Ladies and gentlemen, welcome to the Oerlikon Q3 2019 results conference call and live webcast. I am Andre, the conference call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Andreas Geywitz, Head of Group Communications, IR, and Marketing at Oerlikon. Please go ahead, sir.
Thank you, Andre. Good afternoon to everybody. Ladies and gentlemen, welcome to our conference call on the results for the third quarter 2019. Andreas Geywitz, Head of Investor Relations and Corporate Communications, your host today, as usual, Dr. Roland Fischer, Group CEO, and Jürg Fedier, the Group CFO. Today we also welcome Philipp Müller in our earnings call. Philipp will take over the CFO position as of January 1st from Jürg. Philipp, welcome to the team. As a reminder, all related documents on the Q3 and nine months results, including the following presentation, are available for download on our website. Today, we will follow the well-known agenda. Roland will start with an overview and an update on the segment's performance, followed by Jürg, who will comment on the group's financial performance and the full-year outlook. After the presentation, we will host the Q&A session to answer your questions.
The conference, as usual, will be recorded and the replay will be available on our website later today. Having said that, it is my pleasure now to hand over to Roland.
Yeah. Thanks a lot, Andreas. Good afternoon to everybody on the line, and thank you for joining our third quarter and nine months earnings call. In the third quarter of 2019, Oerlikon has been operating in a challenging market environment. I think that is not a surprise. Geopolitical uncertainties are delaying investments in capital goods production and consumption, and we do see the impacts in almost all of our businesses. Group order intake was 4.3% lower compared to the same period of last year and stood at CHF 627 million. This was mainly driven by a reduced order intake in Surface Solutions equipment. Group sales went down by 7.9% reported to CHF 633 million. This is largely impacted by the record high level of sales in Manmade Fibers in the third quarter of last year. Organic segment sales of Surface Solutions were flat year-over-year.
Allow me to emphasize that in the current adverse market, we have achieved top-line results which are in line with our expectations. In the third quarter, we delivered an EBITDA margin of 13.3% for the group. The EBITDA margin of the Surface Solutions Segment came in at 15%, and it's clearly below our own targets. We have seen adverse mix effects in terms of products, meaning equipment and materials business versus service business and regions, which declines in Asia in particular. Secondly, as announced in our earlier calls, we incurred higher operating expenses as we continue to execute significant investments to secure future growth, which includes, amongst others, our efforts in industrializing additive manufacturing. We continue to be fully committed to these investments and consequently, we are prepared to bear the related operating expenses.
The Manmade Fibers Segment reported an EBITDA margin of 10.7% in Q3, which is mainly attributed to the recognition of a number of lower margin projects from the prior downcycle period. Please here keep in mind that this margin level is as expected. It is fully in line with our full-year guidance, and we had communicated this margin development already in our last quarter's call. Today, we announced the launch of a share buyback program. The purchased shares will be held as treasury shares. This makes clear that we remain fully committed to our group strategy of investing in organic and inorganic growth. The share buyback is expected to start after the end of the black-out period on November 7th this year. Now looking ahead to the rest of the year, we do have a healthy order pipeline.
We have been nominated as a supplier for a number of new contracts in automotive, and we are seeing positive signs for newer technologies such as ePD. Based on the assumption that we currently do not see further deterioration in the market environment and that we will see benefits from our initiated cost measures, we are leaving our guidance for the full year 2019 unchanged. Now let's turn to the segment's performance in the third quarter 2019. The adverse trends in important end markets have impacted the top line development in the Surface Solutions Segment. We have seen a decline in orders by 11.4% across all markets, and in particular in automotive, tooling, and power generation. Segment sales declined by 1.1% year-over-year, driven by China and Europe, but were partially compensated by higher sales in aerospace in the U.S.
The effect from small-sized acquisitions and raw materials surcharge was around CHF 10 million year-over-year. Excluding these and the effects from currency movements, this resulted in flat organic sales growth compared to a minus of 1.1% on a reported basis. Despite downbeat markets, we also saw positive signs, such as the strong increase in the thermal spray business in both services and equipment, and the continuing success in the uptake of our SUMEBore technology. The automotive business, on the other hand, continued to suffer from significantly decreased production volumes and continues to execute mitigation actions to save cost. The overall profitability of the segment was negatively affected by the higher proportion of lower margin businesses in the mix. The aforementioned execution of investments for future growth, such as the ePD and CVD competence centers, as well as additive manufacturing.
In addition, we have seen supply chain and inventory issues in the materials business that weighed on the segment margin as well. Looking ahead, we see that the actions we have taken with regards to segment profitability will provide benefits soon. The operational excellence restructuring and cost-saving measures such as short-term work in some of our facilities and positive inventory valuations are expected to positively impact profitability margins from the fourth quarter onwards. Looking at the Q3 2019 numbers for the segment. Orders decreased by 11.4% year-on-year to CHF 350 million, and sales decreased by 1.1% compared to the third quarter of last year and stood at CHF 369 million. EBITDA for the segment stood at CHF 55 million for the quarter. That is 15% of sales.
The operating profitability is lower this quarter compared to Q3 2018 and is partly anticipated through investments, as I mentioned before, and partly impacted by product and regional mix. From an end market point of view, we observed reduced activity in the tooling industry, which is facing difficult end markets as well. In the automotive business, we still see substantially reduced production volumes, but recognize first signs of stabilization. We have been nominated as a supplier for a number of new contracts in the automotive industry and are seeing positive signs, particular for ePD, where we see increasing acceptance for this specific technology. Although our customers are still holding large investments positions back, we are well positioned for recovery. Also, in the industrial sector, we see stabilizing demand. However, still on a low level. The aerospace market is assumed to grow further despite current industry challenges.
Our generation remains a challenging market in general. From a regional point of view, we see an overall good business environment in North America, flattening activities in Europe and a clear slowdown in Asia, and here, mainly in China. In the third quarter, we acquired AMT AG in Switzerland to extend our product offering for thermal applications and turnkey solutions. In addition, the Surface Solutions Segment launched two new digital services for its customers and introduced four new technology solutions in the third quarter. Innovative strength and technology leadership of the segment are in place, and we are in a strong position to take advantage of opportunities as soon as markets recover. As I close the remarks on Surface Solutions, allow me to reemphasize that the segment delivered a good top-line result in a very difficult market environment.
Our business model remains sound, we are capable to address before-mentioned profitability issues in the upcoming quarters. Now let's move on to Manmade Fibers. The Manmade Fibers Segment sustained its high top-line levels in the third quarter and achieved EBITDA margins in line with expectations. The segment reported a high level of order intake above CHF 200 million for the eighth consecutive quarter. Manmade Fibers achieved a strong growth in sales for textile applications, especially in filament equipment in China, and this was partly compensated by a decline in special filament, mainly due to ethylene investment positions of carbon yarn customers in markets such as Turkey and the U.S. Also plant engineering saw a decline in revenue, mainly in staple fibers.
Let's have a look on the numbers for the Manmade Fibers Segment. The orders stood at CHF 276 million in Q3, an increase of 6.2% year-over-year. The segment sales were 15.6% lower compared to the third quarter of last year and stood at CHF 265 million. This was driven by declines in all regions except Europe, at the same time compares against record sales of Q3 in 2018. As anticipated and as guided before, the segment reported a lower operating profitability in Q3 due to the recognition of a number of lower margin projects from the prior down cycle period. [inaudible] Manmade Fibers Segment delivered a double-digit EBITDA margin of 10.3% and an EBITDA of CHF 28 million.
When we look at the market developments, we see a continued strong project pipeline for filament equipment in China, where our key customers take position to secure their leadership in tightening market conditions. In special filaments, we see low demand levels, which is mainly driven by the BCF markets in Turkey and in the U.S. Also starting from low levels, the segment is active in further exploring new technologies and is observing growing interest in its recycling solutions. Finally, for plant engineering, we see a variety of project opportunities with high interest, especially in the nonwoven business. The segment is also making efforts in positioning itself for continuous polycondensation solutions. For staple fibers, however, we currently see challenging market conditions.
The sustained high level of orders persists for the Manmade Fibers Segment and is leading to an order pipeline with delivery lead times reaching into 2021 and 2022. We expect healthy demand and good order intake to continue in the upcoming quarters. To this review of the segment's performance, let me hand over to Jürg for additional comments on the group's financials. Jürg, please go ahead.
Thank you, Roland. Good afternoon to all of you. Let me start with the group's financial review with a closer look at the third quarter and the nine-month group figures. Group order intake stood at CHF 627 million in the third quarter. That's down 4.3% year-over-year on a reported basis, or down 1.6% after adjusting for currency developments. The increase in order intake of the Manmade Fibers Segment was offset by a decline in orders in Surface Solutions equipment. Sales came in at CHF 633 million. That's a decline of 7.9% year-over-year, reported and 5.4% lower at constant exchange rates. Let me reemphasize that Surface Solutions achieved a flat organic sales growth year-over-year in a challenging market environment, while Manmade Fibers is comparing against a very strong comparable Q3 2018.
Book-to-bill for the group was exceeding one for the first nine months and was slightly below one for the third quarter. EBITDA reached CHF 84 million in Q3. That's a decline of 18.4% and was driven, as mentioned earlier by Roland, by adverse mix effects and continued investment in future growth in the quarter. The EBITDA margin stood, what we have heard before, at 13.3%. EBIT was CHF 36 million for the quarter, which corresponds to an EBIT margin of about 5.7%. The development of exchange rates in Q3 2019 compared to the same period of last year was providing some headwinds to Oerlikon's top line. This is mainly related to translation effects as we report in Swiss francs. The depreciation of the euro against the Swiss franc was only partially compensated by a stronger US dollar against the Swiss franc.
Assuming stable currencies, orders would have been at about CHF 645 million, a difference of almost 3% compared to the reported figure. Sales would have been at about CHF 650 million, also higher by almost 3% compared to the reported amount. Currency development had an impact of more than 2% on EBITDA, the impact on the margin remains minor. When looking at the Group sales split, the good performance of Surface Solutions in this quarter becomes visible as its shares of Group sales in the third quarter 2019 increased to 58%, compared to a level of about 54% in the same period of last year. When looking at the EBITDA split, we see a stable development year-over-year.
The Surface Solutions Segment accounted for approximately 66% of total EBITDA in the third quarter of this year, while Manmade Fibers delivered approximately 34% of group's operating profitability. From a regional point of view, our proportion of sales decreased lightly in the Asia Pacific region to around 46%, while increasing in Europe to about 34%, in North America remained stable at about 16%, and decreased only slightly, marginally in the rest of the world. The share of our service and spare part business increased to 38% of total group sales in the third quarter compared to the same period of last year. The group's third quarter performance resulted in a rolling 12 months return on capital employed of about 8.3%.
The decline in ROCE is the result of a lower EBIT, of course, over an increased asset base, which is largely impacted by the recognition of leasing assets under IFRS 16, which are running in a magnitude of about CHF 180 million. Oerlikon's return profile continues to run at a solid level and reflects our commitment to create value while executing on our strategy. Ladies and gentlemen, let me conclude with the 2019 outlook before we start the Q&A session. In a difficult market environment, we sustained good top-line levels in the third quarter and first nine months of the year, which are in line with our expectations. We recognize the uncertainties in the global economic environment and how that affected the investing behavior of our clients in the third quarter of this year.
As of today, we have a strong order backlog and project pipeline to support sales in the fourth quarter. We see upcoming benefits from the cost-saving initiatives that we have implemented throughout the year in order to improve profitability. Based on the current visibility, we do not see further deterioration in the markets towards year-end. We are therefore leaving our guidance for the full year of 2019 unchanged. We project group orders, sales, and EBITDA margin to be sustained around the comparable levels of performance as for 2018. Ladies and gentlemen, summarizing the third quarter, Oerlikon has reported a set of results that are reflecting the challenging markets in which the company operates to date. Still, we succeeded to deliver increased order intake in Manmade Fibers in the third quarter and flat organic sales growth in Surface Solutions compared to the same period of last year.
The board of directors has decided to initiate a share buyback program, which foresees the repurchase of shares with a total value of approximately up to CHF 340 million-CHF 350 million over the next 36 months. Finally, given the visibility we have as of today, Oerlikon is on track to meet its guidance. We have a strong order backlog and project pipeline and expect to benefit from cost-saving initiatives that are ongoing. In combination with our expectation on market developments, we are leaving the guidance for the full year 2019 unchanged. Ladies and gentlemen, after serving as CFO over the last 10 years and commenting in over 40 quarterly earnings calls, this is my last set of results as Oerlikon CFO.
It was a pleasure providing you insight in the company and often having lively discussion with investors, analysts, and journalists about performance and strategy of Oerlikon here in the calls or at road shows or at conferences. I'm pleased to hand over to Phil, who will take over this task in the coming weeks. Again, thank you very much for the support over that long period of time, and I'm looking forward to seeing you all again, probably in different capacities. This closes our comments on the third quarter 2019. We thank you for joining us on the call, and we are obviously happy to open the lines now for questions. Operator, if I may ask you to go ahead, please.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question from the phone comes from the line of Michael Foeth from Vontobel. Please go ahead.
Yes. Good afternoon, gentlemen. Well, first of all, thank you Mr. Fedier for the collaboration over the years. I think I probably listened to all of those calls, so thanks a lot. My first question is regarding the contributions from ePD in Surface Solutions. I was wondering how much ePD actually already contributes to the results, to the revenues, and what sort of expectations you're having for, let's say, fourth quarter and 2020, if you can give any indications on how that develops. Eventually also the order of magnitude of the impact of the additional investments that you're making in ePD. The reason I'm asking the question is I'm trying to understand if there's any changes to the underlying profitability of the Surface Solutions business when we exclude all these additional investments. Then, I have one question on Manmade Fibers.
Those low margin orders that you mentioned, for how many quarters going forward will they impact the mix negatively? That will be it for the moment. Thank you.
Okay, Michael, a bunch of questions actually. As expected, of course, I'm not ready to give details on ePD business. This is a young, a new technology, right? Just to give you somehow a flavor. There is one operational unit or one unit in commercial operation. A second one is going to be commissioned right now. European automotive OEMs have started buying the equipment. In the midterm, we expect volume up to triple digits, but that is nothing what is coming in 2020. This is really over the course of the next three years, but it gives you a kind of dimension. The spendings we do in innovation and new technologies such as ePD and CVD and others is in the order of magnitude of CHF 20 million to CHF 25 million in 2019. This includes ePD, right? Maybe the last question was concerning Manmade Fibers.
For sure, we will see effects out of these low margin projects for the coming two quarters. Following ones, but not to the same extent anymore, right?
Okay. In Q1, we will still see a negative impact as well?
Yeah.
Okay. Great. Just one last follow-up, if I may. Why was the decision to start the share buyback made right now? What has changed?
I think nothing really has changed. We have been looking at the possibility of the share buyback over a certain period of time. We are obviously sensitive about the capital efficiency, which we have. I think Roland said that before, and I think we also quoted it on the press release. It should not be construed as an element of changing the strategy. On the contrary, we continue to work along those lines and the right thing will come at the right time. Again, based on the current market environment, if I relate to M&A and the valuation issues, combined with the efficiency, as I said, on the balance sheet, we believe that's the right thing to do. We believe that we're not impairing ourselves. That's the reason.
There is really no underlying change, with the exception that we try to make it more effective for the company overall.
Thank you.
The next question from the phone comes from the line of Armin Rechberger from ZKB. Please go ahead.
Yes. Good afternoon, gentlemen. Well, you kept or you stuck to your guidance for 2019, which I think is rather sportive, especially when it comes to EBITDA margin. You still guide for around 15.5%. Especially at Surface Solutions, you guide for 17%-18% reported. That would mean that you would have to reach in Q4 a margin of 19.8%, which would be quite difficult to reach. I figure you must be more confident at the other segment in Manmade Fibers. You mentioned that we will face a negative impact of these low margin projects, at a lesser extent. What margin do you expect around for Q4 in Manmade Fibers, EBITDA? Can you give us some indications there? I know you won't discuss the margin specific, still a try from my side.
Okay. We will do our best, yeah. Talking first about Surface Solutions. You are right. Making the guidance means we expect a stronger Q4. That is what we actually see based on the order pipeline we do have and having understood what are the reasons for the weak Q3. Here we have a product mix topic. I think I mentioned it or, yeah, I mentioned it. We do have a regional impact and investments. What we did on top, of course, in between, is launching a bunch of activities to reduce costs and to improve the profitability. These measures are starting to kick in. Based on that, we believe that we can achieve the guidance around 15.5% EBITDA on a group level. It's also clear it's not a done deal. It's not a home run, for sure not.
Important is as well, that we do not anticipate and foresee any further market deterioration in terms of politically driven or whatever, right? Based to the best knowledge what we have today, this is what we can do. In Manmade Fibers, you are right. We do have this impact from low margin projects. The contribution of the effect is not equally distributed across the quarters. We expect for Manmade Fibers to be around for the year, about 13%, right? Now the simple math kicks in and you easily find out what we do expect for the fourth quarter.
Mm-hmm. Okay. Second question, if I may, regarding product mix in Surface Solutions. You explained already you were saying something about Asia as well and product mix. Can you elaborate maybe again a little bit on this topic?
I think the nature of our business piece is the following. We do have not a homogeneous distributed profitability margin across our portfolio. In materials and equipment, the margins are lower where for service, that's why the service share is a very important one. Even if you have a deeper look into the regional pattern, there are regions, countries where the profitability is much better than somewhere else. There is a clear tendency that in Asia, China, and India, the margins are, I don't want to give too much details, but are better, right? When we are weaker there, this has an impact, right?
Okay. Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question comes from the line of Sebastian Kuenne from RBC. Please go ahead.
Hi, Sebastian Kuenne here. My question is mainly relating to the share buyback. What is behind it? You buy back the shares, you keep them as treasury. If a target comes along, you will use those shares. If no target comes along, what happens then with the share? That would be my first question. Secondly, of course, you could always use your cash for M&A. The fact that you buy the shares, does it imply that you think the share is significantly undervalued? This would be my first two questions. Thank you.
Well, you're absolutely right. We all know that there is a certain holding period on the treasury shares, but that's absolutely the intent. Which by the way, is running for six years. We talk six years as of tomorrow. Definitely, that's the intention, that we use the shares, be it in any kind of construct, a straightforward acquisition, a combine of companies and the like, where we bring the shares in. In terms of valuation, it's not up to me to decide whether the share is undervalued or not. We obviously have a certain view about that, but I think that didn't play a significant role in the decision here. The intention is effectively to keep it, for the purpose of redeploying that into M&A. I would now take the stance that, to answer the question on what if we cannot use it, what happens then?
I think, I have sufficient transparency and confidence in the management also going forward that we're going to be able to redeploy this currency in acquisition, which continues to be one of the main drivers and intention, obviously from our side. I hope that helps a little bit address your question.
Can you cancel the shares if you wanted to?
There will be a possibility to do that, but then you would have to run through the whole procedures with the takeover board and all that, and I think it would take it a little bit too far now that we elaborate on that. The intention is not to do that. Let's put it like that for the time being.
It's not to improve capital efficiency, it's more to redeploy the shares, so we should not- cancel them.
Yes. Whatever way you look at it, yes.
Yeah. One question on Manmade, on the market. I remember you always mentioned market size of around CHF 1 billion, that's something that the market can absorb. Has that changed in the past?
In 12 months or in the past three months, your view that the long-term market size for this machinery is CHF 1 billion or slightly above CHF 1 billion, has it changed?
No. The Manmade Fibers market has not changed. It's still mainly driven by the filament business. Here we do see this well-known phenomenon since, I don't know, since many, many quarters now that four, five, six Chinese players are still working on new projects. I gave an indication reaching into 2022, and first discussions even beyond. That's one part of the story. I also was clear that the smaller market, the carpet yarn, which is just a smaller part of it is weaker right now after having seen a strong 2018, actually, and beginning of 2019. Now it's going down. This is mainly Turkey and U.S. Overall, I would say the Manmade Fibers market is stable. We are in a lucky position actually.
Thank you. Final question. The competition in this business is the Japanese player and you guys, or so TMT and you, or is there any other meaningful now?
The competitive environment is unchanged. Of course, there are some other smaller players, but not playing in the same league with respect to technology. I do not expect any change here. This duopolistic, if to say so, situation will remain.
Thank you very much.
The next question comes from the line of Fabian Haecki from UBS. Please go ahead.
Thank you. Good morning. Good afternoon, gentlemen. Got a few questions, one after the other. Again, on the share buyback program, if you will buy back 10% of the shares and Renova Liwet would not sell any, isn't that risk that you drop under the sanction risk of U.S. authorities?
That's a very important question, of course, and you can be assured that we have looked at that in all the angles. No, that's not the case. Even if that would be the case, and by the way, we don't know, Liwet is not part of this arrangement. Liwet in the worst case will not surpass the 50%, which is the offer threshold for the sanctions topic. That's not going to be the case either way.
Okay. My next question is on the Surface Solutions business. You mentioned supply chain and inventory issues in the material business that was also burdening profitability. Can you specify those issues? Is there anything, I mean, for how long are they going to persist, and is there anything to quantify here?
Yes, I think it's a fair point. We did see some challenges here. It was actually a supplier of one of our suppliers, which missed delivery schedules. This was somehow creating a situation where we have been quite tight on certain materials. The second part of the question is supply chain.
Inventory
inventory topics. Yes. You know that the material prices are on a very low level right now, and this was creating a reevaluation of tungsten and cobalt and stuff like that. I think the total amount was in the region of CHF 5 million-CHF 6 million.
Okay. Is there any relief we can expect already in Q4, be it on your supply side, on material side, or in 2020? Is there any outlook you can give here?
Yes, I think the supply chain topic is solved. The inflow of raw material is fine again. Reevaluation of the material topic might go in the different direction, hopefully, or depends.
Okay. On cost savings initiatives. You mentioned that you implemented throughout the year. You were mentioning short time work. Can you explain a bit, in which region did you implement short time work? How widely within the company? For how long do you expect this to persist? Is there any other measures on the cost side you have been taking?
Of course, I think what you can expect that we really use the entire bunch or the entire toolbox in cases like that. In regions, in countries where it's easier, we reduce headcount. We lay off people, honestly spoken, to a substantial amount of FTEs, right? On the one hand side. In other countries, other regions, we do have the opportunity of short work modes, which doesn't apply to all countries. Beyond that, project cost savings and optimization in different meanings, I think this is nothing special. This is what you can expect, and this is what we did and what we do. The effects out of this toolbox is expected to kick in already in Q4.
On the additive manufacturing spending, where you mentioned throughout the year, there's a 300 basis points in the burden. It's also in your Surface Solutions guidance. Is that something, when you look at your plans for the competence center in Munich and the atomizer and all those investments, something we should expect and keep in our model for 2020? Would that persist?
We did our investments in additive, in the infrastructure, and this is actually done. Whatever is coming now is purely volume-driven in terms of printer or stuff like that. From that perspective, it's not so much a new investment in additive. There are other elements. I mentioned the ePD and the CVD, what is chemical vapor deposition, another alternative technology based on a company which we acquired, I think, one and a half years ago or something like that. These elements are kicking in.
I'm starting a bit to mix up things. Can you clarify here? You earlier mentioned you spend innovation about CHF 20 million-CHF 25 million in ePD and other technology. I think that does not include additive manufacturing. Now with the 300 bips in AM, you also say, or you put ePD in the same basket. I'm a bit confused now.
No, I think the 300 basis points is a frame, which is for sure not exceeded yet. This is the long-term perspective here.
No, let's put it the other way around. We have been currently guiding on these 300 basis points contraction. We obviously do understand that the speed of adaptation and all that, and we said, and I think Roland said that very clearly as well, that the speed of adaptation is slower than what we have anticipated, which inevitably means that we're going to very diligently manage the cost and the expense side of additive. Don't expect significant addition in terms of investment and also expect that will overly level in light with the ramp-up of the top line, the cost base of the global business, right? What does that translate to? I think it's too early to say.
We probably believe that with all the activities which we have been taking, that the CHF 300 million seems to be the cap and that we should expect lower negative contribution as we go forward, obviously in light of a slower but still coming increase in the top line. Does that help a little bit more?
Okay. The 300 basis points, initially, they were kind of R&D costs, but now it seems like this is idling capacity. This is OpEx due to unused capacities because the orders are not flowing in, right?
Well, again, let's be careful the way we word that. If you say the orders are not flowing in, the orders are flowing in, but not to the extent we expected it to be. Needless to say, that has an immediate impact, and particularly if you look at the material part of the business on the titanium production in Plymouth, that the unabsorbed cost needs to be worked out of the system. Yeah, absolutely.
Okay, one last one here. You mentioned three years ago, CHF 300 million in revenues you're planning for 2020. Where are we at the moment, and what is your current forecast for additive manufacturing revenues next year? Can you give us any sense here?
I think we gave, I don't know, quarters ago, some hints that we are still in a double-digit range. CHF 300 million by 2020 are not doable, not at all. We also have been clear that the investments, which we initially also declared as being CHF 300 million, are also not yet done or will not be done, or be done at a very later point of time.
The double-digit range you're doing is basically what you acquired with citim as an additive manufacturing service company and the powder you already produced before, right?
No. I think, we have the citim business, which we acquired, I think, 2 years ago, which we are building up. We do have the powder, the material business, which we are building up, and Jürg was just referring to the new plant in Plymouth, where we installed the new vacuum atomizers, which we didn't have before.
Both together we are not. I'm not giving you the precise figure, but it's somehow medium double digits number.
Okay. Thank you.
Yeah.
The next question comes from the line of Christian Obst from Baader Bank. Please go ahead.
Yes, hello. Thank you for taking the questions. It's more on the balance sheet and on the cash flow side. Can you give us some kind of idea concerning your CapEx spend this year and next year, and the split between Surface Solutions and Manmade? I would say it's a little bit above CHF 200 million. When it comes to operating cash flow and free cash flow, having in mind that you generated approximately CHF 430 million of operating cash flow last year. We have an EBITDA of -17% in the first nine months. Let's assume we have well below CHF 400 million of operating cash flow this year, minus CapEx CHF 200 million, less than CHF 200 million.
On top of that, you now initiated the share buyback program so that we have then might have some kind of a free cash flow minus CHF 150 million-CHF 200 million. Am I right with that kind of assumption? This is the first area of questions.
No. Not really. let's go back.
Okay
on the CapEx. Your assumption of CHF 200 million on the CapEx was indeed, if you take it back a couple of years, and the expectation based on the environment which we are in, and as I think Roland alluded to that before, we obviously take all measures including the very diligent management of the CapEx number. I would expect that that number is coming in probably around CHF 150 million max based on the current visibility which we have. For next year, you should expect that to be even lower. We are migrating away from the CHF 200 million. The CHF 200 million were perfectly justified if you look back over the last couple of years. By the way, they did contain a significant amount of investment into additive manufacturing, which again, we confirmed before is by far not taking the same speed of investment on CapEx.
On the split, if you assume it's CHF 150, in fact, below CHF 150 million, assume that about 20% max will go into Manmade Fibers, and that's related to a couple of specific projects which we have coming out of Neumünster for staple fiber development, and all the rest is being allocated on OSS. Right? From a free cash flow point of view, needless to say that the current development also in terms of the lower income in prepayments is impacting the free cash flow pattern, notwithstanding now the dividend and the CapEx for that matter. We still expect that we probably going to run in the vicinity this year of about CHF 150 million, between CHF 120 million and CHF 150 million for this year. Then again, a tick higher from a free cash flow point of view going into 2020. Right? That's basically the assumption which we have.
Thank you very much for that. This is, of course, before the acquisition, before the purchase program of shares.
Yeah, I know. Absolutely.
Of course. Yeah. Going back a little bit to the balance sheet, its intangibles, can you give us a split of the more than CHF 1 billion of intangibles you have? I would assume the majority, of course, is on Surface Solutions, so that 80%-85%, something like that. Can you give us an idea there? Do you see any risk of some kind of impairments going forward, especially from your acquisitions in additive manufacturing or some smaller acquisitions in the special areas?
Yeah. We are not decomposing in detail on the level of BU with the goodwill, but you're right to say a big part is coming out of the Metco acquisition still, which is obviously to be attributed to Surface Solutions. We do as requested, of course, on a mid-year basis, all the calculation for impairment, and even the weakened environment which we cited in terms of additive does not leave us to believe based on current plans and expectation of future development of the business that we're going to have in any regard, an impairment on the assets based on today's knowledge and based on today's planning assumption which we have for the underlying businesses.
Yeah, of course.
One last question is concerning return on capital employed and WACC. You mentioned, or you highlighted here that in Q3 you received the 8.3%, and this is including, of course, the impact of IFRS 16. Has these IFRS 16 development or inclusion has an effect on your WACC calculation, and what kind of WACC you are currently calculating with? Thank you.
The WACC which we are assuming, or the way we talk about WACC internally is obviously on a segment level. If you look at the company, we normally talk in a vicinity of about 7%-7.5%. Obviously, depending on the external development of the market as well. What was the other question, was related to the inclusion of-
IFRS 16
IFRS 16 on the WACC?
Yeah.
No. Not to the extent I could think of, or non-material, let's put it that way.
Okay. Let's calculate the 7.5%. That's fine, yeah. Thank you very much for the detailed answer. Thank you.
You're welcome.
There are no more questions on the phone.
Thank you very much for participating.
Sorry to interrupt you. There is a last-minute registration from Patrick Laager from Credit Suisse. Please go ahead.
Okay. To you, Patrick.
Yeah.
Just made it.
Sorry for that, actually. Thanks for taking my questions and also a big thank you to Jürg Fedier from my side. I'm sure you're having a lot of fun going forward, playing golf. Hopefully, we will get in touch here. Three questions. Coming back to Fabian's question on cost-saving efforts. He was probably hoping to get some numbers here. Do you have any figures you could share? For instance, the number of temps who left the company or how your headcount has developed, or even better, how much costs you are expecting to take out from the P&L by end of this year or next year? This would be my first question.
A good question, of course. It's very difficult for me to give any details. I tried to give you a sense of flavor. In the automotive business unit, we reduced the headcount by about 200. This is 10% of the permanent headcount, just to give you an idea. All the rest, No, I'm sorry, we simply don't do it.
Okay.
Yeah.
Which makes our life a bit harder, yeah. It's okay.
Yeah.
Then that's more a general question coming back to additive manufacturing. I presume you won't tell us actually that this was maybe a bad decision to invest so much in this space. Fact is today that we are not seeing any signs of industrialization in 3D printing today, and it looks like you are still confident that this technology will be used also for larger batches in future. Actually, when I'm talking to other companies, also sitting here in Switzerland, and also investing in this space, they tell me that this will not happen. Just as a general indication, why are you so confident this will happen in the future?
I think the answer here is quite simple, because the world is going to see much more digital processes, and the life and the world, even the production world, will become much more digital. Additive is the physical arm of digitalization. You are right, it takes longer, it's a bigger effort, and I think, just shifting the mindset and shifting the position from just sorry, taking the parts and the goods we have today and replace the manufacturing technology from casting or from milling or whatever to additive, it's not good enough and it's not the solution. I think the real development kicks in if the products are designed in a different way. I give you an example. If we talk about a next-generation military aircraft, which takes time.
It's clear that the weight to thrust ratio and performance and everything is far beyond everything what does exist today. If such tough and stretch goals are kicking in, it's not about using the old technologies, it's about new technologies like additives. From that perspective, the statement that this is not going to happen is clearly wrong from my perspective. It's going to happen. Unfortunately, yes, it's not going to happen tomorrow and it takes a little bit more time.
Okay, good. Finally on Surface Solutions again, you showed all the extra costs you had in Q3 and potentially also in Q4 and the extra costs you had in Q1, Q2, related to additive manufacturing, et cetera. Can you make our lives, at least here, easier and give us the kind of underlying margin you had in Q1, Q2, Q3, just to really make our life easier here?
I-
A clean margin would be great because of course we can do our own calculations here, but probably we will miss something, and I just want to make sure that we have the kind of clean or adjusted margin for every extras, every one-offs you had.
Actually, not. I think I'm sorry, but I think you have all the ingredients, Patrick, that we gave you in terms of the impact. Therefore, everything that is public is public and you can take your conclusions from that.
Okay. Good. Okay. No problem. Thank you very much.
Okay. Thank you. No further last minute questions coming in. Thank you very much for participating. This concludes our Q3 earnings call. Looking forward to speaking to you after Q4 on the 3rd of March when we disclose Q4 and the full year results. Thank you very much and have a good afternoon or a good day in the U.S. Thank you. Bye-bye.
Yeah, thanks very much.
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