We appreciate the interest in SBO. Before we begin, let me cover a few housekeeping items. Firstly, this conference call will be recorded and made available to the public on the company's website of SBO. Presentation will be listen only, followed by a Q&A session. Let me also draw your attention to the disclaimer included in the presentation. In short, the information provided reflects SBO's current views and assumptions and is intended to give a general overview of our strategy, recent developments, and market environment. It does not constitute a prospectus or an offer or recommendation to buy or sell SBO shares. Today's presentation may contain forward-looking statements, which are subject to risks and uncertainties, meaning that actual results may differ materially. SBO does not provide earnings guidance and assumes no obligation to update the information of the forward-looking statements contained in this presentation.
Please refer to the full disclaimer in the slide deck for further details. With that, let me now introduce today's speakers: Klaus Mader, Chief Executive Officer of SBO, and Campbell McPherson, Chief Operating Officer. Klaus, the stage is yours.
Florian, thank you so much for your kind introduction. Ladies and gentlemen, good morning and welcome in the name of the Executive Board of the Q3 earnings call. Today we will talk about relevant business highlights, of course, the current market environment, the financial performance on the group and also on a segment level, followed by the outlook and the progress on our strategy execution. Let me start with the Q3 business highlights. The mantra today is, we are executing our strategy while managing the current market challenges. Also, in the third quarter, we continued to execute on our long-term strategy despite an increasingly challenging market environment. To recall, the strategy is based on the four pillars: diversification, market expansion, technology leadership, and operational excellence. All activities within SBO support these four pillars, a strategy that is going to be executed long-term and over the next years.
We announced the closing of 3T back in October, the successful closing. We announced the signing of the agreement during our half-year call, and this acquisition will strengthen the precision technology division. We will, with that acquisition, accelerate on our additive manufacturing roadmap, and with that acquisition, we have access to customers in high-tech sectors such as aerospace, space, semiconductor, and the defense industry. This will support our diversification strategy with additive manufacturing as one of the key growth factors. Also, the next activity and the next highlight in the third quarter, the subsea flow control diversification, perfectly supports our strategy based on our core capability of know-how in high-performance materials. With the successful No-SOC listing of our materials, this will enable us to applications beyond our core drilling and completions applications into the attractive subsea market and will support the diversification into flow control.
Also, the market growth in the Middle East and the new manufacturing facility for well completion will strengthen our market positioning in the Middle East in one of the fastest-growing markets in our industry. At the Capital Markets Day, we informed you about our second headquarter for well completion beside Houston. The facility is now ready. We are going to install a manufacturing center during the course of 2026, and as I said, this will strengthen our market positioning in the Middle East. In the third quarter, we also had various record performances with our downhole drilling motors, which demonstrates our technology leadership pillar. Success stories in India, in China, and in the US for geothermal in terms of drilling speeds, operating at high temperatures, and also length of wells, which you can read in more detail in the quarterly highlights, was an activity supporting our strategy.
A milestone that we also have achieved in the third quarter is the manufacturing of the one millionth composite frac plug. I show here a demo piece to you. The reality plug is, of course, bigger, and also that demonstrates and supports our operational excellence and technology leadership pillar. Plugs are increasingly used also in geothermal applications with additional orders that we received in the third quarter from customers in geothermal applications. Also not to forget a recent investment that we are doing now, an investment done in the US by our downhole drilling motors company, Byko. We are insourcing the relining of the motors, which has been done in Europe by our supplier, and we do that now in Houston, 10 minutes away from our main facility of Byko. This will reduce process time significantly.
It will reduce operating costs of the relining and will also enhance supply security to being faster and closer to the market. This relining and distribution center will start operations at the beginning of 2026 and will support our operational excellence pillar of our strategy. Coming to the market environment, the market environment is challenging at the moment, and we have some factors on that slide that demonstrate the current market, challenging market environment that has further intensified in the third quarter. The predominant factors are we are having at the moment an oversupply in our industry, an oversupply of oil. We have seen a significant increase in supply during the course of the year, predominantly of the release of the voluntary production cuts from OPEC. Also, demand is growing. Don't get me wrong, demand for oil is growing, but the supply increase outpaces the growth in demand.
This oversupply got bigger in the third quarter and is weighing on the oil prices. We are with Brent slightly above $60, WDI below $60, and this is clearly below the healthy range for significant and continuous spending. The second factor is the tariffs. We are not only talking about new and higher tariffs. We are also talking about inconsistent interpretations and unclear regulations that are causing a lot of uncertainty at our customer side. This was also reflected in our Q3 bookings. Customers are still figuring out where to order, how the whole situation is in terms of predominantly the Section 232 tariffs on steel and aluminum tariffs, and this was clearly impacting our Q3 activity in terms of bookings and to some extent also in terms of sales. The consequences are clear.
The lower oil price is reducing the spendings on our customer side, is reducing the demand at the moment from our customers, and increasing the customer uncertainty, resulting in lower drilling and completion activities. What does this do to our financials? I am going to present on that overview slide the financial highlights on a group level. Sales in the first nine months are 15.8% below the previous year, which is predominantly or exclusively driven by precision technology and to some extent also the foreign exchange impact.
Not to forget, the US dollar is getting weaker quarter by quarter, and only using the exchange rates from the first half of the year in Q3, sales would be $8 million higher in the third quarter because we had an exchange rate of 1.17 to translate US dollar sales in euro, and it was 1.05 in the first quarter and 1.13 in the second quarter. As I said, the sales reduction is driven by precision technology and has been partially offset by sales increases in energy equipment, which Campbell will provide more color on in a minute.
The decrease in sales resulted in a lower EBITDA from EUR 75.8 million to EUR 58.6 million, a decrease in margins, but still solid EBITDA margins of 16.4%, and the lower margins at PT have been partly compensated by a significant increase in profitability in energy equipment, and also to be mentioned in more detail by Campbell. A similar development we have also seen on the level of EBIT and profit before tax, but even in that challenging market environment, the EBIT margin is still close to 10%. Higher US dollar and euro deposits and the decrease in interest rates on variable loans resulted in a slightly better financial result, so therefore the impact on the profit before tax is a little bit lower than on the EBIT. We will speak about cash flow, balance sheets, KPIs in more detail later in the presentation, but the message is clear.
SBO continues to generate positive cash flows and is in an excellent financial position. I want to draw your attention now to the right-hand side of this slide. It shows the bookings and the backlog, and what you can see in the first three quarters, the book-to-bill ratio is below one. This is driven by precision technology, where we have seen significantly lower bookings as a result of the market environment in terms of oversupply and tariffs in the first three quarters compared to the previous year. This is also reducing the order backlog, which is predominantly coming from the precision technology division, as in energy equipment, bookings and sales are in very similar periods. How do we counteract on that? The headcount decreased by 5% on the group level, but with a different trend in the division.
We increase headcount in energy equipment because we are growing there, even higher in foreign exchange adjusted figures than the 2% in the first nine months. We are investing in energy equipment in the reline facility at Byko, also starting next year in a new manufacturing facility for Wellbos in the Middle East. Here we are growing and investing and benefiting from the efforts that we are taking in the execution of our strategy. We are doing cycle management in precision technology as a result of the lower bookings. We are, and that is what SBO is known for, adjusting the capacities in accordance to the needs. You see a 12% headcount reduction in precision technology, followed also by additional measures in terms of overtime reduction, which is going to be presented also now by Campbell.
With that information, I hand over to you, Campbell, for more information also on the divisional level. Good. Thank you very much, Klaus, and good morning, everybody from my side. As Klaus said, let's look a little bit more into the divisions, starting with sales. As Klaus has already mentioned, group sales declined 15.8% year- on- year, EUR 358 million, due to the contraction in precision technology. You can see in the chart on the right, precision technology sales fell by 32%, reflecting the continuing challenging market environment driven by global tariff uncertainty and in turn the reduced customer demand, all of which was very clearly explained by Klaus in the previous slides. In precision technology, we've got a lot of experience of managing the cycles, and we've continued through the quarter to reduce headcount, capacity, and cost across the business.
I think I said it in our last earnings call, and Klaus just mentioned it as well. We know this playbook very well. We've got residents in our PT companies that have over 20 years' experience and have seen up to four cycles, so they know exactly how to manage this part of the business. Yeah, PT headcount is down 12% year- on- year, and it may likely go down further towards the end of the year if things don't change. Additionally, of course, we have eliminated other costs associated with overtime, and we'll also be making use of short-term working where appropriate and in what businesses we're allowed to do that. There's other things we're doing as well. We're also heavily pursuing insourcing initiatives across the group where PT companies manufacture for the energy equipment companies, of course, where it makes sense.
Already this year, we've had some great success in this compared to previous years. Klaus already highlighted in precision technology, we're not only managing the cycle, but we're really focused on executing on our strategy. In PT, we're strengthening our technology base through additive manufacturing and advanced materials to support long-term growth in new industrial markets. Energy equipment delivered a slight year-on-year increase in sales, up 2%, but when you take into account adjustments for foreign exchange effects, this is closer to 5.5% year-on-year. This reflects the division's better performance led in the US and internationally in Europe, Middle East, and Asia. We've had really great execution from our well completions business and the benefits of all the operational improvements we put in place last year.
Energy equipment did fall short in their sales in Q3, though, and this was due to a deferred drilling tool sale in the period. Next, let's look at EBITDA development in the period. Group EBITDA for the first nine months came in at 16.4% compared with 17.8% last year. As expected, this reflects the very different dynamic of our two divisions. In precision technology, lower sales led to reduced capacity utilization, which had a direct impact on earnings. EBITDA declined by around 50%, but the standalone Q3 EBITDA margin was 9.5%. The weak demand environment combined with the ongoing global tariff situation really continues to weigh on customer planning and spending visibility. Energy equipment, on the other hand, delivered a strong earnings contribution. EBITDA increased by 52%, supported by slightly higher sales than last year, a more efficient cost base, and the operational improvements we implemented last year as well.
The division reported a standalone Q3 EBITDA margin of 17.8%, clearly demonstrating the improved profitability of this business. While group margins are slightly lower year-on-year, the underlying picture is consistent. PT is being held back by the market conditions and customer behavior, while EE continues to perform well and supports overall profitability. With that, I hand back over to Klaus. Campbell, thank you for providing additional color on the divisional performance. We now come to the cash flow and balance sheet KPIs. Starting with cash flow, we continue to generate positive cash flows. Operating cash flow in the first nine months was close to EUR 56 million, which is slightly below the previous year, but a healthy cash flow generation.
Also, the free cash flow was for the first nine months at EUR 24.8 million, including the settlement of the purchase price for the acquisition of 3T, which means adjusted for M&A and closing the deal. The free cash flow stands at EUR 30 million after nine months. In the third quarter, we doubled the free cash flow adjusted for acquisitions from EUR 5 million in the second quarter to more than EUR 11 million in the third quarter. This is resulting in a very solid and excellent balance sheet. Although the equity has been decreased from EUR 493 million to EUR 419 million, although we are generating a positive income, this was predominantly driven by the dividend payment earlier this year and also by the significant weakening of the US dollar, which had an impact, a translational impact on our balance sheet of almost EUR 70 million.
You may recall the dollar was very strong at the beginning of the year at about $1.04 and decreased to $1.17 at the end of the third quarter. The equity ratio still remains very high at 48%, and the cash decreased driven by the dividend payment and the foreign exchange effects, although we are generating positive cash flows, but remains on a very high EUR 282 million. Just adjusted for foreign exchange impacts, cash would be EUR 16 million higher. Final slide on the financial information, net debt and gearing. You see net debt stays at EUR 78 million at the end of the third quarter.
We saw an increase of net debt in the second quarter as a result of the dividend payment and also the foreign exchange impacts on our US dollar deposits, but it was decreasing in the third quarter due to a positive cash flow generation, even taking the acquisition of 3T into consideration. The net debt and gearing ratio with 18.6% continues to be very healthy. We are now coming to the outlook, and Campbell is going to start with the short and then also medium to long-term outlook.
Good. Thanks again, Klaus. Turning to the market outlook, I want to start with the short-term picture. Uncertainty certainly remains the defining feature of the near-term outlook, and this is directly influencing customer spending decisions, predominantly within precision technology. For 2026, the IEA expects a clear oil oversupply, with supply growth materially outpacing demand.
This is keeping pressure on oil prices and is reflected in more cautious investment behavior across the supply chain. Gas demand, by contrast, is expected to reach a historic high in 2026, albeit only 2% more than this year. Beyond fundamentals, the environment is also shaped by the geopolitical tensions, regional differences in demand, and ongoing tariff changes, all reinforcing a more careful stance from our customers. As we highlighted in our Q3 report, several key customers have already reduced their CapEx for 2026. This is most visible in precision technology. As of today, customers are postponing capital-intensive programs and focusing more on capital efficiency through the repair and maintenance of their existing tools, and this is slowing near-term demand for PT.
At the same time, energy equipment is in a different phase, with demand supported by the really strong performance and market penetration of our own proprietary energy equipment, both in the drilling and well completions. Overall, visibility for 2026 remains limited. We expect the ongoing trend in the PT division to continue, with an improvement anticipated in the second half of 2026 onwards. This is based on daily conversations with our customers, and I think you can see this also reflected in our main customers' Q3 outlook on their reporting basis as well. I must say, I do not want to leave this section without putting a little bit of positivity on it, that in the PT division, we have seen a stabilization and some improvement in order intake so far in the fourth quarter compared to Q3.
Q3 was really impacted heavily by the introduction of Section 232 tariffs, and I think it's taken a long time for our customers to get their heads around what this means for their supply chains. I think we're only starting to see this being released as we move forward now. In the EE division, we expect a continued good performance compared to 2025 due to the measures taken operationally and the strong performance of our proprietary energy equipment offerings in the market. We know market conditions can change rapidly, and the good thing is that we are well prepared to respond accordingly. Looking beyond the current market softness, I have to say the medium to long-term fundamentals for SBO remain extremely encouraging. Global demand remains supportive.
The IEA expects oil demand to rise from around 104 million barrels a day today to roughly 113 million barrels a day by 2050, while the global LNG market is expected to almost double in the same period. The rapid build-out of AI data centers, I'm sure everybody hears this as emerging as a major new source of electricity demand. What's interesting about that is BP's latest outlook shows that AI facilities are going to account for up to 10% of global power demand growth and 40% of US growth by 2035. Renewables cannot scale fast enough due to permitting issues, but more importantly, due to grid bottlenecks. Gas remains the predominant flexible and reliable source capable of meeting this round of load. This means US gas demand is set to remain structurally higher well into the 2030s, underpinning long-term drilling activity.
I've mentioned this before, I think over a year ago, global decline rates are steepening, rising from around 3.9 million barrels in 2010 to 5.5 million barrels today. At this pace, the world loses more production each year than a major oil-producing country. To put that in context, that's the equivalent of losing Canada's fuel production each year. According to the IEA, this is why almost 90% of all future exploration and production CapEx is required simply to maintain production levels flat. This only further supports the importance and the necessity of ongoing investment in drilling and completion activity long into the future. Geothermal is another market shaping up to be a $1 trillion business by 2035, and a major source of clean, reliable baseload power, exactly the type of energy AI data centers will need.
Its high temperature, high complexity drilling requirements play directly to SBO's core strengths. Finally, additive manufacturing continues to scale. The metal AM services market, which is directly relevant to us, is expected to grow from $1.5 billion in 2025 to $4.8 billion in 2030, tripling over the next five years, driven by the rising demand in aerospace, defense, energy, and high-precision industrial components. Our recent 3T Additive Manufacturing acquisition positions us really well in this expanding space, along with our own organic growth and investments in this area via our other AM centers in the US and Austria. Overall, these medium and long-term fundamentals strongly support our strategic pillars of diversification, market expansion, technology leadership, and operational excellence. With that, I'll hand back over to Klaus.
Campbell, thank you very much for providing this very important color on the current situation and also on the medium to long-term outlook. I fully agree with you. You're absolutely correct. Today, we are confronted with oversupply and tariffs uncertainty, but this could change very fast, very rapidly, because just 90% of the current CapEx at the moment are used for keeping up the production. The demand growth that you indicated as of the latest statements of IEA would not support that. What we are doing, and in summarizing and closing the presentation, I simply want to reiterate the current challenges are taken care of by us. We have a proven track record in how to manage those cycles, and we are adjusting the capacities in precision technology with further capacities, adjustments already happening in the fourth quarter, as indicated by Campbell.
We will be prepared also for this next upswing and the recovery. You see it on the left-hand side. We have seen those cycles. We are experienced in those cycles. The situation is, on the one hand, challenging, but it is not distracting us from executing on the strategy. It also does not make us desperate because we are fully aware of the medium and long-term positive fundamentals. While we are having this discipline, cycle management, where our presidents know exactly what needs to be done, we continue to execute on our long-term strategy. It is not a sprint. It's a marathon. Every quarter, we come up with the activities that we are setting, which will position us for long-term growth and long-term value creation. They are summarized here again, what I already mentioned at the beginning.
Therefore, we remain on course with a combination of discipline, cycle management, and a clear strategy execution. With that final statement, I close our presentation, and we are happy to take your questions.
Thank you, Klaus and Campbell, for your presentations. Now, I would like to move to the Q&A session. Briefly again, either raise your hands in the WebEx call to make yourself visible and unmute your microphone once I call your name and ask your question, please. Alternatively, you can, and I have seen some of you already did, post your question in the online Q&A tool, and I will read it out loud. The first question comes from Baptiste Lebac from Oddo BHF. His question is,
"Hi, in precision technology, do you have a better view regarding demands per region in Q3 and dynamic, and what is the dynamic for the year end?"
Okay.
Let me take that. Thank you, Baptiste. I think it's just really, as I said earlier, in terms of precision technology, our view for the regions is a confusing one because we supply components to our customers' technology centers, and then they distribute those finished components globally. There's not really a particular thing we can say about demand to a certain region. It's more to where our customers' main technology centers are. What we have seen, of course, is customers' technology centers in the US have been slow because this is affected by the 232 tariffs. They are organizing and reorganizing their supply chains to take shipments other places other than the US because some of the shipments into the US are attracting tariffs in excess of 50%. As I say, towards the end of the year, a little bit of positivity.
We've definitely seen the order intake in Q4 so far better than what we've experienced in Q3, just marginally. Hopefully, this is a sign of things starting to improve. Hopefully, that answers your question, Baptiste.
Thank you, Campbell. There was actually a follow-up question from Baptiste, which is, "Due to reduction of bookings, can we expect a positive working movement in Q4?"
I assume, Baptiste, you meant the working capital movement in the fourth quarter. Due to the reduction of bookings, can we expect a positive working movement in Q4? Let me take that question. In terms of inventory, a clear yes. In terms of accounts receivable, it will very much depend on what we're going to invoice in the fourth quarter.
Campbell mentioned some delays in tool sales from the third quarter where the orders are in the house, but the deliveries are dependent on a delivery of debt in the fourth quarter or in the first quarter of this year, and this will then have an impact on the accounts receivable.
Thank you, Klaus. Another question came in from Alexander Tsinkovich from MWB Research. "Good to see flow control, geothermal, and additive getting traction. Could you provide us a bit more color regarding the revenue mix of non-oil and gas?"
Yeah, let me take that question. I mentioned it earlier in an interview with the Austrian Press Association. We see here sizable growth in these applications, but we also have to take into consideration we are at the beginning in terms of geothermal flow control and to some extent also in additive manufacturing.
The growth rates are in the significant double-digit % area year- over- year, but when you compare the geothermal wells in relation to the oil and gas wells, it is clearly only a fraction of it. Important for me is that we see in all those applications, excuse me, geothermal and also additive manufacturing, significant growth rates. Additive manufacturing in the markets that we defined for us will grow four times till the end of the decade, and also geothermal is going to grow, and we are part of that. We are sizable suppliers to geothermal customers, and we are on geothermal businesses and projects all over the world, starting here in Vienna with the deep project, continuing in the rest of Europe, going to Asia, New Zealand, and more and more also in the US where the drilling is deeper and in hotter areas.
We continue, as mentioned, fervor of one of our main customers, and we are the main supplier of our tools for this company. It is still, and therefore we do not report it yet, it is still not very significant figures, but the growth rates are significant.
Thank you, Klaus. There is a follow-up question from Alexander. You mentioned the deferral of a drilling tool sale within energy equipment in the third quarter. Just to clarify, is the expected delivery in Q4 or later? I think I just answered that with the question from Baptiste in terms of working capital. This will very much depend on the talks with the customers now if it is a Q4 event or a Q1 event. Thank you, Klaus. Two questions came in from Kevin, Kevin Roger from Kepler Chevreux. The first one, "Good morning. In this challenging environment for precision technology, can you please comment on the market share evolution and the pricing evolution? Tariffs continue to impact you. Clients have probably used their inventories. Do you have a view on what their inventory level is?
Okay, thank you, Florian, and thank you for the question. I'll take that one. In terms of the market evolution and market share in PT, we are in very close communication with our key customers, and we have certainly not lost any market share. They've clearly indicated that to us. Our level of business has reduced purely as a result of them reducing their amount of business placed on us. In terms of pricing evolution, that's a difficult one. Pricing's actually gone up recently because customers have had to absorb the tariff charges for a lot of the stuff that's going into the U.S.
This is something that's normalizing itself. In terms of their inventories, it's difficult for us to make a judgment on that, but I would say from where we stand, given that we see order intake improving slightly, and we've seen definitely a heightened inquiry level for more tools, I think it's fair to say that our customers' inventory levels are starting to be used up more rapidly. Hopefully, that answers your question. Thank you, Campbell. Next question again comes from Kevin as a follow-up. "Can you please comment on the margin in non-oil and gas activities and maybe the business unit, maybe by business unit?" I can take that question. The margins are very attractive. We are delivering higher margins on the diversification business in terms of geothermal, also in terms of additive manufacturing or subsea flow control. Margins are higher.
Thank you, Klaus.
For now, as it appears, the last question comes from Nicholas Kneipp from Wiener Privatbank. "What were the main drivers for the 17% quarter-on-quarter top-line decline in energy equipment? Was it mainly coming from the North American market? Did you still experience growth internationally? How do you see the short-term sales development for the segments?"
Thank you, Nicholas. I will take that call. I think it has already been answered that the 17% shortfall in energy equipment is really because of this delayed drilling tool sales in the quarter that we see moved into quarter four. That is the main driver in relation to that. To add on that, those tool sales are in North America as well as international. It is not one tool sales. It is various tool sales. Therefore, the answer is it is both regions. Yes, from a regional perspective. Excellent.
Thank you, Klaus and Campbell.
Are there further questions? Please raise your hand if you want to ask a question or post it in the chat room. As there are no further questions, I want to give back to you, Klaus, for the closing statement.
Thank you, Florian. Ladies and gentlemen, thank you very much for your interest in our Q3 earnings call. Also happy for all the questions that you raised. Yeah, with that, I'm going to close today's conference call. Thank you for your participation and interest and wishing you a nice day. Should we not hear from us or speak to us, also a nice Christmas period. Thank you. Thank you. Thank you. Goodbye, everyone.