Ladies and gentlemen, welcome to the IR Call of PALFINGER AG. I'm Moritz, your call operator. Our today's hosts are CEO, Andreas Klauser and CFO, Felix Strohbichler of PALFINGER AG. I would like to remind you that all participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a question- and- answer 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 Andreas Klauser, CEO. Please go ahead, sir.
Yes, good morning here from Salzburg. Welcome to our Q3 earnings call. I think it's important that you see some of the highlights, so here on slide number one. Despite the difficult conditions, we can really present strong results for the entire year and as well for the first three quarters. What you see, the key topics or rather key highlights. First of all, high profitability despite lower revenue. I think this is something you will recognize later on in the numbers Felix Strohbichler is presenting. Yes, still the market is weak, especially in there, so we have a continued low order intake in the core markets. And on the other hand, our focus is really working on a further inventory, where the reduction both on components and as well also good.
If you go to the next slide here, we are having some significant events in the first couple of three quarters. First of all, we have the IAA Transportation, where we managed, in that one we managed to show some product highlights as well, digital innovations, like PALFINGER CONNECTED p lus+, which was really quite well received in the marketplace. But not to forget, and some of you might remember, yeah, our truck-m ounted forklift, which we launched two years ago in North America, and now we are entering the new products as well in here. We got quite huge customer feedback related to the product and its performance. On the other hand, and we are already hitting an important point, which should be as well further explored in extremely long.
The Marine business, we have been presented SMM in Hamburg, which is a major player, major show here in Hamburg, where we are showing our Marine products and the Marine solutions. And here, again, quite a positive mood with our customers, but as well in the overall market expectations. We launched quite successful Marine crane for quite eight months, and which was very much, very well received in the marketplace. On the other hand, as well, having some deals like here, just to mention one, PALFINGER Systems here for Singapore Defence, which is an overall contract of more than EUR 60 million. Go to the next slide. We have some remarks to our PALFINGER overall numbers. Yes, we're still managing, keeping our number one position here in crane and lifting solutions. In revenue, which we achieved in 2023.
Currently, we are having 12,760 employees, end of Q3 2024. The revenue distribution, still again here, North America, further growing. EMEA, lastly, 58%, but we expect a reduction. And all the other areas, LATAM, CIS, and APAC are still at the 5% level. In terms of product, I think it is also quite important always to see where we sit in terms of our product offering and product portfolio. There are no major changes, just to mention the wind cranes and the Marine type, which is as well, in the end, taking off for our offshore solutions. We are supplying offshore turbines, and here as well, business is really positively coming back. While we are still managing good results, and I think one of the key factors was really resilient, we have through industry investments.
I think this is really key here to mention again, yes, we still have a big portfolio, which is covered at the construction site, but all the other businesses are further growing. We just mentioned as well, railway, logistics business, and as well, the entire Marine business, that we will see the numbers later on. All in all together, sustainability is a key driver at PALFINGER, and here we as well happy that we can report here quite significant improvements of all our ESG KPIs. It's not only about the planet that we are working on, we are still getting 80% energy out of renewable energy. Energy is not only important for our sustainability setup, but as well, in terms of being independent from other energy sources.
For the people, we touch also very important here to report that we have more than 25% of that in terms of international employees and headquarters. The accident rate further improved, so there are significant changes, and last but not least, to look forward in terms of employees, and we are also happy that we really managed to get strong commitment out in the marketplace in terms of our values. The people are really understanding and our employees are understanding, fighting for their PALFINGER stands, and as well, our vision strategy that we are currently working on, so it is now important to see some more details on the numbers, and then hand it over here to Felix, who will share our view for good sales.
Thank you, Andreas. Good morning, ladies and gentlemen.
I'm happy to present again a set of good financial KPIs for the first three quarters of the year 2024 . Let me start with the Service segment, which comprises, as the name is already telling us, all activities related to sales and service. On page number 11, you see some highlights regarding the individual regions, starting with North America, so North America had quite a strong development over the past years. At the moment, we see some slowing down demand due to the upcoming election, however, we expect that, independent of the outcome of the election, North America has good fundamentals and should come back relatively quickly to normal levels of growth and good development. In APAC, we also see a good economic environment, especially in India. On the other hand, in China, there is no recovery in sight.
Andreas Klauser already mentioned several times that Marine is performing very well, so we have seen a significant growth in service in offshore wind, which led not only to a significant increase in revenue, but more importantly, also the very good profitability of the activities in Marine. In EMEA, the core markets, especially in Germany, remain at a low level, also Scandinavia. In the south of Europe, like Spain, Italy, et cetera, we still see very healthy levels of activity. Also in LATAM, Brazil and Argentina are on course for growth. Very important is also the issue of finished goods. We have been reporting now over several quarters that the inventory levels are high, especially in our own dealers in Germany, Spain, and in U.S., due to inflation bottlenecks.
But what we have seen now in the past weeks is that really the inventory levels now begin to decline, which we also then see in our KPIs regarding cash flows. On slide number 12, you see the financial KPIs for the segment and service. So revenue reduced by around 4.6%. Profitability, EBIT, went up by 17%, but this is also linked to the fact that low utilization is reflected in the Operations segment and not in the sales and service segment. More important on this slide is the development in terms of order book and service business share. In the order book, you can see that we have a decrease of -27% compared to one year ago.
However, it's still a very healthy level of order book with almost EUR 1 billion of orders in hand, which is for sure something which gives us a good, good starting point, also into the year 2025. The service business share has been up from 15.5% to 17.4%. You could argue that we've already been there in 2022, however, the reality is that in 2022, we had some time lag in implementing price increases for equipment, which was not the case for service. So the increase from 2023 to 2024 is a real increase, and we expect here much more to come in terms of, share of our service business in the future. Coming now to the O perations segment, we really have seen now some adjustment of capacity already in the past quarters.
Also, the revenue from third-party production due to the overall economic environment is reduced, and of course, this is also some impact, not only on the sales with third parties, but also on the overall profitability of the segment. On the other hand, we also have capacity expansions in other parts of the world. I think Latin America, thanks to the high order intake in Brazil and Argentina, and at the moment, we are also working on establishing a strong supplier base in Mexico to optimize costs and also to prepare for further growth in North America, where we want to reach a lot of our revenue within the next years.
On page number 15, you can see the KPIs of the operation segment of the external revenue from the sales to third parties, reduced by around 17%, and profitability went down by 65%, due to the lower capacity utilization, which is really reflected in these numbers. If you then go to the segment, other non-reporting segments, it's kind of a difficult name, but it includes, in the end, the holding, the former holding unit, and strategic into strategic projects, and also the Tail Lift segment, which is too small to be reported separately. So on page number 17, you can see external revenue. Don't look at the increase, because in the previous year, we just had the European part of the business, even included now as the North American part.
In total, we have here around EUR 83 million of revenue in the first three quarters, Europe and North America segments. The EBIT has substantially improved, especially also because we have seen now a positive earnings contribution from segments, where we had some significant losses in the first three quarters last year within segments. Coming now to the overall situation of the PALFINGER Group on page 19, you can see that the revenue increased slightly by 3%, and the EBIT also slightly by 3.8%. This looks like nothing would have changed. The reality is that we had a substantial reduction in the EMEA business, which is historically the core of PALFINGER.
This decline in EMEA could be almost 100% compensated by the improved earnings in North America, in Marine, and with the improved earnings of the group. Even if the number is almost the same, the composition of what is behind really shows PALFINGER has a very strong resilience, due to the fact that we are present in a lot of markets, that we have a broad product portfolio, which allows us to compensate weaknesses, even in the core market EMEA to a large extent. On the next slide, you can see the level of investment. Here you can still see a high level of investment also in 2024, driven by one-time projects.
This will go down now in the remainder of the year, not going down, but not increasing much anymore, so we will not reach the level of 2023 in 2024. For 2025, we expect a lower level of investments, but at the moment, we are really in a cycle with a lot of one-off projects we have to invest in. On the next page, you can see the development of our net financial debt. So it has gone up again from EUR 719 million to EUR 759 million. This is due to the fact that we still have high inventory levels, as already mentioned before. Also high dividend payments and very high interest costs of around EUR 40 million for the whole year, and this led to this increased financial debt.
However, we are on track to bring this down over the quarters to come significantly. If you look at the remaining term debt, it's more than 2.5 years, and the average interest rate at almost 4% is a very high level. We have around 60% of fixed and 60% variable financing, which means that all the interest rate cuts we do expect in the coming quarters, we need, with a 50% impact of those cuts, also the improvement of our interest. On the next slide, you can see our balance sheet KPIs, which are very solid. As always, equity has improved by around EUR 45 million. Equity ratio to 35%, and all the other KPIs on a solid level. But of course, our target is clearly to bring down the financial debt to improve net debt to EBITDA and also clear.
Last but not least, as we come to the fiscal statement, as you can see, in Q3, we ended up with a slightly negative free cash flow of EUR - 2 million. If you look at the year 2023, at the same point in time, we had around EUR -28 million, and we ended up at the end of 2023 with EUR + 46.5 million. So we have an improvement of around EUR 70 million in the fourth quarter. And also for this year, we do expect that the change in working capital, which is still negative for the first three quarters, 2024, it's by EUR 56.3 million, should be at least neutral, so that we end up with the free cash flow, which should be even better than in the previous year, and even by a margin.
Clearly a significant improvement of the free cash flow in Q4 expected. With this, I would like to hand back to Andreas Klauser for the outlook for the full year.
Thank you, Felix, here, for sharing the numbers with us. I think you have seen that, the numbers are progressing, and we are progressing quite well in terms of overall performance. What does this mean for the remainder of the year? Sorry. What does this mean for the remainder of the year? I think it's important to mention here that we are continuing to see positive development in the main markets of APAC and LATAM. This is, clearly shown as well in the order input and order coverage. Unfortunately, on EMEA, we do not see the market, coming back in terms of economic environment.
We will be in core markets. I think there is not new. On the other hand, North America is currently a bit weaker than expected, but this is mostly caused due to the election switch as we have done in the next couple of weeks. So that we expect as well with the market coming back. On the other hand, what we will do, and what we manage on our side, is we put a just-in-time production capacities in EMEA to make sure that in terms of run rate and capacity, we are not again running the risk that we might be overstocking, so that we have a continued flow as well between operations and as well, on the other hand, selling and investing our equipment.
What we expect, fully in terms of numbers, I think it's clear that, we might see a decline of roughly 5% versus 2023, which will as well result in a reduction by roughly 10 points. Yes, as our record year, 2023, but still we expect quite good results. And clearly, the cash, the focus is here on the cash flow side, reducing our working capital, as Felix mentioned before. All of these actions should again result in a strong overall 2024 result. If you go to the next slide, so no change here as well on our financial goals for 2027. The targeted revenue is becoming more challenging without.
But here, what we see, as we mentioned earlier, in terms of mining business and markets, which are coming back quite strong, we feel confident that we will get there. What would it mean in terms of absolute numbers? Our absolute KPIs, this would mean, still maintaining the number one position in crane and lifting solutions. On the other hand, coming to the EUR 3 billion revenue from organic growth, again, we have, no major acquisitions or any other stuff, we are expected. 10% on EBIT margin and 12% in terms of growth. So this is the commitment we can make to the people here at this point in time for 2027. Yeah, and I want to say thank you for your attention, and I will hand back to our operator. Thank you.
Ladies and gentlemen, at this time, we will 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. Questioners on the phone are requested to use only handsets while asking a question.
Anyone who has a question may press star and one at this time. One moment for the first question, please. And the first question comes from Markus Remis from RBI. Please go ahead, sir.
Good morning, gentlemen. Congrats to the strong quarter. I have a question related to the U.S. and I mean, you've been comparing the wording from the first half conference call and today regarding the U.S. I was actually a bit surprised to hear you talking about the weakness. What makes you so sure that this is just temporary and election related? Is it the fact that requests are still high, but clients or customers are simply not placing the orders? And is that related to a specific product group, or is it like a broad-based phenomenon?
I think what we can say here is, overall, the market is caused by the election this week in terms of making decisions. The orders are out, so the trials are there. Absolutely, there is no doubt. But the decision-makers are still a little bit waiting now. Is it more Hillary, is it more Trump? And I can just tell you here that, generally, the guys who are leading the U.S. economy are very much in favor of Mr. Trump becoming the president, and this is now where they are a little bit waiting and hesitating in terms of signing the contracts.
The orders are out, so this is a little bit slowed down, and this is overall U.S., while the major deals, truck market, so we are having the orders out, where we have some confirmations, at least verbally, to get these contracts signed in the near. So overall, the picture looks probably, but currently, the decision-making process is a little bit slower and weaker than we might have seen, or we might have expected. On the other hand, this is knowing the U.S. economy, this is nothing completely new. If you compare this to other years when we had election years.
Right, and from this historical experience, is it fair to say that at the beginning of 2025 , the momentum should come back then?
We would expect, yes, that the market is then absolutely coming back in Q1 2025, and that is the other reason why we are a little bit reducing our capacities to a rate that we are overdoing, overrunning it in terms of action, so that we avoid inventory, which can't be sold in a reasonable time frame.
Mm-hmm. Okay. Then turning to Europe and on one of the slides, you pointed out that the production capacities in EMEA will be adjusted further in the fourth quarter. Is that something you're doing incrementally because the market is weaker than expected? So is it coming on top to those measures you've implemented year- to- date? And can you maybe outline a bit the magnitudes by which you have adjusted production capacities in Europe?
We just adjusted the run rates to a rate that we are building up inventory, especially as well for the end of the year, but as well for the beginning of next year, since the market is a bit slower. Customers are expecting and you know accepting as well lead times and delivery times of five to nine months, which is as well in the entire industry the average as well considering the adjustments we are getting here from our ends in terms of trucks. So all in all this is just matching what we see in the marketplace looking forward and as well as our customers would expect, and it wouldn't make sense here to build up inventory and then don't get the traction time or the customer is not taking the equipment over.
So this is just. I would call it smoothing out, and then it's the delivery.
Okay. So you say you're kind of reducing the shift loads and, I don't know, more with longer maintenance standstill over the Christmas period. And is that what you're hinting towards?
In the end, what is happening in Q4 is something which has been planned over quarter, so this is not a new measure. We have communicated now, I think, for the last two quarters at least, that we have been constantly decreasing capacity, but slowly, not with big steps, no social plans. So this is very smooth. We use the possibilities we have, moderation, reducing overtime, contract work, et cetera. So in the end, this is a smooth process in line with what we have been communicating over the past quarters. So it's nothing new.
Right.
It's just that these measures now take effect, and you can see it in the results of Q4 for the first time, with a major impact over the third quarter. You could see some impact. So you have seen the first half year, which was stronger than the first half year of the previous year. Q3 was weaker than the previous year, Q3, and the same would apply to Q4. So these are the impacts now of the reduced capacity.
If I can stay for one more question within EMEA. Can you help me understand the dynamics in the large markets like Germany, France, I think also Scandy, that are underperforming? I mean in terms of the year decline, are you thinking that bottoming out or yeah, bottoming out is the approach now? Or I mean, how much further downside do you see until demand really flattens out and eventually some replacement demand kicks in?
I think we are already hitting the bottom year of the business, so I think we moving forward, we don't expect any further major negative impact, but as well, not the market coming back maybe as quick as some people would expect. In terms of housing, like in Germany, you know, how many apartments you would need, but currently nobody is investing, but we can see on the other hand, the rates are going down, interest rates are going down. Yeah, a restart is expected and no further decline, but we don't see the market really coming back. On the other hand, Marine business is still progressing quite well. It's just need to make sure that we can get the equipment out as quick as possible since these are long-term contracts.
Then as well, Latin America is still progressing quite positive, and then as well, U.S. market kicking in. So overall, we see it like a balanced picture looking forward.
Okay. Another question, I guess you commented the wording for the 2024 guidance, but I'm actually more interested in next year already. Not asking for a guidance, but just to get your thoughts around looking at consensus forecast for sales, about EUR 2.4 billion, which is suggesting increase year- on- year. I mean, that given the sustained weakness in core markets, that actually looks increasingly challenged from my point of view. Maybe you can share some thoughts on what is needed maybe to get a stabilization in 2025 . How much-- I think it might be a year of two tails, so to say, weak first half, recovery second half. Is that something that you would subscribe to?
Then I described it already quite well. So a strong trend, first half, no doubt. I would expect that North America will rebalance first after the election will be done, and then I say all the rules are clear. So I would expect a first improvement in North America while Europe is expected only maybe to come back in the second half of 2024 . But as I said, we are currently seeing ourselves at the bottom of the curve. On the other hand, yes, we still have markets like Spain and Italy, which are performing quite well. So it is also now in Europe trying to make a comeback. Big picture.
On the other hand, yes, Germany is an important relevant market to balancing, and that we can mostly offset in other areas, but maybe you would like to add something here. Yeah, as you mentioned, the idea of EUR 2.4 billion, which would be an increase compared to our guidance for the year 2024, which is significant. We have to consider the fact that now the capacity has been reduced over the last months. It takes time to ramp up, so even if orders kick in, it will be quite challenged in the next year to significantly exceed the revenue of 2023.
So I think, nobody knows, when really the markets will kick in and to which extent, but from today's perspective, an increase of 3%-5% seems very high and very ambitious, given the fact that at the moment, capacity is substantially reduced.
All right. Thank you very much. I'm getting back into the line.
The next question comes from Patrick Steiner, from Kepler Cheuvreux. Please go ahead.
Good morning, gentlemen, Patrick speaking. Congratulations on the strong results, and two questions remaining from my side. In the call you mentioned increased service business share in the first nine months, and the expectation of the service business is expected to grow further, if I heard that correctly. Can you explain to us where you see the service business in the next three to five years in terms of revenue and what would be the most important growth drivers?
I think it probably can say here is that we really expect doubling within the next two years. Our service business, which is on one hand related to the main business that already started, so the results are already seen from the main side. On the other hand, we are further developing our spare parts activities. For example, North America, we have higher population of products like the truck-mounter fleet. So we are hand in hand with the bigger volumes and higher profitability which is kicking in. On the other hand, as still when the markets are under concern and under pressure in terms of machine sales, our customers are focusing more again on services and spare parts business. So as well, offsetting maybe certain declines you will see on certain segments.
All right. So if I understood this correctly, revenues to double within the next three years, and in terms of profitability, can we expect the same level of profitability at this higher revenue level, or how should we think about this?
It's mostly, yes, but it's mostly impacting our profitability. I think this is likely to happen, as we mentioned here, and as well gives stability in terms of- What about market environments when we are maybe not taking off or when the markets are not taking off in terms of machinery sales, as quick as expected?
Specifically, if there is, we keep up our margin target, despite of the fact that price increases at the moment are not possible because there is no pricing elasticity. In order to compensate for this, clearly the increase of service revenue share is helping us to compensate this and to come to those margin targets.
Okay, thank you very much. Second question: Is it, I mean, is it fair to assume that the lower order intake in Q3, which was significantly lower compared to Q1 and Q2, is the result of the low demand out of North America, and that the European core market has stabilized at this low level? Or did you see a continuation in demand decline in Europe and in Q3?
As already mentioned, the order intake is stabilizing, so we are keeping the run rate, which we have seen, the last couple of months. There is no further deviation. What is not anymore there, we have a specific backlog we have as well, beginning of 2024, coming from 2023. But now we are quite flat, in terms of, our order intake.
Okay, great. Thank you very much.
And the next question comes from Jorge González, from Hauck Aufhäuser Investment Banking. Please go ahead.
Hello, good morning, and thank you for taking my questions. Again, congratulations on the margins in this quarter. My questions are regarding this, in fact. So looking into your adjusted outlook for 2024, you are mentioning around 5% decline in sales and about 10% decline in EBIT. That obviously is much better now than previously with the 20%. And if I factor this in my model, Q4 should be around the same in sales than Q3, but a bit the margin should show some deterioration. But, I mean, it makes sense, not because Q3 was very strong. I mean, what I'm wondering, have we seen an extraordinary impact in Q3 that is not sustainable?
This mix with SEA with Marine in Q3 or this service a strong development in Q3 is sustainable or is something that is going to change the mix in Q4 and the first part of next year? Just to have a better understanding of what we should expect in the following quarters, if these super high margins are sustainable or there should be some kind of normalization. That will be my third question, please.
Yeah. First of all, let me respond to the point of changing the guidance. So it's not a massive change. We said up to 20% deterioration. Now we say more than 10%. So this is in the corridor of, let me say, around 5%, much better than what we had communicated last time. It's not that far away. Basically, you asked about if this margin in Q3 sustainable. As mentioned already, we are constantly now adjusting capacities, especially in Europe, which also means that there is a change in mix. So we see not yet the full impact in Q3 of the reduced capacities in the year, and this is also the reason why the results in Q4 will be below the result of Q3.
Because we will see another mix change, which is, so to say, reducing the share of the core business in the year, compared to other parts of the business.
Okay. Very, very clear, and regards to the backlog, you mentioned that you think it's, w ell, I don't know exactly your words, but that is a healthy backlog, looking forward or a good point, a good starting point for 2025, and I was wondering if the current levels are comparable to any situation in the past that could give you some confidence that this is enough for probably improving utilization levels this year, or at least is sustaining you for the first part of next year, so how I can understand this backlog, please?
I think, as you have seen as well in the last couple of years, since 2019 , we have managed always to read the market environment, properly, and based on this experience is what we are believing in terms of numbers, so I think the track record is concerning that we know how to manage it, and we know what we can expect in the marketplace. Yes, it is going down, what's going down for the end of the year, we are having talks in the business and which is retail. The customers, you know, obviously are switching from one corner to another. Essentially, as you said, we want for sure, you know, in 2025 , will be quite flat, no doubt.
But, on the other hand, with still the growth and development in the wind business, which is a larger impact, we still expect not a too bad start, as well in Q1 of 2025.
Okay. Thank you very much, Felix, and that's very useful. Whatever works for you well.
And the next question comes from Lars Vom-Cleff from Deutsche Bank AG. Please go ahead.
Yes, good morning. Thank you very much for taking my questions. Three quick ones remaining. We just talked about the order backlog. Is it correct that you're still not seeing any cancellations, or are those customers also rethinking their recent orders?
Currently, can I tell you, we don't see any cancellations. It's now just to make sure that we're adding the right product, the right solution available when the chassis from our end is arriving, and that we have sufficient capacity to mount it as quick as possible in terms of getting the equipment out. But we don't see any cancellations. As well, the orders reach out to the marketplace is not that much below than previous years. Just people are not concluding and not deciding finally, because they expect maybe better interest rates or long-term contracts. But still, the offers reach out in the marketplace are not too bad.
Perfect. Very helpful. Thank you very much. And then maybe quickly looking at a potential margin squeeze, you already alluded to, the effect of you idling some capacity. With regard to your own sales prices and input prices, is it still fair to assume that input prices are continuously coming down somewhat? And are you seeing, as a result of that, also customers asking for price decreases, or is your sales price level still relatively stable?
The bargaining is not following the general trend on the market to reduce prices, so we are keeping prices relatively stable, of course, in difficult market environment. There is more pressure on pricing than in other times, so this is very clear, which doesn't help in terms of margin. But I would say the big impact on the gross margin is coming from personnel costs. So we see steep increases in personnel costs, which at the moment cannot be passed on to the market with price increases. So the pressure on the margins is rather coming from cost increases, whereas in the past quarters, we saw some benefit from lower material costs, from sourcing costs coming down.
However, now we are coming here to a point where not a lot of positive impact out of further improvements in the supply chain can be expected, as personnel cost is still going up.
Excellent. Thank you very much.
The next question comes from Miro Zuzak, from JMS Invest AG. Please go ahead.
Yes. Hello, gentlemen. Can you hear me? Can you hear me?
Yes, we can hear you loud and clear.
Oh, okay. Thank you. Congratulations to the results. I have a couple of questions. The first one, regarding your top line guidance. If I model now Q4, with the - 5% that you are roughly guiding, then I get a decline of 12.2% in the Q4, versus a decline of 2.5% in Q3 now. Looking at last year, I see a much higher growth in Q3 2023 than in Q4 2023. So Q4 last year was already down versus the previous year. And also, I looked a bit at the historical seasonality, and typically Q4 was always the strongest quarter. Now, am I right in that this - 5% is more like a floor?
From today's perspective, given the fact that orders are running sideways at around EUR 400 million run rate per quarter, that the likelihood that it's gonna be a bit better than the -5% is quite high from today's perspective?
No, I would not subscribe to this, so the reality is that this guidance is from today's perspective, with our S&OP planning, relatively precise. Of course, there can be some deviation, plus and minus, but this will not be significantly better.
Okay. Very clear. So you rather wanna increase your backlog then, right? So just make sure that you have enough left.
It's a clear decision to rather reduce here the output, and to make sure that we can improve the cash flow, reduce the inventories, then to optimize turnover and EBIT in 2024, so the focus is clearly on cash flow, bringing down net financial debt, and also making sure that we go into 2025 with rather a better than a worse backlog.
Next question regarding your R&D spending. So that has come down from run rate EUR 17 million, or even a bit higher than EUR 17 million, to now EUR 13.6 million in Q3. Was there any one-off booking of grants or whatever, or did you effectively reduce the cost?
Yes, I can tell you where it's coming from. It was a very clear effort to bring down all the open vacation. So we had a lot of days of vacation in our bookings. We had a huge provision, and we really pushed now also the R&D department, not only but especially the R&D department, to use those vacation days. So this is really a special effect of R&D department taking a lot of time off, which has been provided for already in the past. So this is so to say, the long term effect is not that we have reduced our R&D activities. Of course, there's also lower external costs in Q3. We also have less cost of prototyping, et cetera.
So the reality is always that in the summer phase, you have a lower cost, but the special effect was really reduction of the provision for open vacation.
Okay, thank you. The next question would be regarding your selling cost line. Typically, in the past Q4 was much higher than the previous quarters, probably because of booking of selling bonuses, sales bonuses, and so on. This year, given the fact that your orders are down and you know, the overall top line performance is weak, is it? Am I right in assuming that the seasonality in this line will be lower this year, so that the sales people will get less bonuses than, for example, last year?
It's really sales bonuses are not such a big impact for PALFINGER , because we have a lot of sales done through the services which are not linked to sales bonuses. So, I wouldn't expect a major impact and not a major change.
So that means Q4 will be much higher than the EUR 43 million, more like EUR 60 million, like last year, Q4, so the better assumption?
I do not have all the figures in front of me, so I would not like to answer now with an exact number, but we can make the estimation that Q4 in alignment will come back to you.
Okay, sure. Thank you. Then the next one would be regarding the seasonality in the operations EBIT. T ypically Q4 is very weak, sometimes even negative, or mostly even negative. Is it the same this year?
Well, this is always depending on several aspects. Of course, transfer pricing is determining the split of results between operations and leasing service. And for example, if in certain countries, operations become effectively becomes negative, the legal entity effectively becomes negative, we need to charge the underutilization to the segment service for tax reasons. So this is why it's always a little bit tricky. If you look at before, there are some special effects, and where I would really recommend in terms of understanding the overall picture, not to look too much into the EBIT split between sales and service and operations, because this may be misleading, and this is not just operation. There are a lot of transfer pricing effects in there.
Okay, and then the last one, if I may, regarding the free cash flow. Do you expect the company to be free cash flow positive this year, so looking at the entire year?
At the moment, you're
Yeah. Say it again, sorry.
No, absolutely. So as mentioned, last year, at the same point in time, we had EUR -27 million of negative free cash flow. We ended up with around EUR 46 million, and we do expect a similar improvement also throughout the year. So we really expect a free cash flow number, which is higher and better than the year-end number of 2023, which was EUR 46.5 million+ .
Okay, cool. Thank you very much and all the best for Q4 then.
Thank you.
So there are no further questions at this time. So I would like to turn back to conference to Andreas Klauser, CEO, for closing comments.
Yeah, thank you for attending as well. Thank you for your questions. I think it was a good discussion, and I'm happy that we could fully explore and sort of bring some light into some questions you might have had on your mind. So we are heavily working now on the build of Q4, having a great start into 2024, and this is also important that we can lay clearly the ground now, that we are confident that not only the closure, but as well, the starting point of 2025 will get done. Thank you very much, and take good care.
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