SGL Carbon SE (SGLFF) Management on Q3 2019 Results – Earnings Call Transcript

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SGL Carbon SE (SGLFF) Management on Q3 2019 Results…

SGL Carbon SE (OTCPK:SGLFF) Q3 2019 Earnings Conference Call November 5, 2019 8:00 AM ET

Company Participants

Michael Majerus – CFO

Conference Call Participants

Benjamin Varrow – Berenberg

Richard Schramm – HSBC

Matthias Pfeifenberger – Deutsche Bank

Wolfgang Felix – Sarria

Marc Gabriel – Bankhaus Lampe

Michael Majerus

Yes, thank you very much, and first of all, welcome to all participants of the call. As usual, I will walk you through our conference call chart and will be afterwards available for your questions. So let’s start with the results of our first nine months. So, as usual, we’ll start with the individual business unit. With CFM, our Composites Fibers & Materials, after sequential improvement in the second quarter, we had a significant decline in the third quarter, which was due to the market segment Textile Fibers, Industrial Applications, and Wind Energy. So, sales was much more than EUR 328.6 million, slightly above previous year 2%, currency adjusted 1%.

However, this was mainly driven by the strong market segment Wind Energy, which, however, last year had a very small basis, largely offset by the negative development in the Industrial Application, Textile Fibers segment where the weakening global economy and structural reasons were the cause of that revenue decline. As were the Aerospace, this is more a project-billing scheme, which is, this year, taking place in the fourth quarter, so, therefore, more the timely distribution of the revenue within the year, and the Automotive was approximately on prior level. Despite the fact that revenue was slightly above the previous year, EBIT strongly declined in the third quarter compared to the first two quarters, which was due to the deterioration in Textile Fibers, the Wind Energy, and Industrial Application.

We see here different development. Textile Fibers, besides general slowdown in demand, we see also structural reasons. They are coming from a substitution effect, primarily towards polyester Textile Fibers. So, this is something we expect also to stay in the foreseeable future, whereas on Industrial Application, we see more a global weakening of the economy, but also some sector-specific developments, and here, for example, we see — we have several customers in the automotive sectors, which have reducing market, we’re affected here. So we see a different development in our own Automotive segment, both in CFM and GMS, which I’ll come later, where we see structural growth drivers coming from electric vehicles still being intact, but in this Industrial Applications business, where those not Tier 1 and OEMs are customers, we see a different development. That is a little bit affecting the Industrial Applications segment. Wind Energy, despite the large volume, we have here low-margin business. In the past, we had here a joint venture where we sold fabrics into the Wind Energy. Now we’re selling only fibers with a lower margin, and that’s the reason that we have a higher revenue but lower profit contribution coming from that segment.

Overall, the EBIT in the first nine months was substantially below prior year’s quarter, as I said, primarily driven by the development in Textile Fibers, the Wind Energy segment. And as I said, in Aerospace, we had a different billing scheme. It was last year in the first-half year. This year, it’s in the end, and Automotive is also more temporary product mix topic, whereas in total, we see this on a comparable level.

Now, let’s move to GMS, completely different development, whereas we have seen a strong decline in profitability in the CFM. We see, on the other side, a very strong development in GMS. Actually, we see here for the first nine months, a historic record in the EBIT level and different from the last peak, which is already a few years ago, which was solely driven by the solar business. This time, it’s on a much broader basis because it’s founded on a lot of market segments and has therefore, much better quality than the last historical peak yet.

So, let’s go into details. Revenue, EUR 471.3 million, which is 8% up versus prior year or currency adjusted, 6%. As I said, it’s driven by several market segments, especially high growth — double-digit growth we had in the market segments Semiconductor, Automotive and LED. As I see here, Automotive, this is primarily driven also by the trends toward electric vehicles, parts, for example, for water pump, for breaker system pumps. This is also here in the GMS division growing business and the digitalization sector, semiconductors. We see also strong increase in demand, and this is also a trend we expect to stay also in the foreseeable future.

Further on, we had here Industrial Application, also in Chemicals increased, however, more slight increase. Battery & other Energy was close to prior year level, as expected. This is, of course, driven by capacity limitations, which we do have. And the sales to the market segment Solar was again limited to prior year as we have prioritized the higher-margin supplies to the LED and semiconductor industries.

EBIT improved in the first nine months by 19% and therefore, more than proportionately to sales to, as I said, a record level. This is due to improvements in most of our market segments. And especially in the Automotive, we were able to improve earnings significantly in the third quarter compared to the first-half year. As I said, we have here a fast-growing business, so we had to tremendously ramp up here our production process. This was related with start-up costs in the first-half year. Of course now the production has turned to a more stable status and, therefore, also start-up costs have been reduced and this stabilization has been contributing to profit increase. As I said, battery and Energy maintain — we maintained close to prior year level, as I said, driven also to capacity limitations, and the Solar, as mentioned above, was below the prior level but on purpose because we shifted business to a more profitable sectors in the semiconductor industry.

Now, let’s have a look to Corporate. Also here in Corporate, we saw a significant improvement. This is due to two factors, one is the higher demand from fuel cell customers and the lower expenses for management incentive plan. So revenue was EUR 32.5 million, was 27% up compared to prior year. And this is, of course, primarily related to the ramping up of our fuel cell component business where we provide so-called gas diffusion layer for fuel sales tax. And this business is, so far, located in our central research and development department, and as a consequence, as I said, revenue went up strongly.

The EBIT has — improvement has three drivers, and one is, of course, the positive development here in Central Innovation due to the growth of the fuel cell business; and the other is, of course, a consequence of the strong decline in profitability of the CFM division. Therefore, of course, our reduced earnings expectation for the whole group, since our short-term incentives are related to usually to the budget targets with regard also to the profit of the period. Of course, the reduction of this figure has also caused the segment reduction in a provision for management incentive plans. And that are the two main reasons. And also, of course, since this year is also part of long-term incentive program, also, this was affected by this development. So therefore, we expect — yes, although we had here positive development.

Now, let’s move to group on the next slide, overall. So for the first nine months, we can say that on the recurring EBIT level, adjusted for the one-time gain from land sale in the prior year, where we sold a piece of land from our graphite electrode division in Canada, was a profit of roughly EUR 4 million. We see that the improvement in GMS and Corporate almost compensate for the lower CFM. So taking out this onetime land sale profit of previous year, we are almost at the same level EBIT-wise compared to previous year. Yes, that’s also here with tax declined by 8% to 45 — EUR 54 million, by taking out to roughly EUR 4 million. We are, as I said, on rather stable business.

Net financing result deteriorated mainly due to the onetime expenses in the amount of EUR 6.3 million for the repurchase of the convertible bond due in 2020 as well as due to higher interest expense from the new convertible bond, which we issued in September 2018 and a new corporate bond, which we issued in April 2019 as well as from the first-time adoption of IFRS 16, which is the new leasing standard. And as a consequence, although we have here now lower result, which is, of course, not only effect of the higher net financing result but of course, primarily from an effect which we mentioned in our ad hoc notification last Friday.

The impairment of assets from our CFM business in the amount of roughly EUR 75 million and whereas in the previous period, we had EUR 28 million gain from the full consolidation of the former JV with BMW, and that’s the main reason, of course, for development of this net result. And — however, both positions — both the positive position, EUR 28 million, in the previous year as the negative was roughly EUR 75 million this year, are non-cash flow were the ones — so only affecting the result, but not our cash flow.

And that leads over indeed to the next page, the cash flow, whereas our net result has strongly deteriorated. As I already mentioned, this was not cash-driven. So therefore, on the cash flow side, we see actually improvement versus the prior year. That has several reasons. One is, of course, here the working capital development, and this is reflected in the cash flow from operating activities, which improved clearly from the EUR 7.6 million in the previous year’s nine months now to almost EUR 30 million. And as I said, this is mainly due to the lower increase in working capital but also due to the IFRS 15 effect.

So last year’s EBIT was heavily boosted by IFRS 15 effects, which, however, are not cash relevant. It’s anticipated revenue recognition, so it’s more percentage of completion method. So therefore, the cash quality of our profit has this year improved because we have lower IFRS 15 effects, therefore. So if I had said that the EBIT is comparable, it is accounting-wise, so cash flow-wise, the EBIT is better this year than it was last year. And that, of course, together with the lower working capital increase, are the two drivers for the improved funding cash flow from operating activities.

If you move on to the free cash flow, we have additional effect, which is coming from the investment activities. Despite the fact that we have this year, higher CapEx as we had at the prior year, we have, overall, less cash outflow from investing activities. The reason is that in the previous year, we bought the BMW shares in the Wackersdorf site from our joint venture. And that was, of course, a onetime cash out last year, which did not reoccur in this year. And as a consequence, free cash flow has improved now to minus EUR 9.6 million and is, therefore, not so far away from a close-to-breakeven level.

The cash flow from discontinued operation, which was roughly minus EUR 10 million, this is something which has happened already at the beginning of this year. This was due to cash outflow related to the final settlement payment to the buyer of HITCO Aerostructures in the reporting period. And whereas in the previous year, we had the other way, a positive effect here in cash flow from discounted activities due to the final outstanding payments for the sale of our former PP activities at that point in time.

Now, let’s have a look at our balance sheet on the next page. Our balance sheet ratios, due to, especially, of course, the impairment charge and the related net loss, have weakened but still remain in a solid range. So you can see, despite that our equity ratio is 690 basis points down, it was almost 27%, still on a solid level. Of course, the reason is primarily, as I said, the net loss due to the impairment charges. Another important effect is coming from our pension liabilities. So the further decline in interest rates has led to a higher net present value of our pension obligation, which had a negative effect on our equity.

And both factors together were the reasons for the decline in equity ratio, with some positive foreign exchange effect there, but they were, however, not sufficient to compensate for those two factors. And the higher net financial debt is primarily reflecting, first of all, the roughly EUR 10 million payment to the buyer of the HITCO Aerostructure business, which was already mentioned at the free cash flow from discontinued activities and the small negative free cash flow from our continued activities and the incurred costs for the corporate bond issue. So far, a quick walk through of our nine months figure.

Now let’s have a look at our outlook 2019, starting also here with the business unit CFM. Our previous guidance was, with regard to EBIT, a positive mid-single-digit million euro amount, implies variety in our top release. We corrected this to a negative mid- to high-single-digit million amount. The reasons, as already stated in our previous conference call, is the continued weakness now which is becoming apparent in the fourth quarter related to the market segment Textile Fibers and the deteriorated economic environment, which is affecting the market segment Industrial Applications, and I already talked about the substitution effect, which are structural effect in the Textile Fibers business.

Now on the next page, and this was already announced last Friday. Of course, we’re not only talking about deteriorating market condition. Of course, we are working on a management level with countermeasures. One is, of course, the reduction of the ongoing costs in CFM. What we are doing here is a worldwide debt reduction of around 3%. Half of this already, 1.5% has already taken place, and the remainder will take place in the rest of the year. The associated restructuring charges are already included in our revised guidance. Another thing is, of course, since our structural growth drivers in the strategically important market segments Automotive and Aerospace are well intact, and we have received a lot of projects, we are — which we are accelerating here the conversion of textile fiber lines into precursor productions line for the carbon fiber production and therefore, reduce the amount, of course, of business in Textile Fibers business. That’s one driver.

The other is product mix improvement in Industrial Application and Textile Fibers. What does it mean? Of course, we have developed and are still developing some specialty products in the Textile Fibers segment, for example, pigmented fibers and non flame-retardant fibers. Part of this has been already introduced to the market in the recent months. The next is to come in the course of next months. Of course, this will not entirely replace the commodity business in Textile Fibers, but at least it’s opening some niches in Textile Fiber business, which is due to the specialty character, a higher margin than the worldwide and commodity business.

Industrial Application, as I said, we are serving a broad range of markets here. And also here, we are going to focus on areas which higher margin like, for example, medical applications and some marine applications and other areas and reduce businesses in market segments which are a little bit more under pressure.

Management changes implemented, yes, we have a new management team on board at CFM. I’ve already mentioned on Friday that we have a new business unit president and also this one we have announced that we have a new divisional CFO on board in that division. So the complete management team is new. And that is also, for me, an important step going forward to improve the situation at CFM. Selected price increases, this is primary topic of the Wind Energy. I already told you that this is a low-margin segment. So we are currently in very advanced negotiation phase in increasing prices here in that market segment. Another area is, of course, the operational excellence projects. Primary areas of here the further speedy adoption in the production process, but beyond this, we are also focusing those things in the administration functions.

And for me, the most important strategic part is here, of course, the focus in the higher-margin Aerospace business. As you know, we have tried this in the past with a downstream-only approach. In those times with HITCO, we have realized that this is not a successful. We enter into this. That was the reason why we sold our business in the year 2015. But of course, we were not wasting time. We have used the last years in developing fibers suited for the airplane industry based on our heavy tow fiber. And the next step is, of course, to get those fibers into the Aerospace business. And we will talk more about this in the future. But this is, for me, the strategic, most important part here of the earnings improvement measures because this is, today, the only market which is big and highly profitable in the coming five or six months so therefore, this is, for me, priority number one.

Now let’s have a look then at the outlook 2019. We report the segments GMS and Corporate, whereas we reduced our expectation for CFM. We have increased it both for GMS and Corporate for different reasons however. So for GMS, we have slightly increased both revenue and the EBIT guidance. This is based on the very favorable development in the third quarter, which was somewhat better than anticipated. I already mentioned we had the overall historic record figure on the first nine months. And as also mentioned this is also based on a solid development — positive development in several market segments.

On Corporate, also here, I mentioned the reasons we expect on the year better result than last year, despite the positive onetime gain of approximately EUR 4 million we had last year. And the two reasons are, again, the positive development on our future component business; and of course, the lower expenses for the management incentive following the earnings decline in CFM and thus, also for the group.

Now, summarizing now on next page, the outlook for the whole group, on sales overall, the guidance is unchanged, so a mid-single-digit percentage increase to 2018, which, to keep in mind, was boosted by the positive IFRS 15 effect. The EBIT guidance, we revised downwards from the previously roughly EUR 55 million, now down to EUR 45 million to EUR 50 million, which is a combination, of course, with the weak performance in CFM and the partially compensating by the mentioned positive development in GMS and Corporate earnings-wise.

Net profit, we revised here our guidance downward to approximately EUR 100 million. Main driver is, of course, here the roughly EUR 75 million impairment loss to CFM. As we mentioned in our conference call on Friday, this is not related to the newly acquired assets from the former BMW and Benteler. This is only affecting the other areas and primarily, of course, where our assets in Portugal and Scotland are in, and those are the assets where we serve the markets Industrial Applications and Textile Fiber, which of course, are the root cause of our problems.

CapEx guidance for this year is unchanged, approximately EUR 100 million. Net debt on the yearly guidance is unchanged to mid-double digits increase. And of course, also the cash flow guidance is unchanged, which is a substantial improvement to negative low to double digits million euro amount. As you can see, of course from the footnote, we have to state that, of course, the segment earnings decline at CFM is increasing, to some extent, the risk of non-attaining the last two targets despite the fact that this is, of course, still our priority and as I said, that is still the target, to achieve this.

Now — and my last page is as already also mentioned on Friday, the first sneak preview on 2020. Overall, we are still in the process of finalizing our budget for next year and the five years plan towards the year 2024. So — but — and so a further detailed guidance will follow, as already announced earlier, at January 2020 at the latest. But what we can say today to give rough guidance is that we expect sales revenue in 2020 to be slightly lower than the 2019 level. And for 2019, we expect the revenue in the amount of between EUR 1.050 billion and EUR 1.1 billion. And the EBIT, compared to the already mentioned EUR 45 million to EUR 50 million guidance for this year, we expect to be 10% to 15% lower.

As I said, a detailed guidance will follow later. So far, the presentation from my side, and of course, I’m now happy to answer your questions. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Benjamin Varrow with Berenberg. Please go ahead.

Benjamin Varrow

Hi, good afternoon. Thanks for taking my questions. Just two, please, the first would be on GMS, and you’re guiding for only a slight increase in EBIT, which implies an earnings drop in Q4. Is this mainly seasonal, or do you see some weaker macro also playing a part in this?

Michael Majerus

Okay. This was the first question, and the second…

Benjamin Varrow

Sure. Second question is on CFM. The line which you’re accelerating the conversion of in Portugal. Do you see good demand to use this precursor internally, or do you plan to sell this externally? So what’s the plan for the additional precursor material?

Michael Majerus

Okay, understood. Yes, thank you very much, first, for your question. Now, let’s start with CMS. We always have mentioned that we expect the uneven distribution of the business at GMS in this year, and because we saw that we will have magnitude of the shipments coming in the first-half year and the lower part in the second-half, so therefore, this is as expected as we do not have an even distribution of the EBIT over the fourth quarter, that we have a stronger first-half year and a weaker — that has always been the expectation. So that is not new. What — however, it’s a little bit new that the third quarter was somewhat stronger than anticipated, and that is the reason why we slightly upgraded our guidance. And yes, we also see some seasonal weakening in order intake at GMS, and this is also the reason why, and this are already directionally guided on Friday, as I said, we, overall, expect next year’s EBIT to be 10% to 15% lower, and this will be a different development. So, we will see a somewhat weaker development in GMS, also due to some cooling down of the work of the economy, but as I said, we have to keep in mind that we’re starting from a historic record level in the year 2019 to put this also in perspective.

And on the other hand, of course, also due to the measures we have implemented in CFM, we will see the other way around, improvement on the CFM side for next year, and on corporate level, this is more now a technical effect. We would see two different development, one is, of course, the main effect here will be that usually, we are planning, of course, to achieve the budget, which is logical, of course, because otherwise, you shouldn’t decide on a budget if you do not believe to achieve it. So, technically, we are planning, of course, with the management incentive 100% achievement. As I said, this year, we have two developments to reduce this, and so this will year-over-year be a negative development. So, coming back to GMS, as I said, it’s a combination of the — in a year, distribution and softening of the economy, but in a range which we have foreseen also in the previous guidance. And at CFM, you’re talking about how to use the additional line converted away from the precursor to Textile Fiber. Yes, of course, here, the clear intention is to use this for external sales. And we see also a demand for this.

Benjamin Varrow

And sorry, was that external or internal?

Michael Majerus

Sorry. Yes, yes, yes, it’s external sales. So as I said, we have market demand for carbon fiber, but as I said, the precursor itself, of course, is always internal. So we’re not selling the precursor itself, so the precursor goes then to carbon fiber, but I think the final ultimate question is then, of course, what we’re going to do with the carbon fiber, and the carbon fiber, of course, is for external sales story.

Benjamin Varrow

And of the timing of the exact conversion of the line?

Michael Majerus

We expect to have this ready in February next year.

Benjamin Varrow

Okay. And are you able to say where you expect the free cash to go? Is that going in areas that you’re targeting, so Automotive, and…

Michael Majerus

As I said, we will give a more detailed analysis also with regard to market segment in the course — in the foreseeable future. And I think, in general — of course, in general, I mean, that’s more — we have two strategic markets, and that is the Automotive and the Aerospace. And the Wind Energy and the Textile Fibers business, those are markets, which we temporarily use to fill the capacity as long as the market segment Automotive and Aerospace are not big enough. And as you know, the Textile Fibers is needed for the first phase. The Wind Energy is for the second phase. And Wind Energy, of course, we can say plenty of volume. It’s more economic question, how to do so. But as I said, with increasing prices, maybe this can also become more attractive next year. And as I said, on the Aerospace and Automotive, we are further developing a project, but coming back, we will explain this more in detail in a further conference call.

Benjamin Varrow

Okay, understood, thank you.

Operator

The next question comes from the line of Richard Schramm with HSBC. Please go ahead.

Richard Schramm

Yes, good afternoon. Just a quick one on your investment budget, you have left this EUR 100 million target unchanged, that would mean that you have to spend about, yes, another EUR 50 million in the last quarter. Is this a realistic assumption? Or could there be a kind of spillover toward 2020 so that your budget might come out a bit lower than scheduled here?

Michael Majerus

Yes. First of all, Mr. Schramm, thank you for your question. I mean your calculation is absolutely correct. And yes — but it’s a usual pattern. We always have a year-end loaded CapEx spending, and that has a little bit — reminds me a little bit of the public sector, also the spending taking place at the end of the year. So in all my times here and every year has been the same. But as I said, our cash flow guidance is already taking this into account because we will see two effects in the fourth quarter go in different direction: one is, and that is your point, absolutely right, the increased CapEx budget is, of course, a cash flow negative thing, but on the other sense, the reduction, especially by GMS, which we previously talked volume-wise, will also lower our working capital, which is a cash flow positive thing. So those are the two factors.

Is there a risk that we have some spillover EUR 50 million? Yes, it is, but accumulated for the cash development of the two years, of course, this doesn’t play a role. And as I already mentioned in my call on Friday, we have already reduced our CapEx for the next year, so it will be not again EUR 100 million figure, so we are now looking somewhere in the EUR 70 million to EUR 80 million range, in that magnitude. So we’re already reacting to this also to improve our cash flow situation. So — and therefore, even if we have some cutoff effects for the remainder of this year’s, cash-flow-wise, we will keep this under control.

Richard Schramm

Thank you.

Operator

The next question comes from the line of Matthias Pfeifenberger with Deutsche Bank. Please go ahead.

Matthias Pfeifenberger

Yes, good afternoon. A couple of questions from my side, firstly, quite interesting is just that the GMS business will weaken next year, I mean I think the most concerns of the market were on stopping the bleeding in CFM. And now you’re seeing GMS will start to suffer on the macro. So can you maybe elaborate a bit more what’s the magnitude of the decline in EBIT terms, in absolute terms, in the GMS division, what is it based on? And then secondly, we digged a lot into the impairments in the last call, and my question here is what’s the — how much of a kitchen sinking or cleanout did you do with the CEO leaving? How much of incremental downside is there, let’s say, in the wind business? Or for instance, what happens when you don’t get into structural components on the Aerospace side? You mentioned on one slide that there are already some delays in the billings and so on. So what’s the downside? There is still EUR 100 million of goodwill and intangibles on the balance sheet. And then the third question. EUR 280 million net debt. You’re guiding for a bit of a more than a — I don’t know what the guidance was, mid-double-digit increase in absolute terms, so somewhat more. So let’s say, I don’t know — I mean, what is the mid-double-digit increase? Maybe we can talk some numbers here. And also for 2020, I mean, what’s the goal with the reduced CapEx? Is it to keep the net debt at least stable? Or might net debt go even up further in 2020?

Michael Majerus

Okay. First of all, thank you for questions. So let’s see one after the other. So GMS, I mean, we are not talking about a heavy decline on the market development. As I said, the growth drivers here are intact in that business, and especially, for example, the Semiconductor business, which we see clear, further increase. Of course, the market different, of course, the Chemicals segment is a little bit, of course, influenced by the global economy. But as I said, you have also to keep in mind that we come from a historic high level, which is also better than anticipated this year. So also, I will not put it at negative.

I think GMS will still perform very solid next year. It’s not a problem business, but it’s not that we — as I said, you cannot every year repeat one record year after the other. And of course, we can also not entirely restore our sales from the overall global environment. But as I also mentioned, that it is a very different situation than we had in our last historic peak, this was all based of the Solar business went in and the public exploded. This will not happen in GMS. As I said, we have here a very broad footprint. So this is, from what we’ve seen, relatively coming from the record levels they’re coming from and some effect of the overall weakening economy, but also here, as I said, we will go more in details at a later point in time.

So, coming back to CFM, I mean the reason here is, as I said once again, is not that we download to our kitchen cleaning or something that — like this or whether the CEO is on board or not doesn’t play so much role, frankly speaking. I mean it’s accountingly [ph] what has happened. I mean the decline, the first ad hoc in August has, accounting-wise, triggered here impairment testing, and that is the reason why we had to accelerate the five years plan, which is technically basis from this. And of course, we have to keep in mind that coming from where we originally planned for, somewhere in the EBIT of the magnitude of the prior year, which was above EUR 20 million, now to a minus figure in the — so we’re talking somewhere in the magnitude of EUR 25 million to EUR 70 million less profit this year than we originally anticipated. I mean of course, we have a starting point issue. And coming back to the point that discounted cash flow analyzes the nearer cash flows count to a bigger extent in the more future-rated cash flow is more a factor driven by this lower starting point. And as I said, related to the business of Textile Fibers and Industrial Applications and, of course, also the low-margin Wind Energy sector. And what is also important to keep in mind, we have three different cash-generating units, so that CFM is not one cash-generating unit. We have the former BMW joint venture, which is a cash-generating unit, which consists of the assets in Moses Lake.

And in Wackersdorf, we have the former Benteler joint venture with the two manufacturing site in Austria, which the downstream component business was one cash — separated cash unit. And we have the remaining assets, which is primarily the chemical plant in Portugal, where we do the precursor and Textile Fibers business. And the other carbon fiber line in Muir of Ord in Olin Scotland and the prepreg [ph] business here in Düsseldorf and then some activities in Meitingen. We do have that — the remaining asset in CFM and here, as I said, we had this effect. By the way, the total goodwill, which you haven’t seen, and it’s EUR 20 million. So by far, not the figure you mentioned here. And what is also important, what we stated, the other cash on hand, you do not have the need in an impairment testing. So, rather the opposite, we have here discounter, which are higher than the big portfolio, but I cannot offset this because I cannot — I have to evaluate them, so positive deviation on the one side. I cannot compensate with a negative deviation on the other side because I cannot — I have to evaluate this differently. So that is the situation here.

And with regard to net debt, yes, I mean, of course, we said here, a mid-double digit. Mid-double digit, of course, we will not be more precise than that. But of course, it’s not EUR 10 million. It’s not EUR 100 million, it’s somewhere in the mid, and it is, I think. And as I said, we also have to look at year-end. But of course, a mid figure on here is usually somewhere in the amount to EUR 40 million to EUR 60 million. It can be a little bit more or less. But as I said, it’s not the EUR 90 million, it’s not a EUR 10 million.

Matthias Pfeifenberger

Can I just follow-up on the Aerospace business? That’s actually a business that’s in the Benteler joint venture, right?

Michael Majerus

No, that’s not in the Benteler joint venture. That is, I think, this is a restarting business so to say. And of course, it starts with our own precursor. It starts then with our own carbon fiber, so the precursor, it’s coming from Portugal. The carbon fiber is primarily coming and then from Moses Lake. And as I said, this is, so far in — so far, a very small business. We are also, for the time being, also use some — still some fiber which we are buying from the markets. We’re also using even some glass fiber application. But I think the strategic view forward is to use a heavy tow fiber. And that is a very interesting part because today in the airplane, as you might know, primarily the use is of low tow fiber. Low tow fiber, however, has two differentiating factors compared to our heavy tow.

First of all, it’s much more expensive. Secondly, it’s also not suited for highly automated production processes. So what we see in the airline industry is that the high profits of companies who are in that business today, so the Japanese and the Americans, who have the low tow fiber industry, they are highly profitable companies is, of course, on the other hand, high cost for companies like Airbus and Boeing. And on the other side, the production process, which is going to outer place, is very small one, that’s also the reason why those companies have a huge order backlog for several years because the production process is not speedy enough. With the heavy tow fiber, I think we have found some good advantages. One is coming from the cost, still having a good margin; and the other is higher speed and production process. So we think that is a very good application. Of course, it will take some time. That is, of course, not done overnight, but this is, strategically for me, the road to go.

So we have to position our business step-by-step and faster in the Aerospace business because this is a high-margin business, which doesn’t mean that we will not continue on the Automotive side. Here, of course, we will go more into the component business, which is also a higher-margin business, of course, than just selling a fiber. I already mentioned we see some very good applications in the Automotive, which is primarily the battery enclosure because here, the material has a lot of physical advantages compared to metal, especially lower semi-conductivity, but also the higher strength and the lower weight. And we see here really a growing demand. So as I said, therefore, strategically, we have several directions: one is, of course, the accelerated access to Aerospace; second is more downstream business in the Automotive; and the thirdly is, of course, to have the Industrial Application business in more profitable niche market and on the other hand, reduce over time, our engagement in Textile Fibers and the Industrial Application commodity business.

Matthias Pfeifenberger

Okay, thanks a lot.

Operator

[Operator Instructions] The next question comes from the line of Wolfgang Felix with Sarria. Please go ahead.

Wolfgang Felix

Yes, hi. Thank you very much for taking my question. I was wondering if you could — and to an extent, you’ve already spoken about it, maybe shed some more light again on the makeup of your commodity business. More or less by plan, to what extent, I’m wondering, is much of it coming out of your Portuguese plant? I was wondering what the normalized load factors perhaps were there these days. And a little bit more. You were talking about conversion of some capacity to Automotive, et cetera, perhaps in the future to Aerospace. What proportion would you be converting there? What proportion would remain after, let’s say, Automotive, February in commoditized product, and how do you see the time scale sort of evolving from there?

Michael Majerus

Yes. First of all, thank you very much for your question. The Textile Fibers business today has a magnitude of roughly, what is it, EUR 80 million revenue, somewhere in that magnitude, and it comprises, in essence, currently up to 90% of the capacity in Portugal. We are converting another 10% in particular. Or the other way around, today, we only use 10% of the capacity for precursor production. We will increase this number to 20% next year and consequently reduce the Textile Fibers business by 10 percentage points. And as I said, in addition, we were also to have some — to some extent, but it will be the minor share of this business in some specialty areas, but this will be a maximum 10% of the Textile Fibers business. So the majority will, of course, stay in the — for the time being, next year in this commodity business or we’re working step-by-step. Of course, then the next step will come over the next years that we will convert another line with the further growth of our carbon fiber laser.

So, we grow out step by step. And we will further focus on development of specialty business and we’re reducing our cost. That is exactly also the reason for the reduction in headcount I mentioned. And of course, we are also currently renegotiating also the contract with regard to the steam supply costs. So we are working on several factors now. First, the conversation, the fiber conversion to precursor proposal, lowering the personnel-related cost, lowering the energy cost and going more into niche market with higher margins. So that is — of course, we cannot change the situation here overnight. This is more a step-by-step approach, but whatever we can do, we are doing fast.

Wolfgang Felix

Thank you. And just quickly on the conversion for precursor. The precursor, I’m assuming, would be sold internally.

Michael Majerus

Yes. That’s good.

Wolfgang Felix

How should we think about, presumably, therefore, not increased sales? I guess, that’s going to actually, if anything, drop sales ever so slightly, but how should we think about perhaps your margin effect as a result?

Michael Majerus

Yes. I mean, one thing is, of course, we can presumably produce more carbon fiber, of course, and this is then creating more revenue on the carbon fiber side so — and if — and of course, since this has a higher-margin Textile Fiber business, this has a positive effect coming back to the revenue point of one.

Wolfgang Felix

That’s for the Automotive part that you were referring to?

Michael Majerus

No, for several factors, we can use the fiber, as I said, for several applications, we can use it for Automotive, but we can use it for Wind Energy and we can also use it for Industrial Application.

Wolfgang Felix

Okay. Sorry, I — but those are the first sort of 10% that you were referring to that you might be able to achieve by — or from February onwards?

Michael Majerus

From the capacity in Portugal, yes.

Wolfgang Felix

Yes. And then the other 10% that you’re referring to that you might be increasing the precursor production with. What would that do to…

Michael Majerus

No, no, that’s not the other 10%. That’s always the same 10%.

Wolfgang Felix

Oh, I’m sorry, okay.

Michael Majerus

Yes. So, as I said, I mean, to make more simple reps and lines in Portugal, yes, one is today dedicated to precursor. We will have a second one next year. That is the additional 10% of the capacity per shift.

Wolfgang Felix

I see, I see. And how much does it cost to convert a line?

Michael Majerus

It’s a high single-digit million euro amount, and it’s already evaluated in the CapEx figure, which I mentioned, EUR 70 million to EUR 80 million.

Wolfgang Felix

Okay. Thank you very much.

Michael Majerus

You are welcome.

Operator

The next question comes from the line Marc Gabriel, Bankhaus Lampe. Please go ahead.

Marc Gabriel

Good afternoon. Just a follow-up to that first — last question, when you increase the carbon fiber production by using your own precursor, doesn’t that mean that you have more spot-related business for carbon fiber in the near future as the end markets, as you mentioned, are still not taking all these volumes which are in the market?

Michael Majerus

No. I think, as I said — first of all, sorry. Thank you for your question, Mr. Gabriel, but no, I think the market for carbon fiber is growing. As I said, we see an increasing demand in the aerospace industry, in the automotive industry and also in the wind energy sector primarily, so there are several markets where we can put the carbon fiber into it. So that is not going to the spot market.

Marc Gabriel

Okay, thanks.

Operator

Ladies and gentlemen, there are no further questions at this time. I hand back to Dr. Michael Majerus for closing comments.

Michael Majerus

Yes. Thank you very much for joining this conference call. As I said, we will come back in January at the latest with a more detailed outlook in 2020 and also some further outcome of our new five years plan. Looking forward to this, and wish you a nice day, and goodbye.

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