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Edited Transcript of STM.DE earnings conference call or presentation 5-Aug-19 8:30am GMT

Q3 2019 Stabilus SA Earnings Call

LUXEMBOURG Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Stabilus SA earnings conference call or presentation Monday, August 5, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Schröder

Stabilus S.A. - Group Financial Reporting Director & Member of Management Board

* Mark Wilhelms

Stabilus S.A. - CFO & 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

* 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, and welcome to the Stabilus S.A. conference call regarding Stabilus' financial results in the third quarter of 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. Thank you. Also, welcome from the Stabilus team on this call to all the participants. It's Mark Wilhelms speaking. I've got with me Andreas Schröder, our Investor Relations Manager.

Let's get started with the presentation on the Q3 2019 results.

On Page 2 or Slide 2 of the agenda, you will note that we've added a new agenda point, operational highlights. The rest of the agenda is as we had it in the past. Financial highlights, results by region, results by market, outlook and an appendix to aid us with potential questions and the answering of those you may have.

So turning over to Slide #4 in speaking to additional investments we did at Hahn. Important with those operational highlights is to ensure you, the audience, fully understand what we have been doing over the past 9 months. We at Stabilus feel that a couple of people may have missed those points, that is why we reiterate them here in the call.

So coming to that Slide #4, additional production facility at Hahn. We had announced it at the back end of last year. We had actually actioned the payment, the acquisition of this facility in January. This allows us, as the first bullet point shows, to support the growth of Hahn. Hahn had been growing by more than 50% since we acquired the company in 2016 to about EUR 30 million revenue. It basically stretched the existing facilities to the limit. In order to support further growth, we took the opportunity to buy an adjacent production facility for EUR 4.2 million. And we've now installed production equipment machinery, as you can see with the 2 lower pictures of that facility. It is one of the adjacent buildings to us at Hahn, and therefore, it was really important to buy it because, otherwise, with facilities that are further away, we would have incurred quite a lot of additional material handling costs, and that is why it was important to take that opportunity and buy that facility. Five of the facility, around 2,500 square meters, with about 2,500 clear production area. Right now, Hahn has around 5,008 square meters production area, so that allows them to really grow by another 50% over the next years as the overall market share allows us and market development allows us to utilize this. Our prospects for Hahn are pretty positive. Their products are clearly liked by the market, and ever since 2016, find a lot of additional customers.

Turning over to Slide #5.

We come to our new production facility in China. Right now, our gas spring and Powerise production is in Wujin area. Unlike to Mexico and Romania, in China, most Powerise and gas spring are currently on one production site, and that is what we are solving with this new production facility in China. We basically split gas spring and Powerise assembly as we do it in Mexico and Romania, as mentioned before.

So coming specifically to the slide here. On the left-hand side, you see a picture, and on the lower left-hand side, a sketch of how the building will be set up.

Medium-term Automotive Powerise revenue can really support the size of the capacity expansion. In spite of the current weak environment, we remain positive about the market, the market development for automated tailgates in China.

Second bullet point. As mentioned before, gas spring and Powerise are split in Mexico and Romania. It makes sense from a manufacturing process, from the skill level of people, to really split it.

Construction projects for renewal building in Pinghu, that is about an hour's ride from Shanghai, started this year. We will have a 2-step expansion for the project. First, setting up an almost 13,000 square foot building or precisely 12,600 square foot till the end of March 2020. And we will transfer the 2 existing power lines from the Wujin plant to this. So in essence, there will not be an additional machinery investment needed. This building is big enough to house up to 9 Powerise assembly lines. And 2023, we will set up the second step in this building with around 7,500 square meter, which will also be able to house additional lines to house finished and raw material in order to support the underlying dip in this year.

[Interesting] is local investment support is around 80% for the about EUR 10 million we are spending on land and building. The land is not really bought. It's a Chinese process of being allowed to use it for 100 years. Over the longer term, we plan to invest up to EUR 50 million in the Pinghu facility, timing eventually depending on market development. This will allow us to satisfy the future needs in that important Chinese Asian market.

Turning over to Slide #6. We come to the 3 acquisitions we did in the last couple of months.

A, General Aerospace. Pictures of the products you see on the left-hand side. As we are all seasoned travelers, we all will have seen those products, will have sat flying in an airplane that actually uses General Aerospace products. General Aerospace develops, assembles motion control components and systems for the aerospace industry. 2018 revenue was around EUR 11 million. For this business year, we expect EUR 16 million and a strong growth path going forward. The acquisition was closed in April this year. And therefore, at third quarter, we are looking at actually includes financial results of this acquisition. This will allow us to expand our product line further in aviation industry, strengthen our existing market position in that aviation market and develop a good aftermarket retrofit business for those components.

The other -- the second acquisition we did is Clevers. Clevers is an Argentine niche manufacturer for gas springs and dampers, primarily focused on South American customers, really Argentinian customers. Revenue, kind of small with EUR 1 million. Transaction was closed in May. Rationale here, expands, develop further the independent market -- aftermarket and industrial business in South America.

Argentina is a pretty closed market due to import duties, et cetera. Very fragmented. Used to be a white spot. You may know that we've got a production facility in Brazil that is set up to service the automotive industry, but industrial business, aftermarket business, historically was not that much in our focus. And with this facility, we hope to close that white spot I have mentioned.

Third acquisition, we signed at the very back end of that quarter in June 2016, Piston, a Turkish manufacturer of gas springs and dampers. Annual revenue about EUR 5 million. Rationale here is further expand independent aftermarket and industrial business.

We know from our customers in the automotive aftermarket business, not everybody is interested in buying aftermarket parts with the OE quality part, but rather one that go kind of a slightly lower-priced product. This we can do with Piston. There, we will have a second branch that allows us to attack the more price-sensitive customer base. Additionally, Piston is well-established overall in the aftermarket and has got a very wide product portfolio, so they can actually service aftermarket customers, aftermarket customers of Stabilus on a global scale. We do not envisage any noticeable cannibalization from our own OE-type aftermarket business because we know that customers are either, as I mentioned, OE-minded or aftermarket, more price-aggressive positioned aftermarket products orientated. So that should be a nice add-on for us and allow us to conquer more aftermarket business.

Leaving those operational highlights, we come to the financial highlights on Slide #8, and that is now the form you are used to from the last couple of years.

Revenue at third quarter stood at EUR 241.6 million, which is 3.4% down year-over-year. FX U.S. dollar translation up in the year-over-year by 2.1%. Acquisition, which essentially is General Aerospace, up by 1.6% year-on-year and organic growth is minus 7.1%.

Adjusted EBIT stands at EUR 37.1 million compared to EUR 39.5 million last calendar year. That is 6.1% down year-on-year. The margin with 15.4% is shy only 0.4 points from last year's 15.8%. So we've really worked hard to maintain the margin in order to keep our targets there and show what the company is available to deliver.

Profit for the third quarter came in at EUR 19.3 million compared to EUR 25.3 million. Some may remember that last business year, we had a few good news from the U.S. tax reform as well as an internal reorganization. Profit in margin terms came in at 8% versus 10.1% last business year. Net leverage ratio stands at 1.2x, which is about what we had last year and a little notch below the business year-end September '18 as we paid for the acquisitions. Net financial debt stands at EUR 225.5 million.

Acquisitions, I've mentioned already.

And outlook. Revenue outlook is between EUR 950 million and EUR 960 million, which in essence is in line with current market expectations. This is set on an IHS automotive volume of EUR 90.9 million at a global scale, which is clearly less than we had all estimated a couple of months ago.

Margin -- EBIT margin is expected at 15%, which has been our guidance over the last couple of quarters. Third quarter margin of 15.4% should give us some confidence that the full year result is achievable.

Let's now take a look on Slide #9, the more graphical form on where the results came out.

Revenue wise, I've already spoken to that one, at 214.6% (sic) [EUR 241.6 million]. Within that is a EUR 5.2 million good news from FX and EUR 4 million good news from acquisitions. EBIT margin, 15.4%, and in euro million terms, EUR 37.1 million. That includes around EUR 400,000 good news from acquisitions, which is a GA acquisition currently showing here, kind of a modest EBIT contribution. But over time, we clearly see for General Aerospace, the typical Stabilus industrial margins, i.e., above the group average of 15%.

Net profit, we've talked about, last year 10.1%, this year 8% margin.

Moving over to free cash flow. We came in at EUR 31.4 million, which compares to EUR 40 million last business year.

It is around EUR 4 million higher year-over-year, CapEx, as we still work off the deliveries of machines that have been pushed from last business year to this business year. The percent of revenue, it is 13% versus 16.1% we had last year, the free cash flow.

Page #10 shows us the first 9 months in a graphical form.

Overall, 9-month revenue coming from EUR 731.7 million to EUR 705.7 million. That is 3.6% down. That is 6.1% organic. And FX good news of around EUR 14.5 million and the acquisition of EUR 4 million. But as mentioned before, the GA acquisition was closed in April, therefore, there's no impact on the first 6 months.

EBIT margins of the group over the first 9 months are at 14.7%, which compares to last year's first 9 months of 15.4%. In euro million terms, we are 8.2% down to 1 million -- EUR 103.5 million.

Profit results, 8.1% comparing to 9.9% last year, now stand at 57.4% (sic) [EUR 57.4 million] comparing to 57.6 -- sorry, EUR 72.6 million we had last year. As mentioned before, last year, we had a couple of good news through the tax reform which are, for obvious reasons, not repeating itself.

Cash flow, shown on the lower right-hand side, stands at 7.1% of revenue compared to 9.8% last year. In euro million, at EUR 50.4 million. That includes around EUR 15 million higher CapEx compared to last year. Within the EUR 15 million, we have the EUR 4.2 million for the Hahn building I had mentioned on operational highlights as the first point.

Important when we look at free cash flow is also to keep in mind that we are really fully utilizing early settlement discounts in order to get the material costs down. Around half of the European suppliers give us between 2% and 4% early settlement discounts and that burdens the cash flow, on the other hand, put the around EUR 125 million cash we have at decent use for the company.

Going forward now, results by region, Slide #11 as the entry point to this, and Slide #12 gives us some detail in a graphical form.

On the left-hand side, revenue by region in Q3, and on the right-hand side, EBIT by region in Q3.

Speaking to the regions. European region down year-over-year, 3.3%. That is organically 6.4% down and around EUR 4 million good news from the acquisition of General Aerospace. In the U.S. region, we are seeing a nice increase to EUR 90.4 million revenue. That is 1.7% up organically, however, 4.2% down at constant FX rate. Asia/Pacific, Rest of World, they are down by 17.5% to EUR 26.8 million. Later on, as we speak about the details by region, you will hear where that comes from, which products, which segment.

In terms of profitability, let's take a look on the right-hand side of this chart. European profit down by 3.6% to EUR 18.6 million. U.S. NAFTA profit up by 8.4%, that is a bright spot here on this chart, to EUR 15.5 million. As profits go up stronger in percentage terms and the sales, you all know that the margin has improved. That is due to the very good to work our colleagues in the U.S. did, plus a positive mix effect, as we will learn later on. Asia Pacific, Rest of World, our EBIT stands at EUR 2.9 million, which compares to the EUR 5.9 million we had last year, a notch over 50% down.

Now turn to Slide #13 which shows the first 9 months revenue by region as well as EBIT by region.

Revenue by region. Europe came from last year's EUR 376.9 million to this year EUR 363 million, which is 3.7% down. In the U.S., in the NAFTA region, which is Mexico, U.S. and Canada, we are actually up to EUR 262.5 million, which is a modest but still up 0.2%. Asia-Pacific, Rest of World came in at 9 -- came in at EUR 80.2 million versus EUR 92.9 million last year, which is almost 14% down following overall soft market trends we all know of in China and the automotive industry in general. Remember that we show here our revenue on a billed-from basis. So we show the revenue where the Stabilus company is located that actually ships to the customer.

Profit by region. European profit came in at EUR 52.9 million. That is 9% down year-over-year. The NAFTA profits are at EUR 42.4 million. That is a good 8.2% up. Asia Pacific, not surprisingly suffering from the lower revenue also pushed down their profit, their EBIT to EUR 8.2 million.

Turning over to Slide #14. We see a bit more detail on the European numbers. Left-hand side, the revenue we've spoken about as well as the EBIT number.

Let's look at bullet points key highlights here. European vehicle production in Q3 2019 at 5.6 million units, i.e., 6.6% down versus last year, which compares to a 3.3% down of our revenue. European revenue decreased, as mentioned, by 3.3%. However, 6.4% if we exclude the acquisition. As such, we are about in line with the automotive market development here. European automotive revenue for us, however, continue to be impacted by the weak automotive market. Gas spring is down by 7.4%, with some negative mix effects due to body style and applications. Plus, keep in mind what I mentioned earlier on. From Europe, we shipped a few gas springs to the Asian markets, and there, they are also suffering from somewhat softer demand.

Automotive Powerise year-on-year is down by 17.1%. Cap goods revenue at EUR 44.9 million versus EUR 44.8 million last year. We think that the Vibration & Velocity Control is worthwhile noting with plus EUR 3.6 million or 25.7%, which, however, includes the EUR 4 million acquisition effect then. Netting that one out, Vibration & Velocity is down by almost 3%, precisely 2.9%. Adjusted EBIT margin is at prior year level with 14.9% versus 15% we had last year.

The NAFTA details are shown on Slide #15. Again, on the left-hand side of the graph and on the right-hand side, a few highlights.

Vehicle production in NAFTA is at 4.3 million units, a modest 2.1% down versus last year's Q3 result. Our NAFTA revenue is 1.7% up year-over-year in euro terms, recognizing the strong U.S. dollar. It's obvious that constant currency wise, we are down, that is 4.2%. Within that, Automotive Gas Spring is in euro terms up by 4.7% or 1.1% down excluding the currency effect. So you see a slight improvement to the sense that automotive market being down by 2.1%.

Powerise is down year-on-year 6.3%. And rolling in the strong dollar effect, actually, in constant currency in U.S. dollar, at minus 11.6%. Cap goods developed nicely with a plus 15.3% or in U.S. dollar terms at 8.3%-plus. Vibration & Velocity, those companies we acquired from SKF back in 2016, plus 1%, or in U.S. dollar terms, almost 5% down.

However, overall, our NAFTA region managed to improve the EBIT margin by 1 percentage point up to 17.1%. This is also impacted by the slightly stronger mix of the industrial business versus outlook in the overall setup.

Slide #16 gives us some detail on Asia Pacific, Rest of World.

Asia Pacific, Rest of World vehicle production in Q3 came in at 12.4 million unit, i.e., almost 10%, precisely 9.6% down versus prior year. Within that, China is down 16.2%; Japan/Korea, up 4.6%. Here -- just as a point to mention, we are a strong supplier for gas springs, and in the future, also, Powerise to the Kia-Hyundai group. South America is down in terms of vehicle production by 1.7%.

Our revenue in that market overall decreased by 17.5% or EUR 5.7 million. The revenue development continues to be impacted by weak markets in China. Our Automotive Gas Spring revenue is down by 13%. Powerise is down by 39.4%, very strongly impacted by negative markets there. Cap goods, minus 9.1%. In Vibration & Velocity, up 15%. However, in euro million terms, a very modest EUR 200,000. So I should not overrate this 15%.

Adjusted EBIT margins in that region, Asia Pacific, Rest of World, decreased from 18.2% last year to 10.8% this year. Eventually, due to lower revenue and for overhead, the fixed cost structure that we have, plus we really keep the overhead structure intact to ensure we have sufficient support to work on our long-term strategy, and the Chinese market plays a key role in our long-term strategy, that is why we want to ensure we have the right number of qualified engineers, application people, salespeople on the ground in China in order to support that.

Going through the presentation, the slides following 17 show us the results by market.

In Slide 18, again, gives you a graphical on the market development.

Let me point out here the lower section of the chart where we show in a kite diagram where we are in terms of distribution. Right now, we have 40% industrial revenue share in our business and 60% auto. That compares to last year in that Q3, the automotive was 64% and the industry 36%. Overall, the shift to more industry, which we have also pushed with the acquisitions, helps us to get the average margin out. Quite clearly, margins in automotive are lower than in the industrial business. We have talked about that in many investor presentations and conferences, and that is why putting a bit more focus on the industrial business is positive.

In terms of revenue development, auto down by 9.1% and industrial business up by 6.7%, which includes around EUR 4 million of acquisition good news.

Turning over to Slide #19, those markets on a 9-month basis, first 9 months.

Industrial business, again, talking to the lower part of this slide first, is now at 39% versus 61% automotive. Last year, auto stood at 63% and industrial at 37%. Industrial revenue in euro million came in at EUR 272 million, which is up 1.5% versus last year's EUR 268 million.

Slide 20 gives us some detail on the automotive business.

Global light vehicle production in Q3 is down by 7.5%. Our automotive revenue is down by 9.5% or 11.3% excluding the currency translation effect, clearly impacted by Europe and China with the automotive production there.

Automotive Gas Spring revenue for the group is down 5.1% or 6.8% excluding the currency effect, which is 70 basis points better than the global vehicle production, a positive point worthwhile to note.

Powerise revenue down 14.1%. The higher share, the often-discussed higher share of single versus dual-drive platforms we service and the weaker demand in China clearly take its toll on Powerise. Longer term, our view -- our positive view on Powerise remains. This interesting comfort feature will be seen in more and more models in the years to come.

Slide #21 gives us detail on the industrial business.

Since October 1, we've included the Commercial Furniture in our cap business, as discussed before. Overall, industrial revenue increased by 6.1% in this quarter to EUR 95.5 million coming from EUR 98.5 million. Cap goods, within that, the blue block is up 3.3%, 1.6% organically. Vibration & Velocity is up by 15.2%. Within that, 2.7% organically, plus the EUR 4 million acquisition. General Aerospace has been allocated to our Vibration & Velocity control business unit.

Overall, growth in segments like solar dampers, production, construction technology and medical was partly offset by weaker business with distributors and lower revenues in the segments of independent aftermarket, office furniture and agricultural machinery.

Now let's turn over to the outlook, which is shown on Slide #23.

Last year's revenue was EUR 962.6 million. Our current guidance for this year is a bit shy of the EUR 960 million we had issued before at EUR 950 million to EUR 960 million, kind of taking into consideration the different views on the second calendar year half that are now being discussed in the market. Our EBIT margin is still forecast at 15%, which eventually falls in the good news from our Q3 results and the continued focus on cost-reduction measures which essentially means avoiding overtime, avoiding expensive weekend overtime across the group as well as taking advantage of early settlement discounts, and in line with the somewhat softer global economy, a few good news on the material purchasing side where we are getting a few percentages advantages rolling in right now.

This now concludes my part of the presentation, and we can now open the conference for 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 Marc-René Tonn of Warburg Research.

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

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Just a couple of questions from my side. I think in the third quarter, let's say, taking Powerise and gas springs again, you once again at least underperformed the global light vehicle production and you still have your 6% growth target midterm out in the market. Do you still stick to the 6% growth target over the next years as a strategic guideline? That will be the first question.

Second question would be, we have seen a very strong margin development in the NAFTA region. Is this a purely, let's say, good combination of product mix and just sound utilization in this market? Or has the FX ratio -- or have the FX rates helped you by any means in this market?

And the third question would be, can you give us your assumption for global light vehicle production growth in the fourth quarter, which is behind you? And I think if I go -- if I calculated right, you are targeting 2% to 4% organic revenue growth in Q4. So what's your underlying market assumption in the automobile spaces, please?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [3]

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Yes. Let me start with the NAFTA slide, with the NAFTA numbers with the plus 1% in terms of margin. It is, a, a slightly higher fear of industrial business which mix was clearly hit. It's not really impacted worthwhile by FX effect. As you may recall, we've put a lot of emphasis on local sourcing, and therefore, we avoid some of the good news right now. But if the dollar would get weaker, it would also avoid some bad news. And of course, a very good utilization of the gas spring facilities help us to keep the margin up, and at the same time, the focus on the cost structure, avoiding last year's mistakes helps us to get right. Andreas will speak to your...

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Andreas Schröder, Stabilus S.A. - Group Financial Reporting Director & Member of Management Board [4]

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And about the light vehicle assumption, the assumption for the light vehicle production, this is based on the last IHS forecast and this forecast sees a light vehicle production at minus 4% year-on-year for the calendar year, and for our fiscal year, roughly at minus 4% -- minus 5% year-on-year.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [5]

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Your first question related to the long-term target, plus 6%, it still remains intact. But eventually, it will sit now on a somewhat weaker 2019.

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Operator [6]

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The next question is from Akshat Kacker of JPMorgan.

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Akshat Kacker, JP Morgan Chase & Co, Research Division - Analyst [7]

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Akshat, JPMorgan. First question, coming back on your medium-term target of 6% growth. What are you -- so when you do your budgeting for next year, what are you expecting for industrial growth? What are the avenues within regions, within different product lines? That's the first question.

And the second question is, you mentioned at the end of the call cost saving, then the restructuring actions that you've been taking. Can you give us a number or probably discuss it in more detail? And what can you do additionally going into next year?

And the third question is on your Powerise investment in the medium term in China. What is the competition doing there in terms of your international competitors as well as where do you stand versus local competition?

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

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Yes. On the longer term, 6% growth target, we've never really given a lot of detail to the market. How is that to be seen? A, we've got the overall automotive market development all linked to that one, the more positive trend towards boxy vehicles, not necessarily only SUVs, but boxy cars in general, versus limousine and other non -- smaller cars with kind of sedans, et cetera, designed -- do not get customer acceptance without a gas spring or a Powerise. When you have a boxy car, you must have either a gas spring or an automated tailgate system to aid the opening and closing process. So the body style mix is important within that. And the other point on automotive is the trend to more comfort, to more use of gas springs within the cars. And we've seen over a number of examples that they are mainly planning basis to assume the trend will increase, that we will see more gas springs per car. Last but not least, the Powerise with a strong revenue per unit clearly plays a key role in the long-term strategy. And we've won a couple of interesting award at customers which make us hopeful that within our automotive business overall, we will get our adequate share of the 6%.

And industrial business rests on the foundation that our products have seen over the last years always a stronger growth rate than GDP due to the versatility where they can be used, but also how we've managed to work on the market, finding new applications like so often talked about solar damper, but also aftermarket now, automotive aftermarket. With the Piston acquisition, for example, we can offer a wider product portfolio. And last but not least, the aerospace business is an interesting business for us as there are many gas springs and Bloc-O-Lift used in aircraft fleets, in overhead low cost, in inspection parts for the engine compartment or for the turbines as is called in the aircraft industry. And that gets us to the 6%.

In terms of cost savings, what have we done over the last 9 months? Put a strong focus on overtime avoidance, on avoidance of emergency freight, of airfreight, get our material costs right by entering into longer and stronger negotiations with our suppliers, making full use of what I've already mentioned, the early settlement discounts in Europe. That has helped us. Other smaller points without getting too much into the detail is we've really closed out all external storage and pushed that material we used to have outside fully into our existing facilities. All those items stand-alone are quite clearly little steps, but many little steps actually give us the result you've seen here. Some of those will remain with us for the years to come. Items like overtime reduction, once the plants are fully utilized, will actually not be with us in a year's, in 2 years' time when we expect the plants to be fully loaded again. Same holds true for things like storage internal, external storage, once the plants are fully utilized, we will need more space for production closed storage, and therefore need to push some material out again. As such, it's not really advisable to use this year's 15% as a base with the operating leverage for the next year.

Powerise China competition. Chinese market is, as we all know, very price sensitive. We have our long-known customers, Volkswagen group, General Motors, but we've also made good inroads into local Chinese manufacturers as well as Hyundai, Kia. Quite clearly, there is competition coming from the usual competitors like Brose, Edscha. We also see Magna as being pretty active in that market. We are well set up to service the future demand with the new facility. And we all see the market growing strongly, and it will be a fight to maintain increased market share in this growing market over the years to come. And price pressure, as I mentioned before, I guess will be higher in China than in other markets.

Does it answer your question?

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Akshat Kacker, JP Morgan Chase & Co, Research Division - Analyst [9]

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Yes, yes. I just wanted to follow up on the first question where you said that, obviously, Powerise plays a key role in your long-term strategy. And when you talk about more market share potential, do you still think the division can outgrow in regions like Europe and NAFTA despite the product mix decline over the next few years?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [10]

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Well, I think we have 2 or 3 considerations there. The trend from dual to single-sided systems at some point reaches [support]. Technically, as mentioned before, you cannot really have 100% of the cars with a single-sided Powerise and that will help us going forward. The other discussion point is market share. You mentioned market share. The future growth in Powerise, in automated tailgate for the European market is most likely less about our market share, but more about the market opening up vehicle segments like the [Groves], the Astra, et cetera. You today see in cars like the MINI Countryman, which is agreed a high-priced car in that segment, over 50% take rate. We see that the [tier up] from Volkswagen, which is a more affordable vehicle in that segment, has around 30% take rate. We expect that other models in that C segment will follow in the years to come and actually sets the base for strong -- for another market growth, and within that, with our single-sided Powerise system, give us some room for winning market share and also using our experience, our knowledge around tailgate automation, tailgate kinematics.

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Operator [11]

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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 [12]

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I have 3, if I may. Just 1 follow-up on Powerise and 2 on your guidance. So the global production volumes have been obviously not supported, but we have seen significant underperformance of Powerise versus the global automotive production in all regions. So could you explain a little bit more the details for the underperformance? So what is really related to that structural shift toward single-sided, which is related to a less favorable product mix in the region? And what is attributable to price erosions and also market share losses?

And then with regard to your guidance. The first one, on your sales guidance. So your sales guidance implies 3% organic sales decline in the full year, so a slight improvement in the last quarter. So could you explain a little bit more detail in which product segments or end markets you expect improvements are coming from? And what should we expect for Powerise? Because looking at the Powerise sales level of last year's related quarter, so it was at EUR 64 million. So above the quarterly run rate we have seen year-to-date.

And the last question is on your adjusted EBIT margin guidance of around 15%. So this implies on the midpoint some 16% adjusted EBIT margin in the fourth quarter. So we have seen a steep increase of the adjustment in the third quarter. What should we expect in terms of adjustments for the full year? So is it fair to assume a level of around 23% imply no additional provisions and advisory costs, but only at the higher level of PPA? Or should we expect additional one-offs reflected in the adjustment? And what's the contribution from M&A reflected in the EBIT margin target?

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

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Okay. Let's first look at your Powerise question. I mean we have discussed that in previous calls, the move from double to single sided, the loss of certain sizable orders, that we have been too pushy on the price position -- had taken its toll. In the detailed review of the various markets, one sees about a similar picture, U.S. and Europe, with regards to sales levels and reason double to single sided and so on smaller contract, plus the odd smaller contract won. So that is really following the overall market trend of specific customer movements. Volkswagen has been very strong for us and Volkswagen was kind of soft, so we've been pulled down by that. We see that also in China where we are the supplier to the Teramont. So sales have been really soft. We are in China supplying to Buick for certain models. The Buick sales took a strong reduction during the course of this business year, maybe due to all the trade war discussions we are seeing. So that quite clearly has not been helpful for our Powerise sales.

When I then take a look at your guidance question, we've seen that, what is within the guidance, what is the expectation for the vehicle market. Similar to many other people, at the beginning of the calendar year, we all hoped the second half of the calendar year will be better than the first half, that we would see some improvement. This improvement is not really materializing in the various developments of the forecast numbers. We've seen that the U.S. sales, U.S. automotive market is kind of stable, but Asia Pacific, mainly China, continues to shrink and shrink. That will take a bit of toll on our Powerise revenue. On the other hand, certain products are running very good, namely the Ford Explorer, which is actually a double-sided Powerise system car, is running very well, supporting our U.S. plants. In Europe, our Powerise facility in Romania sees certain stronger [colors] from customers which should also help us to get the fourth quarter numbers up.

Overall, in the guidance, yes, 3% organic. Minus 3% organic for the year implies an improvement in the first quarter. In the industrial business, we are seeing a slight recovery that should help us to improve on that side as well. So we expect to see a higher share of industrial business in the fourth quarter building on the acquisition, but also due to the underlying historical base business.

Your third question regarding to the margin. Yes, it's 16% EBIT margin we need in the fourth quarter. The adjustments we took, I guess nicely explained on Slide 28 in the appendix, they mostly revolve around the PPA adjustment from the 2010, the 2016 and this year's acquisitions. What you see in there for EPA Colmar, that is really a one-off. You may recall from the prospectus during the IPO time, we vacated a facility some 30 years ago in the U.S. It's our plant Colmar. And there, we still have to do some work on the cleanup based on an EPA directive, which basically is soil remediation where certain fluid is pumped into the ground and then pumped out again which should aid the cleanup of the burdened soil about 30 to 40 meters lower down in the ground. We've now booked, based on that recent EPA suggestion, a provision that should fund this remediation work for the next 2 years. That is the EUR 1.5 million. Advisory cost for M&A, we have now done our 3 M&As. I don't expect there will be another one in the fourth quarter. As such, the onetime adjustments for advisory should be the EUR 0.7 million you see here and there's nothing more to be expected. Does that take care of your question, Ms. Steilen?

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

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Yes.

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Operator [15]

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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 [16]

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Philippe Lorrain from Berenberg. Just wanted to ask you around the R&D to start. So I see 3 quarters in a row that the R&D expense has been down versus previous year. Firstly, what's the risk that peers might catch up on you on the technology side where you cut on spending? I also note that you seem to have capitalized more R&D than the previous year. So for us to really understand what's happening there, perhaps you could highlight how much you have capitalized, how much you have depreciated? And hence, give us the cash R&D amount that you spent versus last year. That's the first question.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [17]

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And the second question?

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

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The second question is going to be about Powerise, but I'm going to ask that just afterwards.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [19]

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Okay. Yes. Last year, we took us a number of onetime adjustment extra depreciations in our R&D cost. They were not fully adjusted out, but you can read through the various reports in Q3 that we have booked extra depreciation with regards to our R&D capitalization as we didn't get specific orders. The other change we now have which reflects to more capitalization, we've now got interesting real orders for the DA.90, our electromechanical door opening system, which allows us to capitalize that work, whereas in the past we were not able to capitalize the R&D work for those products in the absence of specific contracts.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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Great. But does that mean as a follow-up, perhaps on the DA.90, that you get now more orders actually in the pipeline or do you have anything to announce besides the one for the electric vehicle in the U.S. and the other one that you had announced towards year-end last year?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [21]

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No, no. I would not go as far as saying we can publicly announce more orders. I mean, technically, I have -- [ask-wise] technically the 2 orders we have mentioned actually now allow us to capitalize the work as a part of this (inaudible). For sure, with electric vehicles, having automatically closing doors will be a feature that a lot of customers will like. We all know from a number of vehicles where soft close features are already installed for BMW, Mercedes, et cetera, and people do like those. And those who drive a Tesla Model X know how cool it is to just release the brake and then all doors close automatically. That's really a convenient feature that we put some hope in. And I'm sure it's the next trend for motor where one will see more cars with those features, at least prototypes presented with features like that.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

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Okay. Great. And then perhaps if you could give us the cash R&D amount that you spent.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [23]

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No, they are not -- these numbers are not part of the Q3 reporting package. So that one will be available on the full year numbers when we look at full year data.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

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Okay. Great. So I follow up now on Powerise. So we've understood that there has been a market share shift over time within both the dual-side Powerise systems and also the single-side Powerise systems. So I was just curious to know from you how the competitors' positions are evolving recently in the single-side Powerise systems market. We understand that you have here the lion's share of the market. But how is Brose, for instance, behaving here? And also, if you could give us an update, quick update on the situation on the double-side Powerise systems as well.

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

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Yes. As you mentioned, our share in the single-sided system is much higher than in the double-sided systems. Why? Double-sided systems are technically a little bit easier to plan. On the other hand, they are more costly than the single sided. In the single-sided, we take a Powerise and combine it with a gas spring, with an upgraded gas spring from us. That allows us to make a financially far more attractive offer to the car manufacturers, but technically a bit more complicated to implement it in the car. With our long experience in tailgate kinematics, we've been able to get a better market share on the single-sided systems. We now stand at about 50%. I don't think one can see quarter-by-quarter movements there because the market share also depends on how is the platform's competition and we are selling to are developing in terms of sales. And that base data is really not available with enough detail on a quarter-by-quarter basis. Therefore, there's no new additional information to be handed out.

In terms of double-sided systems, we've pointed out a couple of interesting orders we recently had, even on double-sided systems like the Ford Explorer where the new model is now in the launch phase after some initial hiccups in the launch, but also some Toyota products we got are, in fact, double sided. In the market, we'll continue to focus on the total cost of ownership of double-sided versus single-sided systems. That is very obvious. The single-sided system is about 30% cheaper in terms of kinematics component than the double sided, and that will for sure always cause car manufacturers to consider that as a valid option for them. The end consumer in most cases will not notice whether it is a double-sided or single-sided system. Therefore, from that side, I don't expect any negatives against single sided.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [26]

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Is it fair to say that your market share over time in single-sided solution has increased strongly towards what you call now the 50% market share? So if you were to compare perhaps to what you had in terms of market share at the time of the IPO back in 2014.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [27]

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Yes. Our share has increased there. Yes, that's a fact.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [28]

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Yes. Could you quantify that?

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Andreas Schröder, Stabilus S.A. - Group Financial Reporting Director & Member of Management Board [29]

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It's in one-sided solutions. So meanwhile, it's more than 50%, yes.

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

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No, his question was, what was it in the past? In the past, we had like 20-ish, 22%, 23% market share when the IPO happened. Now we are a bit over 30%, 33% market share. And in terms of single-sided systems, the 50% we talked about, don't precisely know what it was during the IPO. It was below the 50-ish percent. But also, single-sided systems, they were around back then, but not that very developed in terms of technology to make it work easily, conveniently for the vehicle owner.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [31]

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Okay. Perfect. And the last one, just on -- again on Powerise. So could you remind us perhaps of your exposure to large Powerise platforms OEMs with whom you are most exposed or which are most exposed to you? Because I guess, this year, we've seen that lots of the short-term noise around these platforms is actually coming from the fact if we do some math, for instance, that the X5 was accounting for, according to my calculation, at least 5% to 6% of the total Powerise sales. The Ford Explorer seems to be also like a very deep platform in volume terms. So if you could give us a bit more granularity on your exposure towards these big clients and/or big platforms that would be helpful, even without names.

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

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Well, doing that without names makes it really trickier. I'm not too sure if it's really helpful. I mean, overall, we, like many others, do not want to disclose too much details on sales by customer, by platform, prices by customer, by platform. And the same is here. Quite clearly, we have certain customers where we had over 80% market share for the Powerise. And as we've mentioned in previous calls, this is kind of an abnormality which we have in the gas spring, by the way, too. In the gas spring, we have a high market share and we're able to keep that for many years with very good aggressive pricing. And it's a EUR 3 component. So the car manufacturer more likely accepts single sourcing, whereas on the Powerise which sells for around EUR 40 a piece, the customers, to OEMs have to be very careful in not having a supplier with too much of a market share. That is why in the past, we've also said be careful with market share cost assumptions. We are now at over 30%. I don't think it's advisable in any way to extrapolate that further and further. The customers for those expensive components will always ensure that they entertain 2, 3, 4 different suppliers in order to max out their own purchasing power. And that will work against us with some customers. It will work for us with others depending on our specific market share at those customers.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [33]

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Yes, I appreciate that. Just precise here, so you said some customers with more than 80% market share in Powerise. You mentioned here actually market share per sales platform or in aggregate for these customers?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [34]

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So that was a customer, so don't think we have dozens of customers with over 80%. But it's one customer where we had over 80% in total of its total lead -- total demand for automated tailgates. Simply counting the number of drives that customer was buying.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [35]

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Okay. Sure. So it's across all platforms?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [36]

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Yes. Which is the way most buyers actually look at that. It takes a total demand for a certain product across all platforms and kind of verify for themselves whether they've really maxed out their purchasing power by splitting that over a couple of suppliers.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [37]

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Yes. And perhaps just to bounce back again on that question here. Could we actually use, for instance, the 80-20 rule to kind of understand your exposure in terms of customers or platforms versus the revenues generated in Powerise? Is it true perhaps that about 20% of your -- of the different platforms that you serve would account for, let's say, around 80% of the revenue? Or is it something that is far from the truth from your standpoint?

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [38]

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Good question. I mean if you would be right, we would be servicing an awful lot of small-volume platforms which, in my mind, is not right, because typically when you have a car that is equipped with that feature, it, a, tend to be more expensive cars where you often see 100% take rate. And on other cars where it is an option, those option rates vary somewhat between 10% and 50%, 60%. But then those where it is an option, typically tend to be larger volume platforms. And as such, I don't think this 80-20 rule would be a smart simplification at this point in time.

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Operator [39]

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(Operator Instructions) There are no further questions in the queue.

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Mark Wilhelms, Stabilus S.A. - CFO & Member of Management Board [40]

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Okay. So thanks to all for participating. Thanks for your questions. We will have our call of the Q4 results, the full year preliminary results on November 15. So dial in then to hear how the full year came in for Stabilus. Goodbye.

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Operator [41]

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The conference is no longer being recorded.