Elringklinger Ag

Good day and welcome to the Irving Klingler Group Analyst Conference Q1 2020. Today's conference is being recorded. And at this time, I would like to turn the conference over to Dr. Steven Wolf, CEO. Please go ahead, sir.

Well, thank you very much. Ladies and gentlemen, welcome to our conference call on the Q1 figures 2020. Let me just go shortly through the agenda as follows. I will start with the most important headlines of the first quarter. Then Thomas Esselat, our CFO, will present the financial figures of Q1. Afterwards, I will close with the outlook of fiscal year 2020. And at the end, you will, of course, have, as usual, the opportunity to ask questions. Well, let me start, first of all, with the highlights, Q1 2020. I want to point out some of those highlights for the first quarter 2020, which have already been published in part along with the ATOC announcement in April this year. In Q1 2020, sales declined by 10.2% to 396 million euros due to the general market downturn and of course the coronavirus pandemic. Without the effects of currencies and M&A activities, revenue was down by 9.8%. In 2019, we implemented a program which aims at delivering efficiency gains. The positive impact on earnings can be clearly seen in the Q1 2020. As the EBIT improved by almost 10 million euros to 16 million euros, the margin stood at 4%. Networking capital increased to 453 million euros compared to the end of 2019 due to lower trade payables. But comparing with the level in Q1 2019, we have been able to lower it by more than 150 million euros. The operating free cash flow stood at minus 2.2 million euros after minus 19.3 million euros in the prior year period. Net debt EBITDA decreased to a factor of 3.1 in the reporting period after 4.7 in Q1 2019. In the coming months, we will set a clear focus on three points that I will tell you now, three following points. First, we will manage the impact that the coronavirus pandemic will have on our company. Second, we will continue to optimize cost levels through our program, which enhances efficiency. And third, we will start pre-series production of our first production line for battery systems here in Germany, in Thale. That is going to happen in the second half of the year 2020. Well, so far from my side, and now let me hand over to Mr. Jesulat, our CFO, for the explanation of the quarterly figures.

Yeah, Dr. Wolf, thank you very much. Ladies and gentlemen, a warm welcome also from my side. I would like to comment the financial result for the first quarter starting on slide number four. Order intake decreased by 28.8% to 355 million euro in the first quarter and by 24.7% adjusted for currency effects. It was affected quite significantly by the extended new year vacations and the mandatory suspension of plant operations in China as well as the production hold in Europe and the Americas. And the slowdown of the European economy had an impact as well. The situation was similar with regard to the order backlog, but not as severe. The order backlog declined to 989 million euro, a minus of 8.2%, respectively 6.3% when adjusted for foreign exchange effects. The decline in revenue to 396 million euro has mainly two reasons. First, it is the continued economic slowdown that already has become apparent in the fourth quarter of 2019. And second, the initial economic repercussions of the coronavirus pandemic in China were seen in February as a result of which global vehicle production fell markedly by 23% in the first quarter 2020. So foreign exchange effects reduced sales by 0.1%. The divestment of Hungarian industrial park impacted sales by minus 0.3%. And all in all, we saw an organic sales decrease of 9.8%. While on slide five, Sales in both Europe and Asia declined in the period under review. Sales in North America rose again by 3.3%, and the increase in revenue is particularly significant when considering the decline of 10% in vehicle production within the North American region. As a result of last year's substantial growth, North America, now our second strongest sales region, increased its share of group revenue from 23% to 27% in the 12-month period and even more from 16% to 27% when compared to the first quarter 2019. In Europe, as in Germany, the slowdown in the economy was also reflected in sales performance. And in total, the group saw revenues drop by €30.4 million year on year. About half of this was attributable to the rest of Europe, where revenues declined from €137.8 million in the first quarter 2019 to €122.8 million in the first quarter 2020. And in Germany, revenues fell by €15.4 million or 14.4%. to 91.2 million euro. The economic impact of the coronavirus pandemic was reflected in the performance in the first quarter of 2020 in Asia Pacific. The effects are associated with extended new year vacations, planned closures, and related temporary production cutbacks at automobile manufacturers and suppliers that were implemented in mid February 2020. first in China and then in other parts of Asia. Mainly for this reason, sales in Asia Pacific fell by 16.6 million euro in total to 58.6 million euro. With regard to our segments and business divisions on slide number six, we see some revenue shortfalls. At a divisional level, revenue attributable to the lightweighting elastomer technology division was substantially lower. We have seen this downturn mainly within the area of engine-related components, whereas the demand for innovative lightweight structural modules was only slightly lower year on year. The other classical divisions, shielding technology, cylinder head gaskets, and specialty gaskets, also recorded a downturn in revenue due to current weaknesses of the global vehicle market. The e-mobility division, however, managed to reach its prior year performance with revenues of €6.4 million. In contrast to the OE segment, the aftermarket segment remarkably increased its sales from 44.7 million Euro in Q1 2019 to 52.3 million Euro in the reporting period. There are mainly two reasons that are to be identified. First, the aftermarket segment made an impressive start to the 2020 financial year with this substantial revenue growth as early as January. And second, With the first production restrictions in place in February 2020, the aftermarket segment noticed an increase in volumes requested by customers as part of their production scheduling. Following the global spread of the virus, this trend intensified with the result that revenues also rose significantly in March 2020. Slide number seven now. presents the earnings figures for the first quarter. EBIT reached 16 million euros and the EBIT margin was at 4.0%. Let me outline the main positive drivers for this development. Prior year's quarter has been adversely affected by US anti-dumping and countervailing duties of 5 million euros. By purchasing materials from other suppliers, we are now able to avoid these tariffs and do these to a very large extent. We have noticed tailwind from lower raw material prices, and especially the prices of polyamides, but also the price of steel and aluminum, which Erwin Klinger uses in the manufacture of gaskets and shielding products, trended lower in the period under review. only high-grade steel prices rose slightly in the first quarter of 2020. Our extensive program to improve the efficiency levels also had an impact on the group, resulting in lower personnel costs, and at the same time reduced special freight movements for raw materials, which had been necessary in the previous year to ensure the ability to deliver products to our customers. And to sum up the earnings situation, the net finance result fell by 8.8 million Euro to minus 9.8 million Euro. It was mainly impacted by the Mexican PESEL, which depreciated significantly against both the US dollar and the Euro. The income tax expenses decreased by 2 million Euro to 4.5 million Euro in the first quarter of 2020, and therefore the net income Attributable to shareholders of Erwin Klinger increased to €2 million, coming from minus €1.5 million in the first quarter of 2019. Accordingly, the earnings per share was in the positive territory, amounting €0.03 after minus €0.02 in Q1 2019. Let me now turn to slide number eight, showing the performance of our segments. OE business, despite a significant reduction in revenue, were able to improve the segment result in the OE business by 5 million Euro to minus 0.3 million Euro after minus 5.3 million Euro in the first quarter of 2019. And this development was driven by the explained progress in North America and the declined tariffs and duties. Related to the aftermarket, aftermarket sales in Q1 was clear above the prior year figure, especially driven by Eastern Europe and the Middle Eastern markets. This substantial sales growth also had a positive impact on segmental EBIT, which rose by 75% to 12.8 million euro, where we had in the first quarter of 2019 7.3 million euro. The disproportionately large increase in relation to revenue growth is attributable not only to forward momentum in sales, but also to a disciplined approach to cost within the entire group, including aftermarket, as well as a favorable product-country mix in the period under review. And therefore, EBIT margin increased to 24.5% after 16.3%, in the first quarter of 2019. Regarding engineered plastics, the engineered plastic segment also felt the persistent market downturn in Europe, as well as the first effects of the coronavirus pandemic in Asia. And as a result, segment revenue fell by 10.2% to 28.9 million Euro. Due to the sales decrease, EBIT declined by 14.6%, to 3.5 million euro, and the EBIT margin stood at 12.1% in the first quarter of 2020. Now we come to slide number nine. net working capital went down to 453 million euro over the last quarters in 2019. Compared to the end of December 2019, it slightly increased by 20 million euro, mainly due to lower trade payables. Our disciplined CapEx approach continued in the first quarter, where CapEx was 12 million euro, and the CapEx ratio stood at 3.1%. Investment projects are focused on measures in connection with upcoming product launches. Cash flow from operating activities in the first quarter of 2020 was sufficiently high to finance a large part of the investment outflows in the same period. Operating free cash flow improved. compared to prior year's quarter, and was only just within negative territory at minus 2.2 million euro, after minus 19.3 million euro in the first quarter 2019. Net financial debt decreased to 603 million euro. We'll have a closer look at this figure on the coming slide, number 10. Here, thanks to the positive cash flow trend seen in the recent quarters, the group was able to reduce bank borrowings by 192.3 million euro or 24.2% compared to the first quarter of 2019. Current time deposits and securities of 10.2 million euro are included in net debt as from 2020 on. Regarding our maturity structure, you can clearly see the positive effect of our syndicated loan with a volume of 350 million euro over a minimum term of five years. And this loan clearly improved our maturity structure. While the share of long-term debt was at 60% by the end of 2018, the date before conclusion of the syndicated loan agreement, it increased now to 80%. And last but not least, I would like to focus on the liquidity position of 284 million Euro, including unused credit lines, which is right now quite comfortable. Having said this, I now turn back to Dr. Wolf.

Well, thank you, Mr. Iserath, for the explanations. Ladies and gentlemen, let me now draw your attention to the current year where we are expecting a big global challenge. The lockdown of public life already hits the economic prosperity quite a bit. Almost all plans of OEMs were temporarily closed in Europe and North America. It resulted in a massive breakdown of economic cycle. Much will now depend on how business activities pick up again, especially in Europe and North America, whether the supply chains are affected, whether processes can be resumed efficiently, and whether individual countries are spared a second wave of the pandemic, including another lockdown. At the same time, it remains to see whether demand will develop at a sustainable level in the quarters ahead. This is a key issue for us and for everybody. The traffic lights on slide number 12 indicate that we still have considerable production interruptions in many of our plants. Nevertheless, the red and yellow lights show that most plants are already ramping up, especially those in Germany, Italy, Spain and France. The situation at the Asian plants of the group is continuing to stabilize significantly, with the only exception, and that is India. But uncertainty remains extremely high. We currently assume that it will take until May 2020 at the very least to ramp up the production locations in Germany and Europe. The plants in North America, Brazil, South Africa and India will follow with a time lag. Delays may also occur in the respective countries depending on the course of pandemic and government measures. With regard to market expectations month by month or sometimes even week by week, predictions for the light vehicle productions are revised mainly downwards. This underlines that there is no real insight or visibility at the moment. No one knows how deep the drop in our industry will be. And no one knows whether the plants in Europe and the US will operate on previous levels again. In the economic cycle, Is the economic cycle going to recover in the short term? We don't know. Nobody knows as of today. What can be noted? The first quarter was more the Asian or Chinese quarter with regards to plant closures and the coronavirus pandemic. In combination with the general economic slowdown, it will have an impact of minus 46% on Chinese and minus 23% on global light vehicle productions. The second quarter will be more the European and North American quarter with regard to production interruptions. The shutdown will lead to a minus of around 47% in global light vehicle production. The rest of the year mainly depends on the sustainability of demand. If there is no or even low demand, the cut in our industry will be really deep. Looking at the development of the main markets, we expect the following. The market conditions in North America have worsened over the last month. With regard to the coronavirus impact and the trade agreement with China, which is now finally closed yet, we expect the market to decline by around 25%. The coronavirus pandemic also massively impacts the European markets. Moreover, the economies in Europe still suffer from the unsolved post-Brexit trade relations, and an existing general market downturn. For these reasons, we expect a decrease in car production also of around about 25% in this region. China saw a sharp Q1 decline due to the coronavirus pandemic. It seems that they can recover slightly faster than expected. In addition, the U.S. tariffs still weigh on the economy in China. All in all, we expect a decline of around 15% in China for the fiscal year 2020. Overall, estimates by leading banks, research houses, and industry associations vary considerably, as no one can currently predict the further course of the coronavirus pandemic. Okay. We will now turn to slide number 15 and close this presentation with the outlook for the group for the fiscal year 2020. Operating against the backdrop of uncertainty, Ellen Klinger anticipates a change in organic revenues that will be slightly more favorable compared to the swing in global automobile production. Industry experts expect the latter to contract by minus 22% in 2020. The fiscal year 2020, of course, is driven by the consequences of the coronavirus pandemic. Even though the group has reacted swiftly to the decline in demand, for example, with short-time work or greater cost discipline, the measures will not be sufficient to fully compensate for the earnings effect of the expected revenue shortfalls. Overall, the group is anticipating an EBIT margin for 2020 that is visibly lower than in the previous year, and significant strains are expected, especially in Q2 2020. One remark on our own behalf. As depreciation and amortization of purchase price allocations is not expected to exceed 0.3 million euros for the full year, we will in the future present the margin of reported earnings before interest and taxes in the outlook. So no more pre-PPA figure anymore. Last but not least, our expectations for the remaining indicators for 2020 are return on capital employed that will be below prior year level. Research and development costs including capitalization to account for around 5-6% of consolidated revenue. CapEx level that will be below 7%. Networking capital in percent of group revenues which will be on prior year level despite the expected sales decline. A positive operating free cash flow. An equity ratio that is expected to remain within our long-term target range of 40% to 50% of total capital. A deterioration of net financial liabilities in relation to EBITDA in view of the expected earnings situation. On this basis, the group assumes that in the medium term, it will be improved in returns on capital employed compared to preceding years, maintain its disciplined approach with regard to CapEx, Maintain a level of networking capital as a percentage of group revenue of around 25%. Achieve constantly an operating free cash flow. Optimize its net debt indicator such as it is going to be below two. And we are spending around 5% to 6% of group revenues, including capitalization on R&D activities per reporting period. And, of course, as our long-term goal is already, we maintain the equity ratio in the range of 40% to 50% of the total capital. So that was it from my side, ladies and gentlemen. And, of course, Mr. Ezelat and myself, we are, as in all those calls, more than happy to take your questions. Thank you very much.

Thank you. If you would like to ask a question, please signal by pressing star 1 and the telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach your equipment. And a voice prompt on your phone line will indicate when your line is open. Please state your name before posing a question. Again, that is star 1. Let's pause for a brief moment to allow everyone an opportunity to signal. Just as a reminder, that is star 1. We'll now take our first question. Please go ahead, caller. Your line is open.

Hi. The first question would be given your expectations for revenues and you already said you expect even margin to be visibly down. Could you give us some more granularity on what we could expect in terms of operating leverage for the amount of cost which you may be able to in such a scenario to short-term work or other measures you may have on hand or similar measures in other countries? And after that, on how much in such a scenario now with the revenue being so much weaker, how we should think about the progress of the earnings enhancement programs you have started in the NASA region, but also in other parts of the group, what we could expect there. And the second question would be pretty much along the aftermarket business. I think we've seen this very strong Q1. similar, not that strong, but similar development in other car suppliers as well. So if you could give us some indication of what you would expect for the second quarter in terms of revenue and profitability in that division, that would be helpful.

Thank you. Okay. To your first question related to the operating leverage is really hard to say something to that because it's a very complicated mix Fact of the matter is, as we have seen over the last quarters and the ramp up in North America, that we had incremental sales with incremental negative contributions. We'll see the opposite now. Yeah, on a positive side. But nevertheless, of course, this is not overcompensating the negative impact coming from the decrease here in sales. We focus, you know, besides the savings program and I'll say Something in regard to that in a minute in particular, you know on the on the resource allocation in the in the current period and You know, we try with a let's say with a legal framework that we have in the individual jurisdictions to lower the personnel expenses in the group significantly, you know when you look at that and As a top number, we have per month roughly payroll a little bit below 50 million euros. And the expectation is that while we are very much now in a depressed demand situation, that we reach certainly double-digit relief from those programs, very roughly speaking. We mentioned in the earlier calls that we have four focus areas in regards to the savings program. There is on the one side, you know, improvement of, you know, commercial terms with our customers. And here we have had contributions in the last year will have impact also in 2020. And we also have an opportunity list that we are working on also during the crisis. Same, you know, on the material side, we have identified, you know, and logged in lower material prices where we could, and we have impact in 2020 here, and we are working also on an opportunity list. Personnel cost, you know, I just mentioned, and on general cost, of course, you know, we are running a very tight ship now. in regard to the general cost on the cost centers of the group.

Okay, let me say something to the aftermarket business that has been really strong in the first quarter. We expect that to slow down a little bit. It is pretty clear that also the aftermarket business will be affected by effects from the corona pandemic. Yeah, in often our strong aftermarket markets, you know, things have been closed, car shops have been closed, dealers have been closed. So that the demand that is going to decline in the second quarter, because if you have a lockdown in the magnitude that we saw it globally, it's pretty clear that this will have an effect on everything globally. inside the automotive industry, outside the automotive industry, just everything. In addition to what Ms. Siedler just said, we have, of course, taken, with regard to personal costs, every measure that is possible. That means in countries like, of course, Germany, then also Great Britain, Hungary and France, we have short-term work. Then, of course, in North America, we have so-called unpaid leave. We have just laid off the people as it is possible in North America. One thing I would like to mention that we continued to pay, even the people that have been laid off in North America, we have continued to pay their healthcare. We are one of the very few companies in the U.S. that pay healthcare for the employees and we thought that it's appropriate to pay those healthcare costs constantly even if they are laid off. So we had a great relief in personal costs in the US and then of course in other countries where there is the legal obligation that you continue paying your people even if they do not work and they are laid off like Mexico. we are discussing with the representatives of the workforce to find a solution that we also in those countries get some relief with regard to personal costs. Thank you very much.

Thank you. We'll now take our next question. Please go ahead, caller. Your line is open.

Yes, good afternoon. It's Christian from Bankerslampe. Thank you very much for the explanation. One question a little bit further out. Do you see any postponements on, let's say, orders for future technologies like the fuel cell developments that you have currently? Is that being already something that you see that is pushed back by customers, or has the crisis not affected these future developments?

Well, pretty clear. All the R&D projects are running on a regular basis. We have not seen any postponements, be it with the so-called new OEs. We have a lot of new OEs, new car manufacturers that are highly innovative and they are working on a normal level. But also I have to say that also the traditional car manufacturers, our customers that we have since many, many years, They, in all the R&D projects, and that's not only the fuel cell, it's also battery technology, that's also, you know, other innovative projects in the R&D departments. We don't see short-time work. We don't see, you know, that they postpone things. They are working on a very high level with regard to new technologies.

Okay, thank you. And then another question on the CAPEX. In your guidance, I understand where you say Below 7% is what you're targeting, which would, based on my rough calculation, be around about 90 million. That sounds a little bit high in the current environment. I've heard from other companies that they're looking to cut it by 30% to 40%. For you, it would be a little bit less. Now, looking at Q1, you did cut it significantly. I think it was halved. So why do you think that is, or why is this number rather high? Are there investments that you need to do this year that you can postpone?

Yeah, you know, in regard to the general number, we had and still have commitments that are related to significant capex spendings. And as we go on, you know, as we see projects being delayed or possibilities to delay ourselves, you know, we defer in regard to suppliers. We cannot defer if the customer still has those SOP dates. But going into the year, it was not fully clear. And right now, it is not fully clear as to how many projects we can defer out to later. And therefore, we have given this number when we went into the year. Now, when you ask me for what I'm trying to attain, then I would, from the 90 million, I would try to get down at least 30% of that. But this I can say now, there is a likelihood that we can manage. And I can tell also that if I can do more, I will do more, but I can only say that as we go through the coming quarters when I have more information on that. But there is a lot of short-term activity here, but I can say that, of course, we want to land end of 2020 significantly below the 90 million. That's very clear.

Okay, understood. Thank you very much. Thank you. We'll now take our next question. Please go ahead, caller. Your line is open.

Thank you. I hope you can hear me. I have three questions, please. Akshat from J.P. Morgan. The first one on raw material tailwinds. Mr. Yazulad, it would be helpful if you could quantify the amount you expect in 2020 from raw material tailwinds. The second question on working capital, and if you expect any reversal on your receivables factory facility. We've been hearing from other suppliers that this facility is not working as it used to in the past, and obviously the sales that are used to factory receivables are much lower. So any comments over there would be helpful. And the third question on your debt maturity structure. On slide 10, out of the $494 million in non-current maturities, How much of debt is due in 2021 and 2022, please? Thank you.

Okay, I just start with the last question. We have just below 100 million debt maturity in 2021. I mentioned that we have, you know, approximately the same in 2020. When I go to your second question now related to working capital, you know, we have seen, you know, in our program that we are running that, you know, in the course of lower income for lower invoicing to the customers that we could sell a lower volume only, you know, into the program, which means that, you know, short term, we saw an outflow of liquidity. You know, this main movement happened to some extent in late March. I'd say, you know, with a high single digit, low double digit figure, cash outflow that is also impacting of course here you know our figures as per end of March and you know from now on you know from May on you know it'll be reversed as more customer plans are coming online you know and you know we do more invoicing you know we reach higher sales numbers you know in the course of the ramp up then it'll give us short-term, of course, more liquidity. So I see that we should be through this valley by now or in short. To your first question, how much tailwind do we expect from what's locked in? My expectation right now is a low double-digit. tailwind from material, but we have not been through, you know, our activity list in full. So I'd say, you know, if the conditions are not changing, at least, you know, very low double-digit for the year 2020. Thank you.

That's very helpful.

We will now take our next question. Please go ahead, caller. Your line is open.

Hi, Christoph Laskawi, Deutsche Bank. Thank you for taking my question. A follow-up on the factoring. We heard from other suppliers that actually they see it as more challenging compared to the past to actually use the facilities, and they guide down the overall volume of the facilities by a good 50% at year-end 20 versus 19. Do you encounter any problems currently in the discussion using that facility or is basically everything unchanged and you just expect it to smoothly reverse and basically reach the same level as the end 19?

No, it operates unchanged on, like you said, on lower levels of invoicing and receivables. that we can sell right now. We are in the process, I think, in May, June timeframe to reverse to some extent. And it's hard to say if the level end of 2020 is comparable with the level of 2019, but it, of course, depends on the level of activity of invoicing and how much we have in the accounts. But yeah, that's the expectation right now.

Thank you. And on the ROM at Tailwind, do you expect customers to demand the pass-through of your benefits or starting to negotiate on that in the near future? Or is it really just the gain that you can keep and you wouldn't expect some of that to flow to your customers as well?

No, no. The numbers, you know, when we look at this position, I give the net number after... you know, what, as for contracts are being passed through change of pricing to the customers. That is, that is right. You know, as we mentioned before, we have the policy to, to have, you know, material index clauses with the customers, but we don't have that, you know, to full extent with all the materials. So there is one portion that is being handed through, so to say, and there is another portion that sits with us. When I say roughly two and a half, so 10 roughly for the year, that's my expectation that this would be a bottom line net effect.

Okay, and last question from my end on aftermarket as well. Others have indicated that April was down significantly like 30-40%, but they would expect May to snap back quite quick once the shops are open. Did you see a similar size deterioration in April or was it a bit smoother?

No, we still had a pretty good situation in April. We rather see that now in May it's turning down. But the aftermarket business is pretty hard to predict because when we look at our OE business, we get clear orders from our customers and they also indicate numbers already six months ahead before they need the parts. But in the aftermarket, we have customers that are sometimes on a very short-term basis, they order parts. What we see is that due to lockdowns, customers in the aftermarket have a problem with liquidity. And that, of course, leads to the fact that normally aftermarket is down. But we don't see it in a magnitude as you just mentioned. Understood. Thank you very much.

Moving on to our next question. Please go ahead, caller. Your line is open.

Yes, hello. This is Frank Biller from LBW. It's three questions. The first question is on production. You're estimating a 22% decline worldwide in car production, likely legal production. What are you expecting as an outperformance of Erwin Klinger? Is it in the range of three to five percentage points? The other question on the second quarter here should be clearly negative as many, many OEMs and also suppliers are estimated to Are you also expecting a negative, clearly negative EBIT in the second quarter and a very sharp and negative free cash flow in the second quarter? And one housekeeping issue here is on page seven here on the other slide, an EBIT impact positive 5 million euros in the first quarter. What was that, please?

Okay, your first question in regard to the outperformance, you know, it's a low single-digit outperformance. You know, we cannot be so technical on that matter, but, you know, we have seen that demand for Erling Klinger products relative, you know, to the overall market. given our product mix has been a little bit stronger. We're coming out of some years now of strong growth and the growth curve, incremental sales on the classical business is flattening now, but still we come to the assessment that we should be performing slightly better than the market. But not, four to 5% would be a high number in my opinion. On the second quarter outlook, it's very difficult to say because we have very limited visibility on the demand from the customers. As you can imagine, We were leaving the area of constant production where the ERP systems of the customers delivered more or less constant EDI demands to us. and right now that changed, I think will have a very negative impact on very depressed sales levels in the second quarter. I think that's very clear and that we can say across the board, industry will see that. EBIT, I don't want to say too much, but I see us overall on a cash flow perspective, you know, in a substantial cash burn mode, you know, in the, you know, in the quarters, but from a liquidity perspective, you know, not only for us, this is the case for many others, you know, as we dropped in April, regard to sales, we'll continue to see significant lower sales also in May, you know, with a payment periods that we have with our customers, The liquidity months, everybody will see lower cash inflows from the receivables, of course, is going to be June, July. You know, overall, I see us to some extent resilient from a cash flow perspective. But on EBIT, you know, I really don't want to go into that as I see that more like, you know, as a speculation. You know, on the third question, could you repeat the third question? I didn't get it right.

On page seven, this EBIT bridge, there was a positive impact of $5 million on the other line here. What was that?

Others, that is general cost to a large extent. As we say, we identify the material prices in the waterfall, the personnel cost, and the other cost is mostly general cost that go into the cost centers of the entities of the group. It's totally different cost type. Yeah, there is, you know, there is, you know, there's some transportation costs in there, there is service costs in there, there's some supply costs in there. So it's general cost.

And that would last for the next quarter as well.

Yeah, this is something, you know, that we try to push out. to defer or to avoid to the most point possible. Of course, services, outside services that are not urgently needed, all sorts of different costs you know, we avoid or we push down, you know, is this a run rate here for the following quarters? That really depends on, you know, how much business activity is going to be picking up in the second half, you know? You know, I could say I wish, but I'm not very sure, you know, as to uncertainty related to the second half activity.

Maybe I may say a couple of words to that. We see, of course, tremendous cost reductions caused by this special situation this year. We have a travel ban in the company group since the end of February. That means no travel expenses in March and April and also it's ongoing until the end of May. We have cancellations of big fairs where we had, of course, budgeted costs. If you just look at the Automechanika in Frankfurt in September, that was just canceled yesterday. We have, of course, a big amount in our budget for that because that is an important fair for the aftermarket. Also very important for us, of course, is the International Auto Show for Trucks in Hannover. canceled also this week. So we get, of course, cost effects, and those are cost effects that you see in those 5 million that you mentioned.

And for the whole year on this EBIT line, you're ruling out a loss, an EBIT loss for the fiscal year. Once again, we are... 22% production minus. Are you then estimating a loss for the full year?

I would say it depends on how the market development is unfolding. When you ask us, can we rule out negative EBIT? I think it's, I cannot say that, you know, based on the uncertainty in the second half. We need to see second quarter. We need to see in particular what I think outlook into the second half of the year. And then we can, I think, be more specific to give an answer on that one. But right now, you know, we cannot say.

Well, Mr. Willer, to be honest, You know the situation and you know how things develop and have developed in the last two months and nobody knows what is going to happen in the rest of this year. So how should we here predict what we see under the bottom line at the end of this year? You know, if we experience, let's say, in some countries, second wave of this pandemic, you know, everything might be closed again in July or August or maybe in September or whatever. Nobody knows what is going to happen this year. So it would be really, I think, it is impossible to, you know, to predict what we will see at the end on the bottom line.

It was more on the break-even point, so it was a minus of 20% on save line for staying in the positive range in EBIT. That was an intention here.

Okay. We'll be more specific in the coming quarters, okay? Okay, thanks.

Moving on to our next question. Please go ahead, caller. Your line is open.

Yes, hi. Good afternoon. It's Jürgen Pieper from Metzler. I have two questions here. One is on the top line, similar to what Frank just asked. You said China production to be down by 15%. I think in the meantime, you are somewhat below the consensus here. I think most analysts are probably looking for a single digit or maybe up to 10% decline. So is it because demand seems to come back quite well? Is it more that you see trouble on the concerning the trade conflicts. This is what you mentioned in one word, I think. Or is it don't you really trust these recovery of demand in China in the end? And secondly, what was in these times not so bad, pretty positive, I think, was the most recent news from Sono Motors, this southern German potential carmaker of the future. So how do you think about that, about the current situation, and is it Is it possible or is it planned even that you see some hard revenues already in the short term coming from batteries for Sono? Thank you.

Well, let me start with the second question. Of course, we are in close contact with them because half of the price of this car is related to our battery system. We have a good feeling and we have good discussions with them. We, of course, they order prototypes, but as what they have announced, they are not going into series production in 2020. So I think everything, of course, also depends on how things are picking up again in our industry. But we have a good feeling with regard to Sono Motors.

Okay. And to China, please.

China, this is what we see here is actual demand in our plans. We have seen some good recovery. We had some areas where we had some exposure to the customers in the Wuhan area. But in particular in the northern China region, we have the northern Chinese plant, the region was pretty resilient, I would say, and came back online pretty swift. In the south, it is more like a mixed situation. So generally, it could be that based on the customer structure and the regions where we deliver that there is, you know, some slight deviations, but not any other major reason, you know, I could cite.

Okay. Thank you. If there's one further question, please go ahead. Caller, your line is open.

Hello. Egelink speaking from Odoo. One question basically on also slide seven. I was wondering if unprofitable sales volume also could have dropped out as well. Could you please comment on that?

That's what I said. Because if you see the development in the gross margin, given the decline in sale and the improvement in gross margin, it is part of it. In particular in North America, we have seen some lower volumes. Those increments or decrements, so to say, the sales decrement that goes with a positive gross margin increment is part of it. It's not everything, but it is in fact you know, the removal of those output-related costs in the NAFTA region, you know, where we had some burden in the gross margin. So that assessment, I'd say that is right. It's part of it. It's not all of it. It's part of it.

And this basically leads me to a follow-up for Q2, basically. Would you see the same demand pattern? So we might have a similar... argument change for Q2 versus Q1?

Yeah, we have a significant overshadowing of the lack of gross margin based on the lower sales volume. This is what I mentioned earlier. The impact we were talking about is of course not nearly compensating for the missing gross margin that we will have in Q2. It's lessening the impact, but we still see, of course, a significant impact of low sales volumes with significantly lower gross margins, most likely in the second quarter.

Okay, thanks. Thanks.

There are no further questions. I would like to turn the conference back to you, Dr. Wolf, for any additional or closing remarks.

Yeah, thank you very much. Thank you for attending this conference. We wish you all the best in those difficult times, and we will hear each other again when we have our conference call for the second quarter, and then we see, I hope, a little bit clearer, and I think that things are then running better than they have been in the last two months. So thank you very much.

this concludes today's call thank you for your participation you may now disconnect