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Edited Transcript of STM.DE earnings conference call or presentation 15-Nov-19 9:30am GMT

Full Year 2019 Stabilus SA Earnings Call

LUXEMBOURG Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Stabilus SA earnings conference call or presentation Friday, November 15, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Wilhelms

Stabilus S.A. - CFO & Member of Management Board

* Michael Büchsner

Stabilus S.A. - CEO & Member of Management Board

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Conference Call Participants

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* Akshat Kacker

JP Morgan Chase & Co, Research Division - Analyst

* Marc-René Tonn

Warburg Research GmbH - Senior Analyst

* Philippe Lorrain

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Sabrina Reeh

UBS Investment Bank, Research Division - Analyst

* Yasmin Steilen

Commerzbank AG, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Stabilus S.A. conference call regarding Stabilus' preliminary financial results for fiscal year 2019. (Operator Instructions)

Let me now turn the floor over to your host, Mr. Mark Wilhelms.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [2]

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Yes. Hello, and good morning from Stabilus. We've got here at the Stabilus' desk, Andreas Schröder, Investor Relations; Michael Büchsner, the new CEO, a few extra words to that later; and myself, Mark Wilhelms.

We are taking you through the highlights of 2019. We've just finished accounting for the numbers. As usual, we are one of the first companies to talk about the '19 results. The agenda of the call is the same as we've always used. And I'll move over to Slide #4 with the highlights. And as a first step, I hand over to Michael Büchsner, who will now introduce himself to the audience.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [3]

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Yes. Thank you very much, Mr. Wilhelms, for your introduction.

Ladies and gentlemen, valued shareholders, a warm welcome also from my side to our today's call. As this is my first call in this setting for Stabilus, I would like to introduce myself briefly. My name is Michael Büchsner. I'm 44 years old. In terms of my education, I studied chemical engineering, and I hold a doctor's degree in economics. In my former business life, I did work for TRW and then later on for ZF in various positions.

I'm happy to be a part of the Stabilus team now because I've been in touch with Stabilus and its products for many years in various locations, especially in the early years of my career when I was responsible for equipment construction and equipment maintenance. I was kind of dedicated already to our product. At that time, I was, so to speak, already a customer of Stabilus because I was buying the product, especially the industrial product of Stabilus.

Stabilus stands for innovative products and highest quality levels in industrial and automotive application. As an engineer, our product did convince me from the very beginning. And as a manager, the strong growth potential in various markets and regions were one of my decision points to join Stabilus. Together with the Stabilus team, I want to continue this success story.

However, at this point, I will just jump into the -- Slide #4, starting with the summary and highlights of our financial year 2019. In terms of revenue, we ended up with EUR 951.3 million, which is a slight decline of 1.2% versus prior year. Despite a very strong quarter 4, Mr. Wilhelms will talk about that later, the quarter 4 is very strong and we did grow on the industrial side, 0.5% versus prior year. However, on the automotive side, we had a decline of 6.9%. As I said, we'll get some details on that later by Mark Wilhelms.

EBIT margin. The adjusted EBIT is EUR 142.7 million, which is 15%, in line with our guidance over this summer. Profitability, EUR 80.9 million, which results in a profit margin of 8.5% versus 10.9% prior year. Net leverage ratio, we ended up, yes, 1.0x, with financial debt at EUR 189.1 million.

In these numbers, you'll find acquisitions of General Aerospace, Clevers and Piston as of 30th of September. And starting second half, General Aerospace, quarter 4 results, include already Clevers and Piston.

We'll talked about the details of our outlook later. However, in short words, the outlook for 2020 is in the range between EUR 970 million to EUR 990 million. And we stick to our 15% margin, EBIT margin. The mid- and long-term guidance is still on an average growth of 6%, which comes out -- and we'll talk about this I'm pretty sure later on as well, our STAR 2025 process [as] an average annual growth over the planning period. But as I said, more to come on Page 22 and the following pages when we talk about the outlook.

I'm handing back over to Mark Wilhelms.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [4]

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Yes. Thank you. So let's move to Slide #5 where we see the results of Q4, the individual quarter, [and the] time July, August and September. Revenue wise, we are up by 6.4%, pretty strong growth, moving us to EUR 245.6 million. Now that eventually includes the acquisitions, the 3 acquisitions in the industrial area that Michael Büchsner has mentioned, General Aerospace, Clevers as well as Piston. And we also had a bit of help from the strong U.S. dollar.

In terms of EBIT, this is on the right-hand slide -- right-hand side of the slide, the quarter came in again as last year at 15.9% margin, average EBIT margin. That is a 6.8% growth. This includes also the acquisitions with EUR 1.2 million EBIT from those guys and support from the FX valued at around EUR 900,000. Key to me is to keep in mind that we've, supported by the stronger revenue, kept our margin at prior year level.

Now looking at the profit results on the left-hand side. Profit margin in this quarter is coming down from 14.2% to 9.6%, resulting in EUR 23.5 million profit for this quarter. Free cash flow wise, we are now at 16.1% of revenue compared to last year's 12.3% of revenue. This year, in Q4, we got help from lower year-over-year CapEx valued at EUR 6 million.

You may remember from the previous call, especially in the first half of our business year, we were burdened by CapEx investments that we had pushed from the last business year to this business year. And we've repeatedly said, we are kind of slowing down this year's new CapEx spending to adjust the CapEx spending to the revenue growth. And in this quarter 4, you see the result with the aforementioned lower CapEx spending in the year-over-year.

As we move over to Slide #6, this one shows us the full year results. Michael Büchsner had already mentioned the revenue number of EUR 951 million. Moving over to the right-hand side with the adjusted EBIT, 15% EBIT margin this year versus 15.5% last year. Clearly, we see the overall market pressures that we are getting, a, from customers; and b, also from costs hitting us.

Adjusting the organization to live with a bit lower revenue is always difficult. We've really pushed hard to achieve the 15% and we are clear, as mentioned by Michael Büchsner, that we will keep to the 15% for next year as well.

Bottom left-hand side, gross profit. Profit at 8.5% of revenue at EUR 80.9 million. For last year, we need to keep in mind, last year had EUR 11.1 million one-off good news, nonrecurring result from the U.S. dollar -- from the U.S. tax restructuring, which helped us adjust our [debt taxes]. In terms of free cash flow, which is shown at the bottom on the right-hand side, for the full year we are at almost EUR 90 million. It's kind of a pity that we couldn't push this up. But cash is king, cash [is hard] result. There's not a lot of room to move this.

Last year, we [had] EUR 100 million, a notch over EUR 100 million. Nevertheless, 9.5% of revenue compared to 10.4% of revenue last year is a good, strong result and reconfirms to us that Stabilus' cash generation is still intact and working well.

Going forward to Slide #8, we look at the revenue by region and EBIT by region for the Q4. Again, left-hand side is revenue. All regions are back in the positive year-over-year. Territories there: 5.3% is Asia/Pacific, Rest of World, almost 10% in NAFTA and 4.1% in Europe. So hopefully, this a good omen for the future.

Taking a look at the right-hand side where we see the EBIT, EBIT by region. Asia/Pacific year-over-year, strong growth. Even outpassed by our NAFTA colleagues with almost 40%. Clearly helped by a number of actions that we have prepared over the last 4, 5, 6 quarters, allowing us to now show good, strong results. Europe, on the other hand, was well under pressure, competitive pressure, labor cost increases, et cetera, pushing down in the year-over-year, due for that individual quarter, the EBIT by almost 20%.

Going forward to Slide #9 to take a look at the full year numbers. Again, for revenue and EBIT by region, not surprisingly, on the left-hand side with the revenue numbers, you see that year-over-year Asia/Pacific revenue is down. Car industry soft in those countries, an issue that has been discussed several times within Stabilus in conference like this but also by many others. NAFTA market, up by 2.6%, primarily due to the stronger dollar in the year-over-year view. European revenue for Stabilus, overall down by 1.9%. And that includes the acquisition of General Aerospace in Europe, organically even almost 4% down.

EBIT numbers shown on the right-hand slide, we start with Asia/Pacific. Clearly, Asia/Pacific got hammered by the softer revenue and our desire to keep strong teams for sales, for application engineers on the ground to foster future growth. The NAFTA market, the NAFTA region for us is showing an increase of 15.6%. Good, strong result, hard efforts in the last several quarters. Europe, a bit similar to what we have seen for the quarter, down by 11.6%. Reasons are as I have described for the Q4.

Slide #10 now shows us a bit of more detail on the European numbers. European sales, up for the quarter 4 by 4.1% to EUR 119 million. Within that, EUR 6.1 million from the acquisitions. European light vehicle production at 4.7 million units, a little bit better than the year ago, 0.7%. And keep in mind, within that vehicle production we've seen a lot of changes in terms of body style mix, vehicle mix and also car manufacturer OEM mix. Our Q4 revenue increased by EUR 4.7 million year-over-year, primarily due to the good results from General Aerospace. Organically, we are down by a notch more than 1%.

The industrial business, that is the fourth bullet point now, Capital Goods up by 0.8% organically and another EUR 1.4 million from acquisitions, that is acquisition in Piston, in Turkey. Vibration & Velocity, which includes General Aerospace, is up by almost 3% organically after a few softer quarters we have seen in the beginning of the business year, and another EUR 4.7 million from General Aerospace.

Now speaking to the EBIT margins. EBIT margins are lower, are pressured by various factors, keeping us at 13%, which is below the group average coming from 16.9% last year. European margins were slightly ahead of the group average and now they are a bit behind.

Moving forward to Slide #11, it shows you the full year results for Europe. Revenue wise, down 2%. That includes a bit over EUR 10 million from acquisitions. Organically, we are down almost 4%. European light vehicle production, as you see in our box for key highlights, is down by 4%. So high level, we are kind of -- organically, we have the vehicle production. And on the other hand, as we peel that onion a bit more and look at European automotive revenue for us, our Gas Spring business is down year-over-year by 6%, 6.1% and Powerise by 10%.

As mentioned before in the overall vehicle production, we have seen some mixed changes that has impacted us. Structurally, there's no change to our customer base, there's no change to our position in the market.

Cap Goods revenue, up by EUR 2.9 million or 1.7%. Vibration & Velocity, up by EUR 8.2 million or almost 15%. Okay, a good chunk of that comes from the acquisition of General Aerospace, which has contributed in the business year, with the 6 months it's with us, EUR 8.7 million.

Overall, adjusted EBIT margin at 14.2%, which is 1.6 points below last year's number. Lower fixed cost absorption and generic pressure here in the markets have taken its toll on our results.

Now we come to the much better looking numbers of NAFTA on Slide #12. Revenue wise, for the quarter at EUR 94.7 million, almost 10% up. A chunk of that is due to FX, EUR 4.3 million.

Now moving to the right-hand side with the key highlights. U.S. light vehicle production in Q4 was 4 million units, minus 0.4% versus last year. Again, we've seen there a couple of relevant changes for us. Q4 revenue, as I mentioned, is almost up by 10%. In terms of business units, let's take a look at Cap Goods, that is up by EUR 5.1 million or 31.5% year-over-year. Especially the solar dampers helped us a lot.

With solar dampers, there's a little bit of a non-repeat in there which we need to keep in mind. The U.S. government has introduced a so-called, yes, safe harbor system for solar parts. And anything that is produced and stored in certain locations that are communicated to the customs and duty officials can be held in those stores, in those stocks free of import duties as long as the parts are in those compounds until end of March.

For our products that come from Mexico, it's not that relevant. But it is really relevant for the solar panels itself. That is why our customers, the solar part producers, are pulling a lot of solar dampers in order to satisfy that administrative rule that one has to tick off to benefit from the safe harbor arrangements there.

Vibration & Velocity, up by 8.6%., and the automotive business are about in line with light vehicle production.

Margin wise, it's really good to look at what our U.S. team has achieved here, up from 14.6%, which last year was a notch under group average, to 18.6%, which is well above the group average. Quite clearly, better fixed cost absorption helped and a larger share of the industrial business which tends to be, margin wise, better than the automotive business, has helped us in Q4 in NAFTA.

Going forward to Slide #13, we look at full year results for NAFTA. Full year NAFTA vehicle production, I'm speaking to the right-hand side with the key highlights, is at 16.7 million units, which is 1.2% below last year. And that is in our data cut production from October '18 through to September '19. NAFTA revenue, as mentioned, is 2.6% up in euro terms. Organically, in U.S. dollar terms, minus 2.8%. We've seen that -- we now see that the Automotive Gas Spring business in euros is up by 5.2% or organically 0.4% minus, which is slightly less than the NAFTA vehicle production.

Explanations that we have shared with you are, for example, the GM Silverado platform where we are now supplying to GM gas struts for the bonnet, technical arrangements that in previous models was done with a metal stick to keep the bonnet open, to keep the bonnet at the top position. They produce normally, if they are not at strike, like 1 million of those cars per year, which brings us about 6 million more revenue on an annualized basis.

Automotive Powerise, down by 8% organically. Reasons have been discussed in the past. Cap Goods up organically by 3.4%., eventually supported by the solar damper as described before. And our Vibration & Velocity BU is down by 1% organically.

The EBIT margin, as described, strong for the quarter and also strong for the year with 16.8%, which is over our group average of [15%]. The business within stronger industrial business, very good cost management, clear initiatives was taken there. And in all those positive things, clearly, the softer Powerise, where we've lost a bit of business, [has helped as] the margins in Powerise are not as strong as in our industrial business. And therefore, in average, this loss works out to be beneficial when you look at the EBIT margin stand-alone.

Moving forward to Slide #14 with the Asia/Pacific and Rest of World numbers. In terms of regions, our smallest. The last 3 months of the business year, they delivered EUR 31.8 million revenue. That is year-over-year. Organically, 4.3% up. APAC/Rest of World light vehicle production was 12.5 million units, i.e. 5.5% down versus last year Q4. China, down by 5.3%. Japan/Korea, up by 4.4%. And South America, down by 4.7%.

Our revenue grew, as mentioned, organically by 4.3%. And in there, we've got the Clevers acquisition, a tiny company we had acquired in Argentina, as communicated before. Powerise, we are now, after a few hard quarters, back on more normal for us, more normal terrain with a 16.4% growth, outperforming the light vehicle production in that specific quarter.

In terms of EBIT margin, it's good to see that we are now at 19.2%, which has been strong for the quarter relative to the group, [where] quite clearly additional fixed cost absorption has helped there, positive mix effects and also certain onetime charges where we are billing out work that we have done in previous quarters has helped us here.

Moving over to Slide #15, which looks at the full year results of Asia/Pacific. Full year, we are down by 9.1% at EUR 111.9 million revenue. Vehicle production in APAC/Rest of World for the year was at 52 million units, which is 7.8% down, Within that, China almost 13% down; Japan/Korea, 4.2% up; South America, down by 3.9%.

In terms of revenue development by business unit. Automotive Gas Spring down by 8.4%, so that you can put in relation to the 7.8% vehicle production shrinkage. Powerise down quite a lot, 15.2% on a full year basis. And as mentioned before, the Q4 numbers look better now and we are back to positive.

On a full year basis, adjusted EBIT margin decreased from last year's 16.2% to 12.8% due to lower revenue. Quite clearly, when you have almost 10% less revenue, it's hard to maintain -- almost impossible to maintain the margin. And also, the undiminished, as Andreas Schröder wrote it here, overhead structure, we are keeping our market presence in China in terms of application engineers, sales team to ensure we are keeping track of our long-term strategy which revolves a lot around creating more revenue in Asia/Pacific, in China specifically.

Now let's look at the third point of the agenda, results by market, Slide 16, passing over. Let's go to Slide 17, you see our business in Q4 by market. Important is the very bottom, this cake-like diagram, industrial business now accounts for 40% of our revenue and automotive is down to 60%. This is a trend we've been working on hard over the last years with the acquisition from the 4 companies from SKF in the business segment of industry, and now we've seen more companies that are also active in the industrial area.

Moving forward to Slide #18, we see the full year results by business. As mentioned before, down by 1.2% on a euro million basis. In terms of the cake diagram at the bottom, it's good to see industrial move from 37% to 39% of overall revenues there. And the acquisitions are included, 3 months or 6 months only. Next year, that will eventually be 100% basis.

Automotive business in the full year is down by 4.8%. And industrial business is down by -- or is up by 5.1%, a little bit helped by the acquisitions and the U.S. dollar.

Moving forward to Slide #19, we are speaking to the full year results of the automotive business. In blue color, the Gas Spring; and in the yellow color, the Powerise business. Same color code as the last call we had.

Powerise, down by 6.8%. That includes the EUR 7 million good news from FX and almost 10% organically down. The Gas Spring business helped by EUR 5.9 million from FX, organically down by 4.9%. This compares to global vehicle production in the year-over-year coming down by minus 5.8%. So our growth rate is a notch better than the overall global vehicle production. The trend which we also expect to see in the future, that we are always doing a notch better than the average market.

Going forward to the industrial side of the business on Page #20. Industrial business is up by 5.1% in total, which includes 9.1% coming from Vibration & Velocity. 3 of the 4 companies we bought from SKF are included here. And General Aerospace, our recent acquisition, is included there. You see that also with ACQ, EUR 8.7 million. That is a revenue of General Aerospace included in the Vibration & Velocity segment business.

And in the lower section in blue, that's the Stabilus Cap Goods business, which by the way, also keep in mind, includes swivel chair [as a good] industrial business together with our Swivel Chair business unit. That segment in total delivered EUR 259.1 million business, that is organically up by 1.3%.

And on the right-hand side in the write-up, you see growth in segments. Solar dampers, as mentioned before, has helped the production construction technology which was decent, was partly offset by weaker business with distributors and lower revenues in segments like independent aftermarket, transportation and agriculture.

With this, I'm now moving forward to Slide #21, which talks about the outlook. And I will hand this one over to Michael Büchsner again. He will be helping us to shape the next year as well as the longer-term future to come. So Michael, it's now your turn.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [5]

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Thank you very much. Again, thank you. Our outlook for 2020. The preliminary numbers, as I've said, for '19 were EUR 951 million and the EBIT margin 15%. Our guidance for 2020 is EUR 970 million up to EUR 990 million, which equals to a growth of 2% to 4%. Important in this number is no mix effects included. 1% is still coming out of our acquisition consolidation, 1% to 3% are out of organic growth. The guidance, in terms of the profitability on the EBIT margin level, remains at 15%.

Just some comments here. These are all based on a production forecast of 18.3 million vehicles for the year 2020. In terms of mid- and long-term guidance, I see still our average annual growth rate of 6% up to 2025 confirmed, which is strongly backed up by our STAR 2025 process.

Also here, for sure based on 88 million vehicles for '19, up to now close -- over 100 million vehicles for 2025, for sure that's an impacting factor; as well as the GDP development, which we consider being in a range of 2.8% to 3% up to 2025. And considering, for sure, that we are in the range of 40% to 60% -- that is 40% industrial business and 60% automotive. That's our guidance for the year and for the coming years.

With that, we conclude the presentation. And yes, we would be happy to hear questions. That means we open the lines for your question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Marc Tonn of Warburg Research.

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Marc-René Tonn, Warburg Research GmbH - Senior Analyst [2]

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First question would be, when I look at the appendix of your presentation and we look at the profit development in the fourth quarter, we see quite a big jump from EUR 0.2 million to EUR 5.2 million in other operating income, while the gross margin is still 1.2 percentage points lower than it was in the previous Q4, pretty much the same as you've seen for the year as a whole. But if you perhaps help us a bit as what is behind this jump in this other operating income number? Is this something which is [something like] you're catching up for the remainder of the year? Was there anything one-off to be considered here? That will be the first question.

Second question would be your industrial business was clearly one of the very positive factors still helping to keep the margins on a very strong level in the last fiscal year. How is your visibility going into the current fiscal year? How confident can you be that it will be once again be, let's say, a very strong contributor to earnings overall? And also for the NAFTA business, I think which is among one of the most profitable ones, particularly last year, we now see that they're much more cautious on the latest cuts in production forecast. But IHS have been very much focused on the NAFTA region. Did you put in any kind of, let's say, risk provision there in your estimates for the current year, so saying, okay, being a bit more cautious there? Those would be my questions.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [3]

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Can you take NAFTA...

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [4]

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Thanks for your question. Let me take over the question on the other income stuff, et cetera. That is for the other guys, members of the audience that are not so familiar with our slides, it's Page 26 or 27 for the full year. If you take a look at the slide on Q4, that's Page 26, other income expense year-over-year is up by EUR 5 million. EUR 3.3 million of that one, we have taken out with our adjustments. We are one of the few companies that are taking adjustments to reduce the profit here.

Background is, in Q4, we had onetime income related from the acquisition of General Aerospace. In the initial set-up, the seller took a very aggressive, very positive view for his business development in terms of earn-out related component to push us for high payment into the escrow account. And as the result materialized or confirmed by audit numbers, we've got EUR 3.3 million kind of back as income from the seller and that is reflected in the numbers of the acquiring entity, Stabilus motion control has [high purchase] prices. That is why you see this EUR 3.3 million.

Gross margin, you mentioned on there from EUR 31.2 million down to EUR 30 million. There are always in the year-over-year view some movements in the margin numbers. There, it's better to look at the full year result where we see some reduction, that's Page 27 or Slide 27, going from EUR 30.3 million down to EUR 29.1 million. In the overhead structure, you've got a lot of fixed cost elements like depreciation, et cetera. There's nothing one can change there. That is why the pressure is high in this line item.

In terms of industrial visibility, we've never given a lot of detail on it by segment, by market basis. But nevertheless, Michael Büchsner will give you a few words, his view on the industrial business over the next 11 months that will come to make the business year 2020.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [5]

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Yes. Thank you very much. I think the industrial business, generally speaking, we pretty much benefit from our growth on the industrial sector. As you see in the numbers from prior calls, we've been on 36% industrial [in case] -- or 36% industrial share of our business and we've been able to manage that up to 40% as we speak. And for sure, that will be our future priority as well.

And there is, I think, a reason for that. As you all know, the automotive sector is a volatile sector. And it's more and more volatile in the current year and the coming years probably. And we see the industrial business as a good balance. So what do we do? In -- we benefit from this industrial share and, for sure, our acquisitions help us. And in the next coming months, we will also continue to gain from this synergy with our product portfolio to strengthen us in the different regions, also in North America, to kind of have a positive leverage with the automotive business in the market and in our portfolio.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [6]

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Would that take care of your question, Mr. Tonn?

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Marc-René Tonn, Warburg Research GmbH - Senior Analyst [7]

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Maybe it's just regarding NAFTA, which [was so] strong, and whether you may repeat this in the next year. Or whether there's more perhaps to come from other regions offsetting [versus certain] leveling off from the strong results there.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [8]

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We've not booked a risk provision or something like that. You can't really do that. [That is] risk speculation. We've taken adequate care of [voluntary] reserves, et cetera, and we'll see that when the final numbers with all the details of the year-end growth are issued. Overall, NAFTA next year in terms of car production is the tricky one to see. We remain confident that Americans will continue to like SUVs, pickup trucks, vehicles that have in the past proven to be positive for our revenue.

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Operator [9]

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The next question is from Yasmin Steilen of Commerzbank.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [10]

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I have 3 if I may. So the first one on the performance of Powerise in Q4. So we have seen a rather strong performance implying an outperformance versus the underlying market in NAFTA and Asia Pacific. Could you elaborate on the reasons though? Is it related to new customers? [Also, already] a small business in door actuators, and this is something we should expect to persist into 2020?

Then the second question would be on your guidance. So with 1% to 3% organic sales growth, do you expect to outperform this market by 300 to 500 basis points versus, I think, the outperformance you have shown in the last year by 150 basis points? So could you elaborate a little bit on the drivers for this expected acceleration? And you mentioned, to some extent, the synergy effects in the industrial side, but more insights would be highly appreciated.

And then the last one on STAR 2025. I mean with very little visibility on the global automotive production volumes, your more than 2% sales CAGR, is a very bold statement and to some extent on sharp contrast to the indication we are seeing from the automotive suppliers, which point to a stagnation until 2025. I completely agree that, to some extent, these statements might -- should be taken with a pinch of salt given the current restructuring, but it would be great to understand in more detail your optimism on this. And in addition, could you elaborate on the further acceleration of the outperformance which implies your guidance. So basically 500 basis points outperformance on the underlying automotive market.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [11]

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Yes. Thanks. Just 2 seconds for us to rethought who takes care of what part of your detailed question, yes?

Yes. Miss Steilen, thanks for your questions. The Powerise numbers in Q4 are strong again after a few weak quarters. Yet we have seen good news, for example, from the Ford Explorer that has recently been launched that have helped us to offset some of the negative we have seen before. The Explorer used to be a single-sided Powerise system from Stabilus, it now is a double-sided system. As we've said in the past, there are certain design requirements that force our customers to work with the dual sided rather than a single-sided system. And here in this one, Ford elected to go with a double-sided system.

The revenue of Powerise do not include revenue from the sales of dual actuators that we call DA.90, door actuators for normal front doors. We are working on those projects. We've got business in our hands but we haven't yet started shipping. What we have in for doors is the well-communicated 8 Powerise on each Tesla Model X to open the 2 rear doors of that vehicle. Other than that, there's no door revenue included in the Powerise numbers.

Going forward with now the Explorer, for example, being [strongest with] double-sided systems and Explorer being an important relevant car in the U.S. market, we are reasonably hopeful for the year to come. But as you know from the past, we've never split our overall revenue guidance in regions or product groups or even customers. With regards to your question on guidance for next year, I hand over to Michael Büchsner.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [12]

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Yes. Thank you very much. Coming to your next question, your second question, 1% to 3% organic growth, how does that fit together? I think Stabilus is in a very good position in terms of product portfolio and also the footprint. We want to be the supplier of choice for motion control. So to achieve that, we did set up a very stringent and good process, which is the STAR 2025.

STAR 2025 is kind of setting overall targets, cascading down these targets in a very good way to all levels of the organization and it results in a detailed product portfolio mix which we define, especially focusing also on the industrial sector where we kind of define by product category which growth aspiration we have starting in 2020 but also for the outer years. And that actually leads in the industrial sector to our growth target in the short, mid and long term.

STAR 2025 is also kind of a guidance for the automotive sector. And part of this growth, for sure in the short term, is underlined by the vehicle growth in the market. And that's why we also said in the comments that our assumptions are based on 88.8 million vehicles for the current calendar year up to 101 million up to 2025, and the GDP growth between 2.5% and 3%. That's very important to keep in mind whenever it comes to the guidance for 2020 and the years beyond.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [13]

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Frau Steilen, is that okay for you, the answers?

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [14]

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Yes. So it implies that the outperformance should mainly stem from the industrial segment, correct?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [15]

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What do you say? As I said, we've never given the details by segment.

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Operator [16]

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The next question is from [Darren Joslin from Stock East].

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Unidentified Analyst, [17]

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This is [Darren Joslin from Stock East]. I have 3 questions, please. The first question is can you talk a little bit on how you see the penetration of automated tail gate technology growing going forward? And maybe if you can be as quantitative as possible and touch on the idiosyncrasies within the various regions.

My second question is on your share of single-sided systems, which is currently at 50%, I believe. Given your 70% plus share in Gas Springs, do you foresee your share in the single-sided market growing from the current 50% level in the years ahead? And my third question is really on the industrial business, and I think you may have just touched on it there. But I think you might have mentioned in the past that you've maintained this growth of 2% to 3% over nominal GDP growth. Do you foresee the same level of outperformance out to 2025?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [18]

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Yes, thanks. Let me -- let us now, just internally sort out and take care of (inaudible). Okay. In terms of Powerise penetration, it eventually depends on the pricing the car manufacturers charge towards the end consumer. By then keeping the price high, penetration will be negatively impacted because the OEMs reducing the pricing penetration will be [helped]. With the information we have on hand, we are seeing for Powerise, for our Powerise, a growth rate over the next years till 2025, thus our group average there. And also better than normal car production. That is based on the overall assumption of more [comfort needs] in the market.

The U.S. market is already highly penetrated. It's not coming from there. In Europe and especially in Asia/Pacific, we have room to grow. Some of that is backed up by customer orders already on hand. In previous calls, we had given some [clout] on to whom in Asia/Pacific we are selling right now. And with regards to single-sided and dual ramp-sided systems, I hand over to Michael Büchsner.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [19]

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Yes. Your question was we are actually on 50% share of single-sided systems. And on the other side, 70% of Gas Springs are from Stabilus. How do we see that developing in the future?

That's a topic which is kind of difficult to answer because yes, we are in a good position for single-sided systems, also because we are strong on Gas Springs. However, it's up to the customer to take these decisions which system he drives in the vehicle. And if you consider that in some cases, the customers decide 9 or 12 months before the SOP what they want to do, this is still some information which we get also rather late in our planning tools and that makes it difficult to predict the future. However at the end of the day, wherever there is a single sided system in the game, I see us in a very good position to hunt for that business and get that business. And that is what we have proven in the past, that is why our share in the single-sided is 50-ish percent. And quite clearly our confidence from the Gas Spring business, it helps us to combine the (inaudible) which is kind of a gas spring business, mechanical device, nicely. So that the end customer will never ever see a difference, whether it's a single-sided or dual-sided system. End customer, with our good system will always only have to press 1 button and he will not see that the tailgate [gets a bit of caution] et cetera due to the good way have set it.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [20]

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So -- and maybe give some flavor on the STAR 2025 initiative, also in that term when it comes to the technology of Stabilus. We recently also relaunched our innovation initiative and one outcome is also that we came up with pretty good ideas in the single-handed systems which also in the future will keep us in the game and increase our competitiveness in terms of technological background when it comes to single-sided systems. So I see a clear advantage for us which will for sure materialize in the future.

I wanted to get that so I can take that (inaudible).

The last question was a 3% growth of the industrial business over and above that -- the GDP. It is something we've seen in the past, sometimes even more than that. On what is that based? Overall, the Stabilus products in terms of motion control, help lifting, lowering things in today's labor [work], there are more and more regulations with regards to weightlifting of employees. There's more demand for comfort from end customers to comfort people want to see in certain parts of equipment, whether it is backseat adjustments for buses and trains, whether it is in aeroplanes where we are now active with our hold open struts for the engine covers that allows the service technicians at the airlines who service and inspect them. Large diameter turbines, much, much easier with less physical workout for them than ever in the past, and this will help us to grow more better than that of -- than the GDP average. And also the demographic change helps us a lot because investing in comfort and comfort features will continue in the future.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [21]

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Older people, especially in economically strong areas like Europe and U.S., have simply more spending power. And with a few investments, we can actually make their lives a little bit easier. We've spoken in the past about things like headrest, backrest adjustment for beds. Some 20, 30 years ago, nobody had that. Nowadays, most people use it to actually get a bit more comfort there. Those things are an example of where it is helpful, it's not meant to say that our growth comes from beds or those things.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [22]

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Hope that answers the question.

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Unidentified Analyst, [23]

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I think just on the question regarding the single-sided systems. Maybe if I can get a little bit more clarity. Because the -- what I was trying to get at with respect to your 50% market share in single-sided systems is, do you think you're going to be able to take share from your competitors in that space? And not necessarily is the addressable market going to change with the end consumer making the decision on the single-sided system. So you're the only player that makes the -- both sides of a single-sided system. Do you think your cost advantage of production or the quality of your production is going to give you an advantage to be able to take share from your competitors in that space?

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [24]

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At this point in time, we do not have in our planning to take major shares from our competitors. However, as I said, in terms of technologies, we did a very good step in order to further strengthen our position when it comes to single-sided systems. However, as I said, in our planning for the coming year, we do not have that as kind of part of our assumptions that we would take major share from our competitors.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [25]

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And overall, the pressure on all of us is kind of sustained. The big competitors in that segment, the broader (inaudible), they are all well-managed companies with people with many years experience in their business. It's hard to get an economic advantage over those companies. Nevertheless, our 3 Powerise plants are all in low labor cost countries: Mexico, Romania and China. That helps us to keep our labor cost low. Plus, as mentioned in the last call, we are setting up a dedicated specific Powerise building in China in the Pingwu area with attractive government growth that helps us to stay focused, maybe a notch more focused than other companies, which will tilt the decision of some customers towards us. That needs to show that the long-term plan is set up fairly detailed. But as mentioned, it's not revolving around blowing everybody else out of the market. No. It's in fact assuming a kind of stable positioning there.

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Operator [26]

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The next question is from Sabrina Reeh of UBS.

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Sabrina Reeh, UBS Investment Bank, Research Division - Analyst [27]

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I have a couple of follow-ups. The first one would be, could you maybe also elaborate a bit more on the -- how we should see the dynamic of the guidance for the next year? I mean are you expecting a weaker H1 and an uptick in H2? Or how should we see that?

The second question would be a follow-up on the Powerise which we just discussed a bit. I mean we've been seeing different trends in the past quarters. We've seen a switch from single to dual-sided but also dual-sided to single-sided. And I mean do you expect this volatility to remain on the one -- sometimes positive and [sometimes on the] negative side on the next quarters as well?

The third question would be on EBIT and your cost base. I mean would you say that your cost base is now more flexible in case global vehicle production is worse than you initially anticipated?

And then lastly on CapEx. You lowered this in Q4. Will this remain on a lower level in 2020? Or could you give some guidance on how [to] see your CapEx expectation?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [28]

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Thank you for your question. Also here, we would need a couple of seconds to sort out your question and people who will answer that. Just a second, please.

Yes. In terms of dynamic of the guidance, what we are giving here is a full year guidance for our business here through to November 2020. As you can see, we've changed from our historical practice of calling out a specific number to throwing a band. There is some uncertainty in the market. We have assumed vehicle production, as you see on our Slide 22, for 2020 in terms of calendar year of 89 million units. That is based on input data from one of those big forecasts institutes. And we essentially follow their calendarization there.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [29]

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Okay. I'll take the second question in terms of Powerise. You said that some customers switch from two-sided systems to single-sided and vice versa. That's very true. However, difficult to predict, as I said in -- a couple of minutes ago. I think in terms of the impacting sectors, something to consider is, so how does the customer choose single-sided versus dual sided system. Interesting factors are the body-in-white for example, which stiffness has the body-in-white in terms of tailgate opening's behavior, what's the black box model in terms of the packaging you need. Is this in the rainwater channel in the car versus in the upper part of the body-in-white? How does the interior look like and last but least, design aspect. So that's why it's so volatile and difficult to judge. Because as I said before, the customer can actually choose and pick one or both sided systems 9 to 12 months before SOP. So why it's difficult to predict and put into the numbers.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [30]

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And moving to your question with EBIT, EBIT results, cost structure for this. Our view on that one, like many companies, getting the first volume reduction into the cost structure is easier than reflecting the last bit of a strong volume contradiction in your cost structure. We currently assume, as discussed, to actually organically come back to a growth pattern. So that's not an issue. But for sure, we, like many other companies, have implemented a hiring freeze. Every salary hiring goes via my and Michael Büchsner's desk. We have discussions there to ensure we are not increasing the cost structure there. We are eventually in touch with our unions here in Germany where the labor law for example, is very strict in terms of pushing out people. But what we can do is work on the working hours of the people. The recent union contract actually gives us the opportunity to, instead of pay people, give them 8 days more vacation. That's a flex element that we can agree locally with our work counsel reps and we are really prepared to do that already. So that helps to get the cost structure down in high cost Germany.

The other high cost country for us is the United States. There, overall, the labor law is far more flexible and we can react there, for sure, reasonably quick. As discussed before, when somebody else came up with a similar question, talking about EBIT and the gross margin. Within the gross margin, some of the elements like depreciation, et cetera, they are bank fixed cost. There's nothing we can really do to keep them down to, to push them down in a short-term basis. So there are elements that won't change, but there are still enough ideas to get the cost structure down and we have opportunities to still rationalize some of the locations by moving more work together over on more automated lines in case the volume goes down, as we've done for example in past crises. By simply moving manual work to the fully automated lines, and that way, we can reduce all of the cost element.

Next question was CapEx. Yes, the current quarter was fairly low. Typically, we see us at a 5% spending for machine CapEx, that is what we expect to see in the next year as well. And actually get confirmation that we are on a growth track here and therefore specific product, we will have to invest and it's smart to invest in order to capture market share in order to produce the orders we have efficiently on well automated lines to have some offset for labor cost increases in countries like China, Romania, labor costs go up by 7%, 8% and we need automation to offset that. That is why next year, I expect to see a machine CapEx level of like EUR 50 million, EUR 55 million. Does that takes care of your question?

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Sabrina Reeh, UBS Investment Bank, Research Division - Analyst [31]

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But can I actually just follow-up on the first one quickly? I mean I understand that you give a range between 2% and 4% revenue growth, but I was just trying to understand if I should understand it that it's more back-end loaded? Or because -- or are you confident that you already see at least the range in Q1 already since I mean -- your Q1 [so the] Q4 calendar year more or less is going to -- still going to be a bit burdened by weaker markets and not a recovery yet? So that is basically the background of my question.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [32]

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As I said, we base our forecast on data from one of those forecast institutes that provide us with car numbers. And you may see, if you look at IHS data that -- it's advisable to follow their calendarization. We don't have any more insights than those guys in terms of volume data calendarization, but they form the basis for our internal decisions in terms of work allocation, labor allocation, quarter-over-quarter planning.

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Operator [33]

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The next question is from Philippe Lorrain of Berenberg.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [34]

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Yes. A couple -- just 3 to finish. If one takes out the increase in CapEx of about EUR 9 million during the full year, I guess the free cash flow would've been down only about 2% year-on-year, while the EBIT was declining 4% and the net income are just probably high single digit. So I wanted just to get a better grasp on what was happening there, what were the effects behind the fact that the free cash flow conversion seem to be actually a bit better than it was last year, despite the factors named previously? Was that just solely due to better net working capital control? That's the first one and then I will follow up with the other ones.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [35]

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Yes, Philippe. Cash flow is always a tricky one. It's harder to impact profit. It's something where you compare the year-over-year. You clearly get very much into the detail here. Yes, CapEx on a full year basis is lower than previous year. Overall, the cash flow is grown? Yes? Working capital management is a core part of what one has to do and you see that also when you take a look at the balance sheet details at the back in the presentation. Inventory was kind of increasing, that's partly due to the acquisitions, the receivables in there includes the acquisition effect as well. We have been using, as discussed in the previous calls, a lot of our early settlement arrangements with suppliers in order to get lower material acquisition cost. We have with around half of our European suppliers which again make up for around half of the acquisition cost of the material cost, arrangements for early settlement discounts between 2% and 5%. We've heavily used that in -- during the year and towards the back end of the year as part of working capital management. We reassess where we have to take which route and that partly [gets into this one]. Overall, we're proud of having a decent, good strong cash flow, which has come now in quite nicely for another year, almost EUR 90 million, so…

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [36]

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But I guess like just to come back the early settlement discounts. I mean this is actually a drag on your cash conversion because you're going to pay your supplier actually much earlier than you would do otherwise, which means that the cash conversion, despite the fact that you pay your suppliers early, is actually very good.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [37]

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Yes, yes. Be careful there. Take a look on Page 28, we get into the underwear here, Philippe. The trade account payable is up from last year from EUR 83 million to EUR 91 million. That includes a bit for the acquisitions. During the year, we've used the early settlement discounts. And towards the back end of the year, we've softened the usage of the early settlement discounts this business year, whereas last business year, we didn't do that. So that fits in there. And with the year end numbers, you can't really see what has happened during the 11 months in between.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [38]

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Okay. That's a fair point. Then the second question was since your net leverage ratio has [flown] down to 1x, are your interest costs going to fall further if the net leverage ratio actually moves below 1x?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [39]

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No. There's no further reduction. We are at the bottom end of our interest rate. The 95-point interest we pay is not the lowest in the market, I'm sure we can go out and find even cheaper financing. But we've got overall a good contractual setup with the banks involved in our financing. And pushing it down further in terms of leverage doesn't help, that is why we sit on EUR 140 million cash. We want to be ready for acquisitions. And long-term, we've said we want to keep our leverage below 1.5. We can tick that box. And we also have room now for acquisitions.

So if our M&A team comes up with another suggestion proposal that we like here, we have the cash on hand, we have the financing agreements ready to do anything that is in the area of like EUR 200 million with today's credit facility that we have arranged without having to change anything there. That will cause maybe the leverage to even go up again.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [40]

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Just to follow up on that, if the leverage goes up again, so does your interest cost [then] as well? Or not anymore if it's M&A related?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [41]

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It depends on the size of the movement. With the -- if sufficient [room], when you look back to the time where we were 1.5 to now, it basically has little movement. It will get lost in the overall [roundings] of the business. But of course, the margin [reached] means when you buy something at a higher leverage, the average leverage goes up and then the interest rates go up. But there are, say, my estimate 10, maybe 15 basis points next.

When we buy a company, we may pay like 7, 8x EBITDA for the company. So I get something coming in at the leverage of 8x to our average of 1x in terms of financing. And that will pull up our average leverage above today's 1x leverage, but not a lot. [It won't move in time for whatever.]

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [42]

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Okay, understood. And the last question is just like, is there any update on the DA.90 business? Any new customer prospects perhaps to announce?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [43]

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No, no. We are working on the previously communicated deals, contracts, to get ready to start shipping. But not -- no further details as of now.

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Operator [44]

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The next question is from Marc Tonn of Warburg Research.

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Marc-René Tonn, Warburg Research GmbH - Senior Analyst [45]

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Yes. Just a quick sort of follow-up as we were talking about the balance sheet just shortly. IFRS 16, I think in terms of which will impact you from this business year and now starting onward. Is there anything like a kind of a rough indication you could already give us at this state? What does this mean for the debt side of your balance sheet? Or whether there was any impact on -- or meaningful impact on EBITDA or EBIT?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [46]

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Yes. Let me just go through the docs here to read out the numbers we have looked at before. Two seconds.

Yes. I mean EBIT will hardly be impacted from that, of course on EBITDA, it's a notch more. But we guide on the EBIT numbers. We have not done a lot of things that are impacted by this IFRS 16. So in total, that's like EUR 16 million that will be added to -- sorry, EUR 25 million-ish that will be added by IFRS 16 to the balance sheet as debit.

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Marc-René Tonn, Warburg Research GmbH - Senior Analyst [47]

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3-5?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [48]

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Pardon?

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Marc-René Tonn, Warburg Research GmbH - Senior Analyst [49]

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3-5 was the number? EUR 35 million?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [50]

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No, no. 2-5.

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Operator [51]

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The next question is from Akshat Kacker from J.P. Morgan.

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Akshat Kacker, JP Morgan Chase & Co, Research Division - Analyst [52]

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Just one follow-up on the European margins in the fourth quarter. Can you shed some more light on what are the factors impacting margins, 13% in the fourth quarter apart from high-cost inflation? And are you thinking of taking any more cost actions in the region going into next year?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [53]

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Just a second, please. So last year, we were at 59, this year we are at 59 again. That includes some good news from the stronger mix of the industrial business that on average has slightly better margins. On the other hand, as discussed before, we see a bit of pressure on the gross margins here. Overall, that will prevail going forward. But keep in mind, it's not 59 which is the [guide] of the fourth quarter. We are guiding for 15%. In order to get there, we will have to remain very, very focused in adding cost, especially adding cost in the overhead area that typically is a risk area where companies end up spending too much, too early. So that requires a lot of discipline from our management team not to add costs there. And then in terms of cost structure, we have not planned any planned closures or those things.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [54]

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But typically, what we do and what we are continue to do in order to meet our guidance is we take 2 main actions. On one side, we have set dedicated targets to the individual businesses we have in the individual regions in order to allow a very good cost tracking. And this cost tracking at the end of the day, we do on bi-weekly basis to just make sure that, as Mr. Wilhelms said, we do not kind of spend too much in any area and background. We want to continue and we'll continue to manage this cost very closely to make sure that we stay in our guidance.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [55]

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Okay. And just one more here for Philippe. We earlier on mentioned EUR 25 million. Andreas corrected me. It's EUR 45 million for the overall leading contract et cetera coming in. Background is that we've extended the contractual agreements both in the Romania as well as in Mexico for [personal interest buildings there recently].

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Operator [56]

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The next question is from Lello Della Ragione of One Investment.

There are currently no further questions in the queue.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [57]

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Okay. So we say thank you to all participants from Stabilus. To the team here, 3 dates to please keep in mind. On December 13, we will issue the formal audit reports, the year-end report on our website. There is no extra call planned. We eventually do not envisage any change of the numbers we've shown to you here to what the auditor KPMG finally [stamps] off.

On February 3, next year, we will have our call on the Q1 numbers and February 12, we have the AGM in Luxembourg. So thanks again for participating and have a good finish of the week, a good weekend. Goodbye.

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Michael Büchsner, Stabilus S.A. - CEO & Member of Management Board [58]

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Thank you very much. Goodbye.