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Edited Transcript of SO.MI earnings conference call or presentation 25-Oct-19 2:00pm GMT

Nine Months 2019 Sogefi SpA Earnings Call

MANTOVA Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Sogefi SpA earnings conference call or presentation Friday, October 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Laurent Hebenstreit

Sogefi S.p.A. - MD, GM, CEO & Director

* Yann Albrand

Sogefi S.p.A. - Group CFO & Investors Relation

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Conference Call Participants

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* Alexandre Raverdy

Kepler Cheuvreux, Research Division - Equity Research Analyst

* François Robillard

Intermonte SIM S.p.A., Research Division - Research Analyst

* Martino De Ambroggi

Equita SIM S.p.A., Research Division - Analyst

* Monica Bosio

Banca IMI SpA, Research Division - Research Analyst

* Renato Gargiulo

Fidentiis Equities S.V.S.A., Research Division - Analyst

* Roland Könen

Value-Holdings International AG - Board Member

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Sogefi Third Quarter 2019 Results and Perspectives Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Laurent Hebenstreit, CEO of Sogefi. Please go ahead, sir.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [2]

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Thank you very much. Here is Laurent Hebenstreit speaking; and together with Yann Albrand, Sogefi Chief Financial Officer; and Stefano Canu, Investor Relations for Sogefi. So welcome to all of you to the third quarter 2019 results and perspectives presentation here from Milano.

We will do the presentation in 2 parts. We'll first speak about the third quarter 2019 results. And then in the second part, we'll talk about the perspectives. And you have in the documents, which by now, has been posted on the Internet in Annex, the 9 months results, which, of course, Yann and myself, will be happy to answer any questions you may have on the call of the document.

Let's go now to Page 3 of the document, please. As we start on the highlights on the third quarter, I would like to indicate that the figures are at constant accounting principles and excluding the impact -- the positive impact of the claim we had last year. Remember that there was a quality claim in the past, which we resolved in the third quarter of last year with a positive impact of EUR 6.6 million in the P&L, which impacted both EBITDA and then all the lines below. This year has been neutralized -- we neutralized the like-for-like comparison.

So let's start with the top line. The top line, Sogefi overperformed the market by 290 basis points during the third quarter. EBITDA came out at 12% of sales to be compared with 11.3% in 2018. So that's the first interesting comparison, year-on-year like-for-like, an interesting comparison. The other interesting comparison, which we compare with the first quarter at 10.6%; second quarter at 11.6%; and then third quarter coming up at 12%, which is consistent with the message, which we shared with you in April at the end of the first quarter, when we say that Sogefi from now on, despite strong headwinds, would show quarter after quarter improvement in profitability. This translate as well in EBIT as the EBIT for the third quarter came up at EUR 13 million and 3.5% on sales to be compared with 2.9% in Q1 and 3.4% in Q2.

Net results came out at EUR 1.4 million versus EUR 0.9 million in the prior year. Last but not least, positive free cash flow, EUR 4.5 million positive, while in the third quarter of last year, we had a cash consumption of EUR 8.6 million. The actual cash consumption was higher because we also had the cash-out for the purchase of the Indian subsidiary minority. But if we neutralize this effect, it's still a swing from minus EUR 8.6 million to a plus EUR 4.5 million, which means the positive cash flow kind of supports the profitability numbers that we've seen before.

In terms of debt, now excluding IFRS, net debt came out at EUR 264.6 million to be compared with EUR 260.5 million at the end of 2018. If we now move to Page 4, in terms of the top line split of revenues by geographical area, we have a contrasted picture. Let's start with the negative information. The negative information is that in North America, although the market was, in production, only down by 0.4%, Sogefi was down at constant exchange rate by minus 4.6%. There are different impacts there. I would just like to highlight that the strike at General Motors started in September 15, 2019, and therefore, has been an impact at the end of the first quarter. And there were as well other effects.

Now turning on to the positive element. First of all, China, because the reference markets in Q3 was only down 5.5%, which is better than what we had before. And in there, Sogefi came out at minus 16%, in itself, is not a good number. But compared with what Sogefi was in the first quarter and second quarter, this confirms what I was sharing with you in the previous calls that we have new products coming up in all the [3D industry], starting in production. For instance, in Air and Cooling, we have the new coolant pumps, which we started for Volvo. In Suspensions, we have new businesses starting with BMW and Daimler. So the number in itself is not very good, but the trend is confirming that now Sogefi is kind of regaining traction, although we have unfavorable client mix. And we still have a large share of our business that is Ford and PSA, which are underperforming the Chinese market.

Moving now to Europe. 50% of the sales of Sogefi in Europe is very important, and our total performance on the market mainly come from Europe because we are overperforming 240 basis points in Europe, which is great.

Turning to the next page, on Page 5, our revenues by business unit. I would say the number, which is kind of surprising here is to see the overperformance of Filtration because Filtration at constant exchange rate had 5.1% growth. Versus the market, this is an impressive number. What I suggest is that you look at Page 22, which is a 9-month cumulative on Filtration. And if you do this, you will see that Filtration, over 9 months, is at 1.1%, which is quite good. But that means as well that part of what we see in Q3 is a normalization of Q2, especially in aftermarket, especially in the OEM segment, the sales were low in Q2. They were high in Q3. But if you take it cumulative, which is more normalized. The other numbers would be closer to the variations of the market.

Going to Page 6 on the sales by client. This is a standard Sogefi slide, so we've kept it for Q3. But here again, I encourage you to look at Page 23, which is accumulative, which is more meaningful. And I'll be happy to answer any questions you may have because the numbers for Q3 are not really representative of our activities with customers. We still have a well-balanced customer portfolio. But I think the 9 months numbers are more representative of what's going on with our customers.

I would like now to ask Yann, our CFO, to take us through the numbers.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [3]

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Thank you, Laurent. So moving on to Slide 7. As Laurent mentioned, 2018 and '19 results are comparable. The 2 things we did was, first, to take out the positive impact of the settlement on the claim, so EUR 6.6 million in terms of EBITDA and EBIT last year.

Second thing, as you all know, on January 1, IFRS 16, which is related to leasing, was implemented. And therefore, in order to present comparable figures, we have adjusted the prior year figures with the same accounting principle. So like-for-like, as Laurent mentioned earlier, EBITDA profitability increased from Q3 2018 at 11.3% to 12% in Q3 2019. No big changes in terms of restructuring, roughly the same amount of restructuring as in Q3 of last year.

Moving on to Slide 8. So same like-for-like, with EBIT profitability increasing from 3.2% to 3.5%. It is worth mentioning that EBIT was 2.9% in Q1, 3.4% in Q2, increasing to 3.5% in Q3. So a small recovery showing in -- since the beginning of the year.

Financial results weighing less than last year, so from EUR 7.3 million to EUR 6.6 million, as a result of which, net income increased from EUR 0.9 million to EUR 1.4 million. It is worth mentioning, I know it. I always get questions on this, but we still had a high level of tax expense in Q3, EUR 4.4 million. We had EUR 6 million in Q3 of last year. This is due, as in prior periods, to the fact that we take a prudent approach, first, to start up operations, such as Morocco. And then with regard to the accounting of deferred tax effects, we are pretty cautious.

Page 9, gross fixed costs. Usually, in prior quarters, we reported on total fixed cost. Total fixed costs include, on top of gross fixed costs, restructuring, R&D capitalization and indirect taxes. So we think it was more transparent to talk about the gross fixed costs, which are personnel costs just after direct costs. You can see that gross fixed costs were EUR 68.5 million in Q3 of last year, down to EUR 66.7 million in Q3 2019, so a EUR 1.8 million saving quarter-on-quarter. In terms of percentage, you can see it was 18.3% last year, down to 18% in Q3 2019. And when you look at what it was in Q1 and Q2, fixed costs accounted for 19.1% in Q1, 18.3% in Q2, 18% in Q3. So again, nice improvement over the year.

If you move to Page 10, you have the comparison quarter-by-quarter since the inception of the year. So you can see we still are the low level of sales, EUR 371 million in Q3 versus roughly EUR 390 million in the previous 2 quarters. What's worth mentioning is that material costs, which was one of our biggest issues last year, went down from 54.1% to 53.1% in Q2 and Q3. And we are aiming at lowering this part in the next few quarters. Direct labor, let's say, quite unchanged. Gross fixed costs, I mentioned, we can see 19.1%, 18.3%, 18%, so moving in the right direction. And the level of the orders is largely due to [one off costs] costs, which are something that we've done in Q3. As a result of which, as you can see, both EBITDA and EBIT increased quarter by quarter since the beginning of the year.

If I move to Slide 11, I think it's a slide we didn't show so far. This is the evolution of steel prices since 2016. And this explains what happened, what hit our reserves in '17 and '18. So you have 2 curves there. The yellow one at the bottom is the position of the index, on which our pass-through agreements with the car makers are based. And then on top of which, you have the red curve, and the red curve is the evolution of the price we pay. The difference between the 2 curves is what we closed where we closed supply/demand. So what happened in '16? In '16, the index started moving, on top of which, the main impact is the steel pricing increases was that supply/demand hit us a lot. So steelmakers wanted to recover the margin, and therefore, on top of material cost increases, they increased their prices. And you can see what happened in '17 and '18, which was a very significant impact of supply/demand, which, as you can guess, was not easy to pass through to our carmakers because our clients said we had agreements based on the index. And therefore, they pushed back any demand regarding the supply/demand.

As you can see, on the curve at the top, the price is slightly moving down. It is mainly based on the position of the index. There might be an evolution of supply/demand to be seen. But what is worth mentioning is that the total price we are paying in terms of steel is going in the right direction and should help us in the coming quarters.

Cash flow. Cash flow, again, we have restated Q3 cash flow, which, as Laurent mentioned, included a cash out of EUR 16.7 million for the purchase of our minority shareholders in our Indian subsidiary. So like-for-like, excluding this cash out of Q3 2018, you can see that we ended June 9, 2019 with a positive EUR 4.5 million versus a cash burn of EUR 8.6 million last year. So again, quite a good quarter in terms of cash generation.

Laurent, you want to take over for perspectives?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [4]

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Sure. Thank you, Yann. Moving on to Page 14. Perspectives start, of course, in the next quarter. And the next quarter, again, we have contrasted informations as according to IHS, we see Europe worsening, minus 2.3%, while Q3 was okay at 0.1%, not great, but it was okay. We see also a worsening in Q4 at -- in North America. Sorry, minus 9.8%. So these are the, I would say, the so called bad news, especially for Sogefi, which is large in Europe and significant in North America. But the positive light in the situation in South America, which is seen by IHS by going down only 0.8%, which would be a good news for South America.

And China, which you would see a decline in the fourth quarter of only minus 1.1%, which would be, given what has happened in the past, a good news. In order to understand, we have to -- and that's why we've put all those numbers here. We see that the third quarter was the fifth quarter of reductions in car sales and car production.

So the importance for everyone who follows the [cumulative] and Sogefi's stock profitability to understand that in these circumstances, Sogefi was hard-hit and have poor results, both in Q4 2018 and in Q1 2019. Despite the headwinds in Q2, we improved. We improved further in Q3, and I will give you the guidance as the cherry on the cake for this presentation later. Of course, the importance in the Q4, what happens with General Motors, I just said before that the strike started in 15th of September. It has been the UAW GM's longest strike since 1970, which could stop this weekend. The votes are going on in the GM grounds in the U.S. in Friday 4:00 p.m., which is today U.S. time. And to quote Michigan radio, I would say, it's looking like UAW will ratify the contract. As we speak, there are still 15 towns who have not yet voted. So we heard its outlook seems positive, but it is not yet done.

Moving on to the sales by region on Page 15, taking on a broader picture. Sogefi is still mostly a European company with 60% of sales. We are well balanced in North America. We still have our issue in South America, where car production is 4% and Sogefi sales is 10%. So we are overexposed to a region, which is unstable in terms of macroeconomics, and therefore, in terms of car sales and production. What I would like to highlight, and that's why we put it in the center of the slide, is Sogefi sales in Asia is 9% our stake and it's 52% of the world car production. So as we look at the perspectives of Sogefi, this is certainly the region where we see the highest growth potential for the future.

Moving on to Page 16. The bottom part of the slide is not new, which is basically where Sogefi is and how we differentiate by products our strategy, with products where we have it, like in the fuel filters; products where we have challenges, which we have many of them; and a few products where Sogefi has a leadership position, and therefore, we are developing our leadership. What's good to know is that in each of the business unit, since the beginning of the year, we've had interesting awards. As far as Filtration is concerned, we got a nice order for oil filtration, with the start of production in 2022. As far as Air and Cooling, we've been awarded by a premium German OEM to supply air intake manifold, which will start in production in 2020 in France and also some successes in -- with the German OEM to stabilize the bar for battery electric vehicle. I had mentioned in prior presentations that the electrification of the cars, whether it is hybrid or battery electric vehicle, has, of course, a significance for Suspensions parts coils and bars. And we are happy to report that we've been awarded a stabilizer bar for battery electric vehicle. So -- which has a positive impact for the activity of Suspension. And this will start in 2022 in our new plant in Romania.

Continuing in terms of shaping the perspectives of the company, we've put on the left side of the graph the increase in the capital spending, which is, of course, meant to improve the competitiveness of the company and the profitability of the company. So we had a kind of winning streak from '15 to '17. We moved up the CapEx from 51 million to EUR 68 million, which in ratio to our sale, this is a reasonable number. And at the same time, getting the return on capital employed up to 18%, which is quite good in the automotive industry.

We've been hard-hit, of course, in 2018, as we've said, the impact of steel, which has cost us EUR 12 million and a poor fourth quarter with the effect of the volume starting in the third quarter and amplifying in the fourth quarter. For 2019, we plan to continue investing around EUR 60 million, which will continue to improve our competitiveness, focusing on Mexico, on Morocco. The dates you have on the right are the dates where we have invested tangible CapEx in those plants. China, where we have now the 3D unit, which are represented with comps, which are getting more and more competitive. And last but not least, Romania, where we are very happy with our plants for Air and Cooling in Romania. And we are also making good progress on Suspensions in preparing the plant for start of production next year.

And this -- one of the first products of this Suspensions plant in Romania will produce some stabilizer bars for the E class and the C class of (inaudible), where Sogefi has been awarded 100% of the front and rear bars. So this will be important. Important as well next year, although it's not on the map here, is the start of productions for the S class. (inaudible) has awarded Sogefi for 100% of the front and rear stabilizer bars with new technology, which is a variable worth (inaudible). This will start next year. This is very important because you know that the S class is the reference in terms of comfort and [right-hand] in the automobile industry. And this will start next year. So our colleagues in Suspensions were busy preparing this launch in France and the launch in Romania in the coming year.

Turning now to the outlook. The first point is there are stronger headwinds ahead because we see, recently looking at IHS, a decline of 5.5% in the fourth quarter. So stronger headwinds than we had in Q3. Noting that prior IHS forecast was at minus 1%, so you should see a trend in terms of the evolution of the market.

Having said that, which is the second part of the guidance, is the last quarter compared to the previous year will be in line with the evolution of the market. Nobody knows if it will be what IHS says or less or more, but the guidance of Sogefi is that we will be in line compared with last year with the evolution of the market. And we are happy to say that, we see, we forecast our EBIT margin to slightly improve in comparison with the first quarter of 2018.

Having said that, I would like to thank you very much for your attention. And Yann and myself will be happy to take your questions

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Monica Bosio, Banca IMI.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [2]

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And the first one is on Europe on the performance in the third quarter. Can you please elaborate a little bit more on the reason behind the overperformance? And I was wondering if a better trend was due to the aftermarket activities.

And the second questions -- the second and third questions are related to 2020. Okay. Because the exit in 2019 is worse than expected. That's not particularly new for us. But the real question is what about 2020? I know it's very early, but we would appreciate if you can give us for some indication on what do you expect in term of revenues or if you expect the -- if you see a downside risk on the IHS estimates that are calling for a plus 0.3% in the car production?

And even in a context of a deteriorating scenario or in a context of downside risk versus the current estimates, do you see a potential for a little bit margin improvement?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [3]

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Thank you very much, Monica. Laurent speaking. Thank you very much for your questions. As far as your first question on Europe, I would like to take you to Page 21 of the presentation, where you will see that if you look at the cumulative for Europe, the reference market is at minus 4.3% and Sogefi at constant exchange rate is at minus 1.6%. So we're overperforming 270 basis points. So if this is true over 9 months, that means that there is a trend. It's not just a one-off. So this is the first point.

Why this is going on? This is -- some of it is linked to aftermarket. I was mentioning about the OES timing effect, which we should not overestimate. So we should not project this all alone. What I would say in Europe is that despite the fact that our sales are going down, which is not good, we prefer the sales to go up. So this is a very good job in both improving the profitability in terms of margins as well in terms of reducing the costs.

And that's leading really to your next question, because the decisions we are taking, we are taking at Sogefi, of course, geared towards the immediate needs. But we also gear towards how we see the future. So what I would like to tell you on 2020 is not pretty, I must say. And in line with what [car makers] from Bush has communicated, which is that one scenario could be that the sales and production of cars in 2020, '21, '22, '23, '24, up to '25 could remain more or less constant.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [4]

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Would remain at?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [5]

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More or less constant. No growth. And low growth for 5 years would be a completely new situation for the employee. I've been in this industry for 30 years, and if you track the numbers since the creation of the car, there have been cycles, but there has not been in the period of 5 years with the stagnation of the volumes. So we are really undergoing a revolution in the automobile sector. And more on this will come in future communication from Sogefi. I don't want to spoil the call with this matter.

But I believe that's what we're going to enjoy from the money that 2020 in terms of sales and car production could be flat versus 2019. And that means that working internally at Sogefi, of course, you know us now for 4 years, we are, of course, looking at this and working in a prudent way compared with this scenario for 2020.

Okay. And the third question, Monica, was on...

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [6]

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On the margin.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [7]

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On the margin. If we consider that the view of the front margin is right that there could be any kind of stagnation of the volume, that means that all the capacities which have been created for producing raw materials, for producing -- they will not be more loaded than they are because supply/demand, we have to give some internal supply for supply/demand because in some cases, there was growth in the demand in '17 compared to '16 and in the first half of '18 compared with '17, it should come back to the curve at the end. What we see in terms of steel tube, we see the same in plastics as -- although the magnitude is that is with what is now the fifth quarter was in Q3, the fifth quarter of recession and probably, it will be the sixth quarter with Q4.

Of course, this is an environment which for steel and plastics, which are the main components of the automotive, this is not an environment where it's easy for the suppliers to increase the prices because the demand is not growing. So on this scenario, if this is the case, then the actions, which have been taken by Sogefi, because we've been so hard-hit by the steel increase and by some plastics increase, could bear some fruit. But I want to remain prudent on that because we do not control the macroeconomics. We are here to take a hypothesis, be prudent with the macroeconomics and work from there.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [8]

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Okay. So just to sum up. In a raw -- in a segment scenario, do you -- If I had understood well, you are not seeing any pressure from the raw materials. Is it correct?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [9]

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You saw on the curve, which Yann has commented, that we see on steel, a very slow, very limited, nothing to do with anything we've had. We don't see an increase. We see a small decrease, but that has helped us in the second and the third quarter. This is what we are seeing for the time being, which is in line with the depression of the demand because so much of the theme has been in cars. So if there is a reduction in the volume of cars, of course, the steelmakers, after the sixth quarter of recession, they have a problem. Same for plastics because a big chunk of the plastics is going in the cars.

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Operator [10]

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The next question is from Martino Ambroggi with Equita.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [11]

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The first question is on the fourth quarter guidance and just because the perimeter changed and you have some accountancy reclassification. There could be issue around, not to misunderstand, sales in your scenario will be down like the market 5.5%, around EUR 360 million. Am I right?

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [12]

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Martino, what we project for the time being is a prudent stance. As Laurent mentioned, IHS is projecting a market decrease of 5.5%. And for the time being, we project our sale in Q4 with roughly the same trend.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [13]

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Okay. Starting from EUR 390 million reclassified last year. And still on the last quarter guidance for EBIT margin, a slight improvement. Just to be sure, last year, the figure I have in mind is 1.1% of EBIT margin. Is this the threshold where you see an improvement?

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [14]

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It is correct. EBITDA was, so on a comparable basis, was EUR 37.3 million in Q4, as to say, 9.7% EBITDA. EBIT was 4.3% versus a 1.1%. So we say we probably should do better than in Q4 of last year despite the tough market environment.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [15]

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Okay. Anyway, so not well above 2%. So this is the range you're guiding. Okay. Perfect. So just to be sure. The second question is on 2020, okay? I understood -- I understand your answer. But looking at the recent Michelin, Renault and others commented that they expect minus 3%, minus 4% of volumes for the global market next year.

I'm not telling you what you think about it. But if this is the case, do you believe to be able to outperform as it happened in the first 9 months of this year? And why?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [16]

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It is early to give you an answer. We usually start the year by saying that our sale evolution will be in line with the market. And then for the last 4 years, as the Euro evolves, we can confirm or not the fact that we could overperform. This is very dependent on the success of the models on which we are. If some of the models -- because Sogefi doesn't have 100% of the market, we have some markets shares at some customers, so if the models on which we are has commercial success then we outperform the market. That's what's happening basically.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [17]

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That's very clear. But I was referring new client, new platforms conquered.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [18]

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That's a good question. The new platforms, if we refer to Suspensions, for instance, to the large MRA2 platform, it's a business which is worth a lifetime, more than EUR 400 million. This is the single largest order from Sogefi. This will start slowly at the end of 2020 with the S-Class. And then will ramp-up -- start the ramp-up in 2021 with the C-Class. So S-Class will start in France. C-Class and S-Class will ramp-up slowly. Because you know Mercedes they don't ramp-up like crazy, they ramp-up safely. So C-Class and E-Class will ramp-up in 2021. And then we will see 2022 and then 2023 as the full volume. And then the better loads of our plants in Romania going forward in those years. We are in the industry. We are not in consumer goods. So we ramp-up the product as the car manufacturers ramp-up and whether it's on the engines for Filtration or for Air & Cooling or whether it is for chassis. It is slow. It is slow to come that's why the work we've been doing on technology and then growing with the premium, this is something, which we -- in terms of significant volume impact come in the out years, I mean 2022, 2023. Some of it is starting next year. Some of it is starting in the year after, but this takes time.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [19]

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Okay. Okay. And 2 quantitative questions on ramp-up ...

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [20]

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Maybe one positive thing I could say is, you remember we had the press release on a German premium sports car where Sogefi has developed together with the car manufacturer, we called it coolant module. We can now say it officially in the Porsche Taycan. And Porsche Taycan as you know, it starting now at the end of the year and they have very good order portfolio. So again, depending how the car goes and how successful it is in production, this could be a substantial win -- positive win for Sogefi in 2019.

This is the first electric car of Porsche. There are still uncertainties and that's why we probably will start the year with saying that we see Sogefi sale growing in line with the market. Unless we have confirmation until then that these models are really cranking up the volumes.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [21]

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Yes. And 2 quantitative questions on startup costs and the raw materials benefit following the renegotiations you finalized. Could you quantify Q3 year-to-date? And what could be going forward for these 2 items?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [22]

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Sure. One startup cost which was significant in Q3 as well as in the first 6 months we had shared with you, was the ramp-up of our filtration plant in Morocco. I am very happy to share with you that we've now started in production in new products and additional product, which will ramp-up slowly in volume in Q4 and be significant in terms of sales for next year.

So in that case, this is an element, which is a market share gain for Sogefi. And therefore, will be a positive structural element. In terms of getting rid of the startup cost and moving into absorption of fixed costs in the plant in Morocco. We have couple of others, but this one is probably the more significant element. We're talking here of an additional sales of filtration of around EUR 20 million next year just for that product. On the raw materials side...

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [23]

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Sorry to interrupt you. In my notes, I had that the startup cost in the first half were EUR 4 million for the Morocco and other plants. What is the total amount in Q3, if it's something you want to share with us?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [24]

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Yann is looking around just to check it, if we have the number handy or not.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [25]

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It was an additional EUR 2 million.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [26]

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Around EUR 2 million negative.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [27]

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Okay. Our filtration team did an announcement in Germany in resolving the issue we had there. And we are now on a much better track, seems very competitive product and price, but an important milestone with the start of production here.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [28]

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And with regard to your other question on raw materials, so you've seen the nice trend between Q1, Q2 and Q3 and we do expect further reduction in Q4.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [29]

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Okay. This is already factored in the guidance, I supposed.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [30]

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Yes, it is. Of course.

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Operator [31]

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The next question is from Alexandre Raverdy of Kepler.

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [32]

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The first one, can you please quantify the GM strike impact both on the top line and on the EBIT? And the second one, can you please be more specific on the factors driving the lower outperformance in Q4, that is the first 9 months? I just want to understand whether -- I mean to what extent this is linked to the GM strike or to other factors, maybe I missed something.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [33]

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Okay. Thank you, Alexandre. Hello. The GM strike for Sogefi is mainly impacting the Air & Cooling activity where we are the #1 supplier for intake manifolds at GM. We're very happy with this good strategic position. And the hit in terms of sale for us is around EUR 4 million per month.

On EBIT, our team is doing a good job to flex the costs as much as possible. And of course, the cost of the -- the full cost of the strike is something that we're going to try to address with General Motors in order to see how much we can get some compensation for that. I would say for Sogefi something which is significant, but that's not the materiality, which it could have for some other suppliers in the auto industry. I'm not sure I got your question -- your second question, I heard lower outperformance in sales in Q3. Could you tell me more on what you (inaudible) around the question...

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [34]

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Yes. Sorry, I just wanted to understand, you plan to perform in line with the market in Q4, you outperformed in over the 9 months. So I just wanted to understand which factors or which regions drove the lower outperformance in Q4 versus the first 9 months?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [35]

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Okay. First of all, Sogefi, we are trying as much as possible to be careful in the guidance that we are giving, so which is the first element. We try to be prudent on the guidance. The second element, as you said, is the strike, the GM strike, which is, of course, something you need to take into account and basically, again, the unknowns. If you compare the Q3 by customer and the 9 months by customer, you see very important fluctuations. We are in the automotive and let's say the world, we are in the revolution. And in this revolution, there are many surprising things, which happen in the short term. The revolution is not for -- 5 years from now. The revolution is now. We're entering this revolution.

And therefore, there are some models which are going up, some models which are going down. There are some engines which are going up, there are some engines going down. I'll give you an example with diesel. 6 months ago, the consensus was diesel is dead. Now what we are seeing is both through data and also through customer -- consumers' polls is that the CO2 matter is becoming so important that the fact that diesel engines now have the same level of NOx emission as the other emission. The same level of fine particle emissions, but have 16% less CO2 emissions, is becoming a factor to which people are sensitive.

We know the opinion poll in France has shown -- being asked what is for you, your main personal [preoccupation], 62% of the people said the protection of the environment came out first. The second was the evolution of the social system with the retirement [data]. And the third was the buying power. So we are already in the change of perception of the consumers on the matters of the environment. And in an interesting way, the quality of the diesel engines of CO2 consumption compared with gasoline -- they are making a comeback in some cases. You have Volkswagen cars where if you want to order diesel engines you have to wait 4 months, because the guys, they have reduced their production capacity and now they have more orders. And that's why we are careful in our outlook on sales because there are things, which are going on some models and on some engines, which are very hard to predict.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [36]

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Maybe I can add some flavor. Maybe we are too prudent in Q4. No one knows where the market is going. IHS in recent quarters was not prudent enough, so now we want to be prudent. We don't want to be hit by a reversal of the market. So when IHS came up with a 5.5% decrease of the market. We don't say that we are taking that for granted, but we do assess is what's happening. And we are doing everything to adjust to a decreasing market.

Okay. Not sure it will hit us as IHS is predicting, but we are trying to adjust, as you see, to be able to live with the decreasing market.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [37]

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And I could add one more thing. Of course, we're quite happy with the trend of the improvement of profitability in Q3 and the trend in cash Q2, Q3. Now having said that, profitability is still low by any standard. So as Yann said, when you have low profitability, you don't want to build your plant on too much optimism. And one of the reasons why we've been able to buck the trend in the automotive industry as one of the few suppliers in the world whose profitability and cash are improving in Q3 compared with Q2 is because we've been very careful in planning and very prudent.

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Operator [38]

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The next question is from François Robillard of Intermonte.

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François Robillard, Intermonte SIM S.p.A., Research Division - Research Analyst [39]

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First question on the client portfolio mix in Q3. It was a slide you said it was maybe not representative. If you could just go back to that slide and tell us why it's not that representative given that the mix of premium O&Ms is going down. Is it due to the fact, the same factor you explained after the first half results because of the Renault, Daimler common contract? And then second question, 6% of your top line last year and 3 of your plants are located in the U.K. If this time, again, for the U.K. to exit before the end of the year, maybe. Could you just give us an update on what's your vision of potential strategic decisions you could take concerning your U.K. operation going forward? And the final one, yes, the last time you told us that you use IHS guidance because it was broadly in line with your internal projections. Is it still the case for Q4 and also for 2020 based on your client -- your projected client production and what IHS is showing?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [40]

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Hello. Thank you very much for your question. So we have to go to Page 6, if we start from the bottom, we see that BMW is, I would say, relatively flat to today. This is mainly due to, I would say, shift inside the product portfolio at BMW with pluses and minuses, which are compensated. I confirmed that the new orders which we've been booking and on which we are working, our target mid to long term is to grow BMW to 10% of our sales. So although it is not yet showing, this will need a couple of years so that you see the difference coming in.

The next one, of course, is Daimler. At Daimler, there are 2 effects. One is that within these numbers we have cars and we have trucks. And the activity in Daimler trucks, especially in Q3, have been slowing down due to very strong competition with (inaudible) MAN -- with Kenya in MAN. So part of what you see in terms of decline is linked with the heavy-duty activity.

The other element is linked, as we said last time, and you correctly remind this to everyone is that we declare in the Renault accounts all the intake manifold we do for the joint engine on new Daimler. And therefore, this bumps us the whole numbers. So on the premiums, the German premium, BMW, Daimler, we confirm that we are on track to grow significantly over the years. And our goal with Daimler as it is with B&W is to reach 10% of our sales.

These are, I would say, the activities representative. What is going on at Ford is really a Q3 phenomenon because if you look at the 9 months it's completely inverted actually. So this is really not representative area for Ford. It's just due to a mix effects and the geographic effects. That's okay for the first question?

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [41]

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GM, Laurent mentioned the first impact of the UAW strike. And another impact, which is throughout all the U.S. carmakers is that all American carmakers are starting to be strongly hit by the China-U. S. war. That's to say they sell semi-diesel in China and this used to be a very large market for them.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [42]

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In terms of exporting some of the cars, yes.

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François Robillard, Intermonte SIM S.p.A., Research Division - Research Analyst [43]

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Okay. And the Volkswagen, Audi?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [44]

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On Volkswagen, Audi, this is some old contracts running out. The new contracts, which we have taken are not going yet. This is to come. I've repeatedly said that our goal mid, long term is to get BMW and Volkswagen to 10% of our sales. At Volkswagen, Audi Porsche group, we are more focusing on the premium. On the Porsche, which I had mentioned as well as on Audi rather than on the mass market at Volkswagen for the time being. Although we got a nice order from Volkswagen for Suspensions for stabilizer bars, we are still a very small player at Volkswagen on a worldwide basis, because Volkswagen is #1 in Europe. We are 60% in Europe. So the numbers mean that we are small at Volkswagen. And our growth focus is really on the German premiums, BMW, Daimler. And to a certain extent but to a lesser extent, Audi and Porsche. To a lesser extent in BMW and Daimler. Is that okay for the Page 6?

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François Robillard, Intermonte SIM S.p.A., Research Division - Research Analyst [45]

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Yes. Okay.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [46]

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Let's move now to the U.K. We have not put it again but traversing -- I think in the last presentation where we put the sales by country. The sales in the U.K. is 5% of the sales of Sogefi, so which is significant. This is not something, which is of paramount importance to economics of Sogefi. Having said that, you are right. We have 3 plants in the U.K. And we are -- since the beginning of the year, we've created the full-time position of Chief Risk Officer. At Sogefi last year, the function of Chief Risk Officer will share with the internal audit. We did that, and therefore, we have a weekly call, which is led by our Chief Risk Officer, to prepare for, of course, the Brexit scenario, we will switch on to the U.K.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [47]

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To your question on possible scenarios, there are 2 answers. Short term, as everyone, we are trying to get ready for something which doesn't happen. So we've been piling up stocks, additional stocks on top of the one we usually have. The teams have been made ready to absorb additional logistic problems. So this is short-term reaction. But as all the company's in the U.K., you prepare and you stop, nothing happened. You prepare and you stop, and you never see the growth coming. The growth anyway is coming because the impact of Brexit people don't realize it. Whatever happens, whether there's a hard Brexit, a soft Brexit or not Brexit at all. The damage is done. The damage on the U.K. car industry has been done by the uncertainties over the past few years. Investment in the automotive 4 years ago were GBP 2.6 billion, GBP 2.7 billion a year.

Last year, they were for 2018, GBP 600 million. In the first half of the year, GBP 10 million. And so that means that no one is creating new capacity and when you read the announcement from the carmakers. They do as everyone as to say, they don't want to be faced with uncertainties. So it means that all the allocations of new production are going elsewhere. So it means that no matter whatever happens in terms of Brexit, there will be an impact on the car industry in the U.K. And therefore, there will be an indirect impact on Sogefi because our clients are moving elsewhere.

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François Robillard, Intermonte SIM S.p.A., Research Division - Research Analyst [48]

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And so you might follow your client in that case?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [49]

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Well, we are looking at the different scenarios. In the 4 years since I've come, we have not proved one wrong. Why? Because in the beginning, there was some good activity and since the reduction in volume and you've seen it the head count, what we have been doing is we've been doing a lot of productivity in the form of cost-cutting by putting in place Sogefi excellence system. But we want to shrink rather than close because closing is very expensive. It's very traumatic. It's very difficult for all the stakeholders.

So at this point, we are working on the scenarios. How much can we continue to shrink and flex and whether or not at some point we need to take another decision. This is too early to assess, they're very important decision, which we want to consider when we have all the facts and the data on the table.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [50]

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And François, you had another question by comparison with the IHS projection. Again, we are very cautious because we have our internal projections, which are based on the EDI, let's just say, on the electric data transmission from the carmakers. These are reliable short term. Let's just say, Q4 is quite reliable.

Next year, I wouldn't bet too much on it. So for the time being, we listen to what the market is saying in terms of market outlook for 2020. We are trying to be more cautious than the market because we don't want to be hit by headwinds we have been prepared. And therefore, we base our next year budget more on cautious assumptions than on uncertain data, which might prove wrong in the coming months.

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Operator [51]

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(Operator Instructions) And the next question is from Renato Gargiulo of Fidentiis.

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Renato Gargiulo, Fidentiis Equities S.V.S.A., Research Division - Analyst [52]

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Well, my question is on net debt. Just -- could you please provide a guidance or an indication about your expected full year in net debt? And related to use on working capital, last year, I remember that you experienced some issues with some carmakers on payments. How is the current situation? Do you foresee any more issues?

And lastly, on the factoring, can we assume this level of factoring for the full year?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [53]

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While Yann is putting together the numbers, just a general comment. As Q4 will be most probably the sixth quarter of recession in terms of sales and production of cars, you can imagine that the pressure of the carmakers is building up, which shows then in the press release of some of the car manufacturers who come out with hard revisions both on sales, on profitability and on cash. So the pressure is, of course, increasing coming from the customers on cash. This is just the general picture now. Maybe Yann, you can share some indications.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [54]

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So in terms of full year debt, we see it roughly in line with the level we had at the end of Q3. In terms of factoring, that should be made up with less factoring that when we have a few million less than end September.

And to your question on the carmakers, we are very cautious there because as Laurent already said, the industry is in turmoil at present. Some carmakers have financial difficulties. And so we expect -- we might have trouble getting paid at the end of the year, especially there is a specific market we are very cautious about, which is China where people are not ashamed to pay you 6 months later than projected. So this is something we follow very, very closely, but on which we -- there's not much to be done if the client decide to pay you on January 1 instead of December 31, it will happen.

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Operator [55]

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The next question is from Roland Könen of Value-Holdings.

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Roland Könen, Value-Holdings International AG - Board Member [56]

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Most of my questions have already been answered, so just one left. Could you please elaborate a bit on your restructuring costs for the full year 2019? I guess in the Q2 call, you guided something about EUR 10 million, after 3 quarters EUR 5.7 million. So most of that growth come in Q4? Is this the limit? Or do you have some less restructuring cost in 2019?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [57]

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[Foreign Language] Yann is putting together the numbers, so what's the number? So you're ready. Go ahead.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [58]

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The restructuring cost year-to-date is EUR 5.7 million in 2019. It used to be EUR 4.2 million last year. And last year, on a full year basis, we spent EUR 8.3 million, and we probably are going to spend EUR 1 million more, but not much more.

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Operator [59]

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(Operator Instructions) Mr. Hebenstreit, Mr. Albrand, there are no more questions registered at this time. Excuse me, there is a follow-up question from Martino Ambroggi, Equita.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [60]

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Just a quick question on CapEx, because based on the worsening environment. Do you confirm the increase for the full not only the tangible, but also the intangible EUR 10 million increase that you had in your previous calls?

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [61]

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Yann is putting together the numbers. What we see on the CapEx is one of the main drivers of the CapEx for this year is the CapEx for the Suspensions plant in Romania, which we didn't have last year, of course.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [62]

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The CapEx -- tangible CapEx, as Laurent already said, we are shooting for roughly EUR 60 million this year. So roughly the same amount as last year. Last year, we closed roughly at EUR 58 million. Out of the EUR 60 million, we have EUR 12 million, EUR 13 million from Romania, which is the first tranche of the new investment in Romania.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [63]

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The total investment in Romania is closer to EUR 45 million, so it's a big plant and a big investment for Sogefi. But this is the first, as Yann said, this is the first step this year. And of course, we'll continue next year.

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Yann Albrand, Sogefi S.p.A. - Group CFO & Investors Relation [64]

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And in terms of intangible assets, it's more an accounting issue because. It's what we do, capitalize. And we plan to capitalize roughly EUR 30 million this year instead of EUR 35 million last year. We probably are going to capitalize less than last year because of the evolution of the market.

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Operator [65]

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(Operator Instructions) Gentlemen, there are no more questions registered at this time.

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Laurent Hebenstreit, Sogefi S.p.A. - MD, GM, CEO & Director [66]

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Okay. Thank you very much for participating to this Q3 2019 results and perspectives conference call. And we look forward to talk to you again once we present the results for the full year. Thank you very much. Bye-bye.

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Operator [67]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.