Kloeckner & Co SE

XETRA:KCO

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Q3 2018 Analyst and Investors Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Felix Schmitz, Investor Relations. Please go ahead, sir.

[Felix Schmitz, Investor Relations Executive]

Thank you. Good afternoon, ladies and gentlemen, and welcome to our Q3 Analysts and Investors Conference Call. With me today is Marcus Ketter, CFO of the company, who will guide you through the presentation. After the presentation, we are happy to answer your questions. With that, I'd like to hand over to Marcus Ketter. Please go ahead, sir.

[Marcus A. Ketter, CFO & Member of the Management Board]

Welcome, everyone, and thanks for joining this call. Today we want to present our Q3 results. Please let's go to Slide #4 to see our Q3 highlights. Compared to last year, our shipments decreased this quarter but only very slightly. We increased our sales significantly by 12.1% to EUR 1.8 billion, especially due to the higher price level. Gross profit is up from EUR 310 million in Q3 2017 to EUR 332 million in this quarter. This was mainly also price effect driven. Gross profit margin decreased to 18.9% and is, therefore, down by 0.9 percentage point due to elevated sales prices. The EBITDA comes in at EUR 59 million, and is right now within our guidance of EUR 55 million to EUR 65 million. This is a year-over-year increase by more than 25%. Our digital sales share improved again. Sales generated through digital channels were 23% at the end of the third quarter, a plus of 2 percentage points compared with the end of last quarter. We confirm our fiscal year guidance EBITDA should be at least slightly above last year's figure. To sum it up, sales increased considerably and gross profit is up year-over-year both due to higher price level. Please go to Slide #5 now. I would like to give you an update on our digitalization engagements. Again, we were able to improve our digital sales share. At the end of the first half of 2018, we had a share of 21%, we now have reached a level of 23% at the end of the third quarter. We improved the share by around 7 percentage points year-over-year, and we were able to increase this figure in 8 subsequent quarters. Excellent progress, we think. We also have new third-party vendors in our market places, which are a functionality of our proprietary online shops. SixBros is now one of the latest. It is the broadly diversified retailer selling its products across Europe and are offering a variety of metal product via our online shops. With that already, 11 third-party vendors are selling through our proprietary online shops and several more are currently in the pipeline. And of course, where business is growing, our teams have to grow as well. Around 90 people work for kloeckner.i in Berlin now and take care all of our online products and innovations. Let's now take a look at XOM Materials, our online platform. Our open industry platform is also progressing. 96 customers are registered and 7 vendors are already on a contract offering around 800 products. The latest news just came in yesterday evening with [indiscernible], we took the first steel mill and our contract was 8 vendor signs and will sell on XOM. Furthermore, we just opened our new office in Atlanta this month. For this space, we will prepare the U.S. launch of XOM, which is currently planned for the beginning of 2019. We expect the first financing round by the end of the year. Let's turn our focus from digitalization to our operating business now. Next slide gives an update on further parts of our Klockner & Co 2022 strategy. Let's start with our high value-added business. Last time we talked about our progress with regards to our shipyard business. Now I'd like to turn the gates to the years. Our entire work equipment for the physical vapor deposition technique is now in operation. So called PVD is a high-technology coating program for different kinds of materials, for instance protecting from scratching. First product has been sold and our customers are very satisfied with the quality of the coating. With this new technology, we are able to get into architectural as well as industrial niche markets. With the approval of a new tube laser for our Dallas facility and further substantial upgrades of key machinery and equipment in the U.S., we keep progressing our transformation to a more higher value-added company. Our aluminum investment as Becker Stahl-Service is operational now. All equipment is working, being the slitter and the cut-to-length machine as well as the high-speed cutter. Becker is now the most modern Alu service in the center -- in Europe. By now the first white orders were processed. The auto skill is extraordinary sensible, which requires a lot of expertise from our people. Let's now switch to our efficiency improvement programs. Both programs, One Europe & One US are well on track. Our Europe -- One Europe had an impact of EUR 12 million of the first 9 months of this year. The One US program contributed USD 7 million to EBITDA already. That means it is USD 3 million ahead of the budget for this year. We expected that One Europe would contribute EUR 15 million in '18, EUR 5 million in '19, and that One US would contribute USD 4 million this year, USD 5 million in '19 and USD 6 million in 2020. While, as I said, with USD 7 million it already over contributed versus its budget for 2018, which means that we are executing faster than expected. Let us start with shipments, sales and gross profit for the third quarter. Shipments decreased by -- decreased year-over-year by 1.2% and 5.3% quarter-over-quarter, mainly due to the weak automotive business in Europe, but despite a robust demand in the U.S. In Europe, reported shipments came down by 7.7% year-over-year, where shipments in the standard distribution business in Germany improved year-over-year. Becker Stahl-Service shipments decreased due to the weaker automotive sector. In the Americas segment shipments were up substantially in Q3 2018 year-over-year by 7.7%, due to the Section 232 tariff decision and due to further market share gains. Sales increased year-over-year by 12.1% significantly, due to higher average sales price. In Europe, sales increased year-over-year only by 1.5%, and in the Americas segment by 30.7%. Gross profit increased by EUR 22 million year-over-year to EUR 332 million. Gross margin came down from 19.8% to 18.9% year-over-year as the average cost for inventory picked up stronger than sales. In the Europe segment, gross profit declined from EUR 202 million to 900 -- EUR 194 million as a result of the weakening automotive sector. While Europe Metals contributed EUR 5 million to the gross profit. In the Americas, gross profit increased substantially by EUR 29 million or 27.1% to EUR 138 million, mainly driven by our prices.To sum it up, shipments decreased year-over-year and quarter-over-quarter due to the weakening automotive sector in Europe, despite the healthy demand in the U.S. Sales increased due to the higher sales price. Gross profit is up due to Section 232 effect, and also because we are gaining market share in the Americas despite the decline in Europe. We will now focus on the EBITDA for the group. In Q3, EBITDA came in at EUR 59 million, after EUR 47 million in Q3 2017. We saw a slightly positive volume effect of EUR 1 million, which I think I need to explain. This is due to the fact that we are calculating the volume effect for 18 product groups and in short, we saw a positive product mix effect. That's the reason why in total our shipments are down nearly 20,000 tons, but we still are showing a positive volume effect of EUR 1 million here in this bridge. Furthermore, we had a strongly positive price effect of EUR 16 million, due to the healthy demands and the Section 232 tariff decision in U.S. The EBITDA contribution of our One Europe and One US measures was EUR 8 million. We also saw higher OpEx for shipping and personnel costs, which were both volume driven. Overall, the EBITDA margin came in at 3.4%. To sum it up, EBITDA from Q3 was EUR 59 million, substantially exceeded prior year's quarter of EUR 47 million. It's strongly benefited from higher prices in the U.S. and from our One Europe as well One US project measures. So let's focus on other segments now. EBITDA in Europe decreased by EUR 3 million to EUR 25 million year-over-year. We saw a negative volume effect, minus EUR 7 million, mainly due to less total processing and lack of automotive business at Becker Stahl-Service center as well as less turnover in our German, Netherlands and Swiss operations. The price effect was a negative EUR 4 million, mainly resulting from the weak automotive business and inventory valuation's effect, which were partly offset by increase in prices, mainly in the Swiss rebar business. One Europe measures contributed EUR 5 million, thus the EBITDA margin for the European segment came in at 2.5%. Just as a reminder in Q3 2017, we had 2.8%. To the Americas segment, we saw a boost in operating EBITDA from EUR 19 million to EUR 40 million in Q3. We had a strong price effect of EUR 20 million and also positive volume effect of EUR 7 million. This effect came from the Section 232 decision to apply tariffs of 25% and 10% on steel and aluminum imports respectively, and also from market share gains. OpEx increased by EUR 10 million, primarily for personnel and shipping expenses. Accordingly the operating EBITDA margin for the Americas segment came in at 5.4%, also here as a reminder, Q3 2017 in the Americas, we had a margin of 3.4%.To sum it up, in Europe, operating EBITDA decreased by EUR 3 million to EUR 25 million year-over-year. In the Americas segment, we saw strong positive price effect, which led to an overall sharply increase in operating EBITDA from EUR 19 billion to EUR 40 billion. Now I'll focus on financing here. As you can see, our cash flow from operating activities came in with minus EUR 5 million. Starting from an EBITDA of EUR 59 million, cash out for net working capital build-up were EUR 31 million, cash out for interest and cash tax payments were EUR 18 million and changes in other operating assets and liabilities were EUR 15 million. The reason in the other operating assets and liabilities are mainly also prior bonuses of EUR 11 million, which were not due yet, so we have accounts receivable in all of our [chief] products. In total, this resulted in a negative cash flow from operating activities of EUR 5 million. Cash flow from investing activities came in at a negative EUR 30 million, mainly from investments in property, plant and equipment and intangible assets. Thus, free cash flow resulted in minus EUR 18 million. Net financial debt consequently increased from EUR 552 million to EUR 569 million. There were only minor translation effects and cash out from settlement of FX swaps of EUR 1 million. To sum it up, free cash flow came in at minus EUR 18 million. Net debt increased notably from the end of the previous quarter from EUR 552 million to EUR 569 million. Nevertheless, our balance sheet stayed very solid. Let's take a look at our funding portfolio and maturity profile. Currently, where we utilize -- we have utilized approximately EUR 0.6 billion or 44% of all facilities. In September, we executed the renewal of our European ABS program. The new maturity is September 2021, which is a refresh of the original 3-year term at slightly better financing conditions. Virtually, we have no maturities in the next 2.5 years. The volume-weighted residual term of our core facilities is 2.8 years now.I want to explicitly state that we see no risk related to the current concentration of maturities in 2021. As demonstrated in the past, it is our policy to always execute the renewal of our working capital facilities well ahead of expiration, which we will do also here. Financing costs are very similar to last year. The financial results year-to-date is minus EUR 24.5 million, which is just EUR 0.1 million higher than in 2017. To sum it up, financing is very solid with a strong headroom on our committed debt facilities, a solid equity ratio and a low gearing. I come to our business outlook for this year. Let's start with Europe. There are no material changes to our outlook assessments from last quarter's call. Construction is rather flattish this year. The sector is running well in Germany, though with less enthusiasm in recent months. The situation in Switzerland turns out to be rather different. There has been strong investment expansion in the sector in recent years, which has now led to an increased level of vacancy. Moreover, U.K. is still facing challenges in the sector, it is, therefore, weaker. Machinery and mechanical engineering is still well on track and in a good position, especially the strong domestic demands and investment growth in 2017 drive the positive development of the sector. With regards to energy, we do not see any changes of the situation compared with former call's assessment. There are neither positive nor negative indications. Subsequently, we expect 2018 to reflect for this sector. The challenges for the European auto sector are, of course, quite substantial. The diesel scandal with its emission test and the political processes and discussions set the car manufacturer under pressure. All in all, from our point of view, the sector will develop a bit weaker in 2018 than anticipated before even though car registrations have been growing again just recently. Nevertheless, we see the sector's development rather flattish for 2018. Shipbuilding stays strong at it is, therefore, we expect the sector to grow further in 2018. For instance, our key customer Meyer Werft has a very strong order book with 5 crew ships to be delivered in 2019, and another 4 in 2020, and so far 3 in 2021. The sector is in a moving mode right now.Now let's turn our view on the U.S. There's also no material change from our previous segment outlook. However, our forecast for the real steel demand in the U.S. is now at 2% to 3% year-over-year and therefore, a bit more muted than before. But optimism is still high in most of the steel sector. Construction is strong this year. Both residential as well as nonresidential are developing very positively in the current year. Available capital is pushing the entire sector. Also manufacturing and machinery is on a strong growth path in 2018. Especially heavy equipment will grow significantly this year due to the positive development in the oil and gas and mining sectors. Expectation for energy remain also very positive. The growth of oil and gas, renewable power generation and power transmission is continuing. The development of the auto industry will be rather flat. They expect the sellers to start selling off the 2018 models as the new models are arriving. But this will not change the sector outlook for the remaining part of the year. There's also no change in the expectations regarding shipbuilding. Currently, there are no positive indications, nor are there any downturns to be expected. Therefore, we see a flat year for the sector. In general, we expect stable prices in Europe and in the U.S. until year-end. That is our business outlook for Europe and U.S. in 2018. Let's take a look into the remaining part of the year. As you all know, when the end of the year comes closer, seasonality kicks in, and, thus, our business in Q4 is mostly not as strong as in Q2 and Q3. However, for the fiscal year, we expect higher sales because of the higher price levels than last year. We very carefully raised our EBITDA guidance in Q2. We confirm this guidance and are still expecting an EBITDA, which should be at least slightly above last year's level. Thanks for listening. We are open for your questions now.

[Operator]

[Operator Instructions] We will now take our first question from Seth Rosenfeld of Jefferies.

[Seth R. Rosenfeld, Equity Analyst]

Just a couple of questions to start out on the U.S. market outlook. Clearly, there are very significant windfall gains in the course of Q3. Even though spot prices in the periods can be a relatively stable. Can you give us a bit of sense of what's your [ position ] are going into Q4? Do you expect to continue tailwind? Or will higher cost inventory hitting P&L begin to be more of a sequential headwind for you? And then secondly, on the U.S. cost outlook, you highlighted some cost pressures with regards to both personnel and shipping. Can you clarify, are you seeing cost pressure on a per unit basis? Or are you seeing that basically being driven by volume growth? I mean, what's the scale or mix of that cost pressure between personnel versus logistics?

[Marcus A. Ketter, CFO & Member of the Management Board]

Thanks for joining the call. So there we don't see any windfall profits in Q4 to be clear on this. The windfall profits actually went away in -- starting in August and then in September. There will be no windfall profits in Q4. That's -- so we don't have any tailwind there going into. But it will be, from our point of view, a quite normal quarter so far where we have normalized margin spends in the U.S. In regard here to our higher shipment and to personnel expenses we had, for example, few price increases of 22% approximately and it's basically associated with higher volumes. So for example, our personnel expenses in the U.S. also are highly correlated with the -- with our EBIT -- with our earnings, and, therefore, we have also higher bonuses for our U.S. business to pay. We have more attempts to have the -- to do the volume. And then we had a general higher shipment cost but that's related once again to the higher volume there.

[Seth R. Rosenfeld, Equity Analyst]

And just one last question with regards to the windfall gains, the price effect in Europe. Clearly you're hit by a negative -- wait, I think your comment earlier was negative mix effect with lower auto volumes impairing realized prices. Would you expect the sequential step lower in Q4? Or will that be more muted or neutral in Q4?

[Marcus A. Ketter, CFO & Member of the Management Board]

I think that will be more neutral because we have seen with the emission certificates, especially in Germany and that is Becker affected also that there was less demand from the automotive business. We are now seeing that automotive demand is coming back, but it will not fully compensate the less demand we had in Q3. So I -- we are saying that it's going to be a more normalized quarter also in regard to automotive demand in Q4.

[Operator]

[Operator Instructions] We will now take our next question from Rochus Brauneiser of Kepler Cheuvreux.

[Rochus Brauneiser, Head of Steel Research]

Can you talk basically on the performance in Europe? I guess, the gross margin trend was a bit sluggish even though on the one hand side, carbon flat products were quite stable in price, maybe slightly up and the loan process done, I guess, quite well. So can you maybe give a bit more clarity where the pockets of weakness has been in the European distribution markets? And on the U.S., I guess, Marcus, you commented that you have gained market share. When I look at MSCI data, I think that we're around plus 10% in July, August. I, might be, haven't seen the September yet. Maybe, can you clarify a bit on where you have seen the market versus your 7%, 8% gross you have indicated. And then the third question on the -- performance on the auto side. Can you give us a bit of a sense of how Becker Stahl has trended in terms of volumes in the third quarter versus previous year? That would be great.

[Marcus A. Ketter, CFO & Member of the Management Board]

So let's take a look at Becker perhaps first. So we saw that in the third quarter, actually we went down at Becker of around 60,000 tons in comparison to last year. We were still significantly profitable on EBITDA and also on EBT basis, and we also on our cost of capital, I can assure you. But we had a tremendous third quarter last year. So you need to take this into account also there. So that's Becker. It's -- we see actually less demand from the automotive business but as I said, we are still profitable EBITDA, EBT, and we're still earning our cost of capital there, so it's still good but not as great as it has been last year. In Europe, distribution business, we see actually that the Brexit and less cement in construction in the U.K. is actually leading us there to a loss position, quite frankly. We see that in France. We don't see as much uptick as we have expected. GDP there is -- it's not coming down, but it's not as growing fast as we thought. So France is not really on a high-growth path right now as a country and in our business. In Germany, we saw that there is a bit less demand there but overall, it's good. So this is where -- in our main countries actually where we saw -- it's U.K., and it's France, especially where we see the distribution business weaker. It's more like country specific and less, as you said here, long and carbon steel are flat. And here gaining market share, we think that we are gaining market share because we are growing faster than the market in the U.S. But let's take a look at the numbers when they are out and see if our growth rate -- it's really above the market. But we see the Section 232 had an effect that the customers are buying more from domestic suppliers, meaning distribution business like us who are buying domestically and then selling to them because the imports, of course, are much more expensive. And therefore, it's a diversion of demand from imports to domestic. That's why we perhaps can go faster than the overall market.

[Rochus Brauneiser, Head of Steel Research]

Okay, got it. Maybe a brief follow-up on the pricing. I guess you said, you expect quite stable prices for the rest of the year. When I look at Europe, you could argue that on the flat side you see disruptions in the supply chain because of lower levels. You see probably a higher utilization of input quotas in the coming weeks and months. Scrap having picked up a bit, maybe less pressure on Turkey. Is there any upside risk on the U.S. -- European pricing? Or would you see a continuation of, kind of, a greater sluggishness in the demand overall?

[Marcus A. Ketter, CFO & Member of the Management Board]

Well, I think that's -- there's definitely -- I think we agree on this, Rochus, that there's no downward pressure right now on the flat side. There could be some upticks, for example, here ThyssenKrupp declared their fourth merger, there could be less supply actually in the market and as you just pointed out, there could be less pressure on Turkey now. And -- so let's see. But we don't see any downward pressure for now, we are just saying it's going to be flattish. Could there be any upside? Could be that this is the case. Let's see how the supply actually is going to evolve. But if there's any upside to the pricing, it will be solely supply-side driven. And I think we agree on that too.

[Operator]

We can now take our next question from Carsten Riek of UBS.

[Carsten Riek]

A few questions left from my side. The first one is on the free cash flow of goods -- the first 9 months, we have seen minus EUR 160 million, which is a very negative number. When do we expect actually to return to positive territory and probably, hopefully, not only in the fourth quarter in the next fourth quarter but also more structurally because the gearing is not low at the moment. That's the first one. And the second one also related to the free cash flow is, maybe you can explain why we have seen a net working capital build-up in the third quarter? And not a relief given that the market clearly turned a bit more shaky than you thought initially. So I would have thought you would've already tried to reduce inventories into those more difficult environment. Maybe you can elaborate a little bit on this.

[Marcus A. Ketter, CFO & Member of the Management Board]

Yes, Carsten. We're going to turn to positive free cash flow, just for the quarter, of course. In Q4, we will see if all the free cash flow actually is going to look like that for the whole of the year. But we definitely going to have a strong operating cash flow generation in the fourth quarter of this year. The reason why free cash flow is so negative is simply that we have seen a strong price increase actually in the U.S., and we also looked at our pricing of the inventory per ton in Europe and also that went up. We went approximately up 24%, 25% in our inventory per ton expenses in the U.S. volume -- U.S. inventory. At around still 7% for Europe. And then contributed strongly actually to the net working capital increase and, thus, to a negative operating cash flow minus the investments CapEx we had to then turn out to be a high negative free cash flow you are mentioning. So we are turning the operating cash flow definitely now around in the fourth quarter of this year, but this is how our business is actually structurally. So in a good year, we have always said that we're going to have high earnings, but it could be that this is also due to price levels, higher price levels and more volume and this brings up our inventory level. As far if prices go up just by 10% and volume goes up by 10%, our inventory actually goes up 1.1x, 1.1 by 21%. So this is really the nature of our business. So therefore, I would say, structurally, this is the nature of our business. So when the price increases stop, then we don't have any net working capital build up as we expect for the coming month. And then, of course, we will be generating through our earnings cash. Additionally, of course, for the fourth quarter, we will reduce inventory further. We are strongly in the process of doing this right now, which, as you pointed out, didn't show -- or didn't show to inventory decrease in the third quarter. But we are doing this now very strongly here in the fourth quarter of this year.

[Carsten Riek]

Quick follow-up on this one because you mentioned in the press conference that the acquisition of ThyssenKrupp Materials might be off the table. Is that -- could we read that as a positive sign for your investing cash flow going forward? And if it's a temporary off the table or does it look like it's at least for the time being for their restructuring process?

[Marcus A. Ketter, CFO & Member of the Management Board]

We would not have been able to finance this through -- with our cash flow. So this would have been real big financing package to be able to do such a deal. But as you said and as we -- as Ketter said in the press call, we think that it's off the table right now. I mean, ThyssenKrupp Materials is basically -- will become ThyssenKrupp Agee there. And the mother company -- or most of the mother company, which then owns the bigger stake in ThyssenKrupp Industrials. So we do not see that there will be any divestments from ThyssenKrupp in regards to their Material business. Quite the opposite, they announced that they want to be a consolidator in the market. Might that change, we don't know. But as far as we saw they are on their way to do this -- to do the split-up of the company by the Annual Shareholder Meeting, I think, in 2020. And if their strategy does not change, which we do not anticipate right now, then I think the deal will be off the table. Till then, if they decide to be consolidator of the market or the strategy changes, then, of course, there might be some options for the 2 material business here.

[Operator]

We can now take our next question from Christian Obst of Baader Bank.

[Christian Obst, Analyst]

Now first of all, I have to come back to the free cash flow and inventory question. It's not only that it's increasing in absolute terms but also inventory to sales and I looked, quite a bit of those sales is on a level which you last have seen in 2015. So when we compare that to sales normally, we eliminate the -- this pricing effect and we are, therefore, again on a very high level compared to the last 4 to 5 years. Maybe you can give another explanation for that. And then on the aluminum business. What is your plan to ramp it up? What is the current number of volume, what you are delivering and shipping? And what do you planning -- how do you plan to ramp it up going in the next quarters? And does that also have an effect on the inventory level?

[Marcus A. Ketter, CFO & Member of the Management Board]

Okay, let's first take a look at the inventory. So it's -- when -- we also, of course, use the ratio that you were just referring to. So if I take here net working capital as a percentage of sales. And we take these, the sales of the last 3 months times 4 and then put this in relation to the revenue, we come up with a ratio of -- end of Q3 then 20.9%. End of September Q3 last year, we had 20.5%. So we are not that far away. We're also looking here -- following closely our cash-to-cash cycle. So it's always last 3 months. We have a cash-to-cash cycle end of September of 90 days, and we had 1 of 90 days end of September of 2017. So we are basically in line. Nevertheless, that is not good enough for us. So that's why I'm saying we are further decreasing our inventory, and we will be strongly generating operating cash flow in the fourth quarter of this year because we see that negative operating cash flow in the first 9 months of EUR 160 million, of course, is not what we are targeting at. So we've tried to turn this around in the fourth quarter of this year. So has this -- to put this into perspective. So it's really the higher sales level, the higher prices, which contributed not only to higher inventory in euros but also to higher sales. And when you put this in relation, it doesn't look as negative as you might just have pointed out. As I said, 20.9% in comparison to 25.5% year-over-year comparison. Now to aluminum ramp-up. So we have a capacity this year of 15,000 tons. We will ramp this up to 80,000 tons by the end of 2019. And 80,000 tons is also the capacity of our aluminum service center. So if you take this number, 80,000 times 3, you have a comparison of 240,000 tons, and with these few tons, we are doing in our service center.

[Christian Obst, Analyst]

And just one follow-up. First and just one follow-up. It's -- the change a little bit of the mix of your product XOM aluminum coming in higher quality products. Does that also have some kind of a negative effect on your inventory going forward because prices -- average prices are higher structurally?

[Marcus A. Ketter, CFO & Member of the Management Board]

Well, yes. Its average prices are higher until we have more aluminum, which is weight ratio 1:3, as I just pointed out, and if you take this to then inventory euros per ton, then of course you would see it increase. But on the other hand, you'll see -- would see an overall proportionally increase actually in our gross profit to compensate for this. So as we are going towards a bit of a different product mix, especially here with the ramp-up of aluminum we might see this. But on the other hand, one has to see that our inventory in tons is 1.2 million tons, a little bit above 1.2 million tons. Now if I take the aluminum in with 80,000 tons and say, "Okay, the average pricing is considerably higher." Probably when you look, overall, there needs to be also other effects to bring really our inventory pricing per ton up, not only due to product, which will effect in the inventory.

[Christian Obst, Analyst]

Then I have a last question. You -- I think you talked about Switzerland saying, after years of investment, the country is now facing sign -- an increasing level of vacancies. What do we expect? Does that -- this kind of development has an impact on your business going forward?

[Marcus A. Ketter, CFO & Member of the Management Board]

Yes, we're getting a bit more cautious right now. That's all what I meant. We are not negative. We don't have any indications that it's really going down, but more vacancies in apartments, of course, are a sign that perhaps the boom, which we have seen in the construction industry, might come to an end. On the other hand, I mean, Switzerland is a very attractive country with very high income that might mitigate this. But all I wanted to point out that we are getting a bit more cautious for the construction business in Switzerland. But so far, we see very good results, especially from our rebar business, which caters to the construction industry in Switzerland.

[Operator]

We can now take our next question from Luc Pez of Exane.

[Luc Pez, Stock Analyst]

A follow-up maybe on the free cash flow, which I think is surprising everyone. Especially, as we try to remember right, when you were talking your digitalization strategy, one of the main gain was to see number a lower inventory as a percentage of sales. Just clearing that we are -- what we are witnessing. So I understand the argument about the underlying growth, but the underlying trend does not look here -- very nice from here. Could you maybe quantify, therefore, the kind of reversal you would expect for the Q4, given that if I'm not wrong, you consumed something around EUR 300 million for the first 9 months?

[Marcus A. Ketter, CFO & Member of the Management Board]

Let me clarify first. What did we consume EUR 300 million for the first 9 months? We have a negative free cash flow of EUR 197 million and a negative operating cash flow of EUR 160 million. So what are you referring to with the EUR 300 million?

[Luc Pez, Stock Analyst]

With the working cap capital build up specifically for the 9 months.

[Marcus A. Ketter, CFO & Member of the Management Board]

Okay the net working capital build-up, yes. Okay, got you, got you. Let me just -- yes. So we will try actually to come very close to -- I mean, the free cash flow, I would say, overall, for this year, to be clear on this, I would not necessarily expect that we would come to a positive free cash flow with the net working capital build-up we had. I mean, it's just one quarter left, we will do the utmost actually to reduce inventory and to generate further operating cash flow. We will have a strong operating cash flow in the third quarter nevertheless. But as I said before, this is really how our business works. So if there are high price increases, which results in high profitability but that also meets the net working capital build-up. So it's pretty much asymmetric usually in these times when prices go up between earnings and our operating -- our free cash flow. But, I mean, I can give you here an example here from last year. Last Q4, we generated well above 100 -- around EUR 117 million in operating cash flow in the fourth quarter there. And we expect to do so perhaps even more this coming quarter. But, I mean, the cash is not gone. The cash is simply in the net working capital. So if the prices stay flattish, actually, we will then generate cash from our future earnings if prices would go down, actually then the cash is coming back from our net working capital. So still, I mean, through the cycle, our firm goal is to generate positive cash flows of course. But this is actually how our business works. So in these times, with these high price increases, it's really business eminent that our cash flow comes under pressure.

[Luc Pez, Stock Analyst]

Okay. Maybe another question with regards to your comments on the auto segment. You were talking the impact on the volume, the mix that I understand it's mostly a Q3 impact, and therefore, it should be less impactful over Q4. Is it fair to say, therefore, that this WLTP effect should start to ease when we get into the Q4? And you should boost, actually, activity when we get into Q1 next year? Is it possible?

[Marcus A. Ketter, CFO & Member of the Management Board]

Well that's actually what we expect and what we see. So there is demand coming back from the automotive suppliers in 4 -- in Q4. Nevertheless, we saw that actually one big Bavarian automobile company has said that 2 plants will still be closed, each for 1 week. So as I said before, we do not expect that this Q4 will compensate for the less demand in Q3. But we are already beyond the turning point and seeing more demand in Q4 than in Q3. Will that follow up through Q1? We think it will actually if the associated emission problems are gone that we're going to be back on track. But it all depends, of course, if -- how the overall economy will be doing. But I would say for Q1 of this -- of next year, I would expect a more normalization in comparison to Q3, and that means for Q4 and Q1 on a more normalized level.

[Operator]

[Operator Instructions] We now take our next question from Rochus Brauneiser of Kepler Cheuvreux.

[Rochus Brauneiser, Head of Steel Research]

Marcus, when you reiterated the guidance, can we still believe that the comments you guys made a quarter ago are still valid because when it comes to the definition of what is at least a slight increase, I think the wording was that it should be at least around EUR 230 million. Is that still the case? And secondly, regarding this first financing round for XOM. How likely is this now that it's happening by the end of the year? Or is there still a possibility of that it's slipping into 2019? And are there certain necessary milestones you want to see before this is being done that you want to have, I don't know, 10 vendors on your books and you want to have a certain [indiscernible] before you get something done. Maybe can you give us a better clarity of what is needed or what is the prerequisite for you to get the deal done?

[Marcus A. Ketter, CFO & Member of the Management Board]

Okay, perhaps first to your first question in regard to guidance. Well, it's slightly up. That means between 1% and 5% above last year. And we are still sticking to that. So the higher end of the 1% to 5% would be the EUR 230 million you are mentioning. In regard to the XOM financing. The financing process actually has started. So we are in the process of doing this. We still see a high likelihood that we will be able to do this by the end of the year, but as everyone here on the call knows, when it comes to these kind of financing, you never know if you can be able to -- if you are able to do this within the timeframe. We are thinking of meeting by the end of the year or it will be slipping to the end of -- to the -- till the next year. They don't have indications that it is slipping, as I said, we are just -- we just started the process, so we don't have any further KPIs which we would like to reach before we start this as you pointed out Rochus. We waited actually to the second half of the year or to the -- actually, also second half of the second half of the year to start this process, to have more traction on the platform. As I said before, we have 96 customers registered. We have now 8 vendors on our contract to -- so -- and we thought this would be the right time to start such a financing for the platform.

[Operator]

[Operator Instructions] As we have no further questions, I'd like to hand the call back for any additional or closing remarks.

[Marcus A. Ketter, CFO & Member of the Management Board]

Okay, thanks everyone for joining this call. I think it's interesting times when you look at the stock market. All the -- whole sector actually it's performing at right now. We stayed within our guidance, and I hope we gave you today, valuable information for analysis. Thank you for joining the call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.