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Dear, ladies and gentlemen, welcome to the NORMA Group Q3 results 2018. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Bernd Kleinhens, CEO, who will lead you through this conference. Please go ahead, sir.
Thanks a lot, operator. And also on behalf of the entire management board of the NORMA Group, a very warm welcome to the third results conference call today.Starting on Page 2. I'd like to lead you through the highlights of our third quarter results. Sales are up by 9.7% to EUR 268.1 million versus a EUR 244.4 million comparison -- comparative number in Q3 2017, of which 7.1% is organic growth in the respective quarter 3. Adjusted EBITA at EUR 42.8 million, reflecting a slight increase versus the EUR 42.7 million of Q3 2017. That leads to an adjusted EBITA margin of 16%, which marks an improvement versus the 15.2% of Q2 2018 and is coming from 17.5% in Q3 2017.On the balance sheet, we reported equity ratio of 40.1% versus 40.7% in December 2017 and a net debt increase of around the 33% to EUR 457 million, including dividend and acquisition payments. Earnings per share increased by 10.3% to EUR 0.66 versus the EUR 0.60 in Q3 2017. And adjusted earnings per share increased by 8.8% to EUR 0.83 versus the EUR 0.77 we recorded in Q3 2017.Finally, on this page, we confirm our guidance with organic growth of around 5% to 8%, aiming to reach the upper end, and adjusted EBITA margin between 16% and 17%.Continuing on Page 3, ladies and gentlemen. We would like to lead you through the detailed analysis of sales, which shows that we had a strong year-to-date organic growth of 9.7%, or in the quarter 3, respectively, 7.1%, which is mainly coming due to an increase of content per unit share of wallet and the global production output of the passenger and commercial vehicle markets as well as a very good development of our water management business, particularly in the U.S.I guess that shows that our underlying growth story is intact. And despite of headwinds from the macroeconomic affairs, including but not exclusive to trade barriers, tariffs, some of the WLTP homologation issues, which we see in particular the European markets, and relatively speaking, higher comps versus Q3 2017. We still see a significant growth in that quarter.Acquisitive growth adds to about 1.4% or EUR 10.4 million from our Statek, Fengfan and Kimplas acquisition.But finally, negative currency effects, in particularly the first half year, and the relatively flat development in Q3 led to a total sales decrease of 4.1% or EUR 31 million, mainly resulting from the strong euro versus U.S. dollar currency exchange.Looking further down on that page to the chart. The last line here shows that the total Q3 year-to-date sales accounts for a total of 18 -- EUR 817.1 million, which is up EUR 53.7 million or 7%., of which, again, 9.7% year-to-date are organic. And one of the particulars in that case is certainly the region APAC, which is up in revenue 20% organically year-to-date, which also demonstrates our ability to penetrate growing markets and increase our share of wallet in areas where we see still potential for the future.Moving on to Page 4. We'd like to lead you through the sales by region and way to market. The indicated favorable organic growth, particularly in Asia Pacific, as well as of the acquisitive growth from Fengfan and Kimplas in that region led to an increased 13% sales ratio in APAC. Please refer to the graph on the left-hand side and see we are up from 11% a year ago to now 13% in the Asia Pacific region. Despite of -- negative currency effects, especially in the Americas, partially counters the positive organic growth and leads to stable 41% sales ratio in the Americas versus the 46% in EMEA.On the right-hand side of this page, you see that strong growth in the EJT shifts the sales contribution 2 percentage points up to 64% versus 62% a year ago. However, with the acquisition of Kimplas and Statek since the first half year results, we increased that split on the DS side from 35% after the first half year up to 36%, which shows that we are accounting for the DS sales of Kimplas and Statek into that category of our way to market.Moving on to Page 5, endeavors to the development of our profitability. Of course, we still see the influence of both strong organic growth, be it with the effects from increased shortages and price increases of our raw material sector, which is quite volatile. And I guess this is something the NORMA Group doesn't see exclusively during the course of 2018 and fueled by, among others, trade barriers, including force majeures, growing protectionism in some markets, to name Section 232 and Section 301 in the U.S., which is, in that combination, also a key driver to a temporary increase in our variable extra cost in both purchasing, production and logistics.Following the Q2 margin of 15.2%, however, Q3 margin comes in with a slightly improved run rate at 16.0%, which marks, among others also, and shows that our countermeasures in place, including the pricing power, are helping us to drive to the run rate slightly up.And with that, I would like to hand over to our CFO, Michael Schneider.
Yes, Bernd. Thank you very much. Also a very warm welcome from my side to all of you.Looking on Page 6. I would like to address some more details on the adjusted EBITA, Q3 and year-to-date. We see, looking on Q3, a stable gross profit in terms of 58.9%; 59%, Q3 2017. The stable gross profit in Q3, but year-to-date, below last year because of the reasons that we meanwhile addressed a couple of times, some material shortages and price increases on the raw material side, especially on the alloy surcharge, thermoplastic material and on the steel price, driven by the trade barriers that Bernd mentioned earlier, so that we have some variable extra costs in the areas of the supply chain at NORMA Group.We see an increase in material costs, higher material costs in the quarter 3 and also in the year-to-date period. If we address these material costs, we have to keep in mind that transferring these material costs to COGS and to gross margin, we also have to include the increase of inventories of finished goods and work in progress, which increased in the consequence of the volatile environment that we see in all different markets and also in production -- in the cost of production relocations. So stable gross margin, Q3. Year-to-date, it was 58.7%, below last year.Looking on the overall adjusted EBITA. We see that in the second -- excuse me, in the third quarter, we have increased our EBITA in percentage of sales versus Q2 from 15.2% to 16%. Nevertheless, below last year. And we also see 16.0% year-to-date for the first 3 quarters. This includes a slight improvement in Q3 in the personnel expenses being year-to-date on the same level as last year at 26.7%, while we see an increase of other OpEx mainly driven by higher freight cost for the whole group.So overall, 16% EBITA margin Q3 and also year-to-date for the first 3 quarters. This includes a couple of adjustments, which we show on Page 7 of this presentation. On Page 7, you'll see that we have EUR 1.3 million of adjustments in EBITDA for acquisition costs. We have, in the EBITA area, additionally EUR 2.8 million depreciation for purchase price accounting. And also shown below the EBITA and the EBIT, EUR 15.3 million amortization PPA. So that overall, we see earnings per share adjustments of EUR 0.45, which means we have adjusted earnings per share of EUR 2.61.If we looked on the change of earnings per share versus last year on Page 8. We see that this increase of earnings per share -- adjusted earnings per share is 8.8% in Q3 versus 2017 and 4% in the year-to-date period. In terms of reported earnings per share, we are up 10% in Q3 and slightly over 4% for the year-to-date period.Looking on the net debt and financing aspects on Page 9 of the presentation. We see that the net debt increased to EUR 457 million, including EUR 580 million of gross debt and EUR 123 million of cash. The increase of net debt, we have to see that this includes also an increase of dividend payments. Dividend payments this year, EUR 33.5 million. And also, the acquisition of Kimplas and Statek that we have around EUR 66 million of cash out for the purchase price for Kimplas and Statek, though this is included in this increase of net debt. Equity ratio, as mentioned earlier, 40.1%, up versus Q2. And leverage of 2.2, end of September.Moving on to cash flow on Page 10. We see the cash flow for Q3 2018. Net operating cash flow of EUR 23 million. We also mentioned in the last quarter that we have, in the course of our growth, the working capital outflow which leads to the decrease and negative impact of net operating cash flow, as mentioned, EUR 23 million in Q3. Year-to-date, nearly EUR 40 million for the first 3 quarters. With that, I hand over to Bernd back again.
Well, thanks, Michael. And ladies and gentlemen, to summarize our today's conference call and our Q3 results, we finally would like to lead you through the company guidance, which remains unchanged versus last quarter's guidance. So on the sales side, with organic growth of around 5% to 8%, we aim to reach the upper end with year-to-date numbers being at 9.7%. We are quite optimistic that we will reach that upper end as a result of our strong first 3 quarter organic sales growth.Additionally, around EUR 17 million from acquisitions, namely Kimplas, Statek and Fengfan. Our adjusted EBITA margin confirms between 16% and 17% with a net operating cash flow of EUR 130 million and an unchanged dividend policy with approximately 30% to 35% dividend payment of adjusted net profit. We have not changed the company guidance as a result of Q3 KPIs.With that, we would like to thank you very much for your attention, ladies and gentlemen. And at this time, happy to answer your questions.
[Operator Instructions] The first question we received is from Ingo Schachel, Commerzbank.
I have 3 questions. The first one would be on your, yes, pricing strategy and the price increases. Obviously, your Q4 guidance implies Q4 margin pretty much in line with the Q4 margins you had in the last 5, 6 years when the raw material prices were normal. So with regards to your attempt to increase prices, would you say that the Q4 margin will then reflect, let's say, a fully increased price level with most of your customers? Or is there another residual round of price increases to kick in, in the first quarter? Or should we expect normal price downs in the beginning of next year?
Well, coming to the pricing question, Ingo, this is Bernd. Of course, we have during the course of the year, on the back of those alloy surcharges and raw material price -- base price increases, resins as well as ferritic and austenitic stainless steel, continuously negotiated with our customer base. And we will continue to do so while we see the impact in Q4 for 2018, but we will continue to do so also in the next quarters to come. On the back of our assumption that due to Protectionism Section 232, Section 301 and similar trade barriers, we do see another set of potential price volatility in 2019. So it's not that we have already reached the peak of the pricing power or pricing negotiation from our side to the customer, but that is a continued effort provided that, of course, ceteris paribus, the raw materials are going to go up on the way forward.
Yes. My 2 other questions would relate to the cost side because I think 2 items were interesting in the quarter. On the one hand, employee benefit expense, which went down actually quite meaningfully in the third quarter compared to the second quarter. And I think you mentioned lower bonus payments and so on, which I'd like to understand a bit better to what extent this is sustainably a reduction of employee benefit expenses that might represent partly a shift to other operating expenses or whether it's more a temporary reduction of bonus payments, which will then resume next year if performance improves.
Well, this is Michael speaking, Ingo. Thanks for the question. I think if we look -- when you look on the employee benefit expenses, you see the bonus development. The bonus development is clearly oriented on internal targets that we have. And according to these targets, we have changes in bonus expenses depending on the development of these targets. And what we see in the current figures is the reflection of these developments.
And second to what Michael also said just before, it's not monocausal. We also see some improvement in our efficiency and productivity, which has continued to drive the company on the way forward so that we see our ratio not only on the back of the already mentioned employee benefits development but also on the development of efficiency gains and productivity gains moving into that direction.
Very clear. And the last question would relate to the work in progress change, which was EUR 12.5 million. Quite high. And of course, you stated the reasons. You got the production relocation and volatility in certain sectors. But still, I haven't seen such a high number in your company P&L. So just curious whether you could shed a little bit more light on what -- what's happening. What's so meaningfully different from all the previous 7 years since the IPO that explains such a big change in capitalized work in progress and whether you would expect the corresponding reversal of work in progress built up already in Q4 or whether that's rather something which should then go down in 2019?
Well, it all hinges to a large degree to -- with the volatility. And it depends on the volatility of raw material supply and the shortage, which we saw particularly in Q2. It was unprecedented as well. In order to balance that out and in order to ensure that despite of our strong growth, which comes on top and multiplies the challenges in that respect, we would like to get a very balanced and high on-time delivery to our customers because having the undisrupted supply chain in the focus of our doing, you cannot risk to actually disrupt the supply chain towards our client base. Therefore, we try to mitigate that material shortage impact, which was certainly driving also our margin in Q2, as already indicated. And on the back of strong organic growth, we do see that volatility to continue. And therefore, as a mitigation effect, it will also take the, well, let's say, security measure and that step into the direction of increasing our stock level in order to have the right answer to that challenges on the material side.
We received a question from Kai Mueller, Bank of America Merrill Lynch.
The first one is really sort of a little bit of follow-up on the points made earlier with regards to your guidance. You've done 16% adjusted EBITA so far this year in the 9 months. You tend to have a weaker margin in Q4. But I understand there are some sort of compensation on the raw material side. How do we have to think does that play out in the fourth quarter? Is it just price increases going through for products you're shipping? Or are these actually also reimbursements you're getting that are coming through at 100%?
Well, there's 2 factors actually. We see a slight decrease of alloy surcharges, which is giving us some tailwind while we saw the alloy surcharges above average in the last 9 months. So we see a positive trend on alloy surcharges. And we do get the full swing of our pricing negotiations in Q4, which led us to believe that the 16-plus percent in Q4 are going to be achievable, which is finally also baked into our total year guidance.
Okay. If you can break it out a little bit maybe between the previous quarters. Obviously, in Q2, we had that 15% adjusted EBITA margin. How much of this was sort of labor cost overrun due to weekend work? And how much was really on the raw mat side? And if you could give us the similar number for our -- for the 16% basically we've got sort of in the 9 months number now. Just to get a little bit of color in terms of how much can reverse also thinking about next year.
Well, if you -- Kai, this is Michael speaking. I think it's hard to give a split because what we saw in the quarters before is also a shortage in the materials. This has not only caused pricing issues in the raw materials but also, let's say, challenges in the supply chain based on shortages of materials. I mentioned getting material not on Wednesday afternoon but on Friday evening. You have to work during the weekend. You have some extra pay. So it's a mixture in all cost components that you see. What you have to see on the Q4 margin development, as we mentioned, Q4 in the last year, it was around 15-point-x percent. In a couple of years, it was 16-plus percent. So there is no typical seasonality for this Q4 in general. And what we see this year so far is that we have a different cycle, a different seasonality based on the whole volatility in the environment. And what Bernd pointed out earlier, we have some positive impacts in pricing. We have positive impacts in material cost in Q4. So that we see a clear improvement in Q4 in relation to that development in Q2, for example.
Okay. And then maybe if we take a sort of step back, thinking about next year. Obviously, you've grown very fast. Especially, North America has been very strong in terms of your NDS and I think mainly also your truck business. What do you see as sort of the first signs from your customers? Because your production is obviously holding up very strongly. But how do you plan your capacities going into H1 next year and then the second half as well?
Well, certainly after 2 years in or around the 8% organic gross margins with the effect of last year in particular also in the NDS side and this year of certain recovering, we do not expect that this 8% is going to be seen on the way forward. We are a bit more cautious, and we are planning our capacities in accordance with that relative to 2017. 8.6% in 2018. Our guidance is 5% to 8%, aiming to reach the upper end. We are planning a bit more cautiously next year, also on the back of the macro economical developments in -- not only in North American markets but globally.
Okay. And is it just because your comp, obviously, is getting a lot tougher?
Yes. Well, comp Q4 versus Q4 last year, we had 16-over percent organic growth in Q4 2017. I think we also indicated earlier this year that 2018 will certainly be front-end loaded from a growth perspective and to a degree, back-end loaded from a margin perspective, which we actually do see now happening. But still, 7-over percent growth in Q3. 9.7% year-to-date is a comfortable sign that the customers are in need of Engineered Joining Technology.
The next question is from Omid Vaziri, Jefferies.
If I could just pick up on your full year guidance for growth again. Many expect auto production declines in China in the fourth quarter continuing and also it being quite weak in Europe as well. Now clearly, through your track record, you've shown you benefit from the structural growth element when it comes to volume development already -- auto production volume development, which is positive. But given -- it would be quite interesting to hear your views on how you expect the auto production developing in China and Europe. Clearly understand, year-to-date, growth has been 9.7%. That gives you a good starting point going into the fourth quarter. But also sequentially, we're seeing a lot of the end markets deteriorate quite -- or expect to deteriorate quite materially. So it would be good to understand how -- from where you are sitting today, what is it that you look at that makes you quite comfortable in pointing us to the upper end of that guidance range? Do you look at the current backlog, which is up 11% year-over-year? Do you see something in there that makes you more comfortable? Or is it something else?
Well, thanks for the question, Omid. And certainly, it's a combination of a number of different factors. And it's not volume-driven. That is for sure. We have seen this continuous overperformance in almost all markets driven by, for instance, in China because we indicated in China, sales or volume development, relatively weak. On the passenger and commercial vehicle side, it's actually declined this year. Still, the tighter emission regulations in those markets like China, like in India, which started stage 6, a key driver for an increased share of volatility because the client base in these development countries are more and more looking for Engineered Joining Technology rather than using a scotch tape or a paper tape because they recognize that the emission regulations can only be met with a fully fledged assortment of joining technology. And that's exactly where we are coming in. That's exactly where our engineering teams are helping our customers to meet that tighter emission regulations. And that is one of the key drivers of our overperformance relative to market growth. And of course, the backlog scenario supports that view, as you pointed out, double-digit backlog growth versus the year 2017, which indicates that despite of relatively weak production as well as GDP numbers as well as the overly indicated trade barriers. And certainly, that supports volatility. And volatility, normally, is never good for growth. But we see that underlying growth drivers in the mega trends, be it water management or tighter emission regulations, as the key for our growth trajectory.
Okay. That's clear. And then if I could ask another question on the margin side of things. Clearly, third quarter results indicate a sequential improvement of 80 bps over a problematic second quarter. Sorry if I missed this already. I had a bit of -- some technical problems on this call. But would you mind confirming whether you've had any more force majeures on your resin plastic suppliers? And also, a lot of the extra costs borne at Q2 results, so extra weekend works, higher freight costs because you have to source material from places around the world that you wouldn't necessarily go to as the cheapest source. Would you mind just giving us an update on how these elements have progressed sequentially into the third quarter? And it sounds like they've fairly eased, but in which parts specifically have we seen the improvements? And do you still see the supply -- the material supply being quite constrained? Have they eased a little bit?
Well, it's Michael speaking, Omid. I think if you look on the fuel shortage that you mentioned, force majeure cases and the thermoplastic materials, we had 9 force majeure cases in the first 6 months, down on new force majeure cases. Nevertheless, we still have some shortages and very, very high price level, that's for sure, in the thermoplastic materials. We see some better developments on the alloy surcharge development, currently a slight improvement that we expect nevertheless on a quite high price level for these nickel and ferrochromium alloy surcharges. And we all have to see that steel prices are still on a very volatile level based on the trade barriers. So there is, of course, a still very volatile situation on the market. Nevertheless, we have, as mentioned, a couple of improvement measures that we see so that we are confident for the adjusted margin level in the fourth quarter.
And I think to that, coming to the question of whether we see the supply constraints now easing on us, well, there's no homogenous picture in here. If you go to the U.S., for instance, where we've seen a significant growth in Q3 -- and the protectionism of the steel industry there is now unfolding to a larger swing than in Q2 when the measures of Section 232 actually kicked in. We see, certainly, that the steel mills are playing that card of protectionism and that they are playing, of course, with the relative shortage of their supply versus demand in order to get their prices under the umbrella of tariffs lifted in the years to come. So we don't necessarily see that as kind of like global aspect. In Europe, it's much less of a material supply constraint than it is, for instance, in already mentioned Americas on the steel side. Force majeure, it was already indicated. No need to further drill into the thermoplastics. However, it is not a homogenous picture. And we are on top of that at this moment, trying to mitigate it.
Yes. So to summarize, it does sound to me there's clearly a lot of variable volatile external factors that could potentially put your margins at risk. I mean, you need fourth quarter margins not to deteriorate below 16%. Otherwise, you won't be able to meet your newly lowered guidance.
Yes. Well, again, with our pricing power now unfolding to full swing in Q4, we are -- and that's why we confirmed the guidance. We are very certain that we are going to mitigate that impact. However, what we want to transmit here is that the situation, while it is volatile at this very moment, doesn't come to a stop in a term of like year 2019 comes and all of the volatility issues on the material markets are going to be away. We are going to be resilient, and we are looking into that and continue to negotiate with our clients. And with respect to the material situation, we are 100% aware of that criticality, which is certainly unparalleled on the back of Section 232, Section 301, I've already mentioned a couple of times, development which go beyond our control. But again, we are on top of it, and we have the pricing power to mitigate that with a certain time line.
[Operator Instructions] As far as there are no further questions, I hand back to Mr. Kleinhens.
Well, thank you very much for this interesting Q&A session and your attention and your interest. And we would like to thank you, and looking forward to speaking to you in the upcoming future. Thanks a lot. Have a good day.
Thanks a lot. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.