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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Media and Analyst Conference Call. I'm Andrea, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Norbert Klapper. Please go ahead, sir.
Thank you very much. Good morning, everybody. Thanks for dialing in this morning. I will give you a summary of how Rieter has been trading over the last 9 months in terms of order intake for the group and also by business group. And in my introduction, I also have to report on a change in our management team. [Audio Gap] team. I'm on Page 3 now. I'm going through the [Audio Gap]Order intake in the first 9 months was at CHF 750 million. In the third quarter, we booked CHF 238 million. In our business groups, we saw that in Machines & Systems, our order intake was below the previous year, mainly driven by the low demand from Turkey. In our After Sales business, we saw that the numbers were slightly below the previous year, the reason is also here the low order intake in the machines and business systems because the installation services, which we need to install the machines at our customers are being reported under After Sales.The Components business is stable on previous year's level and the reason is that our customers are running their mills [Audio Gap] capacity load, so they need wear and tear parts and this is the main reason why we see a stable development in the Components business And as I said before I have to report that we have a change in our management team at the Rieter executive team. Carsten Liske, who is today in charge of After Sales has been appointed Head Business Group Machines & Systems. He will take over from me. I'm doing this on an interim basis at the moment. He will take over from me on January 1, '19. Let me move on to Page 4, where I have one of the highlights of what happened in Q3. We were at ITMA Asia in Shanghai, which is an important trade show in our industry. At this trade show, we presented a couple of innovations with the focus on digitalization of the spinning mill. We included UPtime, you have it here on this slide. UPtime is a maintenance system, which includes predictive maintenance based on artificial intelligence. We launched this product in Asia at the trade show. And in addition, we launched our digital platform, which is marked in red here on this slide. It's called Essential. It is a platform, which offers the customers the option to integrate Rieter's digital offerings as well as other digital offerings, and it also offers the option to link the digital offering -- our digital offering to their ERP systems. The response of our customers to this introduction was very positive. The introduction of both UPtime and Essential is a major milestone in our innovation programming, which we have reached.The ambition is to fill the box, the red box I have here on this slide, with digital products. And the reason is not that digital is fancy at the moment, the reason is that we strongly believe that the digital technologies can leverage Rieter's know-how for the benefit of our customers to make them -- to make our system offerings more attractive, and that is why we do this and the response we get from the market is very encouraging. Having said that, I'd like to hand over to Joris, who will walk you through the numbers.
Thank you, Norbert. On Page 6, you see the development of order intake by business group. Accumulated order intake of CHF 749.8 million was below previous year's level. Main reason for the decrease was the expected lower demand for new machines. So business group Machines & Systems took in orders in the amount of CHF 433.4 million, a decrease of 12%. Business Group After Sales realized CHF 111.3 million in order intake, slightly below last year's figures, and business group Components received orders worth CHF 205.1 million, a growth of 29% compared to the previous year's period. Without the acquisition of SSM, orders were slightly lower by 3%. Now let's have a look at the order intake in Q3 on Page 7. Rieter's orders received were at CHF 238 million in the third quarter, a decrease of CHF 31.7 million compared to Q3 2017. Business group Machines & Systems realized CHF 135.7 million in orders. It is 18% lower than in the Q3 2017. Reason for the decrease is the differences in demand across the regions. Order intake grew in Asian countries, especially Vietnam. Now China developed on a stable level. India, however, showed weaker orders due to financing constraints. And Turkey was on a expected very low level. Business Group After Sales received orders of CHF 36.3 million in Q3 '18, a decline of 4%. The spare parts business developed positively, however, the demand for installations, which is linked to the demand for new machinery declined. Business group Components finally realized an order intake of CHF 66 million and held the previous year's level nearly stable. I hand over to Norbert Klapper for the outlook.
Thank you very much, Joris. Before we come to the outlook, I'd like to introduce Carsten Liske to you. Carsten is with Rieter for 9 years. He started in operations in the BG RMS with the Machines & Systems. At the time, it was still called Spun Yarn Systems. Carsten was based in China for quite some time. He built up Rieter's operations in the country. In 2015, he moved from the Machines & Systems business to the After Sales business. He was the guy, who started to establish this business as a business group. He shaped the strategy, he built an organization and a team and after 3 years, he had grown the top line by CHF 19 million and the bottom line by CHF 8 million when you compare '14 numbers to '17 numbers. He's the right guy for taking RMS to the next level. And we will talk about his succession for the Business Group After Sales as soon as we have made the corresponding decisions. Now let's go into the outlook on Page 10. As announced, earlier this year, we expect Rieter -- in total, we expect our sales numbers to come above 2017 figures and EBIT before restructuring cost below the prior year level. Net profit is expected to be significantly higher than in the previous year. The reason is that we do not expect extraordinary restructuring charges this year as opposed to what we had in 2017 for Ingolstadt. The market situation, we have talked a couple of times about the challenges our customers are facing in their countries: rising interest rates, currency, commodity price volatility and the political situation in a couple of countries. And this has not changed. We are of the opinion that these challenges for our customers will continue to impact demand as we move on. We are through with this presentation now, and we are open for questions.
[Operator Instructions] The first question comes from the line of Reto Amstalden from Baader-Helvea.
And I have 3 subjects. First, on the investment side, on the subdued investment climate in the industry. When you look at your current project pipeline and project under discussion, is it fair to assume that, let's say, the Q3 order intake number is the best case and a fair assumption for the next 2 to 3 quarters going forward? Or would you see here even more pressure on this order run rate from the third quarter? And then the second topic on Turkey. You indicated that there was also declining demand in After Sales business area in that country. Is that more related to the fact that the spinning mills active for the domestic market are squeezed here and make hardly any money anymore and invest here because on the other side we know that in Turkey, the main part of the textile industry is active in the export, and so they actually should make money here still and invest. Maybe you can elaborate on that part as well. And then thirdly, your strategy to increase your EBIT margin up to 10% in the mid- to long term, we know you increased here or you stepped-up measures to achieve this target and can you share here some data points or milestones for additional measures and the successful implementation that goes beyond the Ingolstadt project we know already?
Thank you very much, Reto, for your questions. Let's come to the pipeline first. The pipeline of project negotiation is in good shape. It -- we are working on turning the pipeline into order intake and that is challenging in a couple of markets as we pointed out earlier. It's hard to predict how this goes into the next couple of months. What I can say is that the pipeline is doing okay. Turkey. After Sales lower in Turkey, yes, but one of the reasons is for sure as you mentioned, the mills, which are producing for the domestic markets and who have to buy cotton or raw material in hard currency they are in a difficult situation and that is part of it. As opposed to the export spinners, in particular, if they have access to Turkish cotton, they are doing very well. The second reason for the After Sales development in Turkey is the low installation volume, which has a big impact as you might imagine. And the EBIT targets, yes, the step-up program is well underway. You mentioned Ingolstadt. Ingolstadt will be done by the end of the year, the savings will kick in next year. What is on the agenda at the moment is the innovation portion of this step-up program. We are working at full speed to get prepared to the next milestone and this is ITMA Barcelona in summer, next year.
The next question comes from the line of Alessandro Foletti from Octavian.
I have 2 questions and then maybe a follow-up afterwards. Regarding the financing issues that you have mentioned in India, I wonder how new that is and how the financing conditions are in other countries i.e., China, also Turkey, is that problem at all? That's the first question. The second question is related to the business overall. Do you have an idea how well your competitors are doing? That's my second question. I maybe have a follow up.
Financing. Yes, it is -- for our customers, it's moving in the wrong direction. If you go into the Indian market, for example, and you see the increase in the interest rates in the central bank interest rate, which happened recently in 2 steps, you see that this has an impact on the investment sentiment, of course. And in Turkey, we recently had a report from a customer, who had been offered a bank loan with an interest rate of 50%, I guess, that tells you the story. So it is changing for our customers. It is moving in the wrong direction. And one of the reasons that -- you know that very well is, of course, the interest rate development in the United States and the impact on the emerging countries. And from the business overall, yes, I guess, everybody in this industry is facing the same situation now. We have not heard of any of our industry peers who report a different situation. We have met -- the industry has met in Shanghai at ITMA Asia and the comments that had been made by everybody were all moving in the same direction.
Okay. Then maybe my follow-up regarding more specifically the Zara numbers that were out in H1. They were quite strong if you ask me. I looked at the Q3 numbers, they're all in Chinese, I'm not sure, I got it right, but all growth rates are positive. So -- and, although, Lakshmi in their sort of very local report seems to grow, so is that -- do I see the things wrong here? Or if not, why are they growing while you are kind of flattish?
Well, for obvious reasons, I'm not going to talk about our competitors one by one. I can tell you that the message that we get from the market is consistent. The situation in the market is the same, maybe with an exception for Zara in China. They are very strong in China, they have own spinning mills, the Xinjiang group has own spinning mills in China, who get a part of the machines that they are producing, so that might be a different story. But from an overall perspective, this is the picture that we have. And when you look at the stock prices of these companies, you see it reflected there as well.
We now have a question from Armin Rechberger from ZKB.
[Audio Gap] to me at least and I wonder just the very latest developments is there are no clue of a hope in some markets, Turkey, India, China. Then the other 2 questions. You mentioned a step-up program and some further possibilities to shift some production to other countries. What do you have in mind there? Where are -- where do you see possibilities to shift production? And my last question is about Trump's trade war. What consequences do you see so far?
Yes, thank you very much. We didn't get the first part of your first question. You were asking about the latest developments in Turkey, India and China. Is this correct?
Yes. Correct. Because your outlook is not very optimistic. Is there any reason to be a little bit more optimistic just at the latest information you've got?
Well, as I said, the reason that, that gives us -- that we see that the business is not going down is the pipeline that we have. But it remains to be seen to what extent we can turn the pipeline into order intake. That is the big challenge at the moment. With all the things around us financing, trade war and so forth. There is projects there, the question is when will they turn -- if and when they will turn into order intake. And you know, order intake for us means that our customers make financial commitments. So it is not about nice words and handshakes and having a nice dinner and agreeing on a new contract. It is about money that flows from them to us. That is the point.
Perhaps to give you some specific insights, we have some projects, which are quite large, which are in discussion and that was what Norbert Klapper means with the order pipeline. However, if these orders are going to be booked this year or next year, remains to be seen and that depends on the availability of financing. So there is -- that's why we are also cautious because we cannot definitely predict when those orders will turn into orders received and be booked as firm orders.
The second question. Step-up production shift to other countries is not on the agenda at the moment. The company is fully focused on the innovation program that we have going on, that is our #1 priority. And the Trump trade war, yes, we are just -- we were in Shanghai in October, and we -- of course, there were lots of discussions on the impact of the trade war, in particular, on the Chinese spinning industry, which is the biggest in the world. However, we were not able to identify clear direction. The last customs list that the U.S. published included some textiles, but apparel was not on the list, yes. So we -- the market is in a waiting position, I would say. No clear direction yet.
Okay. Then I have one follow-up question regarding -- you mentioned spinning mills are running under good load when I got you correct. I mean, that's a good basis then for further on maybe, might it be components or new machines? Or how do you see the situation there? No idle capacities around, I suppose?
Well, I wouldn't say there is no idle capacity around. But what we can see is from what -- how the Components business is doing that the mills are running and -- but our customers make a difference between a good business, which is running well where they are making money and their decisions to make additional investments. That is a separate -- that is a different story for them. And of course, the returns and the cash flows that you generate from an ongoing business as a spinner gives you the possibility to make investments into the future, which would mean for us new machines. At the same time, you pick the right timing depending on the financial situation and the financing situation and depending on the political situation, depending on support programs by the governments and that is the situation at the moment.
Also, coming up fair in Barcelona, the ITMA won't help. I mean lots of customers will wait till you present the new innovations as others do there.
Yes, the more we approach -- the closer we get to ITMA Barcelona, the more this will have an impact. You're, right.
The next question is from [ Sir Arnold ].
I have actually 2, first, on After Sales. You were talking here that spare parts were developing positively whereas installation was down. Could you give us a little bit of color what kind of profitability levels we have here, spare parts versus the installation business? That's my first question. And my second question is about the ITMA Asia, just took place in Shanghai as you mentioned. Do you expect here some tailwind for orders in the fourth quarter?
Well, perhaps let me answer the question regarding the profitability difference between installation and spare parts. I think if we model it, we can assume that this -- we can -- just say, we can assume it's similar for modeling the business group's results.
And the second question, ITMA Asia, as we pointed out, there was lot of discussions at ITMA Asia on new projects, also big projects in Southeast Asia and also in China. At the same point in time, we saw that our customers are in a waiting position. They look at the development of the trade war and they look at the development of the financing situation in their countries, and so there was a good discussion and interesting pipeline, attractive pipeline. Also at the same point in time, we will see to what extent and if these projects in negotiation will turn into real order intake.
The next question is from Fabian Haecki from UBS.
A few questions. So first, in this environment with further declining demand, is it right to assume that pricing overall, is also under pressure? That's my first question. I ask one after the other.
Yes. In a situation where there is not so much volume on the market, pricing is under pressure, but we stick to our principles.
Okay. And you are successful sticking to your principles or you kind of deliberately kind of losing some orders or giving away some market share?
Well, that might happen, yes. If you are in a negotiation, if you say, okay, this is my walkaway position, and you -- and one of your competitors makes a move that you don't want to follow that can happen, where you lose an order, but that's part of it, and you need to know your walkaway position and you need to stick to it. At the same time, you need to be competitive, that is the other side of the equation. But when you are sure that your competitiveness is okay, then you have the walkaway position that you have to stick to. That is our conviction.
And how important to come back to this kind of market share question Alessandro Foletti also had. Is it still kind of the key parameter you're looking at to keep your market share? Or do you say, we don't care really much? We have our economics. We want to be leading in terms of technology and the higher niche, or how do we look at this whole metric? Or how do we as analysts, do we wrongly interpret the numbers of competitors? What would you kind of tell us to help us better interpreting Rieter's strategy and how the market and the whole competitive environment is developing?
We -- our strategy is to be the technology leader and to make an offer to our customers and offering to our customers, which roughly 30% of our customers can afford because technology leader means also that we are -- have a premier pricing. And there is customers in the world to say, okay, I would love to buy a Rieter machine, but my financing capacity is not sufficient. We have to make -- we are making an offering to the market, which helps or which makes sure that 30% of the market should be able of acquiring of buying our machines, but that is a byproduct of the technology leadership and the pricing level that you go into the market with.
Do you see increasing pressure from customers now, particularly its financing? I mean, it's always been a bit of a topic but now has exacerbated. Is it -- do you -- do they pressure you to help them offering more creative ways how to finance it? And how do you react to that?
Well, that type of discussion is always around, but the market knows that we don't do this.
Okay. And there is no, kind of, other way with partnering with some companies to kind of mitigate that issue?
I think you need to differentiate there between having financing on Rieter's balance sheet and not having financier -- financing not on our balance sheet. Of course, we support our customers, if they want to invest in a country with -- liaising with financing partners that maybe banks or that may be other companies, which can provide the financing and, of course, we also have the products, which can then be eligible, for example, export risk insurance. So this is an instrument that we know and that we also use. What we don't do and I think there are some competitors who started to do this is that they directly give longer payment terms that they also take it on their balance sheet. We think this is too risky in a business which is always going up and down. And we like to predict our balance sheet and have it sustainably strong and firm.
Okay. And then maybe just a question on CapEx. In 2019 and also a bit beyond that into '20, in view of your new campus you want to build at Winterthur. How should we see that? We see CapEx going up or being flat in terms -- in absolute terms?
The decision on the building in Winterthur will be made in spring next year and that will be the point in time when we can talk about the financial dimension of it.
But you must have a rough idea whether it's...
I have a lot of ideas, but I will tell you about it in spring next year.
[Operator Instructions] We have no more questions at this time.
All right. So thank you very much, everybody. And I wish all of you a great remainder of the day. Looking forward to talking to you next time in January 2019. Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.