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Jenoptik AG
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Good afternoon, ladies and gentlemen, and welcome to the Jenoptik AG conference call regarding the results of the first 9 months 2018. [Operator Instructions]Let me now turn the floor over to your host, Dr. Stefan Traeger.
Yes, thank you very much, and a very warm welcome from our team in Jena to our Q3 earnings call. With me today, as always, is Hans-Dieter Schumacher, our CFO. As usual, we're going to start the call with a quick look into the recent developments of the Jenoptik Group. We're going to give you a quick current trading update. We will discuss later on the individual segments of our company, have a closer look into that and we will round up the call with our outlook. You'll have seen that we have given a -- raised our forecast for year-end and sales and the absolute profit target, and we'll discuss that at the end of the call. I think, first of all, I'll take you through some major events that have happened in the last few months or actually in the first 9 months of this year. But just relatively recently, we have launched the new brand for our mechatronic defense business. That has been a major milestone for us. In fulfillment of our new strategy, we brought to light the new brand for this business. It has been received very nicely, both in the marketplace as well as within our own organization. Our associates have been very positive about that. So for us a very, very important milestone and we delivered on a -- if you want, a promise of our strategy. We have made 2 acquisitions in the year thus far. Earlier in the year, we have acquired Prodomax. Prodomax Automation has been the largest acquisition that Jenoptik has done in the last decade or so. And it's developing pretty nicely, and we're going to talk you through some of the backdrops and background of Prodomax later on the call. Recently, we've also added the Otto Group, OTTO Vision and OVITEC, to our business. It's more of a local acquisition here in Jena, and we'll explain that in more detail later on as well. However, we don't just invest into new companies that we acquire, additions to the portfolio. It's also investing into expanding and modernizing our own locations and facilities in order to improve our own business and prepare ourselves for even more growth in the future. We have today raised our revenue forecast, as you will have seen. We kept our margin target narrow at the same level based -- however, based on the higher sales. So in return, that does mean that the absolute profit targets are now higher for the group. And that -- we do that despite the fact that we have substantial PPA effect, which we are going to detail later on in the call. If we have a quick look at the results itself, financially, the first months of 2018 has certainly been very successful for Jenoptik and we are proud of what we have delivered thus far. Revenues are up 12.6%. And if we exclude the acquisitions that we just mentioned, organically, we have seen sales growing by 8.5% to narrow -- a total of EUR 593.4 million of the first 3 quarters. We managed to expand our margins pretty significantly. We added around 110 bps to our EBITDA margin, which is essentially plus of 21.7% and that equates to EUR 89 million in our EBITDA line. So overall, the first 9 months of the year have been very, very promising and we will going to go into more details, as I said in the call. Let me just take you to the next page and have a real quick look on the 2 acquisitions that we've made thus far, both of which developed very, very promising in the first weeks that we have them with us in the group. Firstly, Prodomax, we discussed that in the last call that we had together. Prodomax have been the largest acquisition the company has made in recent years. With Prodomax, we basically continued down the road that we have started to sort of explore with the acquisition of Five Lakes automation last year already. Prodomax is a machine integrator and helps us to expand our business in the process automation, particularly on the automotive industry, a business in the sector, in our industry, automation of production processes, where we're very convinced that it's going to grow in the years to come, and we're very pleased to have our colleagues up in Barrie, Ontario now with us. Prodomax has about 180 employees, as I said, headquartered in Barrie, Ontario in Canada. We come to them obviously as, number one, our local or global channels. Prodomax is thus far acting predominantly in the Toronto and Detroit area. They are selling to the big OEMs and Tier 1s in Detroit and Toronto, so really at the U.S. automotive industry. We bring to them, as I said, our global channels and we want to and are going on -- hopefully are going to expand that business around the globe. We also bring to Prodomax though our financial power. In this segment, prefinancing of larger deals often is required. And we have the financial power and the willingness to invest into that business, to grow that business and to enable that business to participate in larger deals, therefore, enabling them to grow their own business going forward. Thus far, we're, as I'd said earlier, very pleased with the acquisition of Prodomax. It contributes quite a lot already to the figures that we're discussing here. There is a consolidation effect and an IFRS 15 effect, which we have detailed in our reporting. But as I said, thus far, actually very pleased with how Prodomax developed for us also operationally.The Otto Group that we had acquired more recently is a smaller and local organization and local acquisition. They're based here in our headquarters -- or near our headquarters here in Jena in Thuringia. They do bring to us very interesting technology. Otto comes with an optical 2D and 3D inspection systems for quality assurance and process optimization. They are selling currently predominantly in the automotive industry, and we're going to integrate that business into our Automotive division, which is going to be called Light & Production.Otto doesn't though just sell to automotive. They're also seeing a good potential in neighboring and adjacent segments, in particular in the electronic industry. And we're pretty convinced that this type of production metrology and industrial imaging for process application is an important step into, what we call, Industry 4.0, an expansion of our business into that direction. With that said, I'll hand over to Hans-Dieter, who is going to take us through the numbers in more detail. And later on, we will give more color around our segments. Hans-Dieter?
Thank you, Stefan. A very warm welcome from my side as well. Here, you see now the slide concerning our revenue development over the quarters and the first 9 months. In total, you see the increase of 12.6% to the highest revenue in a 9-month period over the last years of EUR 593.4 million. Without the acquisition impact, so to speak, in the revenue, we have an organic growth of 8.5%, meaning that the acquired companies contributed around about EUR 22 million in revenue. We had a business increase in all 3 segments, stronger demand in particular from the areas of semiconductor equipment, Healthcare & Industry, which [ has spurred ] on a very high level, and we see down -- no downturn in the near and middle time frames from now on, but Stefan will explain it to you later when he talks about the segments. As well as traffic safety solutions, we have talked to you about our toll monitoring systems with our partner Toll Collect in Germany, which we have shown in our figures already in the first 6 months. So it hasn't impacted Q3 anymore, no later at least. But we have seen a very positive development in the first 6 months. So this has been the positive toll wins in the businesses. If you then follow me to the Page 6, you see the regional split of our revenue. In the meantime, our foreign part of the revenue has reached almost 70%. If you see it on the world graph, you see that Americas has 24.7% increase, not only driven by the acquisition, but obviously very supported by our acquisitions there, the Five Lakes automation in U.S. and Prodomax in Canada. You see Europe, an increase of 15.7%. There, you see -- the main reason is obviously our ongoing good business in semiconductor area. Then we see Germany with 19.4%, where you can see the positive impact from the Toll Collect business. You see, not for the -- on the first few minus -- development minus in revenues in Asia Pacific of 15.8%. This is due to the fact that we could not gain the follow-up project in Australia, but we are working hard to cover this in the months to come. This is the development in the regions. If you then look into the profit figure, EBITDA and EBIT, you see that they are even stronger development of sales, increased EBITDA, as Stefan has already mentioned, increased by 22%; last year, 21.7%. And with 15.0% margin, we have now substantially improvement of 110 basis points compared to prior year, where we had 13.9%. And in these EBITDA figures, we have already booked an impact of the purchase price allocation effect of minus EUR 4.8 million. If you can ask the question, why do you have some PPA effects also in the EBITDA and not only in EBIT? This is coming from the inventory side. We have the impact from inventory step-up, but it means on the other side, that they are turning around the inventories in the sales figure and now we took the benefit. There is another approximately -- before you ask the question approximately, we foresee another EUR 1 million to come to the year-end. So all in all, we will have booked then roughly EUR 6 million in the EBITDA margin to the year-end, and we still keep our 15% EBITDA margin at the target. And then the acquisition costs. We have to have lawyers and auditors on our side to be very precise and have a sure basis that everything is done well. So we have booked costs for the acquisition of EUR 1.8 million. Both of these impacts, you also see in the EBIT. But on top, you have purchase price allocation impact maybe on the sales, cost of sales, functional cost coming from the customers' valuation and depreciation. So all in all, you have -- we have an impact in the EBIT of minus EUR 6.3 million. But despite this impact, we had an EBIT margin of 11.2%, which is also a very good and strong EBIT margin for the Jenoptik group for a lot of years. So we added [ cleared up by a year ], this 9.9%. As we have shown it to you here very transparent, the acquired companies contributed to this EBIT figure of EUR 66.7 million, also the EUR 23.9 million in Q4 -- Q3 alone, only minus 0.2% including this PPA impact or effect. So the calculation is the 9-month appraisal. If you take out this, then you can take the benefits with you that the operational EBIT of the acquired companies has been around EUR 6.1 million linked to 21.8%[Technical Difficulty]
Please continue.
So let's continue. It's a clear indication how approachable our acquired company's operational arm on the operational side. Then we go -- then you'll see on the next page, the P&L in a little bit more detail. I think a very important message from this slide is the clear improvement on the earnings per share, meaning the net-net-net figure, taking into account even our tech side, where the earnings per share increased from EUR 0.77 per share to EUR 0.94 per share, which is also a very strong development and above the sales increase, clearly above. And you see it here, it was driven by relatively slow -- low functional costs, only an increase of EUR 3 million roughly, EUR 2-point-something million, but it's mainly an increase in R&D and selling expenses and the [ opposite indication ] the administrative expenses, but we have reduced them, which is -- one of our targets. So it's working out already a little bit. The gross margin was influenced by the PPA impact on the one side, and the other side is that the acquired the business we've -- on the Prodomax side has driven in the business model a little bit lower gross margin than the rest of the Jenoptik Group. But because that they have relatively low functional costs, they have such high EBITDA and EBIT margin. And you see it here the financial results, I'd like to explain with one sentence. It has a development from plus EUR 2.3 million to minus EUR 2 million, and this is a deviation which is only linked to one-off income from the disposal of a nonoperating financial investment we hold last year and we sold to it a new owner of the company. This is the only impact there. And the tax rate is still the -- cash effective tax rate is still relatively low with 14.5%, which is due to the tax -- U.S. Tax Reform, which just started. So all in all, even if we look in a more detailed side to the bottom line, very, very bottom line, it's a very strong development of our company. Then, I'd like to look with you all my view together with you in the future for development. You see here 2 very important KPIs, on the one side, the order intake; on the other side, the order backlog of the group. The order intake, I'd like to highlight that we recently -- I think yesterday or today, have published 2 major order intakes we have received in our traffic safety business. These big orders are not in the figures here. We will show that in Q4, but Stefan Traeger will explain it to you a little bit later when he goes through the segment development. We'd like to address here that in the Q3 alone, we had plus of 11.9% on the order intake side that we ended up now after 9 months with a plus of 2.1%. But with this very strong Q3 in mind, we think that the rest of the year will also develop very positive. Then I think we can switch over to the order backlog. The order backlog is plus 6%, reached now EUR 480.9 million. The good basis for our commitment to you concerning our revenue target to the end of the year, we assume that it will have 48.1% converted into revenue in this year, which gives us a strong basis for our guidance for the rest of the year. It's, by the way, also influenced by the acquired companies, of course. Then my last slide before I'd like to hand over to our CEO. I love this slide. It always comes with me as the last slide because it's all about my favorite issue, the free cash flow. And I think we'd like to give you together the strong signal that in optic, it's able to finance the investments and the acquisitions from our cash and cash flow. So all in all, we ended up after 9 months, including the payouts for our investments and acquisitions, with a net debt of only EUR 16.6 million. A year ago, we have been, so to speak, plus EUR 69 million. But we think that through the year-end, it should even improve in the direction of 0 balance probably. So all in all, a very strong development. You see here cash flow is possibly double as high as in the prior year from EUR 32 million to EUR 57 million. We have obviously increased our working capital in absolute figures because of the strong sales development than the previous years where inventories are high, but the ratio is 29.5%, still better than a year ago with 31.3%. So all in all, we are in good financial shape. And this is, I think, the key takeaway from this slide. And then I'd like to hand over again to Stefan, who will explain to you the performance of our segments and the outlook.
Sure. Thank you. And let's dive right in into it and start with our Optics & Life Science segment. In Optics & Life Science, we have seen continuing very positive performance and development, driving growth and expanding profitability. There always have been discussion, particularly in the last few weeks and months, about semi and semicon and the development of that market coming -- I keep saying we don't have a crystal ball, like none of us has. The only thing we can tell is how our own funnel is looking like, what we see in the marketplace and from our own customers. And quite frankly, that continues to be strong. We have not seen any indication for a downturn in that business, at least as I said, not from our customers, not in our funnels. So as you can see, the result of continuous strong demand from the semiconductor equipment manufacturing industry as well as our customers in health care and life science area, we have seen order intake growing by 4.8% to now EUR 233.4 million after 9 months, which is, I guess, versus last year, which already have been very strong, a very positive development. You do see that sales have been growing even harder. We managed to grow our Optics & Life Science business by 10.4% based on the strong demand -- ongoing strong demand and also based on the good performance of the business, our associates and the like. We have seen, as I said, very strong growth. We work hard to ship as much as we possibly can out of this segment. Nevertheless, the book-to-bill rate is still above 1. We have a book-to-bill of 1.11, which again indicates the ongoing strong demand in and quite frankly, the ongoing tailwind that we get out of this business. With the even higher volume and positive product mix, we have seen EBITDA stepping up, yes, significantly. Our margins are very positive. We have seen EBITDA coming to now EUR 51.1 million for the segment after 9 months, an increase of 18.9%, and the margin has stepped up to 24.2% after the first 9 months. So if it comes to Optics & Life Science, as I already indicated, we are very positive about that business. We do see that in the current trading, developing very nicely. And at least for the foreseeable future, the next weeks, months and into the early part of 2019, we don't see any signs for significant downturn here. With that said, let me go to the Mobility segment, which has been influenced by onetime effects this year quite a bit. Order intake in this segment is now up by 5.7%. Hans-Dieter already pointed out what's not included in the EUR 212.3 million are the large orders for the Traffic Solutions business we have communicated -- we have received and communicated yesterday. We have discussed those orders number of times in the past. I think we have set the number of times that there is something in the funnel, but we weren't quite sure when it will land. Now it did land, and we are very positive and very pleased with the fact that we could bring home that business. It will show up though in Q4 in the segment. Revenues have improved even more significantly organically as well as with M&A and FX. From an organic point of view, the rollout of our Traffic Solutions, Toll Collect project has helped us significantly in the first half. We have communicated that to discuss it. And in the past already, we have made good organic growth from our Toll Collect project in Q1 and Q2. We also see ongoing demand in the automotive industry for our existing projects so that overall and all and all in all, excluding acquisitions, the segment could bring in 11.6% of organic growth. And if we add to that the contributions that we have got from our acquisitions also and Prodomax, Hans-Dieter said earlier, revenues growing by 23.7% to now EUR 223.4 million. It has to be said that in particular, for Prodomax, we have seen some consolidation effects from the translation from local Canadian GAAP into IFRS 15, which had an additional positive impact on our sales figure here. With the higher sales number, with the higher volume and the positive mix effects, we also see the profitability expanding very nicely in that segment. The EBITDA figure that you see here of EUR 25.4 million already does include substantial acquisition-related negative effects. We have had around EUR 1.8 million of onetime costs related to the acquisitions that we have made. And we have seen PPA effects of EUR 4.8 million in the EBITDA and EUR 6.3 million in the EBIT figure. Those are, of course, estimations at this moment in time. That's what we have booked. I think Hans-Dieter already pointed out what we expect for the remainder of the year. Nonetheless, the EBITDA margin of this business, including the acquisition effects, including the PPA effects and the onetime effects, came to now 11.4% EBITDA and that's -- I think that's a very positive development for us. So from Mobility, let me to go the Defense & Civil Systems. The colleagues there, as I pointed out earlier, launched the new brand of our defense business. We're now going to market under the name VINCORION with this business, very positive development. As I said earlier, the new brand has been received very nicely actually in the marketplace. I think it helps us to commercialize products in this area -- arena and in this area that are going forward. I have said in the past and I'm continuing to use this sort of phrase or the line here and I'll point it out one more time, we do not have an active process at the very moment to sell this business. However, we exclusively don't want to exclude that for any future developments. Revenues in this segment, in the Defense & Civil Systems, has grown by 3.8% to now EUR 160.9 million. As expected, we have seen our EBITDA number of profitability rising quite a lot actually here as well, which is attributable to a profit mix effect but also to some operational cost savings that we could achieve in the business in the first 9 months. EBITDA margin of the Defense & Civil Systems business or VINCORION business is now at 11.6% versus 10.2% in past years. And EBIT margin improved to 9.6 percentage of [ the link in this ] business, so a very good development. Nevertheless, we think there is -- yes, there is positive development that we've seen here and we're certainly going to work hard to improve the stats and figures of this business going forward. Quick look to the order intake in VINCORION or the Defense & Civil Systems business. You do see that the order intake declined versus the first 9 months of last year. However, please let me point out again that we have had a very tough comparator here in the first quarter. Eventually, the -- in the second and third quarter, we managed to close the gap there and to get closer to the last year's order intake. That's pretty normal in this project-driven business. And so at this moment in time, we're looking with certain confidence in the order intake development of our VINCORION business. So with that said, let me switch gears somewhat and go to the outlook and to our guidance here. This morning, we have raised our guidance actually the second time this year. Following the acquisition of Prodomax and the Otto Group and the application of IFRS for these companies, we now expect revenues to be in the range of between EUR 820 million to EUR 830 million. We still anticipate an EBITDA margin of around 15% at this higher sales level, which obviously translates into higher absolute profit numbers. Included in our margin targets already, as we've discussed, around EUR 4.8 million PPA effects in the EBITDA figure and around EUR 6.2 million PPA effects in the EBIT figure from the acquisitions. And also, we have already digested onetime effects from acquisition effects, onetime effects from, as Hans-Dieter pointed out, the payment of lawyers and the like. So overall, we are very pleased with the development of the group in the first 9 months. We look with quite frankly a lot of confidence towards the remainder of the year and for the remaining weeks and months. I think we have a good basis for strong growth and revenue expansion for our business. We do see at this moment, I believe, the start of the New Year to be pretty strong. Obviously, we do monitor very carefully the recent political developments. And I think in this call, we have discussed that a number of times. We do depend on global trade. We do believe in global trade. We monitor potential political effects very closely, in particular when it comes to trade wars between different jurisdictions. At this moment, we don't see a major impact into our own business, but we monitor it very closely and it does come with sort of a disclaimer that, God knows what's going to happen in 2019. As I said earlier, we don't have a crystal ball. All we can do at the moment is to look into our own business funnels and our own pipeline and that does look to -- or does continue to look pretty strong at this point in time. So with that, we would like to close our presentation here and look forward to receiving interesting questions from your end.
[Operator Instructions] And the first question comes from Mr. Craig Abbott, Kepler Cheuvreux.
Two questions, if I could. First of all, just getting back to your outlook statement regarding your semi activities, obviously, very positive. But I'm just trying to get a feel for why the outlook situation for your customers in semi remains so positive when we've seen so many companies in that space obviously warn and see very real and very sharp declines in the order intake figures going into the fourth quarter as a number of semi producers have implemented quite significant cuts in the CapEx on the short term. Is this because your customers are benefiting from upgrade trends and, in particular, conversion to EV? Or I'm just trying to get a better feel for why is this sort of a special situation that your customers are still seeing -- have a good pipeline and are seeing such good demand there. And secondly, on the Defense & Civil Systems, I noticed in the report you mentioned that there's an arms freeze being considered for Saudi Arabia, which could also potentially include deliveries of equipment that have already been approved. I just wondered to what extent this has been taken into consideration in the upward revised guidance on whether or not this could represent a potential sizeable risk in that business over the next months should that come about?
Thank you so much for your questions. Let me start with the Saudi Arabia question. At this moment, we don't have a large exposure to Saudi Arabia. We have had in the past been to Saudi Arabia. We did maintenance there in the past. But at the very moment, our exposure to Saudi Arabia is next to none actually -- or sorry, next to 0 actually -- about the same, next to 0 actually. So it has been included in our figures in that we don't see an impact for our current business. On the semi one, that's the -- to be honest, that needs a longer explanation because frankly, we were asking ourselves a number of times in the last few months how come that we don't see it whilst a lot of other market participants indicate and actually do see sharper declines there. And we came to the conclusion that it all starts, this whole business, this whole industry really has changed in that the end customer exposure, if you want, diversified so much. Whilst in the past, semicon was pretty simple. You know the more PCs are sold, the more the industry goes up or balanced. And nowadays, one has to look just so much more careful and closer and dissect the marketplace so much more -- so diligently. Now we do sell essentially into 2 segments of the whole semi space. We sell into optical lithography, and we sell into optical inspection businesses. And if one dissects the optical lithography, which for us is the biggest semicon sector, we sell into machine builders of optical lithography machines. And there are a few less than a handful of real players in that segment, less if you want, 2 of which have their own optics business -- significant optics business. I think we can talk about that in this segment, there is ASML, there's Canon, there is Nikon and a few other much smaller players. And ASML -- sorry, Canon and Nikon essentially have their own -- if you want, their own products and you all know that we sell to ASML. And if you follow what ASML has communicated actually recently in their Capital Markets Day, I think that is a good explanation and actually probably the better explanation than whatever I can come up with of outcome that we don't see it in terms of a downturn and the like. I guess the best way for me to answer the question is to point to their codication, to be honest, because it's very nicely explained there. And I guess, it's actually exactly why predominantly, we did -- we do also sell into the inspection arena, an important segment for us as well. And in the inspection, things are also still strong not as much as in the lithography space. There are some companies in the inspection that sort of are a little bit more cautious there. But overall, the impact for us is predominantly driven by our large customers and everyone has -- [ didn't or what ]. But I don't want to raise sort of the perception that it's just that. I think it's just because essentially, we -- in a way, we're lucky that we sell into 2 segments that don't seem to be as affected as, for example, the measurement industry. I think that's -- essentially, that's the explanation.
The next question comes from Malte Schaumann, Warburg Research.
The first one is on the gross margin in the third quarter. Is it -- would it be fair for you to strip out the EUR 4.8 million charge for the inventory step-up? And then why is it a 38% gross margin in the quarter?
To be honest to you, we don't have this Q4 gross margin figures. But as I already tried to explain to you, we will see another inventory step-up, PPA impact in Q4 roughly around about an additional EUR 1 million so that we will end up with EUR 5.8 million or roughly EUR 6 million. And on the EBIT side, you will end up with additional EUR 3 million. We're -- at the moment, we are foreseeing roughly EUR 9 million in the EBIT coming from EUR 6.3 million. So all in all, there are some negative impacts to come in the Q4 as well, but they are not as big they have been in the Q3. So with the strong development and regularly Q4, we will have -- we will see a strong gross margin.
A short answer to your -- very short answer to the question is probably yes.
Okay. And then on the -- what are the [ adjust ] product mix? Or are there specific drivers that then led to the high 30s margins, which is above the levels seen in the prior quarters?
I guess, the -- here, the answer is really mix.
Yes.
It's mix. It's product mix. The more we sell in certain highly profitable businesses for us -- or segments for us have or, of course, profit. I would like to point out one thing. Maybe I'll use the opportunity there. We use the opportunity to just discuss an effect from Prodomax, in particular, and it's not that big but hard. But Prodomax or the automation business per se, the integration business per se has not the highest gross margins because there is a lot of third-party items that are essentially bought up and get pushed through into the channel. We can discuss that in more details if you want to, but just sort of to give you a full, sort of colorful picture here. There is a number of effects that we see that will impact our gross profit margin going forward partially because of the [ inventory ] effects and, of course, the positive mix effect that we have discussed on the opposite hand. Going forward though, as I said, integrating businesses like Prodomax inherently has lower gross profit margin because of the -- yes, the effect of marking up and pushing through channel third-party items. For us, it's a very profitable business because -- whereas the bottom line effect is very positive and the gross profit margin has -- isn't affected.
Okay, okay, good. Then on G&A, I mean, that came down from the 9-month 2017 figures. Probably some but probably minor currency effects played a role here. So -- but you significantly gained in G&A efficiency. When should we expect G&A to rise -- to start rising again? I mean, how long can you maybe keep that level stable or maybe would not expect to come that further down but -- so maybe what is your view on that.
We will continue to work hard to reduce our G&A expenses in terms of percentage of sales. I think your anticipation of -- at some point it will, I'll probably say, find the bottom and might even rise again at some point, is certainly not wrong. But we will make -- we'll work hard to keep at least the ratio in percentage of sales at the lower level and improve there going forward.
Yes. Okay. Then your guidance hike was more or less kind of a technical reason due to higher contributions from Prodomax and Otto Group versus [ the other ones here ] competition driven?
Yes.
Yes, okay. And then on your automotive business, especially the project pipeline, I mean, there was a lot of noise around the automotive industry, et cetera recently over the past, say, 2 to 3 months. Do you see changes in your project pipeline with regards to the industry automation -- industry metrology and the automation business and laser business?
That's a very good question. As you said, there has been a lot of noise in the industry. And about a year ago or so, we were sitting here scratching our head. I was quite frankly I think even if it worried about the impact of e-mobility and all of that and what does that mean for us and so on and so forth. In the last few weeks, I've continued saying that this discussion, the tone of the discussion has changed at least with -- in power companies actually quite a bit. If you think about the underlying trends in the automotive industry, there is certainly trend to more hybrid-type cars. And if you think about a hybrid car, hybrid between sort combustion engine and an e-mobile that's on an electronic engine, then these hybrid cars, they need to downsize yet way more efficient combustion engines. And in order to make that happen, companies need our metrology equipment, which drives sales for us. In addition to that, we can also participate and profit from the trends to more sort of e-mobility and both in our metrology business but also in our laser processing business because quite frankly, whilst the uncertainty in the automotive business is still very high, one thing becomes ever clearer: the complexity for the industry rises. In other words, they have to provide more and more different models. And the lifetime of a particular model becomes smaller and smaller. And when do we sell? Essentially, we sell when there is a change in the production street or in a production environment. And therefore, it's the change that helps us actually. So our view at the moment is the more change in the automotive industry, the better for us. However, it does come, of course, with some of the caveat of the uncertainty that certainly is in the industry. What we see is that there is a lot of pressure on payment terms not necessarily holding back investments. As a matter of fact, I don't -- we don't believe -- we're actually convinced now that the automotive industry cannot hold back on investments. They have to invest if they want to survive. And if they want to sort of face that trend to changes in the industry, what does show up though is a lot of pressure on payment terms, on prefinancing of deals, if you want. And that -- we've discussed that already when we sort of talked about Prodomax. We are lucky enough to be in a position to at least be able to deal with that and, therefore, actually take in share at the moment.
Okay, sounds promising. And you don't seem to be too concerned about the shorter-term prospects or your more immediate project pipeline?
Actually, on the contrary. We have been a bit concerned last year. If you would have asked the same question a year ago, I would have been more concerned than I am at the moment because of that effect -- so of course, we don't know what -- really what the future is going to bring. I said earlier we don't have a crystal ball. We do monitor the whole trade war effect and all of that. But short term and our own pipeline, we don't see a negative in that here at all.
I'd like to say only one sentence because I'm acting as the head of provisioning in addition to my CFO...
For a couple of weeks.
Since the beginning of the year and also the year-end probably or the beginning of next year, but everything Stefan said, I'd like to underline because I -- with the business, I talked to our colleagues and potential customers and I can see a lot of promising contacts to customer. So there is the ongoing demand for projects. So we are busy. The division is busy.
Okay. Last question in that regard, and that has been my final question is what do you see in that respect development, especially in China with the Chinese -- discussion with the Chinese or maybe more Asian clients but especially with the Chinese clients?
Okay. Maybe that is the one thing where we have to be a bit more cautious here. We are a bit more cautious. The ongoing discussion in particular between the United States and China, they could have an impact on our business. We don't know at this moment. But certainly, we do ship stuff from the U.S. into Asia, partially into China. And also, the tariffs on both sides, they could have an impact going forward. That's why we're so cautious here on this end. We don't see a major impact at this moment, but how that is going to develop in 2019, we don't quite know.
The next question comes from Richard Schramm, HSBC.
Two questions, please. So one concerning the PPA. Going forward, as you mentioned this year, it's mainly driven by this inventory item, but this should then probably fade out next year. So is it a fair assumption that next year on EBITDA level, we should expect more or less no further impact? And on EBIT, there remains around about EUR 3 million per year going forward?
You better answer.
Okay. Yes. Mr. Schramm, I think it is my -- on me to answer your question. We'd like to be a little bit cautious because it's concerning the next year, but we can give you an indication. And our intention -- as I already stated, it's an ongoing process. It's a work in process with purchase price allocation workload we are still undergoing. But to date, we think that at the year-end, we should be fine with the impact on the EBITDA, therefore this year. Then next year, there should be no or no -- at least no very big -- from our point to date, no impact on the EBITDA anymore. But we will still have impact in the EBIT significantly, little bit lower than in this year obviously. And then we come to regular basis in the year to come with a certain amount. I think the focus on this amount is not so big that we have some feelings of sorrow or bad feelings. We can handle it, yes. So all in all, we think that there will be 2 years, this and the next year, next year only in the EBIT. And then the years after, it's coming down and then we have a certain main amount, which is not so huge anymore. We can talk to you a little bit in detail when we have finished this exercise, clearly year-end, maybe in the beginning of the next year.
Yes. Maybe just add to that, I mean, Hans-Dieter pointed that out. We see the EBITDA effect this year. There will be remaining EBIT effect next year. We are careful about next year because there is a lot of calculation in the background. And yes, we want to be clear and certain before we commit on anything for next year. But for this year, let's just say we have adjusted it. We will -- we are very happy with where we are for this year. And on the EBITDA figure, no impact next year but some on the EBIT figure and then some loss going forward.
Okay. And now a question on Mobility, on [ operating ] Traffic Solutions and the contracts you just published yesterday. So can you shed more light on the timeline? Because that's already Q4 with the deliveries here but it should stretch into 2019. And the volume you talked about was -- and you roughly given it, I think it's lower double-digit EUR 1 million amount to what should be something between EUR 10 million and EUR 20 million. Or is it still more? And also, the margin quality would be interesting. Will this have to further brush up the margin development in this business here?
Sure. Look, we will see some impact this year, Q4, but not sort of -- the majority of the sales will materialize and be booked next year, some this year, but a larger part next year. You're right. We have -- that's the numbers that you quoted in terms of our -- sorry, I should be more precise here. We have said in our communication that it is a lower double-digit figure. It's certainly not as big as the total Toll Collect project. So it's not -- we will not compensate everything from Toll Collect, but it's a substantial figure. It's a very substantial figure, double digit, and yes, we're happy that we have it. In terms of margins, we don't comment on the margins of individual projects, which I think you'll understand.
But you should be able to give at least a kind of an indication if it's, let's say, above average or if it is just average? Or is it even dilutive because it was a very competitive process and you had to more or less buy these contracts?
Well, I don't think that we have ever communicated that we're buying projects, certainly not. It's -- we're happy that we have those businesses. Again, we really don't want -- and please understand we cannot and do not want to disclose and discuss margins of individual projects. I will say that we have certainly not bought the business and I don't think we have ever said that. It has been a competitive process but that's always the case in this industry. We're not the only ones that participate here. Some, we win. Some, we lose. We lost one in Australia. We won one in our local -- in North Africa and the Middle East here. I think we won this time because we have made a very good offer from a technology point of view. I think the customer likes our technology and overall what -- the package that we put together for our customers. and again, we have certainly not bought it and we're happy to have it.
The next question comes from Stefan Maichl, LBBW.
Stefan Maichl from LBBW. I have 3 questions. I will start the first one. I was really astonished by the EBIT margin for your acquired businesses in the third quarter if I take out the PPA. Is that a normal level going forward? Or is this somewhat disturbed by seasonality or some one-offs? That's my first question.
I will try to address this real quick. I will give you a qualitative answer and then I don't know if, Hans-Dieter, you want to add to that. If it comes to the speakers of the acquired companies, again, it's very important to point out that we had a consolidation effect here. Ongoing business of the acquired company and let's say that's what's essentially we're talking pretty much here. Otto is important but in terms of numbers, it's not material. The ongoing business of Prodomax is -- or the underlying business is very profitable and we always said that. The business is strong, is developing strong from -- has strong demand. In addition, essentially, Prodomax's last quarter or this quarter essentially used to be Prodomax [ fourth quarter ] and often for many companies, for whatever reason, that is a strong quarter. And dare I say driven by market demand but it's a very strong -- it has been a very strong quarter for Prodomax. And again, it's essentially their last quarter, the old fiscal year. On top of that, we have the consolidation effect and -- now I am not an IFRS 15 expert, but in simple terms, my understanding is by translating from Canadian GAAP to IFRS 15, certain revenue recognition rules kick in, which essentially means that we revenue-recognize projects that are -- that have been sort of in the pipeline beginning of year already. Prodomax used to work on the beginning of the year already that are now finalized and we can revenue-recognize it in our third quarter. So it's a multitude of effects. It doesn't take away from the fact that Prodomax's underlying business is very profitable and we have 2 additional effects, the 1 effect that I mentioned in terms of seasonality. It is their essentially last quarter of their fiscal year that we use. They'll change that. And we have the additional top line effect, which of course, comes with a strong margin from the IFRS 15 and consolidation.
And to this, I may add some sentence, Mr. Maichl. This IFRS 15 issue is relatively simple to explain that local GAAP, Canadian GAAP was handled in that way that they recognized the full sales and profit after 70% of the project have been closed. Under IFRS rules this is not allowed. We're now ending up with a decision of our auditors and our Head of Group Accounting in Texas, which is a very, very good IFRS expert, then it will be accounted followed by the margin component rule and this means there is now different realization of cost and profit in the P&L, which is coming from 3 months before we acquired them. This is, so to speak, a little bit of shift over. But as -- I'd like to highlight this once again, as Stefan has already explained to you, the real bottom line, the underlying business model of Prodomax is high profitability above group average. And what we will see in the months to come is clearly some costs we have to integrate them into our group and follow our IFRS accounting, planning, you know what I mean, this monthly report, quarterly report. So we will have some additional costs but we have done the business case and the projection. In the phase, we talked to them and prepared ourselves for our supervisory board meeting. And looking forward, we will still have an above-average margin. And taking into account that from today's point of view, the EBITDA -- negative EBITDA impact will disappear next year. They will be already helping our group margin from the next year, EBITDA margin for the group. You know what I mean? You'll see positive impact in our EBITDA margin from the next year.
I think that's a very, very important point in our profitability and effect next year. Obviously, we really don't want to go into forecasting 2019 here. I think it is just fair though to point out one is other effect -- to clarify and another effect on the top line. As you have just said, with the conversion from local GAAP to IFRS 15, I'm a physicist here but layman's view on...
But you do it very well.
The consolidation effect is essentially, it is -- if we have more months of the year 2018 already, so the effect is as if we would have acquired them a few weeks or months earlier. Why do I even mention that? I wouldn't want you to sort of take the number and sort of roll it forward 12 months into 2019. I think it is that consolidation effect. This is a onetime effect. It is not an effect that we're going to have next year as well. So I think that is very important. It doesn't work around the message at all why we have acquired a very profitable business and we're digesting related expenses this year. We will have some PPA effects next year, as we pointed out, but the majority of the cost, we have had this year already or will have had this year already.
Okay. Would you be willing to quantify that positive consolidation effect in the third quarter on EBIT we have seen? We've seen margin probably to around 28% EBIT margin, which might not be sustainable.
I -- look, I think -- I think we would be -- it is wise if we say, look, this is a very complex territory and we would like to discuss those and very carefully with our auditors and...
The group had purchased 11.2 and they are above the level.
That's for sure.
20 is probably a little bit too high, probably, probably, yes?
Yes. So the -- that's our additional effect, yes.
Okay. Let's move forward to the next point. Cash flow, congratulations, good figures in the third quarter. Your outlook, given for some net debt or net cash for the full year 0 would imply a rather weak Q4 free cash flow versus last year. So maybe could you give us the moving parts for free cash flow in the last that? I mean, I'm aware that CapEx might go up, but working capital and/or so forth, it's hard to predict.
Yes, Stefan. I'd like, if I may, take over from my CEO. I will answer. First of all, yes, you will -- we will see the major part of our year-to-year investments in Q4. So we are actually at EUR 26 million all-in investments after 9 months and we will end up clearly above EUR 40 million, maybe in the region of EUR 45 million at the year-end, yes. So there is a strong investment coming up in Q4. That is one point. The other point is we will have a strong Q4 in terms of sales. So this means we have a working capital increase in terms of trade receivables and probably also inventory because we are already also preparing Q1 next year because what our customers, especially on the semiconductor and optic area, are forcing us is delivery, yes. So we have to be able to deliver because our customers need our product. So we have to check and balance the pure working capital, cash flow driven CFO, where -- the business support, which also is highly appreciated. And obviously, we'd like -- don't like to hinder our business to make our customers satisfied. So we will handle this. And as we are in a strong financial position, we can finance and support this because the money will come then in Q1, yes, because our biggest customer like ASML, he has ever paid us. We have no single true loss. So they will pay us. They just do. And this is why I'm saying probably we can end up even better than 0. Maybe it depends on what is happening. So if I say it's a minimum target, yes. And if there are happening some other spending, then we will explain it to you. From today's point of view, we should end up even cash positive at the year-end.
I understood. Next on tax rate, you've given us some guidance some months ago for the full year higher than the figure we are seeing in 2017. As of 9 months, you have seen 16.9% versus 18.8%. So for the full year, is still the figure of 17%, 18% a feasible estimate?
I won't say no. From today's point of view, it's lower, yes. And I have talked yesterday to my tax experts about today -- on the today point of view, foreseeable tax rate and it's influenced by our actual running planning of the next 5 years and we will have done the 5 -- the fifth year. And if you look into this planning, we will see that we were again making usage of our carryforward losses, which means that we have to show in the year-end procedure, a certain amount of the realizing of these tax carryforward losses, meaning we will have to book deferred tax assets. And then we have the operational tax rate, which stays at the level we have discussed. And we have the positive impact on the deferred tax asset side. So probably our tax rate will be below prior year. So this is what we can estimate as of today, yes.
So below the 9% you have booked in 2017?
No. I don't think we have booked -- do we have booked 9% all in? There was the operational tax rate. In all-in, it was a higher rate, wasn't it? We will check it.
Okay. And maybe a follow-up.
We just -- if you excuse me. We cannot say at the moment exactly where we are now concerning the tax rate, yes. But at least the tax side is not an issue in a negative sense. You know what I mean? So we will still have a very comfortable tax situation because we will continue more and more our carryforward losses, tax-wise.
A follow-up, have you confronted with any supplier bottlenecks in the third quarter using your sales potential? Or do you anticipate anything like that in the upcoming months?
I mean, that's an ongoing battle in the industry at the moment. 90%, our biggest sort of hurdle for more growth -- or preventing more growth is, number one, to get skilled personnel and, number two, to get supply from our supply side. So it is an issue. And follow-up question could be, to what extent do we see that showing up in our costs? Not material at the moment because we have these long-term contracts and the like. I want to use the example of, I think, specific popular material, calcium chloride, which becomes ever harder to get. And even as it becomes more expensive, it does have a relatively little part of our bond. So I think the short answer is, it is an issue. It continues to be an issue. We negotiate and try to get the deliveries faster as much as our customers want to have deliveries faster, but it's an issue. It is limiting the ability for us to achieve more growth in the fourth quarter.
At the moment, there seems to be no further questions. [Operator Instructions] There are no further questions left.
Okay. Well then, thank you very much for your attention. Thanks for the participation on the call. There's little we can add on our end. I will end to say, today, I will look with a lot of confidence into the remainder of the year, and we believe that we're going to have a good start into the new year. And with that, I wish you all a good rest of today and rest of the week. Thank you very much.