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Ladies and gentlemen, welcome to the Oerlikon Q3 2021 Results Conference Call and Live Webcast. I am Paul, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Stephan Gick, Head of Investor Relations. Please go ahead, sir.
Good morning, and welcome to Oerlikon's Q3 financial results call. With me in the call, I have Roland Fischer, CEO; and Philipp Muller, CFO of Oerlikon. We start the call with the business update from by Roland. Then Philipp will go through the financials, which we will then follow up with the Q&A.Roland, the floor is yours.
Thank you, Stephan. Good morning to everyone, and welcome to our third quarter results presentation. Our third quarter was again a strong operational quarter. Besides continued financial growth, we demonstrated technology leadership and executed on disciplined capital allocation by integrating our 2 acquired companies, INglass and Coeurdor.And now let's go into some more details on the quarter with a short summary on Page 3. Sales of CHF 695 million were up 17% and order intake at CHF 835 million increased by 61% year-over-year. This represents the highest quarterly order levels since the year of 2014.Growth was driven by a strong performance in both divisions. In Surface Solutions, we saw sales slightly improving compared to the second quarter. The generally improving trends in Surface Solutions are supported by a book-to-bill ratio that has been above 1 for the last 3 quarters. Demand for automotive and tooling was robust, with impacts from supply chain shortages being roughly in line with our expectation. We also saw positive development in general industries and aviation.In Polymer Processing Solutions, we achieved the highest order intake and sales in the last 8 years. We continue to experience a very strong market environment and are currently making excellent progress, filling up order books for the year of 2023.Our group operational EBITDA of CHF 117 million increased by 26% compared to last year and showed sequential growth. Continued cost containment and operating leverage supported operational EBITDA margin expansion year-on-year. And summing up, we as a team have delivered a robust third quarter, supported by our solid operational execution, and based on Q3 and current visibility, we confirm the 2021 group guidance.Looking beyond the transitory supply chain bottlenecks, we do see strong commercial activity. Combined with operational execution, it will provide a positive backdrop for the midterm outlook in both divisions. On the next few slides, I will give you a business update before Philipp goes into the financial details for the quarter.And now let's move on to the market update on Page 4. Our end markets continued to face varying recovery profiles. In Polymer Processing Solutions, we achieved the highest order intake in the last 8 years. Demand in the filament market is very strong, with key players in China continuing their downstream integration. We continue to make good progress with our structural shift into more non-filament business. Larger integrated systems combined with our latest technologies save significant energy and are a strategic priority for China.We see strong demand for plant engineering solutions, such as staple fiber and continuous polycondensation plants. We also see a positive market development for our BCF, our carpet yarn technology, particularly in the U.S.The acquisition of INglass opened up polymer processing markets in automotive and general industries. In automotive, the market development is strong as sales are mainly linked to new and updated light vehicle models. Every time there is a design change, the hot runner and mould needs to be replaced or optimized, and so there is less of an impact from temporarily lower production levels.Overall, we continue to expect the Polymer Processing Solutions division to reach a positive book-to-bill ratio in the year of 2021. This will also support our sales growth trajectory in 2022, while we are currently filling order books for the year of 2023.In the Surface Solutions division, we are operating across the tooling, automotive, aviation and general industries end markets. The recovery continues to differ by end markets. We achieved combined a 15% sales growth in the third quarter. The general industries and energy end-market see shorter cycle services recovering well. The recovery in general industries is broad-based, and we also see oil and gas gaining momentum.In automotive and tooling, we saw intensified supply chain interruptions due to semiconductor and commodity shortages in the third quarter. As such, we are affected by temporary shutdowns of major customers during summer holidays. We mostly anticipated this in our full year guidance provided in August. We see supply chain interruptions as transitory and the strong demand environment gives us confidence for the medium term, as I will highlight later on.And finally, in aviation, sales improved in the third quarter with more flying activity and demand for MRO services. Aviation remains substantially below pre-pandemic levels and new COVID variants do have the potential to further extend the recovery profile. Even on low levels, the beginning of the recovery is positive and it will be a tailwind for Oerlikon for some time to come.And so summing up, we see a strong market environment for Polymer Processing Solutions. In Surface Solutions, we are closely monitoring and mitigating the impact of transitory supply chain bottlenecks. We consider a strong demand environment across our end markets, a positive indication for medium-term growth.And now let's move on to Page 5, where we provide an update on our strategic priorities. Our strategy to drive profitable growth, extend addressable markets and gain market share is unchanged. As a result, we are focused on 3 key strategic priorities: sustainable innovation, cost containment and disciplined capital allocation. In terms of sustainable innovation, we have launched in Q3 a new thin-film coating product family, Balzers. It is designed for the machining of high-performance ceramics, carbon-reinforced polymers and high abrasive aluminum alloys.Our recently acquired INglass launched a new nozzle for injection molding of small parts. This opens up a new market for parts weighing less than 10 grams, where high cycle times are required. And last but not least, we also launched a new coating powder for solid oxide fuel cell applications.In terms of cost management, we achieved 110% basis point expansion in operational EBITDA margin driven by Surface Solutions. On group level, we reached a 16% to 18% target corridor in the third quarter and for the year-to-date. And finally, disciplined capital allocation has been a key priority for Oerlikon since many years.The integration of our recent acquisitions, Inglass and Coeurdor, are well on track. They are adding diversification to our business and position us well in growth markets. The addition of INglass is already benefiting both divisions and allowing them to operate better together.We achieved a 16% sales growth in non-filament for the year-to-date. In terms of R&D, we focus on capital return and growth, as I will present later on. And last but not least, we paid a stable dividend in the first half year and have been buying back shares in Q3.I will provide now some more details about our view on the automotive end market on the next slide. As highlighted before, our automotive customers are experiencing supply chain constraints that impact their production. Some of these shortages are expected to extend into the first half of 2022. We are mitigating the impact the situation has on us by tightly managing our operations and production capacities while retaining the ability to step up production on short notice.Important for us is also to look beyond the current supply chain bottlenecks. Light vehicle production is expected to steadily recover over the coming years. With end -- high end-user demand and car inventories at very low levels, we see Oerlikon well positioned to benefit from the recovery.On the right-hand side of the slide, I want to focus on the longer-term picture for our automotive business. The chart shows the production forecast for light vehicles per power train alternative. And one of the most important takeaways for our product portfolio is that the combination of internal combustion and hybrid engine production is expected to be roughly stable over the next decade. These are the traditional Oerlikon applications and provide a stable base for our growth initiatives.More efficient engines required by regulations and the additional gearing needed for hybrid transmissions are expected to result in increased coating requirements and surface treatments per vehicle. On top of that, we are driving R&D in battery and fuel cell applications to capitalize on electric vehicles. We are looking into heat shields for batteries and into coatings for battery housings, sensors and electric motor components.Tangible electric vehicle opportunities also include coating solutions applied on forming tools. Furthermore, INglass hot runner systems should benefit from increased use of lightweight components in light vehicles. And last but not least, electric transmissions produce higher load factors via increased torque, which will need additional surface treatments and coatings. All in all, we are on track with focusing our investments to support our customers in their transition to future mobility.With that, let's move on to the next slide, where we take a look at Polymer Processing Solutions growth. Since 2014, we have grown Polymer Processing Solutions sales by around 25%. This has been driven by growth in filament and non-filament. In filament, we have a broad and integrated offering of machines and engineering solutions, which our customers use to produce manmade fibers used in apparel. We have a strong market position. Strong demand is driven by innovation, resulting in economical and ecological productivity improvements, continued downstream vertical integration of large filament producers and manmade fibers outgrowing natural fibers.In the last few years, we initiated various growth initiatives to diversify our business into non-filament applications and plant engineering. We are doing that by addressing adjacent growth in niche markets with innovative high-quality offerings.As you can see on the top left of the slide, we have been growing sales of nonwoven with a CAGR of almost 50% since the year of 2014. This was initially accelerated by the success with the facemask applications in the year of 2020. Now we are also selling systems for nonwoven applications such as wet wipes and filters. This has been growing substantially with a CAGR of around 30% to 40% since we announced the joint venture with Teknoweb in the year 2017. Going forward, Oerlikon continues to aim for growth, application diversity and market share gains in the nonwoven market.Other successful growth initiatives can be seen in our plant engineering business, where we reached a sales CAGR of 17%. Furthermore, our increased focus on customer service drove a 5% sales CAGR in services since 2014. Importantly, the customer service business is closely linked to the production levels and OpEx decisions of customers. It, therefore, adds a robust baseline to Polymer Processing Solutions sales.As outlined on the bottom left, we are complementing organic growth initiatives with accretive bolt-on acquisitions. We delivered that this spring with the acquisition of INglass. It expands upon our key polymer flow control competency that drives polymer processing in manmade fibers applications. INglass was cash and margin accretive from day 1 and significantly accelerated our diversification towards non-filament.The adjacent INglass market opportunity is over CHF 2 billion, is highly fragmented and is growing with a mid-single-digit percentage annually. This provides solid perspectives for attractive organic growth and opportunistic bolt-on acquisitions.Adding up our organic growth initiatives and bolt-on M&A, the Oerlikon team is well on track to transform Polymer Processing Solutions into a growth platform with market-leading returns. Our target is to reach a diversified 50-50 sales split between filament and non-filament, as you can see on the right side.And now let's move on to the next slide, where we highlight our focus on capital returns. We have communicated earlier in the year that we have a midterm ambition to reach a double-digit ROCE. In order to achieve that sustainably, we have further increased our internal focus on managing capital investment and return.We strengthened our capital allocation framework with capital return and growth perspective, representing key investment criteria. Based on defined hurdle rates, we raised the focus on allocating CapEx and R&D investments to high-return and growth areas. This is complemented by the introduction of zero-based budgeting in order to intensify the internal competition for capital, especially for investments in growth and innovation.We also introduced standardized review processes to better monitor the achievement of investment targets, including capital returns. And last but not least, we induced ROCE as a key metric in our long-term management incentivization program.We are convinced that these measures will help us to position our company to sustainably generate a double-digit ROCE over time. Upside will also come from recovering end markets and continued cost containment. And all in all, our strength and focus on capital return will position us well for profitable growth as we continue on the next slide.We see upside potential for sales and margins in both divisions in midterm. In Surface Solutions, we are well positioned to benefit from recovering markets beyond currently supply chain interruptions. While shorter cycle Surface Solutions business is driving the 2021 sales recovery, we have further upside from a longer cycle business. Growth will be driven by sustainability, megatrends, innovation, cross-selling, new applications as well as continued geographic expansion. The supply chain and semiconductor shortages have put the recovery in tooling and automotive on pause, and we expect it to resume during the year 2022. Besides growing Surface Solutions from a top line perspective, we will maintain our cost focus and allocate capital reasonably.In Polymer Processing Solutions, we have the target to reach a 50-50 sales diversification between filament and non-filament. In filament, we see a continued strong demand environment, and currently we are filling order books for the year 2023. In non-filament, growth is supported by our growth initiatives and accretive bolt-on acquisitions.Summing up, the improving commercial activity and strong operational execution provides a positive backdrop for our midterm outlook and profitable growth. Team Oerlikon has done a fantastic job in preparing the organization for the next stage of structural growth.And with that, I will now hand over to Philipp, who will take you through the financials in more detail.
Thank you, Roland. I will start with the group results and then provide more details on the divisions. At the group level, orders were CHF 835 million, up 61%, driven by strong order intake from Polymer Processing Solutions and the continued recovery in Surface Solutions.Sales were CHF 695 million, up 17%. Both divisions contributed equally to our sales increase based on the market recovery in Surface Solutions and continued strong demand in Polymer Processing Solutions. Our group book-to-bill ratio was 1.2. With that, our book-to-bill was above 1 for the fourth consecutive quarter.Operational EBITDA was CHF 117 million, a 26% increase versus the prior year. Our margin rate increased by 110 basis points to 16.8%, driven by operating leverage and tight cost management.Next, on Surface Solutions. As Roland highlighted, Surface Solutions end markets are recovering, albeit at different rates. Orders were CHF 332 million, up 29%, while sales increased 15% to CHF 323 million. In the third quarter, our shorter cycle businesses in automotive and tooling were impacted by the semiconductor and supply chain issues. As highlighted in our annual outlook in March, the longer cycle businesses showed improvement in the third quarter.And a critical indicator for this development, we achieved a book-to-bill ratio above 1 for the third consecutive quarter. As a result, Surface Solutions has the highest backlog since the first quarter of 2020.Operational EBITDA on Surface Solutions was CHF 59 million, up 41% versus the prior year. This represents around 340 basis points of margin expansion, mainly driven by operating leverage and benefits of our structural cost reduction program.We are currently facing higher input costs, especially with regards to labor, raw materials and energy. We expect to be able to manage these cost increases to a large extent. In some of our businesses, our contracts are indexed to input materials and automatically adjust prices to our customers. In other areas, we are pursuing a structured approach to adjust our product pricing in order to reflect the current inflationary environment.Next, on Polymer Processing Solutions. Orders in Polymer Processing were CHF 503 million. This is the highest order intake in over 8 years and is up 93% versus the prior year. In the first 9 months, we booked over CHF 1.1 billion of orders, which is up 45% year-over-year. We're on track to reach our guided CHF 1.45 billion order intake for the full year.Third quarter sales of CHF 372 million were up 19%. On the one hand, this was supported by strong organic end-market demand. On the other hand, INglass made a full quarter of revenue contribution and supported our diversification into non-filament. Organically, sales were up 5% at constant FX against the strong base comp.Third quarter operational EBITDA increased 15% to CHF 55 million. Margins were down 60 basis points to 14.8%. As highlighted in August, we recognized certain additional expenses related to a project delay in the third quarter. We expect a sequential step-up in margins in Q4, in line with our full year guidance.As you know, we are facing major challenges in terms of supply chain bottlenecks, global logistics and some regional power availability at the moment. Currently, we do not foresee a major financial impact from these issues in Q4. However, visibility remains challenging. We are managing the situation closely and have various mitigation measures in place in order to successfully deliver on our business plan.Concerning power shortages, we are working in shifts and optimizing energy consumption away from peak times. So far, we have been able to manage the challenges and expect to be able to continue to manage them in Q4. To a certain extent, the situation remains difficult to predict, however.With that, let's conclude the presentation with our outlook. Based on our strong Q3 and year-to-date results and off of the current visibility we have, we confirm our group guidance. We continue to expect group sales at approximately CHF 2.65 billion and group EBITDA margin to be approximately 16.5%.Looking into 2022, we see continued strong demand for Polymer Processing Solutions and strong bookings in the first 9 months underscore our expectation of a positive book-to-bill ratio by year-end. We also further increased our 2022 order book throughout the quarter. Furthermore, 2022 top line will be supported from including 12 months of sales of INglass versus only 7 months in 2021.In Surface Solutions, we see a reason for optimism as we expect supply chain interruptions to ease throughout 2022. This positions automotive and tooling well for a further recovery. We also expect aerospace to continue to improve from the low base. And in our longer cycle businesses, we have already replenished our order books.To recap the first 9 months, we have made excellent progress towards our forward-looking priorities. We delivered 16% sales growth, driven by both divisions. We've reached the mid-end of our EBITDA target corridor already in the first 9 months of 2021. We have a strengthened capital allocation framework in place, which will support us in our ambition to reach double-digit ROCE. We have executed 2 value-accretive and strategic acquisitions and are well on track with their integration. And finally, we paid out a stable dividend of CHF 0.35 per share.With that, let me open it up for Q&A.
[Operator Instructions] The first question comes from Michael Foeth from Vontobel.
A few questions from my side. You mentioned that you bought back shares in the quarter and I was wondering if you could tell us how many shares you bought back and how that fits with your further M&A strategy, if you could give us an update on that as well.The second question would be regarding the very strong order intake in Polymer Processing. If you could give us a bit more granularity which segments really drove that and how we should think about quarterly order intake in coming quarters? Your guidance obviously gives an indication for Q4, but how should we look at that in early quarters 2022?And then connected to that would be the question on production capacity in Polymer Processing. Your trailing 12 months orders are CHF 1.4 billion. Can you tell us what your production capacity is, or if you need to take any steps to increase it? That's it for me.
Do you want to take the -- I'll start with the -- Michael, I'll start with the share buyback. You know we have some -- our program is obviously running in line with the parameters that we've communicated previously. We have given certain trading instructions to our [indiscernible] bank on that. And I'll maybe just summarize on the overall status of the buyback. Since the inception of the program, we've bought back about 16.8 million shares. We utilized about 3.7 million in the INglass transaction. So our net balance right now is 13.1 million shares at an average purchase price of just under CHF 8.50.And so I think it fits right into our M&A strategy. You have seen how we've successfully utilized some of those shares in the INglass transaction. We continue to think about that as the strategic priority. And obviously, from an overall balance sheet and leverage situation, we continue to have a very strong balance sheet that allows us to do M&A on top of some of this buyback activity.
So -- and Michael, I take the second and the third question. I think the current order intake of CHF 500-plus million is a record order intake since 7, 8 years. And definitely, it's not the run rate, right? And based on the confirmation of our guidance, CHF 1.45 billion, it's a simple math. What we expect in Q4 and for the year of 2022, we do expect to be on a similar level like this year in 2021.When it comes to capacities, I think 1/2 of the answer is already given. We talk about delivery time lines in 2023. That means, obviously, we are running at full capacity with our existing sites. And what we do, of course, is optimizing our existing sites, investing here and there in newer and more efficient machines. But this is not a major investment in new addition of capacity. It was always our saying that – look, we stay with what we have. We optimize it. We improve it. But we are not talking about additional sites here.
Is very important. And Michael, so it's included in our CapEx guide for the current year, nothing above and beyond that. And when you think about it internally, a lot of the CapEx investment, capacity investment really goes into the non-filament space. And I think it's always important to drive that unit differentiation.
The next question comes from the line of Sebastian Kuenne from CVC Capital Partners.
Yes, it's RBC Capital Management. But yes. I have a couple of questions, mainly on OPP on the polymer business. I would like to hear a little bit more about the pricing of the current order book. I mean you had a long stretch of very strong orders. You filled the orders for 2023. You talk about customers pushing for earlier deliveries. How will that then translate into margin? I would assume very strong margin profile going forward? That would be my first question.Secondly, also on the polymer side. You mentioned that you go more into plant engineering activities rather than just the machinery. Can you explain to us how you manage the risks of that, especially when you book an order 18, 24 months ahead and you have the raw material risk? Can you explain to us how you manage that raw mat risk, if there's a pass-through clause and so on?And then the third question on -- also on polymer, would be on project delays that you mentioned. I assume there are penalty payments for this? And how do you see the risk next year that because of logistic delays that you can't deliver on time and then your customers are charging you for late deliveries and project delays? So how big is that risk?I have then another question on service, but I'll ask it later.
Okay, OPP pricing. I think this is an interesting topic. And here, we have to keep in mind that 4 years ago, 2016, we have been at the very bottom of a cycle where we had a yearly revenue of 480 -- I don't know, it's 6 or something like that. So -- and this was going in line with a tremendous pressure from our customer base in terms of pricing.And just to give you a feeling, taking the 2017 trough in pricing per unit -- let's take a winder, typical on POI. We are -- have been able to increase over the course of the last year the prices in average by about, let's say, 30% and being back to a decent level, not where we have been in the peak times in 2014, but we are moving in the right direction.The second part was plant engineering. And here, you have to be maybe a little bit more precise. We talk about diversification of our business portfolio. That means -- and I think I was clear. We tried to achieve a 50-50 ratio, a healthy basis, between filament and non-filament. And plant engineering here, polycondensation is one element beside of others where we are gaining momentum. But we are not talking about an entire plant in terms of EPC. We talk about an extension of our product portfolio. And here, the risk, I would say, is a limited one.The raw material risk does exist in general. We are trying to include that in our contract to the best possible extent. That's a rise from customer to customer, right?And last but not least, the project delays. And I think we have been -- we were communicating one case where, obviously, last year we have been not able to fulfill the contracts because of travel limitation. We have been not able to [ send ] the right quantity of right qualified people to the sites. And here, we had delays and we had a certain negative impact. But you can imagine whatever we are going to sign today, we are trying safeguard us as much as possible here.
And Sebastian, if I can maybe jump on that last one. I think that the most critical component that we're looking at is obviously the electrical component that we have within our winder technology. So specifically as it relates to inverters. And we're thinking about a variety of different fulfillment strategies and shipment strategies of how we can ease that pain. I think that's the most pressing area where we're going to see shortages and challenges on the supply side. But I think we have an ability to manage around that to an extent and basically complete all the equipment without some of the electrical equipment and then ship that later on.Hopefully, that will allow us to fulfill all of our contract obligations with our customers. Obviously, we're in constant exchange with our customers on the topic because they see this pressure not just from us as a supplier, but from basically all their other suppliers as well.
So what you're basically saying is you ship out kind of semi -- like semi-finished machinery and then you hope that you can airfreight the controllers out to the destination in Asia and then put those controllers in and then ship it to the client. Is that kind of the strategy at the moment?
Right. Just -- that's right, Sebastian. Not yet, because we're not yet in that situation. But think about the -- not a semi finish. It's basically 97% finished. And then you need the inverter technology on top, obviously, to make it run. So there are certain parameters that we absolutely need to fulfill with our clients in order to basically make the polycondensation plant run efficiently. But that's basically the strategy, yes.
Yes. Final question on Surface. Very strong margin. I'm a bit confused actually how strong it is. Is this mix? Is this also Coeurdor already, the kind of the contribution? And then do you have -- do you see cancellation risks, because we heard it from SKF recently and Sandvik also was cautious on the -- especially on automotive? Do you have cancellation risks that you see in the next weeks or have seen in the past few weeks?
No, Sebastian. The nature of our Surface Solutions business is a short cycle business. And we do not talk about too many explicit projects, at least not in the Surface business. In the equipment business, there are no cancellations because everybody believes the midterm cycle is intact here.And I think the second part of the question was...
Just on margin.
On the margins. I think -- the brutal truth is, I think, we did our homework, right? And we are heavily working on our cost base here. And this is not since yesterday. We started in '19. And now we are not yet completely done, but almost through. And now we see the results, right? And it's not driven by the markets. This is internal cost management.
The next question comes from the line of Christian Obst from Baader Bank.
First of all, on the cash flow. So there are not so many information about cash flow and [indiscernible] can you give us some kind of an idea how much you spend on M&A this year so far? What is the CapEx plan for this year, maybe next year? And especially some more details how the working capital developed during the third quarter?And then another clarification, more or less. Of course, very impressive the development of the cost measures and the impact there. Can we expect something special on cost measures also going into 2020 (sic) [ 2022 ]? Or is it only the transfer of costs to customers and how to manage cost volatility going forward?
Yes, Christian, on cash flows first. We don't release a separate cash flow statement in the first half -- the first quarter and after the third quarter, only at the half year. But I'll give you a little bit of color. All the M&A activity was already reflected at the half year. So we didn't do any incremental M&A in the third quarter. Take what we've released in detail at the half year point as -- that's everything from an M&A standpoint.And then maybe a little bit of color from a networking capital standpoint. I think that is the biggest area that we've talked about. You've seen that in the first half, networking capital was a significant use of cash that is in line with the revenue profile that we communicated for the second half of the year. We also said that we expect that to partially reverse in the second half. In other words, networking capital could be a source of cash. We're not going to reverse the entire impact based on the growing top line that we're expecting for the current year and also for the next year. But we're expecting some reversal of that impact in the second half of the year.Obviously, when you look -- when you back into our guidance, you can see that earnings in the second half are expected to be stronger. And then finally, I would say CapEx guide is in line with what we communicated all throughout the year. So I think that gives you all the components you need from a cash flow standpoint.And then on cost measures, I would say, to Roland's point, the big painful actions that we had to take are done. At the same time, we continuously look at how we can optimize the portfolio. So underperforming businesses will continue to be put under scrutiny, and if we need to take some more cost actions there, we will do it in a very, very fast way. But don't expect another huge action like we take -- that we had to take in 2020.
And maybe a side comment from my side with respect to net working capital, what always has been in the focus area, one of the most important focus areas and all. But now in light of our market environment, we also have to make conscious decisions when it comes to inventory, getting access to parts and pieces to make some compromises here in order to bring -- or keeps us in a position to deliver to our customers, right?
Okay. Then maybe some small additional questions or -- there is -- or you talked about the continuing downstream integration, especially from the big players in China. Have you any idea how long this trend will last?And the last one is on additive manufacturing. So the impact is going down, which is, I see, positive. But what is the current status there?
Okay. I think OPP, Polymer Processing projects - all we can actually say is the ongoing projects, which are in a phase of execution or planning even, are not showing any signs or indications of delays or even cancellation. That means for '22, we are secured, we are safe. '23, I would say as well. Earliest in '24 -- or how to say it? The [Foreign Language], what does it mean in English? The outlook in somewhere end of 2023 and for 2024, we cannot give any confirmations here. From that perspective, no negative signs at all.Then you talk about additive. For sure, there is a kind of dilution in our business. But I was in Balen just, I don't know, a few weeks ago, and as an operational guy, I would tell you -- [indiscernible] 2 minutes, 1.5 minutes. We don't like nonquality, of course. This is -- but it was the first time I saw in the side consignment store where industrial parts are handled and stored and deviations are going to be discussed and evaluated with customers. That means what I want to say is the industrialization of this business really takes place now and that makes us very optimistic.And you might have heard about the conference just 2 weeks ago we did in Aachen, was again a great success. A different group of people, much more industrial guys, joined, which are really dealing with the topic and applying it. And that makes me very confident.
And I would say on additives that we actually had one of the most successful quarters ever in terms of the order intake both in Europe and in the U.S. across a variety of applications, really large-sized industrial type contracts that we're signing up here. So the business is on better footing from a cost standpoint. And we're ready to execute on those contracts. And the dilution is in line with what we told you earlier, Christian.
All the best.
The next question comes from the line of Alessandro Foletti from Octavian.
I have 2 questions, actually. I'm not sure you wrote it in the press release or in the presentation or maybe it was a talk that I had with IR, but it seems there is a percentage of conclusion effect in the Q3 numbers. Can you please quantify if there is an effect on that on sales and EBIT? I'll take the questions one by one, if you don't mind.
Alessandro, percentage of conclusion?
Of completion. I think [indiscernible]...
POC, sorry. Percentage of completion.
Yes. Percentage of completion is a standard revenue recognition method under IFRS that we have in polymer processing. So -- you can maybe see in our annual disclosure how much of that follows that versus transactional revenue recognition. But that's not a number that we disclose separately.
Right. But was there anything exceptional in the way the margin then developed in Q3 because of...
No, no, no, no.
All right. Okay. Great. Then on the bottlenecks, supply chain bottlenecks that you have mentioned. Would you -- how would you assess it? Like the worst was in Q3? The worse is coming now in Q4? Or the worse in Q1, Q2 next year?
I think this is an interesting question, right? And I think the level of question or uncertainty in the economy out is extremely high. And we have to [ differ ] between 2 different topics. When our customers, the automotive industry is struggling, we are to a certain extent affected. But this is beyond our reach, right? It's a simple question of what is the number of cars being produced. I think this is one part of the story.The other part is our internal -- our own business where we are short of pieces and parts. And Phil was referring to the inverter, this is the controller unit for our winder technology. But there are also other shortages when it comes to logistical questions, availability of container and even power supply in China. So that means there are plenty of elements here. And what we would say -- what we are saying is all this -- this entire bunch of different phenomenas will last at least into the first half of next year. And that is what we expect actually.
Okay. But when you -- I don't know if you can measure this in a way. But maybe by the number of discussions that you have internally, do you feel like it is worsening still? Or is sort of -- well, we know that it is -- we can deal with it? Or do you have the feeling that there may be things that are even worse in the coming quarters?
No, this is very difficult to judge. We take what we have right now. We will assume it will last on the level we have right now. It might change. Regionally, it might change from product to product or material, commodity or whatever. But it's -- all I can say is so far we have been able to manage it quite successfully, not saying that we didn't have some minor negative impacts here, but we have been able to compensate that.
Right. My final question is, coming back to the share buyback, do I understand correctly that your shares can only be used for M&A? Or you can actually use it also for other purposes, it's up to you?
Primarily to be used for M&A.
Okay. But is there any legal limit, that's what I mean, in the utilization?
Well, you cannot cancel them. As you know, there's a significant tax disadvantages to them. I think that's the biggest reason.
The next question comes from the line of Sebastian Vogel from UBS.
I have 3 questions. I would like to post them one by one. The first one is on Polymer Processing. In the slide deck, you mentioned about a couple of margin headwinds: project delays, higher raw mats and freight costs. Can you shed a little bit more color there? How much the different factors have been a headwind to the margins? And if there were some offsets that were helping the margins, volumes, of course, on that side? If you can help us to get a little bit of a better sense how the different factors impacted the margins on that segment.And of course, related to this question, is like these project delay you were talking about, is that now being really finished? So is there nothing what you'll see anymore again? And if you could also [ add to that ], that would be great.
So the order of magnitude is low single-digit millions we talk here. And the project delays are to our best knowledge -- as you know, today, I would say, yes, we are converging and we do not foresee any additional new topics coming up.
Got it. So that project is pretty much finished today. There's nothing -- no potential further deterioration to expect from this one?
No, the project is not yet finished, but we are back on track.
Understood. The second question would be on Surface. Can you deliberate your thoughts on the different end markets, how the growth rates have developed over the course of the third quarter? How the last month was comparing to the first 2 months? Was there some trends? Or how have you seen things there?
So OSS, fortunately, we do have a quite broad market and customer base here, what helps a lot. Automotive industry is stagnating from our perspective. Here, we have to be more careful. Different regions are showing slightly different pattern. And from that perspective, I think our figures in terms of order intake and sales in Q3 are in line with what everybody expects here, right?
Yes. And I would say from a monthly standpoint, obviously, after July and August, which are typically slower months, especially August, an acceleration into September and then -- but at a moderate level, specifically in the auto industry because of the idiosyncratic challenges and the planned shutdowns. And then -- we're a similar pattern. So I think that's specifically the comment on our industry.
And did that work into October further, that we have again seen some sort of gradual acceleration into October so far?
Versus September, no. I think on the auto side, it's similar to September.
And on the short cycle side in China?
It depends a little bit on the end market, as Roland was saying, and on the geography. So it's kind of a mixed bag of things.
Understood. And then one last one with regard to the auto exposure on the Surface side. I hear the third quarter global production numbers seem to be quite negative. Actually, if I have calculated it correctly, your numbers are suggesting that you have even seen a positive growth. Can you explain that a bit? Was it just like because the third quarter '20 was a bit different, which it led to the sort of mismatch between global production volumes and then your growth numbers in automotive?
It's really -- it's obviously a slight nuance that you're picking up on. And you're right. It's a mix of the base effect and then specifically our geographic mix, where -- and customer mix, where we've picked up. By and large, we see -- we really see a trend that is very similar to our overall production numbers.
Okay. This concludes today's call. In case of further questions, don't hesitate to contact us in the IR team. Thank you for your participation, and goodbye.
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