Edited Transcript of ZIL2.DE earnings conference call or presentation 30-Mar-20 12:30pm GMT

First of all, I want to point out some of the highlights 2019, which have already been published in parts, along with the release of the preliminary figures in last February. In 2019, global automobile production contracted by 5.6%. Operating against this challenging backdrop, the ElringKlinger Group managed to expand its revenues by 1.6% to EUR 1.73 billion in total. Without the effect of currencies and acquisitions, revenue was up 0.5%, thus, the group clearly achieved its goal of outperforming the market by 2 to 4 percentage points in terms of organic growth.

At the beginning of 2019, we implemented a program, which aims at delivering efficiency gains. This began to show its first positive effects with regards to earnings. In total, EBIT before PPA amounted to EUR 63.2 million, including the sale of our industrial park in Hungary in the fourth quarter. Thus, the margin stood at 3.7%, which was at the lower end of the target range of around 4% to 5% that we had predicted. The success of the extensive measures was illustrated by the particularly favorable direction taken by operating free cash flow in 2019, which improved by EUR 262 million to EUR 176 million. As a result, the group has been able to reduce the level of net debt significantly.

Against the background of the earnings performance in 2019 and the economic impact of the coronavirus crisis, the dividend has been suspended for 2019. In taking this approach, the group is looking to strengthen its internal financing for the ongoing transformation of our industry. In 2020, we will continue towards the path of improving efficiency and standardizing our processes on a global level.

Yes, before we come to the financial details, I would like to share our key strategic points with you. As you all know, we are right within a far-reaching transformation process in the automotive industry. The mega trends of urbanization, globalization, technological process and climate change result in industry-specific trends. Autonomous driving, connectivity and innovative ride-sharing services will be part of this change of mobility. ElringKlinger will particularly cover the strong trend of efficient propulsion, which aims at CO2-neutral technologies as far as possible.

These trends are reflected in the expected development of the automotive markets, which you see on Slide #7. New drive systems that enable decarbonized mobility will play an increasingly important role in the future. The internal combustion engine will lose more and more market share, but at the end of the decade, it will still represent 85% of the engines in global light vehicle, including — global light vehicles, including hybrids. It will, of course, vary by region and by application. Regions like Asia or the U.S. West Coast will change faster than regions like South America or Africa. At the same time, we note that more than half of the vehicles will feature new drive technologies, also including hybrids.

In the short-term view, the change of the industry will be driven particularly by regulations. But afterwards, mobility trends and cost considerations will gain in importance through economic — economies of scale and technological progress.

Yes, we come now to Slide #8. As you all know, the emission regulations are becoming stricter and stricter in the future. The process of regulation-driven change started at the beginning of the last decade within certain quotas of diesel and gasoline vehicles. But the diesel issue has turned the tide. Instead of moving towards the strict emission targets per fleet, manufacturers are currently moving away from them because there is less demand for CO2-friendly diesel cars. As a result, manufacturers are forced to speed up towards new technologies but at high cost for the industry just to avoid the even more costly penalties that are seen in the future.

ElringKlinger prepared itself for change at a very early stage, both in the short and long term. Our strategy is a triad path within the process of change. First, we will continue to exploit the strong footprint in classical applications of the combustion engine. This enables us to defend and even further expand our market share. As now new OEMs for ICE cars are to be expected, we will primarily supply established customers with our proven technology. Second, the classic business units are using their know-how for developing innovative solutions for the new drive systems. Thus, they are serving both established and new customers. Last but not least, we have added new ideas and new technologies to the group. Battery, fuel cells and electric-driven — electric drive units supplement the product portfolio to unlock the tremendous potential of new drive systems. Let me go into more detail on the following slides.

First, our strong footprint in the internal combustion engine technology. The roots of ElringKlinger lie in the gasket business. We have a strong market position in cylinder gaskets but also for specialty gaskets. And I don’t want to forget our 2 biggest businesses when it comes to revenues, that’s heat shielding and lightweight elastomer. Both of these units are experiencing strong demand. This demand is not expected to be reduced. If you consider the relevant hybrid cars to the number of internal combustion engines are not going to decrease a lot over the next decade. Markets expect — experts estimate the production will roughly remain on the same level until 2030. This also means that we can use our strong market position and continue to supply our established customers, but new ones as well with our well-known product.

If I have to choose a product example for this part of the strategy, it clearly is our domestic product, the cylinder gasket. Looking at the number of cylinder gaskets manufactured on ElringKlinger production lines, we come to the conclusion that almost every second car of an annual production should have included a cylinder gaskets by ElringKlinger. Why are we experience such a high demand? We achieve a reliable ceiling for any engine type, thanks to the multilayer design and beads for macro sealing, an effective elastomer coating for micro sealing, the option of combining stoppers in different variations, coins, folded or laser-rolled it. All in all, we offer product solutions like these to our customers from a strong market position with a high level of engineering content and the quality that guarantees long — longevity. And this will contribute to both our revenue and our earnings over the upcoming decade.

Well, now on Slide #12, I will shed some lights on the transformation process within the classical business units that we have. The classical business units are not just resting on their success in the internal combustion engine technology. They also continue to advance and to contribute their extraordinary knowledge in order to develop solutions for the new drive systems. For example, the metallic bipolar plate, decisive component for a fuel cell stack, will be the new cylinder-head gasket. It is a sophisticated product for which deep knowledge in material processing is needed, not only the material know-how itself but also the skills, how to achieve a very precise and elaborate flow field are relevant. In addition, the tooling is a key element to realize a standard process for serious production.

The bipolar plate is just an example. We have the same situation with special gaskets in the shielding sector or even in lightweight constructions. We contribute our extensive know-how from the classical business to get innovative solutions for the new drive systems. This will generate future sales in the area of new drive systems.

I continue on Slide 13, and this shows a successful example in the Specialty Gaskets business. A few years ago, a German sports car manufacturer asked us to develop a disk carrier for the transmission of its new full electric vehicle. They told us that it has to withstand high mechanical loads and speeds and should work reliable. After all, we have developed a product that enables weight savings of up to 50% to standard market solutions on a more general basis and have been nominated by this customer. It is now in serious production. The product and the full electrical sport car has been released a few months ago. It is a true success story for both the OEM and, of course, for us, ElringKlinger as the supplier.

Yes, when looking at the successful product developments for E-Mobility cars, we should also consider the market. The pure EV cars, and this includes battery electric vehicles as well as fuel cell electric vehicles, are expected to increase significantly over the next decade. Regarding absolute numbers, Asia will be the hotspot market, growing from 1.1 million full-electric vehicles in 2019 to almost 9 millions cars in 2030. ElringKlinger is involved in more than 20 projects in this region, particularly in the fuel cell technology.

In addition, Europe will be a prosperous target market. The growth rate will be even higher than in Asia coming from 300,000 full-electric vehicles in 2019 to 4.6 million cars in 2030. North America is a more ambivalent market. On the one hand, it will remain a traditional market for the classical combustion engine technology. On the other hand, there are regions like the West Coast that are our guard for innovative drive systems and new mobility concepts.

In the area of new drive systems, ElringKlinger has already brought in its competencies for new components. I have already mentioned the metallic bipolar plate for a fuel cell system. The same is true of the cell contacting systems, which play a key role in connecting the different battery cells and transferring the power towards the electrical motor. It is nothing new for us that we are — have here in serous production. This is almost for 8 years now, the case that we have this in serious production.

But due to the profound R&D work of its engineers, ElringKlinger has been able to develop modules as well as system competency around batteries and fuel cells. These 2 technologies have been supplemented by the acquisition of a strategic minority in hofer powertrain, which means in the end that the capabilities around the electric drivetrain unit has been added to the product range of ElringKlinger. This also — this all follows the maxim, only those who understand the system can build the better components. In the last years, we have been quite successful in winning orders across these metrics. Here, you see that on Slide #15.

There are 2 orders for battery systems to be ramped up beginning at the end of 2020 — or the end of 2020 or beginning of 2021. There are orders on hand for battery components as well, and we are quite successful in the fuel cell business, especially in Asia.

The fuel cell business is one of the differentiating factors for ElringKlinger. We have achieved a strong expertise over the last 2 decades starting roughly with the new century when we have been chosen by a German premium OEM to develop fuel cell components. It has never been realized, but we have held on to the technology because we have been always driven by the vision to engineer a CO2-neutral drive technology. We can now offer components, modules or complete fuel cell systems. It is a technology that shows a broad range of applications and will see a breakthrough for the mass market.

Why are we so confident for this technology? Why now? For the first time, there is a congruence of the different dimensions. The technology is ready for the market. There’s a strong political will to decarbonize the mobility sector. We note a strong social need for climate-friendly drive systems. A tripling of mobility trends, autonomous driving, connectivity and efficient propulsion, along with the diesel engine issue, has initiated a far-reaching transformation process. Buses are one of the key markets for fuel cells, and likewise, heavy-duty trucks. For both downtimes, for reaching its expensive for their owners or operators. With regard to these applications, fuel cell is superior to battery, assuming that we need decarbonized technologies. The same arguments apply to vehicles for long distances, for example, medium-sized or large cars.

And last but not least, I would like to mention the remaining mobility devices like trams, trains, ships or even airplanes that all will benefit from innovative and sophisticated fuel cell solutions, which brings me to my third product example on Slide #17.

The fuel cell stack is a good example for a solution that we have newly developed and which was previously not technological part of the classical business unit. It represents a new technology that has been added to the product range by adding new experts over the last 2 decades to the group. Our fuel cell engineers have been very successful in their work. ElringKlinger is now ready to market a fuel cell stack for different applications. By the way, we have currently 3 different configurations of such a fuel cell stack as the numerous applications require different designs. We are able to realize an electrical output of 2 to 150 kilowatt based on our metallic bipolar plates. Very recently, we have built a new technology center for battery and fuel cell systems by which we can soon cover the first industrialized processes to manufacture fuel cell stacks. Thus, ElringKlinger is ready for serious production of those fuel cell stacks.

Yes, all in all, these strategic triad is the basis for the transformation of ElringKlinger. We will see a process of change of the company as products for E-Mobility will gain a larger share of sales. To get there, the Board has implemented a process to realize new operation systems, which consists, for example, of global standards, new work requirements, et cetera. This is part of the path to what our ambition 2030, to generate more than 25% of our sales by structural lightweight products and E-Mobility systems.

On Slide #19, you see the reason why we are quite confident to get there. We have received nomination letters and projects by customers, which have other E-Mobility products. It illustrates the strong growth, which is to be expected by the continuing establishment of E-Mobility drive systems.

Before getting to the financial details, I will close my strategic presentation with the shift of ElringKlinger’s content per car when E-Mobility products have ramped up and generate larger shares of sales than today. Currently, we could provide components with a value of roughly EUR 40 to EUR 60 per car. If the OEMs also order across car beam, this range will rise to EUR 100 to EUR 150, depending on the design. In future, if the car includes a fuel cell stack or battery system, products of ElringKlinger represent a value of up to EUR 10,000 per car.

Well, ladies and gentlemen, this concludes my strategic presentation of the future of ElringKlinger, and I will hand over to my colleague, Thomas Jessulat, our CFO, and he will give you an overview of the financial figures in detail for 2019. And then I will be back here with some final remarks. So please, Mr. Jessulat, please go ahead.

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [2]

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Yes, Dr. Wolf. Thank you. Also a warm welcome from my side.

Let me start on Slide #22 with our robust order book situation. The volume of units requested by customers as part of their production scheduling increased slightly by 0.1% to EUR 1.737 billion in the fiscal year 2019. However, the last quarter showed a decline of 2.4% to EUR 382 million, mainly due to the underlying weak market situation. With regard to sales revenue, the group continued on its path of growth and generated sales of EUR 1.727 billion. We had a strong tailwind from the foreign exchange market, mainly due to the U.S. dollar, but also the Mexican peso and the Swiss franc contributed. Additionally, we have to consider an M&A impact in Q1 2019 from the Hug divestment closed in February 2018. And without the effect of currencies and acquisitions, revenues were up by EUR 9 million or 0.5%.

The picture turned around in the fourth quarter where sales decreased on the back of the current market downturn by 2.8% to EUR 420 million. While on Slide 23, sales in both Europe and Asia declined in the year under review, and sales in North America rose by 25.1%. The strong performance in North America was driven by the supply of components, used vehicles for which demand in the American market was more buoyant than originally planned.

In addition, the start-up of the new production plant in Fort Wayne provided the basis for new product rollouts that generated higher tool-related revenues. Those associated tool-related revenues were always built at the start of production in 2019. With a share of 26%, North America ranks now as the group’s second largest sales region. The strong recovery trend, which we have originally expected for the second half of 2019, failed to materialize in Asia Pacific. Operating in this challenging climate, we managed to generate revenue of EUR 310 million, which corresponds to a decline of 1.4%. Therefore, the region’s share of total revenue decreased slightly to 18%, coming from 18.5% in 2018.

The general market weakness was most evident in our largest sales market, rest of Europe and in Germany, with revenue declines of 4.2% and 7.8%, respectively. And for this reason, the share of total revenues fell by 1 percentage point to 29%, while the share of the domestic market was down by more than 2 percentage points to just 23% in 2019. Compared to 2019, it is clear to see that the continuous internationalization of the group led to much stronger increase in sales outside Germany, especially in North America and Asia.

With regard to our business divisions, see on Slide #24. The gaskets divisions were negatively impacted by the market downturn and by foreign exchange effects. Lightweighting/Elastomer further increased its sales share to 29%. This reflects generally the high customer demand for innovative components made of high-performance plastics. And within this business division, the area of structured lightweighting showed the strongest performance with an increase of 32%. Shielding Technology came close to matching its prior year performance, and E-Mobility increased revenues by 9.7%. But on an overall EBIT level, breakeven has not been achieved yet.

I will turn now to Slide #25. We have made a substantial investments in recent years in an effort to position ElringKlinger as a global player. Today, we operate with a requisite capacity levels in all of the major automotive markets around the world. And the expansion was an essential in order to assure that the group can remain successful in a globalized world of manufacturing. For this reason, our customer base today includes all major automotive manufacturers. And furthermore, there is no dependence on individual customers as we generate around 11% of our sales with our largest customer in North America.

On Slide #26, you see the earnings development on EBITDA and EBIT pre-PPA level. As you all know, there were external as well as internal factors, which affected earnings in 2019: among others, product mix effects in the market downturn, especially in China, resulted in lower sales and lower earnings contributions in 2019 than originally planned; second, raw material prices are still on a high level, but nevertheless, we have noticed a tailwind as of recent; and third, the ongoing high demand in the former NAFTA region, which led to extra costs in the North American locations. And we have established targeted measures to counteract the effects in operations and in the end, on earnings. First positive effects on earnings have already been achieved in the second half of 2019. And last but not least, the initiated cost saving measures, which includes the reduction of material costs of the group, improved the earnings quarter-by-quarter in the course of the reporting year. The very strong improvement in earnings in the fourth quarter 2019 compared with the same quarter of the previous year is due to an EUR 8.6 million contribution to earnings from the sale of the business part in Hungary.

And let me now turn to Slide #27, showing the performance per quarter of our segments. As we have already discussed the main issues of the OE business above, I will now focus on the remaining segments. in Aftermarket, revenues stood at EUR 42 million in the fourth quarter and at EUR 173 million in the fiscal year 2019, 14% and 8%, respectively, above the comparable figures of the previous year. The Aftermarket segment recorded its biggest gains in the Middle East as well as in Eastern and Western Europe, whereas Germany fell short of the prior year figure. After a temporary stagnation of earnings in the first half of 2019 as a result of sluggish European markets and geopolitical tensions, the Aftermarket segment was prospering in the second half of 2019. And as a result, EBIT margin could improve quarter-by-quarter, reaching 18.9% in the last quarter of 2019. For the fiscal year 2019, the EBIT margin increased by 17.6%. In regard to Engineered Plastics, Engineered Plastics segment felt the market downturn across all industries but could resist in the bottom line. Segment revenue was close to prior year level at EUR 26 million in the fourth quarter and EUR 118 million in the fiscal year 2019. As soon as the first signs of subdued demand became apparent after 9 years of continuous growth, management initiated immediately countermeasures to save costs during the year. However, due to persistently high commodity price, it was not possible to fully offset the effects of existing cost structures in every quarter, and therefore, the EBIT margin decreased to 13.5% in fiscal year 2019 after 16.6% in 2018, whereas a very strong EBIT margin of 19.7% was achieved in the last quarter.

On Slide #28, you see the development of the net income attributable to shareholders in the earnings per share. Both key figures were significantly below previous year’s figure as net finance cost increased in 2019 by almost EUR 5 million to minus EUR 19.7 million, mainly due to the increase in interest expenses; secondly, higher tax expenses, as ElringKlinger earned most of its profits in countries whose tax tend to be higher than the German tax rate; and last but not least, the noncontrolling interest stood at EUR 0.9 million.

Against the background of this earnings situation and the currently uncertain economic effects of the coronavirus crisis, the dividend for the 2019 financial year will be suspended. The group is, therefore, also strengthening its internal financing for the former transformation process. We come now to Slide #29. As Dr. Wolf mentioned before, we have implemented a comprehensive efficiency program to optimize group’s cash flow figures in the short and medium term, which is based on the 3 building blocks: earnings, net working capital and CapEx. The program includes measures to improve earnings. For example, the group-wide cost reduction program as well as the optimization of the performance in Switzerland and North America. And in addition, we have clearly defined effective measures to reduce net working capital, and this includes an extension of payment terms at a reduced level of trade receivables and the optimization of inventories. And regarding CapEx, we continue a disciplined approach.

Coming now to Slide #30. On this slide, you can see that the initiated measures show effects so that we were able to reduce the net working capital position significantly by 25.4% in 2019. Our centralized approach of raw materials, the sale of tools and the optimization of existing stocks in the global locations decreased the inventory level by 11%. Trade receivables have been lowered by a strict reinforcement of overdue accounts and the partial use of financial instruments, which amounts to slightly more than EUR 60 million. Trade receivables were reduced by 24% compared to the previous year. Moreover, payment terms of supplier contracts have been extended so that we were able to increase trade payables by EUR 21 million or 15%. All in all, net working capital came down to EUR 423 million, coming from EUR 568 million by the end of 2018.

Coming now to Slide #31. Besides these efforts, we continued our disciplined CapEx approach in each quarter of 2019 with CapEx ratios of between 6.6% in Q1 and 4.1% in Q4. But this low level does not mean a radical bow-headed principle like safe CapEx at all costs but rather, a clear focus on projects associated with our strategic new business areas, such as E-Mobility or structural lightweighting. We’ll manage the growth in the classical business fields in order to tap the potential of the new technologies. Having this in mind, CapEx has been spent in a disciplined way in 2019. It could be lowered to EUR 92.2 million, which represents 5.3% of total sales. Our ambition to get to a double-digit [million euro] number has been successfully achieved. All these targeted measures of our efficiency program had a positive effect on our operating free cash flow, which increased substantially to EUR 175.8 million in 2019. The prior year figure was minus EUR 86.2 million. The final quarter also contributed to this positive development with EUR 65.7 million.

Now let’s have a look on Slide #32. Compared to December 2018, we were able to bring down net financial debt by EUR 128 million or 17.7%. If adjusted for the IFRS 16 impact, debt level has even been reduced by EUR 175 million or 24.2%. Regarding our maturity structure, you can clearly see the positive effect of our syndicated loan with a volume of EUR 350 million over a minimum term of 5 years. This loan clearly improved our maturity structure. And while the share of long-term debt was at 60% by the end of 2018, it increased now 78%.

Having said this, I now turn back to Dr. Wolf.

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [3]

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Well, thank you very much, Mr. Jessulat. Ladies and gentlemen, it’s me again. Let me now draw your attention to the current year. At the beginning, I have already explained the situation after the outbreak of the coronavirus pandemic. We are expecting a global challenge, a real big challenge. The graphics unconfirmed COVID-19 cases shows that in China, the source of the outbreak, the numbers are declining again according to official announcements and this since mid-February. This gives hope because especially since the beginning of March, the numbers in Europe have been rising strongly. With a 10-day delay, the U.S.A. is also following. Europe and the U.S. have enacted rules of conduct in order to contain a slow — and slow down the pandemic and get to the pattern similar to China. As a consequence, the OEMs have closed their plants temporarily. And so had we to do it to.

On Slide 35, you see the impact on ElringKlinger. We have reduced operations in Germany, where we have the most plants in one country. In other important European other countries like France, Spain and Italy, we have almost no operations. In Turkey and especially U.K., we have also dramatically reduced the production. According to the instructions by the U.S. government, we have suspended production in California, in Michigan and in Georgia. For Mexico, we have also — we are also considering a temporary shutdown. And even other plants like Brazil or South Africa are also operating at a very limited capacity. The only ray of hope at present is that Asia is recovering. And our plants in China, Japan and South Korea have started up again. They are operating at a very good level, again, but the first quarter will nevertheless leave deep marks here in those countries and those operations.

With regard to the market expectations, we see the same pattern as last year. Month-by-month or sometimes even week-by-week, predictions for the light vehicle production are revised and adjusted downwards. This underlines that there is no real insight or visibility for the rest of the year. No one knows how deep the drop in China was. And no one knows when the plants in Europe and the U.S. will be reopened again, and if we — if the economic cycle is going to recover. I also question whether people will go straight back to buying cars or restrict themselves to essentials. Employment rates will also play an important role. We have frequently adjusted our market expectations, but what was current yesterday is already outdated today. When finalizing the annual report a few weeks ago, we adjusted our expectations for the economic impact of coronavirus on China, but the outbreak in Europe seems to be concentrated on specific regions. Day by day, the situation worsens and expectations are reduced, thus, the forecast of light vehicle production in the different regions will be lower and even by far lower than originally expected.

Overall, there is currently a great uncertainty. There are many questions without clear answers. When will the plants of the OEMs and the suppliers subsequently will be reopened again? Will people buy cars afterwards so that global auto markets are going to experience a recovery? Will the supply chain be stabilized after the restart of production? Is the announced state aid be sufficient enough? And also, will there be a second wave of pandemic? It is impossible to predict the duration of plant closures by manufacturers. The same applies to the potentially more extensive measures in the coming weeks, also from a political perspective. In view of these considerable uncertainties and significant dynamics, the economic effect on the group cannot currently be determined with sufficient reliability and accuracy, thus, we currently refrain from giving an outlook today. It will follow when we have more visibility on the economic impact on our industry in general and, of course, on our company group in specific.

Ladies and gentlemen, thank you very much for your attention from me and from Mr. Jessulat, and of course, both of us are now more than happy to take your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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And the first question is Christoph Laskawi, Deutsche Bank.

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Christoph Laskawi, Deutsche Bank AG, Research Division – Research Analyst [2]

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The first one would be, I know this question has been answered several times already, but I think it’s more relevant than ever now. On the covenants on your debt, could you remind us if there are some which you might be at risk of breaching? And aside from that, could you potentially renegotiate those covenants and negotiate with the banks on the debt? The second question will be on savings from short-term work. Could you give us a rough indication on the operating leverage to the downside if you are in production shutdowns and make use of short-term — shortening working time schemes across the globe? And the last question will be on potential indication from you on the cash burn by month in times of a shutdown?

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [3]

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Yes, let me start with the second question. Mr. Jessulat will be answering number 1 and 3. Of course, we have savings from short time work, and of course, we use that. We have to use it because utilization of the plants, as I mentioned in the presentation, is quite down.

We have different situations around the world. There are countries where there is short-term work, similar to what we have in Germany. There are countries where we don’t have that. The overall situation is that we try to reduce personnel costs as much as possible. So what we did in March, we just reduced over time. And now in our German operations, we are in short-term work in — up from April 1. And roughly — roughly, I would say the average in Germany, overall plans is going to be about 50%. We still have, of course, part of our operations that are running really good. If you look at the Aftermarket business, that is running on a very high level, which is good for us because it generates revenues, and it has a very high EBIT margin in the Aftermarket business. But that runs, I would say, at 110%. Also, the ErlingKlinger Abschirmtechnik that also produces products for the medical industry is running still quite well, at least in this area.

So a different situation in different areas. But in the average, I would say, 50% short-term work up from April. And of course, that applies around the world, especially where factories are closed because of official regulations that have been sent to us. We, of course, try to reduce the personnel costs remarkably.

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [4]

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Okay. On your question number 1. No, right now, we are not at risk. And on the debt covenants that we have, it is, of course, something that we have to look at, depending on how long the shutdown period will last. With what we think, the scenario that we’ve been calculating, we are not at risk with what we know today.

On the third question on the cash burn, I want to give you a more detailed answer on that. There is 3 components. The first is the structural component. What is the EBIT level from a normal operations perspective that still gives us sufficient cash flow so that we are not, from an operational perspective, in a cash burn mode. Here, I think we are somewhat resilient because there is plants in shutdown, but there is still operation going on also into April. So there is cash flow generation, but the dynamics in terms of releases from customers and customer orders is from today’s perspective for April is a difficult one. So I cannot really answer that except for, I feel we are, from that perspective, relatively resilient at this point in time since we have Chinese operation — Asian operation that is still going on. For me, the risk, when we look at the use of working capital is really the deliveries of supplier that continue to deliver us with — according to the old schedule. What we have done in this regard, we have a while ago rescheduled all our resource planning in terms of requests and delivery schedules for suppliers, and we have also rescheduled our internal necessary production orders according to that scenario. And we have reduced here the risk now to a very high extent that we are seeing an increase, a significant increase in inventory. But this is still a risk item, and we watch this very closely.

On the CapEx side, when we look at also the use of cash, there is not much that we have committed for 2020 in regard to CapEx spending. There is an amount that I’d say, there’s roughly around EUR 25 million at the beginning of the year where ElringKlinger has committed for payments in regard to CapEx. So there may be the case where we go into a cash burn, but at this point in time, there is really no clear answer that I can give to you right now.

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Christoph Laskawi, Deutsche Bank AG, Research Division – Research Analyst [5]

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Very helpful. A follow-up on that. The receivables that you have, I guess, factoring currently is not really an option. Do you get indications from the OEMs that you actually will get the payments on time? Or do you see some delays there? And can you pass those delays on to your suppliers potentially? Or would you see a potential squeeze in the coming months from that?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [6]

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No, we don’t see any deferred payments from the OEMs. And clearly, from our perspective, it’s the — it’s our clear expectation that liquidity flows from the OEMs in our direction that, that continues. Very clear. And we continue also to make payments to our suppliers at this point in time. We need to be careful that we are not hurting the Tier 1, 2, 3, 4 suppliers below us in terms of liquidity. So we continue to make payments as we expect that our customers continue to make payments as well.

The sales receivable program that we have, this is later, I think, is going to be helping us in the later run up. But right now, it’s neutral when I look at cash flow.

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Operator [7]

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And the next question is from Christian Ludwig, Bankhaus Lampe.

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Christian Ludwig, Bankhaus Lampe KG, Research Division – Head of Research & Analyst [8]

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Two quick ones. First of all, could you give us an indication if you — what you would have guided on EBIT without COVID-19 or the coronavirus crisis? I mean, my understanding is that you have a real estate sale included in 2019 EBIT? So would there be — will there have been growth in EBIT without corona 2020? And second question is will you apply for state aid? Or have you done that already?

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [9]

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Second question, no. First question, as we have a situation now with the coronavirus, it’s irrelevant what we would have guided without this because we have a situation that is like this. So it’s not going to be helpful to think about that or to say something about that because we have to take the situation as it is. .

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Christian Ludwig, Bankhaus Lampe KG, Research Division – Head of Research & Analyst [10]

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I’m just trying to get, underlying, would you believe that you would be able to increase margins this year without — I mean, the measures you’ve undertaken last year would…

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [11]

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You know, Mr. Ludwig, you know exactly our midterm guidance that we have in all the presentations and instead, a continuous increase of EBIT and sales. That is what we have guided since a couple of years.

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Operator [12]

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And the next question is from Henning Cosman, HSBC.

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Henning Cosman, HSBC, Research Division – Analyst [13]

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Yes. I thought there were 2 very interesting things in what Mr. Jessulat said in response to the first question. The first was regarding the covenant and that you’ve calculated that you’re not going to touch them in your estimated scenario, I think you called it. I was wondering if you could please share your underlying assumptions there.

Dr. Wolf has of course talked about China. I think we’ve a few of your OEM customers talk about sort of successive return to the 0 line in China. If you could just maybe share your assumptions for Europe a little bit and the U.S.? If you’re in line with IHS, which I believe is going for about minus 10% now for the year and then some growth in ’21 and so on, if you could just share a little bit what you’re thinking. That’s my first question, please.

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [14]

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Okay. The overall scenario is that starting from March, we dropped down significantly going into April, and that we see a slow recovery throughout the first half year, and we will have not a big impact in the second half of the year. This is very generally saying, the scenario that we have, which is close to what we experienced in the Chinese situation. This is currently a very general situation that we simulate.

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Henning Cosman, HSBC, Research Division – Analyst [15]

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Okay. I understand. And the second thing that I picked up on what you said was with respect to your operating cash burn that you have a level of operating profitability that allows you to remain cash positive. That’s at least what I understood. So are you willing to elaborate on that a little bit? Or can we just take away that you expect to be operating profit breakeven or better in the first half, given your scenario that you just laid out? Is that a fair understanding?

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [16]

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I — when we look at the level of depreciation on a quarterly basis, then when we only look at EBIT and EBITDA, then the group could go significantly red without going into structural cash burn. But the topics that we really have to manage very careful is the supply chain from the information flow and from the order flow perspective, and this is what we do very carefully, and we have to be careful that we are not increasing inventory in the situation significantly.

And like I mentioned, on the CapEx side, we have the possibility to delay, defer more relative to what we had planned before. I mentioned around EUR 25 million was the initial commitment here for CapEx going into the year. That gives us opportunity to push it out. But I think the key consideration is that the closure of the plants that, that is not continuing significantly into the second half of the year. I think this is the key assumption that we made, and we’ll see if this holds or not.

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Henning Cosman, HSBC, Research Division – Analyst [17]

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Understood. As a final clarification, if I may. I think Christian asked about have you or will you, in kind of one question above stated, and the answer was no. So can I just clarify at this point, you’re ruling out that you will apply for state aid, is that correct?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [18]

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You can never…

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [19]

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You never know.

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [20]

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You never rule out that if we continue to close plants globally, or let’s say, in the western world, you cannot say. But we have not applied for it.

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [21]

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The question — the clear question was, “Have you applied currently for state aid?” And the answer was no. And you modified the question now and say, “Are you going to do that in the future?” So that’s a different question. The first question was — and the clear answer is no, we did not apply so far. But you never know how things develop. And if this goes on, the situation goes on for months and months, situations can change.

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Henning Cosman, HSBC, Research Division – Analyst [22]

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I guess my point was a little bit in relation to the suspension of the dividend as well. I mean, you haven’t done that so that you can apply for state aid because we’ve seen a relationship here now where the German state aid saying you can’t pay dividends if you want state aid. The 2 are unrelated for you at the current point?

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [23]

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No, that has nothing to do with that. We just decided once again to not pay a dividend for 2019 and ’20 just to save liquidity. It’s pretty clear.

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Operator [24]

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And the next question is from Akshat Kacker, JPMorgan.

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [25]

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My first question is on OE profitability. I was slightly surprised to see a sequential decline in Q4 versus Q2, Q3. Factoring in all the raw material tailwinds and cost actions that you’ve been talking about, can you discuss what happened to OE profitability in the fourth quarter? And linked question to that is also, can you quantify the raw material tailwinds, please, in the fourth quarter and what are you already seeing for 2020? I’ll follow-up with the rest.

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [26]

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Yes. The reason why we have a decline in a gross margin profitability was unfavorable mix in Q4. Part sales were down. Tooling sales was up, and it’s something I would call product mix with some weak market development here, in particular, in China.

When we look at raw material, then from a spot pricing perspective, there is, in some areas, weaker pricing that we saw in Q4. But as you know, as material costs come through average pricing through our systems, we have not seen the average pricing in terms of the reductions coming through in Q4.

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [27]

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Okay. And any thoughts for 2020 on raw material?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [28]

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Raw material generally tend to be weaker. Some materials came down as of recent. It will take some time until average pricing adjusts to that, in particular, of course, with the background of the plant closures right now, but we tend to be see better pricing for raw materials generally.

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [29]

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The second question is on the balance sheet. Can you comment on where do you stand in terms of liquidity at the end of the first quarter? I see that you have gross cash of EUR 135 million, credit line of EUR 150 million, and you have refinancing needs of EUR 160 million, but that was December 2019. Can you give us an update as of March 2020?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [30]

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No, I can give you some expectation from my side in regard to that. We have had, as you know, as for December 31, EUR 294 million in terms of liquidity. And we have, on the short-term maturity, around EUR 150 million for 2020. The larger portions of that represents EUR 100 million in terms of term loans where I do not expect that all of that needs to be refinanced or paid down at this point in time, yes. And the rest is essentially some line of credits around the globe, smaller one where, do not expect significant movements. But as of today, I cannot give you any updated information on that as we report Q1, as you know, later.

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [31]

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Okay. And the last one is that you have made good progress on inventory management. I think you’re now on 75 days. Do you see room for more improvement there in the coming quarters once the production shut down end?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [32]

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For me, on the working capital side, in particular, the number as a percentage of sales, the 25% would be the level that I would want to attain going forward. I think this is a good level now, but now we have to keep it, and this is for me the primary target. So I would not want to make any further promises to that.

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [33]

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I just wanted to check if you see some more room specifically on inventory to improve inventory further?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [34]

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Inventory, not much because now we were coming from some velocity here, and now we have a full stop. We need to see that we slow down supply chain effectively. And as the plants go into shutdown, there is — mainly in China, I’d say, maybe in some other companies, the possibility to rotate material out, but I’d say this capability when we are in a half global shutdown is rather limited.

Looking into the second half of the year, I would have to reassess that. And I would expect there is more possibilities. But right now, I’d be careful with that.

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [35]

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Understood. The last one from my side, on R&D capitalization. It picked up significantly in 2019 again and more so in Q4, if I’m correct. Can you just tell us how should we expect developments on that in 2020?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [36]

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Yes. The overall capitalization here is just under EUR 17 million in 2019. And I would expect a similar level on the way forward.

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [37]

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In absolute terms? Just to be sure. .

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [38]

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In absolute, you mean in terms of…

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [39]

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You mentioned percentage capitalization ratio.

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [40]

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Oh, okay. In Q4, we have seen the highest level so far. In regard to this, we say 10% to 20% of R&D, and I’d say we stay within this for 2020. 10% is probably low, 20% is probably high, but somewhere in that area.

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Operator [41]

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If there are currently no further questions, I hand back to Dr. Wolf for closing remarks.

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [42]

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Yes, thank you very much for attending our conference here and asking your questions. Well, we do everything to keep the company running on a good level, and we are going to further report next time when we have our conference call with regard to the first quarter.

So far, I would like to say take care and keep safe, everybody. Thank you very much for attending the conference. Bye-bye.