in the yard. We have not been able to do that, but we will do it.
Up to the end of the year, we are expecting to achieve at least EUR 15 million to EUR 20 million additional sales out of this potential of EUR 25 million. Coming now to the Americas. In the Americas, the numbers are looking quite nice with +10%. We have strong growth on work sites, technologies, generators, light towers, and so on. The rental chains are investing heavily, and our program with the anchor dealers is starting to lift up. On the skid steer loaders, we can say on the one hand side that this product has proved to be a key product and door opener for also other compact equipment. We have had, in the light of the restructuring of our plants in North America, issues to ramp up our own production capacity for skid steers.
Consequently, we can say that we would have been able to sell in the quarter EUR 15 million more, one-five, in skid steers, if we would have been able to increase our capacity as the market is wanting our products. If we would add these EUR 50 million, so another potential, we would have ended up the quarter with +28% instead of +10%. Negative signs here in South America, and this is due to political uncertainties. They have had a lot of elections in Brazil, in Peru, and so on, and we are now facing, for the future, probably better times. Last not least, we can talk about the revenue development in Asia. Pacific was +15%, FX adjusted, and it's due to the positive development of our sales with the excavators in China.
We can say that the production plan in Pinghu has started according to plan, supporting this top-line growth. Coming now on the next slide to the balance sheet structure. A little bit boring, this slide, of course, because it's always the same. We see a low gearing, and we see a stable equity ratio. You can see an increase of net financial debt to EBITDA from 0.6 to 0.8. If you look to the quarters before, we have been able to bring that down step by step. We are now on the level as we have been on the year 2017, 0.8, but we jumped from Q2 to Q3 up. This is due to the fact that we have these issues with our net working capital, to which I come right now on the next slide.
The bottleneck in the supply chain continued to have dampening effects on our activities. If you look to the left-hand side, you see the results. In the first quarter, EUR -41.4 million, then plus EUR 6.1 million and EUR 9.1 million in the third quarter. Overall, the operating activities ended in a negative cash flow of EUR 25.8 million. Now a good question is what will come up to the end of the year. Our estimation is that we have to catch up in the last quarter, and that we are pretty sure that we are able to increase the operating cash flow by around about EUR 55 million, so that accumulated, we will achieve EUR 30 million for the whole year 2018. Sorry. On the right-hand side. No, let's take, first of all, a look at the net working capital in total.
You see it's jumping from 34%-39%. We have two reasons for this. One reason is that we are sitting on a bunch of unfinished machines, and that on the other hand side, we are stopping with pre-buy engines up to the end of the year. To be very clear, we are also doing conservative inventory strategy for raw materials and supplies because we have seen how difficult it was in past months to get the stuff. The second is that the trade receivables are increasing due to higher volumes on the one hand side, but on the other hand side, we are also doing financing of the rental business in North America. I was already talking about the anchor dealer strategy, and we are actually working on financing solutions for this because we still have this financing on our books.
Last word to the inventories. When you see the inventories, we are not liking this situation, jumping up from 130-153 days. It's also ongoing because the production plants are running under full steam. As it is always a seasonal effect, in December, the sales are relatively low. With the EUR 496 million, we have increased inventories significantly. The reasons are pre-buy engines, which we have already on board. Another reason is the unfinished machines. Let's have a look on these two issues for the outlook of the year. The pre-buy engines will increase from today on. That means from September on, from the end of September, it will increase by around about EUR 30 million up to the end of the year. It will be then around about EUR 40 million. EUR 10 million we have already on board at the end of September.
We are able to reduce the unfinished machines by EUR 15 million, one five. We will reduce also a further finished machine by EUR 15 million. Rental equipment will be sold off by around EUR 15 million. The aged inventory will also move down by EUR 15 million. We have EUR 60 million as a good potential to reduce. On the other hand side, we have the EUR 30 million pre-buy engine. From today's perspective, we should reach an inventory at the end of the year, which will be around about EUR 470 million. Coming now to the next slide is the share development. What you can see here is that Wacker Neuson took a hit from May to August.
I think this is a clear reaction to the situation of our net working capital and also in the following months, up to November, we have been in line with the development of the peer group, but we have been below. However, also today, the stock market has reacted when we have presented our numbers, and it is clear from our perspective, if we are not delivering more EBIT when we do more sales and we have a negative development in cash flow, then this is the result. We have to become much better here, and this is our promise what we will do in the last quarter. Thank you for listening, and I would like to hand over back to Martin for the outlook.
Thank you. Coming to the outlook. First of all, a short look on the business climate index for construction industry and also for agriculture. In the construction industry, the business climate is still on a very positive side. Really, business is on record levels, and we see it also in our order income, also in the last couple of weeks, also in October, no signs of any slowing down. The business in Europe is extremely going well, same in Asia and also in North America. Especially for North America also, the outlook is already quite good for next year. In agriculture, business climate was coming down a little bit, but is still on a very positive level for us.
Our development in agriculture in the next couple of months, we see it still extremely positive because also the business with John Deere, as already mentioned, is running very well, but still in a ramp-up phase. We probably need further 12 months till end of next year to bring all the John Deere dealers to our product range, to our Kramer product range. There is a very positive outlook and development, what we expect over next year for agriculture. Also, order intake is very well. We had also finished October with very positive results in revenues. We are quite confident for the next couple of months and beginning next year, that the development is going further very positively. Overall, we are keeping our guidance, revenues between EUR 1.65 billion-EUR 1.7 billion and EBIT margin between 9%-10%. That we are on track here.
Anyway, you have seen all in our figures what we explained and Wilfried showed to you now. There is much more potential in our development and in our results. We are in the guidance and we are working hard and pushing to release the further potentials, which we see in our company in the next couple of months. That was our presentation, thanks for listening, and now we are open for your questions.
Yeah. Thank you very much. We have one question from Mark Gabriel posted via the webcast. We will start with this in a second. Before that, I would like to ask the operator to give a brief introduction for asking questions via the phone.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name before posing your question. Again, press star one to ask a question. We'll now take our first question from the web, from Mark Gabriel. It says, "Good afternoon. The development of the free cash flow was negative after nine months when adjusted for the real estate cash-in of EUR 60 million. You stated that the EUR 100 million investment in working capital was the main reason, my question is, when the situation should normalize and until when you will get the cash back?
Okay. Mr. Gabriel. The analysis from your side was exactly right, the question is, when are we going to get this back? As I said, we are expecting a positive net working capital development in the fourth quarter. Starting in the fourth quarter, it will be round about EUR 25 million, what we expect here. Furthermore, we have on the accounts receivable side, starting a program for the refinancing of our anchor dealers in North America. This has also a potential of up to EUR 40 million. In the course of next year, our target for the net working capital is 34%. A further decrease of net working capital will happen next year, or better, not a significant increase because we are also planning, of course, for top-line development, we don't want to talk about this today precisely. Has this answered your question?
Okay. Thank you. We are ready for the next question. Operator, could you please open the line?
Yes. Thank you. Our next question, Connor, your line is open. Please go ahead.
Yes, good afternoon. I have a question. If you could talk about the regional regions basically separately in Europe, because we see Europe especially developing very soundly in Q3, do you see there any further potential for margin progression? If we look at the Americas, where do you think you would be able to land in 2018 in terms of EBIT? Can you also confirm that you already expect to become profitable in terms of EBIT in 2019-- sorry, 2018? No, correct, 2019. Lastly, on the Asia Pacific, what is the expectations there for 2019? Is it the breakeven or is it still going to be loss-making?
Okay. In Europe, we have, of course, further potential. As I said, the potential will come from higher volume and restrictive increase of overhead cost. In the Americas, we are expecting a positive EBIT situation in 2019. Asia Pacific will be, I would say, plus minus zero. Could be a light red number in Asia Pacific next year. Could be.
Okay. Thank you.
Thank you. We'll now take our next question from Winfried Becker. Please go ahead. Your line is open.
Yes. Good afternoon, gentlemen. Winfried Becker from Equinet. I have a question in the direction of your supply chain difficulties. From the macro picture, some of the economists have reduced down the estimate for the GDP growth of the world in various regions. My question goes in that direction. When booming economy is cooling down a little bit, but still growing, does that help maybe over time, the situation that your difficulties in the supply chain might normalize, or is there more or less no link to the overall economy and volumes, et cetera? If you could share with us your view would be helpful. Thank you.
For sure this could help a little bit, on the other hand, we already mentioned in the last call that we have taken actions already middle of this year to secure and to improve the situation, especially for next year. Short term, it was difficult, we are working already since several months with our suppliers really to securing our demands and the materials for our demands for next year. We are working on contracts, we are working on additional suppliers, we are signing week by week agreements with them, securing our necessary materials. We expect for the next year when we have already made a very positive planning for next year, the situation much better than now.
Okay. Thank you, Mr. Lehner. Thanks.
Welcome.
Thank you. We will now take our next question from Alexander Haliza. Please go ahead. Your line is open.
Yes. Thank you. I would like to also ask on this backlog that you said you have a EUR 15 million sales potential in the U.S. with skid steers. Is there an expectation to deliver them in the fourth quarter, or are they also potentially spilling over into the next year?
When I talked about this potential, I was talking about that we have not been able to increase our capacities according to the market demand. We have now started measures to do this, and from today's perspective, our plans are that we will be ready latest in April 1st with a ramping up situation, January, February, March, but that we will be on a significant higher production capacity than from April on. That means that we have for next year the potential that we can realize from the potential of round about EUR 45 million, round about two third. Sorry, three quarter. Divided by times three. It will be for the whole year, potential what we can realize of EUR 35 million round about.
Understood.
Yeah.
One follow-up on the gross margin expectation for the fourth quarter. We see that in the third quarter you clearly faced difficulties on productivity side from the reorganization and also material bottlenecks. Do you also expect the pressure to be similar to the similar extent in Q4, especially stemming from the reorganization part of things, or do you expect already some easing on that side?
When it comes to the minor part, this is on the Philippines, the Manila, this is done. There will be no further impact. In North America, we are in the middle of, let's say, this restructuring, no further significant positive development in the fourth quarter can be foreseen. It's a lot of work there. In the other companies and all our other production companies, I believe it will become better step by step. On the other hand side, we have the negative effect, December, which is seasonal, due to the fact that we are closed in the factories for Christmas and New Year. Having seen these numbers, I do not really expect a significant better situation taken all together for the fourth quarter when it comes to the gross profit margin for the fourth quarter.
Thank you very much.
Thanks.
Thank you. Again, as a gentle reminder, please press star one to ask a question. It appears there's no further questions in the queue at this time. Oh, pardon the interruption. We just have one question. Please go ahead, caller, your line is open.
Hi there, Jonas Blum speaking, Warburg Research . Just two questions. You talked about your John Deere cooperation and the potential positive effect next year. Could you quantify this a little bit for us? Another one, I've just seen that your EBIT result from the NAFTA region turned negative in Q3. Did something special happen here, or was it just still issues going on with restructuring and lower potential productivity there? Thank you.
Yeah. Martin Lehner speaking. Regarding John Deere, we cannot disclose detailed figures in numbers or in revenues, but we are expecting midterm low double-digit revenue with John Deere. We will see how it is going on. That there was a new product for John Deere in this region. We are starting beginning next year with the first product. It helps us anyway to come much earlier to a much better utilization of our plant in China. In midterm, at the moment, we expect low double-digit revenues. Coming to your question regarding the EBIT situation in North America. What happened there in Q3 or what was more severe than in the six months before, is that we have moved the production from Norton Shores to Menomonee Falls, and that the ramp-up of these products in Menomonee Falls was not as it should have been.
We have had too much people on board, and the outcome of these new products for Menomonee Falls, they were a new product that was not as it should be. Again, when I am talking about the skid steer, we were ready of going to produce more stuff. But on the other hand side, we have had material availability also at this case. We were totally overstaffed in the third quarter in North America. That was a significant effect in these three months, which was negative.
Thank you.
Welcome.
Thank you. Our next question comes from Mark Webb from Caro Capital. Please go ahead. Your line is open.
Yes, good afternoon. Two questions, please. Firstly, regarding the component shortages. Since the auto sector is cooling off a little bit at the moment, are you seeing any normalization of the component supply? In terms of price increases, you talked in the past about having increased prices in July. How are those price increases sticking, and are you forecasting any further price increases? Second question in terms of the comments you made on generating EUR 55 million operating cash flow in the fourth quarter, could you give us a bit more color on that? I'm not sure I understood all the calculations. How does that impact your net debt figure at the end of the year? Thank you.
Yeah. Martin Lehner here. To your first question. Our supply base is not really linked to the automotive industry, so that's not really a big help for our suppliers that the demand is a little bit slowing down in automotive. As I said, the ramping up is slowly getting pace on the supplier side. On the other hand, we made sure with our contracts we have signed in the last couple of months and weeks with our suppliers to secure a much better delivery situation for next year. Regarding the prices, we made an increase mid of this year. We also said that the price increase will come slowly into our books. It's now starting that we are confirming new orders with the higher prices.
We also already have announced the price increase already in the past, a few weeks ago already for beginning 2019, where everything which is
Shipped beginning 1st of January, has some price increase depending product by product, but in an average, 2% or slightly above that. Okay, coming to your question regarding the potentials for the net working capital. Overall, I see from the EUR 55 million, round about EUR 25 million coming from the net working capital. Out of these EUR 25 million, I said it will be around about EUR 30 million with lower inventories. The negative impact will be on the accounts receivable side. Plus EUR 30 million from inventories, minus EUR 5 million from accounts receivables, ends up in the EUR 25 million net working capital. This is the first part of the EUR 55 million, and the other remaining EUR 30 million is just coming out of the profit situation in the last quarter. These numbers together end up then with EUR 55 million for the fourth quarter.
You can deduct the CapEx of around EUR 18 million, one eight, and you end up with EUR 37 million, and this will be the number which is then ready to reduce the net debt which we have in our books at the end of September. Regarding the free cash flow, I said it will be around EUR 37 million for the fourth quarter, and accumulated, it will be then cash flow from free cash flow will be EUR 45 million. Does this answer your question?
Yeah. Just to help us with the final figure, the net debt that you declared as of the end of September was, I can't see the figure here, EUR 193 million. Do I simply take EUR 37 million off that for the end of the Q4?
Right.
Okay. Thank you.
Thank you. Again, if you would like to ask a question, please press star one. It appears there are no further questions at this time. I'd like to pass the conference back to you.