Edited Transcript of ZIL2.DE earnings conference call or presentation 7-May-20 12:00pm GMT

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Yes. Dr. Wolf, thank you very much. Ladies and gentlemen, a warm welcome also from my side.

I would like to comment the financial results for the first quarter, starting on Slide #4. Order intake decreased by 28.8% to EUR 355 million 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 EUR 989 million, a minus of 8.2%, respectively, 6.3% when adjusted for foreign exchange effects. The decline in revenue to EUR 396 million is mainly 2 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 5, 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 EUR 30.4 million year-on-year. About half of this was attributable to the rest of Europe, where revenues declined from EUR 137.8 million in the first quarter 2019 to EUR 122.8 million in the first quarter 2020. And in Germany, revenues fell by EUR 15.4 million or 14.4% to EUR 91.2 million.

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, plant closures and related temporary production CapEx 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 EUR 16.6 million in total to EUR 58.6 million.

With regard to our segments and business divisions on Slide #6, 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 Technologies, 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 EUR 6.4 million.

In contrast to the OE segment, the aftermarket segment remarkably increased its sales from EUR 44.7 million in Q1 2019 to EUR 52.3 million in the reporting period. There are mainly 2 reasons that are to be identified. First, the aftermarket segment made an impressive start to the 2020 financial year with a 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 #7 now presents the earnings figures for the first quarter. EBIT reached EUR 16 million 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 U.S. antidumping and countervailing duties of EUR 5 million. By purchasing materials from other suppliers, we are now able to avoid these tariffs and duties 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 have regular uses in the manufacturer 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 freights 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 EUR 8.8 million to minus EUR 9.8 million. It was mainly impacted by the Mexican peso which depreciated significantly against both the U.S. dollar and the euro. The income tax expenses decreased by EUR 2 million to EUR 4.5 million in the first quarter of 2020, and therefore, the net income attributable to shareholders of ElringKlinger increased to EUR 2 million coming from minus EUR 1.5 million in the first quarter of 2019. Accordingly, the earnings per share was in the positive territory, amounting EUR 0.03 after minus EUR 0.02 in Q1 2019.

Let me now turn to Slide #8 showing the performance of our segments. Our OE business, despite a significant reduction in revenue, we were able to improve the segment result in the OE business by EUR 5 million to minus EUR 0.3 million after minus EUR 5.3 million 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 clearly 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 EUR 12.8 million, while we had in the first quarter 2019, EUR 7.3 million.

This disproportionately large increase in relation to revenue growth is attributable not only to forward momentum in sales, but also to a disciplined approach to costs 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 2019.

Regarding Engineered Plastics, the Engineered Plastics 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 EUR 28.9 million. Due to the sales decrease, EBIT declined by 14.6% to EUR 3.5 million and the EBIT margin stood at 12.1% in the first quarter of 2020.

Now we come to Slide #9. Net working capital went down to EUR 453 million over the last quarters in 2019. Compared to the end of December 2019, it slightly increased by EUR 20 million mainly due to lower trade payables.

Our disciplined CapEx approach continued in the first quarter, where CapEx was EUR 12 million, 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 EUR 2.2 million, after minus EUR 19.3 million in the first quarter 2019.

Net financial debt decreased to EUR 603 million. We’ll have a closer look at this figure on the coming Slide #10. Here, thanks to the positive cash flow trends seen in the recent quarters, the group was able to reduce bank borrowings by EUR 192.3 million or 24.2% compared to the first quarter 2019. Current time deposits and securities of EUR 10.2 million 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 EUR 350 million over a minimum term of 5 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 a liquidity position of EUR 284 million, including unused credit lines, which is, right now, quite comfortable.

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

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [4]

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Well, thank you, Mr. Jessulat, 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 plants 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 #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 regards 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 U.S. will operate on previous levels again. In the economic side — 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 production. 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 regards 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 declined 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 #15 and close this presentation with the outlook for the group for the fiscal year 2020. Operating against the backdrop of uncertainty, ElringKlinger 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 as 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 EUR 0.3 million 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 cost, including capitalization, to account for around 5% to 6% of consolidated revenue; CapEx level that will be below 7%; net working 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 net working 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 2. 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 total capital.

So that was it from my side, ladies and gentlemen. And of course, Mr. Jessulat and myself, we are, as in all those calls, 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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(Operator Instructions) We will take our first question. Please go ahead, caller.

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Marc-René Tonn, Warburg Research GmbH – Senior Analyst [2]

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It’s Marc Tonn from Warburg Research.

The first question would be, given your expectations for revenues, and you already said you expect EBIT margin to be visibly down. Could you just give us some more granularity on what we could expect in terms of operating leverage for the year as a whole, or as the amount of costs, which you may be able to capitalize in such a scenario through short-term work or other measures you may have on hand or through 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 program you have started in the NAFTA 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, seeing we’ve seen this very strong Q1. Not that this is seen similar, not that strong, but similar developments in other car suppliers as well. But if you could just 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.

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [3]

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Okay. To your first question related to the operating leverage, it’s 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, yes, on a positive side. But nevertheless, of course, this is not overcompensating the negative impact coming from the decrease here in sales.

We focus, besides the savings program, and I would say something in regard to that in a minute. In particular, on the resource allocation in the current period, we try with a, let’s say, with the legal framework that we have in the individual jurisdictions to lower the personnel expenses in the group significantly. When you look at that as a top number, we have per month roughly, payroll, a little bit below EUR 50 million. 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 4 focus areas in regards to the savings program. There is, on the one side, improvement of 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 on the materials sides. We have identified and locked 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, I just mentioned and on general cost, of course, we are running a very tight ship now in regard to the general cost on the cost centers of the group, yes?

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [4]

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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, yes? And also our strong aftermarket markets, 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 inside the automotive industry, outside the automotive industry, just everything.

In addition to what Mr. Jessulat just said, we have, of course, taken in — with regard to personnel 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 the — 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 health care. We are one of the very few companies in the U.S. that pay health care for the employees, and we thought that it’s appropriate to pay those health care costs constantly, even if they are laid off. Still, we had a great relief in personnel costs in the U.S.

And then, of course, in other countries where there is a 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 personnel cost.

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Operator [5]

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We will now take our next question. Please go ahead, caller.

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Christian Ludwig, Bankhaus Lampe KG, Research Division – Head of Research & Analyst [6]

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It’s Christian Ludwig from Bankhaus Lampe.

One question a little bit further out. Do you see any postponement 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?

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [7]

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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’re in all the R&D projects, and that’s not only the fuel cell, it’s also battery technology, that’s also other innovative projects in the R&D departments. We don’t see short-time work. We don’t see that they postpone things. They are working on a very high level with regards to new technologies.

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

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Okay. And then another question on the CapEx. In your guidance, if I understood right, you say below 7% is what you are targeting, which would, based on my rough calculations, be around about EUR 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.

But now looking at Q1, you did cut it significantly. I think you — all of it was halved. So why do you think that this is — or why is this number rather high? Are there investments that you need to do this year that you can’t postpone?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [9]

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Yes. In regard to the general number, we had, and still have commitments that are related to significant CapEx spendings. And as we go on, as we see projects being delayed and all possibilities to delay ourselves, 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 EUR 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. What I can say that, of course, we want to land end of 2020 significantly below the EUR 90 million. That’s very clear.

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Operator [10]

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We’ll now take our next question. Please go ahead, caller.

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Akshat Kacker, JP Morgan Chase & Co, Research Division – Analyst [11]

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I hope you can hear me. I have 3 questions, please. Akshat from JP Morgan.

The first one on raw material tailwinds. Mr. Jessulat, it will 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 factoring 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 factor 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 noncurrent maturities, how much of debt is due in 2021 and 2022, please?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [12]

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Okay. I just start with the last question. We have just below EUR 100 million in debt maturity in 2021, yes? I mentioned that we have approximately the same in 2020, yes?

When I go to your second question now related to working capital, we have seen, in our program that we are running, that in the course of lower invoicing to the customers, that we could sell a lower volume only into the program, which means that short term, we saw an outflow of liquidity. This main movement happened to some extent in late March. I’d say with a high single digit, low double-digit figure of cash outflow that is also impacting, of course, here our figures as per end of March.

And from now on, from May on, it will be reversed. As more customer plants are coming online and we do more invoicing, we reach higher sales numbers in the course of the ramp-up, then it will give us short term, of course, more liquidity. So I see that we should be through this valley by now or in short, yes?

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 our activity list in full. So I’d say if the conditions are not changing, at least very low double-digit for the year 2020.

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Operator [13]

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We will now take our next question. Please go ahead, caller.

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Christoph Laskawi, Deutsche Bank AG, Research Division – Research Analyst [14]

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Christoph Laskawi, Deutsche Bank.

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’re just expected to smoothly reverse and basically reach the same level as the end of ’19?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [15]

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Yes. 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 time frame, 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 yes, that’s the expectation right now.

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Christoph Laskawi, Deutsche Bank AG, Research Division – Research Analyst [16]

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And on the raw mat 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?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [17]

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No, no. The numbers, when we look at this position, I give the net number after what — as per contracts, are being passed through change of pricing to the customers. That is right.

As we mentioned before, we have the policy to have material index losses with the customers. But we don’t have that 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. Now when I say roughly 2.5, so at 10 roughly for the year, that’s my expectation that this would be a bottom line net effect.

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Christoph Laskawi, Deutsche Bank AG, Research Division – Research Analyst [18]

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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-sized deterioration in April or was it a bit smoother?

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

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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 see — look at our OE business, we get clear orders from our customers, and they also indicate numbers already 6 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 the — due to lockdowns, customers in the aftermarket have a problem with liquidity, yes? And that, of course, leads to the fact that normally aftermarket is down. But we don’t see it in the magnitude as you just mentioned.

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Operator [20]

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Moving on to our next question. Please go ahead, caller.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division – Investment Analyst [21]

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This is Frank Biller from LBBW. It’s 3 questions.

The first question is on production. You’re estimating a 22% (sic) [23%] decline worldwide in car production, light vehicle production. What are you expecting as an outperformance of ElringKlinger? Is it in the range of 3 to 5 percentage points?

The other question. On the second quarter here, it should be clearly negative as many, many OEMs and also suppliers have estimated. Are you also expecting a negative — clearly negative EBIT in second quarter and a very sharp and negative free cash flow in the second quarter?

And one housekeeping issue here is more on Page 7. Here, on the others line, an EBIT impact, positive EUR 5 million in the first quarter. What was that, please?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [22]

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Okay. Your first question, in regard to the outperformance. It’s a low single-digit outperformance. We cannot be so technical on that matter. But we have seen the demand for ElringKlinger products relative to the overall market. Given our product mix, it has been a little bit stronger. We were coming out of some years now of strong growth in the curve, 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 — 4% 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 we’ll 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, our industry will see that.

EBIT, I don’t want to say too much, but I see us overall, on a cash flow perspective, not in a substantial cash burn mode in the quarters.

But from a liquidity perspective, not only for us, this is the case for many others. As we dropped in April with regard to sales, we’ll continue to see significant lower sales also in May. With the payment periods that we have with our customers, the liquidity months probably — everybody will see lower cash inflows from the receivables, of course, is going to be June, July. Overall, I see us, to some extent, resilient from a cash flow perspective. But on EBIT, I really don’t want to go into that as I see that more like as a speculation.

On the third question, could you repeat the third question? I didn’t get it right.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division – Investment Analyst [23]

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On Page 7, this EBIT bridge, there was a positive impact of EUR 5 million on the Others line here. What was that?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [24]

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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, yes. But it’s totally on cost — yes, there’s some transportation costs in there, there is service costs in there, there are some supply costs in there. So it’s general cost.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division – Investment Analyst [25]

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Yes. And that would last for the next quarters then as well because it’s more on…

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

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Yes, this is something 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, we avoid or we push down. Is this a run rate here for the following quarters? That really depends on how much business activity is going to be picking up in the second half. I could say I wish, but I’m not very sure as to uncertainty related to the second half activity.

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [27]

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Of course then, maybe I may say a couple of words to that. We see, of course, tremendous cost reductions caused by the special situation this year. We have the travel ban in the complete company group since the end of February. So 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 Hanover, canceled also this week, yes? So we get, of course, cost effects, and those are cost effects that you see in those EUR 5 million that you mentioned.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division – Investment Analyst [28]

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And for the whole year on this EBIT line, you’re ruling out a loss — an EBIT loss for the fiscal year?

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [29]

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Once again, we are…

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division – Investment Analyst [30]

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Still saying positive with 22% (sic) [23%] production minus, are you then estimating a loss for the full year?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [31]

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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 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, we cannot say.

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [32]

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Yes. But Mr. Biller, to be honest, you know the situation. And you know how things develop and have developed in the last 2 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?

If we experience, let’s say, in some countries, a second wave of this pandemic, everything might be closed again in July or August or maybe in September or whatever, yes? Nobody knows what is going to happen this year. So it would be really — I think it is impossible to predict what we will see at the end on the bottom line.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division – Investment Analyst [33]

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All right. It was more on the breakeven point. So with a minus of 20% on sales line, you’re staying in the positive range in EBIT, that was intention here.

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

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We’ll be more specific in the coming quarters, okay?

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division – Investment Analyst [35]

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Okay. Yes. Great.

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Operator [36]

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Moving on to our next question. Please go ahead, caller.

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Jürgen Pieper, Metzler Equities, Research Division – Senior Advisor [37]

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It’s Jürgen Pieper from Metzler. I have 2 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 the 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 this 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 is this Southern German potential carmaker of the future. So how do you think about that, about the current situation? And is it possible or is it planned even that you see some hard revenues in the — already in the short-term coming from Sono — from batteries for Sono?

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [38]

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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, yes. But as what they have announced, they are not going into sales 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.

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Jürgen Pieper, Metzler Equities, Research Division – Senior Advisor [39]

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Okay. And to China, please?

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

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China, this is what we see here, is actual demand in our plants. 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 plants, 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 some slight deviations but not any other major reason I could cite.

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Operator [41]

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There appears to be one further question. Please go ahead, caller.

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Harald Eggeling, ODDO BHF Corporate & Markets, Research Division – Analyst [42]

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Eggeling speaking from ODDO. One question basically on also Slide 7. I was wondering if unprofitable sales volume also could have dropped out as well. Could you please comment on that?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [43]

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Yes, that’s what I said. Because if you see the development in the gross margin, given the decline in sales and the improvement in gross margin, it is part of it. As 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, the removal of those output-related costs in the NAFTA region 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.

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Harald Eggeling, ODDO BHF Corporate & Markets, Research Division – Analyst [44]

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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 chain for Q2 versus Q1?

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Thomas Jessulat, ElringKlinger AG – CFO & Member of Management Board [45]

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Yes, we have a significant overshadowing of the lag 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 going to be — 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.

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Operator [46]

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

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Stefan Wolf, ElringKlinger AG – Chairman of the Management Board & CEO [47]

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Yes. 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 2 months. So thank you very much.

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Operator [48]

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This concludes today’s call. Thank you for your participation. You may now disconnect.