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Edited Transcript of CIE.MC earnings conference call or presentation 28-Feb-20 4:30pm GMT

Full Year 2019 CIE Automotive SA Earnings Call

GUIPUZCOA Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Cie Automotive SA earnings conference call or presentation Friday, February 28, 2020 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lorea Aristizábal Abásolo

CIE Automotive, S.A. - Director of Corporate Development & IRhip

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Conference Call Participants

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* Alexandre Raverdy

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Alvaro Lenze Julia

Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst

* Jose Maria Canovas Garcia de Blanes

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst

* Santiago Domingo Cebrián;Solventis SGIIC;Equity Portfolio Manager

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Presentation

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Operator [1]

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Welcome to the earnings report for CIE Automotive. Lorea Aristizábal, Head of Corporate Development, will be in charge of presenting. (Operator Instructions)

I would like to hand over to Mrs. Aristizábal. Go ahead.

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development & IRhip [2]

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Good afternoon, everyone, and welcome to the conference and earnings report for the fourth quarter 2019 of CIE Automotive. We're going to start talking about our sales and talking about the current situation in the sector over the fourth quarter. This has been marked by a negative performance in all the markets. And we go into the detail of each one of them. We will go from the worst performance in the 4Q to the best performance, and this implies to talk about North America.

The North American market has suffered a contraction of 9% over Q4 with minus 2% -- 12% in Mexico, minus 9% in the United States and a flat market in Canada. The main explanation of this drop is the strike in most of the North American plants from General Motors. A strike that started on the 6th of September and ended on the 25th of September and lasting for 6 weeks. 14 out of 17 plants of General Motors in North America suffered shutdowns or were closed over that period, and this translated into not producing 300,000 vehicles.

After this impact to production in North America in 2019 has dropped to minus 4%, resulting in a more marked drop in Canada and United States compared to Mexico. With regards to 2020, we estimate a growth in the American market of above 1% up to 16.5 million vehicles. I would like to highlight the expected growth in the United States of approximately plus 4% under the hypothesis of recovering a significant part of the lost volumes in the fourth quarter due to the General Motors strike. Mexico, we expect a flat situation in the context of a not too strong internal demand and exports to the United States that are not able to compensate exports to other weaker markets. And Canada will continue with the negative trend.

And if we are to talk about India, the Indian market has suffered a contraction of minus 8% in Q4, a significant fall, but lower than the double-digit drops in the 2 previous quarters that even exceeded minus 20% in the third quarter.

India has closed 2019 with a drop of minus 11%. And for 2020, the forecast is an additional contraction of minus 4% to reaching 4 million produced vehicles. We would need to pay attention and monitor how measures impact on the market. Measures that the government has implemented to reactivate demand in [2019], like to launch a scrapping program to reduce interest rates, to reduce corporate tax or to lift a ban to increase governmental fleets, among other. In any case, the forecast for 2020 is very much that marked by the entry into force of the Bharat Stage VI in April, which we believe would be the big turnover -- turning points to improvement with significant growth and supported by the low volumes in the second semester of 2019.

And now we move to Europe. In -- with regards to passenger vehicle, the European market has dropped nearly minus 6%, mainly impacted by the stocks adjustment carried out by OEMs. On the one hand, the typical stock adjustments of Q4, that has been greater than in previous years. And as a figure, at the end of September 2019, the inventory days -- the average inventory days of the main OEMs had reached multiyear maximum record figures, 58 days compares 56 in 2018; 53, 2017; and 52 in 2016 and 2015. And on the other hand, and looking at potential fines due to emissions that will come into force in 2020, OEMs have been selling over Q4, the most polluting vehicles so that these -- the most penalizing units will not be accounted in 2020.

We must remember that Europe came from very negative quarters with drops of minus 5% and minus 7%, considering of the demanding like-to-like basis due to the effect of the WLTP. And -- but after this negative Q4, the drop of productions is around minus 5%. 2020 does not provide a lot of visibilities due to the tactical movements that the OEMs will carry out in order to pass the emissions limit exam, the current estimate is that a European market decreasing to minus 2% to 20.4 million vehicles.

And if we talk about trucks, the -- such a negative performance in the market as we anticipated in the third quarter, the German productions has suffered a drop of up to 30% -- minus 30% in Q4 and giving a global figure in the year of minus 20%. Although we already expected worsening at the second half of the year, it wasn't expected such a big fall and drop. Probably, this has been influenced by a number of factors, like, for example, the end of the cycle of the truck, the slowdown of the expected growth for eurozone or a certain advancement effects due to the advancement of purchases.

So we understand that over the following quarters in Europe and in Germany, we will still see drops in volumes, but not as marked as in 2019 with a production estimate in 2020 closer to a negative double digit. And the European market for trucks could start a positive cycle as from 2021.

And now I would like to talk about Brazil. The Brazilian market in Q4 has shrunk minus 4%, worsening vis-à-vis the performance that it had over the first 3 quarters and burdened by the development on Argentina, the main important of vehicles produced in Brazil. Notwithstanding the performance existing in the fourth quarter, Brazil has been one of the best markets with the best performance in 2019. And in spite of the fact that the annual growth in production has only remained at plus 1%, the internal demand in Brazil is taking over the Argentinian demand and estimates for 2020 is a growth of plus 4%, reaching 3 million vehicles. This would mean to go back to levels from 2014, the beginning of the crisis.

China. And we'd like to conclude by talking about China. In spite of the very chaotic situation, it has had the best performance in Q4 with a growth of plus 1%. But that's not been, by far -- sufficient to recover the drop over the year. A slight improvement in the fourth quarter vis-à-vis the previous quarters due to other factors and -- because the transition standard has -- China 6 has been overcome, and the rest will come in July. But 2020 has brought us coronavirus and with it, all the measures by the -- implemented by the government to contain the spread, which has meant closing factories and very significant logistical restrictions, like to hold 14-day quarantines to workers that travel to work or to quarantine situations for lorry drivers after delivery.

So this has meant the extension of the production shutdowns beyond the Chinese year. And the factories are resuming certain activities -- certain degree of activity, except for Hubei where they're still close. And although these shutdowns will have an impact in production for 2020, we also expect the recovery over the rest of the quarters of a part of the lost volumes since the existing idle capacity in the country and demand peaks that have existed in previous health crisis. The last focus for the Chinese market in 2020 considers a loss of approximately 1 million vehicles produced by the coronavirus impact, and it's a drop of minus 4%, reaching 23.6 million vehicles.

With regards to CIE, out of our 12 plants that we have in China, only 2 are located in Wuhan, and the 2 small plants that started their activity in 2019 and that are still waiting to obtain the permits from the Chinese authorities to resume activity. The rest of our plants in country are resuming the activity as they can and adapting to the pace set by the customers and by logistical restrictions. Having said this, we understand that the impact of coronavirus on the sales of the first quarter will not be relevant.

And to conclude, the review of the markets, let's talk about the global. The vehicles in the fourth quarter has dropped minus 5%, totaling minus 6% over the year. So having less -- so less than 89 million vehicles produced. And -- so in spite of 2 things that are playing against us are refusal to nonprofitable volumes and the temporary trend to in-housing from our customers. So many OEMs have the idle ability that in this market situation, they decide to use, and this dynamic has expiry dates because as soon as volumes come back and OEMs have to invest in new capabilities, they will start to outsource and, therefore, have resources to have their own in -- to have resources to invest in the core activities.

2020, seems not to bring good news. The like-to-like basis helps. The last forecast from analysts is having a contraction of around minus 2% up to 87 million vehicles. Although, we understand depending on the development of variables like coronavirus or macro variables could -- this drug could be even greater. But it's a moment to look back and remember that the trend over the 4 years for the strategic plan that we closed today has been to keep a gap in our organic growth and in the market. It wasn't the case in 2016, but it was the case in 2017 with a gap of 14 points; in 2018, having a gap of 11 points; and in 2019, which has been so negative, we have had a gap of 2 points. So this means that while the productions market is in -- at levels similar to 2015 and without having expansion in the period of the strategic plan, the organic growth in CIE has been very significant. And the outperformance to the market during the period has been of 7 points.

Let's talk about margins for CIE for the fourth quarter would be around 16% EBITDA and 11% EBIT, reflect an income statement -- show an income statement of the new CIE. So these margins, in a way, are diluted by the integrations carried out in 2019 in more than 1,200 points. But on the other hand, this dilution is limited, thanks to the sustainability of the margins of the organic perimeter. The organic perimeter, in spite of the negative performance in sales along the year, is significantly above the 18% EBITDA and around 14% EBIT, and therefore, meeting the guidance vis-à-vis the market. And the operating margins grow vis-à-vis 2018 both in percentage as well as in absolute terms.

Variability of the income statement, production flexibility, work flexibility, very highly contained fixed overhead lean structures, being quick in decision-making in all the plants allow us to absorb negative situations like the one existing right now in the market. An organic perimeter of around EUR 3 billion in sales and the benefit -- sorry, profit after taxes has exceeded 10% over sales, and the net profit has multiplied by more than 2.3x over the last 4 years, growing from EUR 180 million to more than EUR 270 million. So, therefore, we again, meet our commitments. And if we are to talk about the total perimeter, the new perimeter in CIE, and we talk about the income statement for 2019, we see an EBITDA that grows by 12% to EUR 594 million and a net profit that increases by 18% to EUR 287 million.

So once again, another year, double-digit growth, profit, in earnings per share and, therefore, dividends to pay out to the shareholders. With regards to the balance sheet and cash flow, the headline for Q4 is the deleverage, having reduced the ratio between net financial debt and EBITDA in less than 0.1x in the quarter and closing with a net financial debt of around EUR 1.5 billion and a ratio of 2.3x. This net financial debt that without the acquisitions in 2019 would be under 1.4x, thanks to the ability of the organic perimeter in CIE to convert over 55% of the EBITDA in the operating cash flow has meant EUR 314 million, and it's all in line with the guidance vis-à-vis the market. I would like to highlight that the dividend paid out in 2019 has amounted to EUR 80 million. And this means a growth of 11% vis-à-vis the dividend paid in the previous year. And this means that CIE still paying shareholders a dividend that has double-digit growth. And at the same time, is able to fund its growth and without jeopardizing the strength of the balance sheet.

The paying to the shareholders that will be increased over the next 2 years to come not only by the additional increments of the net profit of the company, which we will probably see, but by the shares buyback program that has been announced today to an amount of 5% of the capital and up to EUR 160 million. And the final objective is to reduce the capital and increase the earnings per share.

And to conclude, I would like to highlight the fact that the merit of having achieved our commitments in economic slowdown situation and the sector contraction, and I would like to summon you all to see us each -- see us on the 31st of March in Madrid for the Capital Markets Day.

I would like to thank you all for your time, especially Friday afternoon. I'd like to hand over to the Q&A session now. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is by Jose Maria Canovas from JB Capital Markets.

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Jose Maria Canovas Garcia de Blanes, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [2]

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Congratulations for the results. In Brazil, as you said the fourth quarter has been a bit weaker and you have spoken about the forecast for the year, how do you expect -- what do you expect for the year? Maybe the first quarters will be weaker, maybe it will recover along the year? Is that -- could that be the case?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development & IRhip [3]

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If we are to talk about Brazil, and we talk about the market forecast, and then we talk about us. If we are to talk about forecast for 2020, we see it positive. There is an expectation to increase the productions by 4%. It's true that this forecast is not -- divided into quarters in a very linear manner. If we broke down the 4% into quarters, we would see the first quarter to be more flat and the second, third and fourth quarters to be stronger. So in a market context, I agree, maybe it will go from less to more. CIE in that market for 2019 has been a very good example.

It would be -- it would serve as an example of the post-crisis CIE. CIE that has done the homework and that quarter after quarter in Brazil is showing an improvement in the margins and operating leverage after all the action plans that were conducted after the crisis. So I think that Brazil, in 2020, both in terms of markets as well as margin expansion in CIE will hope that this area will bring us a lot of very good news.

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Operator [4]

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Next question will be asked by Santiago Domingo from Solventis.

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Santiago Domingo Cebrián;Solventis SGIIC;Equity Portfolio Manager, [5]

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My question is regards integration, the integration of the company and what do you expect for the future with regards to the integration?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development & IRhip [6]

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I think that the Inteva definition or the definition of the integration of Inteva is as complex as we expected. We know that Inteva is a very big company, and that requires certain efforts and that will require a lot of work in many specific areas. So in 2019, and I remind you, everyone that we've only been owners of the company for just half a year. Although we've been talking about Inteva for 2 years, we've only been managing over -- this company over 0.5 year. But this 0.5 year has been very much focused on setting the basis of what we are going to do in the following year. And we call it -- CIE Golde, we call it. And in the years to come, we hope that profitability improves.

The inorganic perimeter which is made up by CIE Golde has a low profitabilities under 9% in EBITDA, but we have been setting the ground or setting the basis and looking at the priorities. We have been prioritizing the operating improvements in a couple of plants, where they were burdening some margins in the group due to operating issues, one of which was Mexico and another one was in Europe. We have been very much focused on these 2. We have been focusing on what to do with the integration of the company on how the things are done in CIE. And it's not just cultural in terms of how we offer, how we comply with budget, how we deal with investment. We are talking about these sort of things, where we attach a lot of importance in CIE. And this is -- it's just a starting ground.

In the Capital Markets Day, we will talk more about the future. Here, we are here to celebrate the successful closure of a strategic plan. But without doubt, the improvement of CIE Golde and the performance for the following year will be part and parcel of our future.

So right now, we are setting the basis of the future. We're looking at priorities. We're looking at operative -- operating issues. And from there, you will see step-by-step, year-after-year, the operating improvements that we will achieve.

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Santiago Domingo Cebrián;Solventis SGIIC;Equity Portfolio Manager, [7]

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The second question and last question is related to the shares buyback. Shares have dropped, and it could be an interesting aspect. But I would like to talk about rationality. What's that this -- in the previous year due to the big investment opportunities, you set it aside. Has it been motivated by a share drop? Or was it something that you already had forecasted before?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development & IRhip [8]

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Well, what happened is that we are looking at any interesting investments or any M&A that could be interesting. And this doesn't block us from continuing with an expansion strategy, but it's true that the share drop -- share price drop has made this investment very cheap, probably the cheapest one, the cheapest investment. And there's no other better way to provide an additional remuneration to the shareholder. This question has been asked before. There are companies that whenever they launch this sort of program, they suspend the dividend and take advantage to say that that's not the case. This is an additional remuneration to the shareholder, and we believe that it's interesting in a way we are forced by the situation of the market, but we are not talking amounts that are blocking CIE. But thanks to the generation capacity that we have in CIE, I think, they are fully compatible one with each other.

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Operator [9]

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(Operator Instructions) Next question will be asked (inaudible).

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Unidentified Analyst, [10]

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Just a question. It's (inaudible). I mean, first, well done with the results. My question is, in terms of M&A, do you think, actually, now it's easier to do M&A after the slump that we've seen in so many of your competitors?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development & IRhip [11]

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Well, thank you very much for that question. There's no doubt whatsoever. The market, the more timing -- as more of the market is deteriorating, we will have more opportunities for M&A. 2019 has been a very good example of big acquisition. It's true that this has meant a little peak of debt that we're not worried about. We're in a ratio of 2.3 and generation capacity of the perimeter. We will deleverage very quickly. Q4 is the proof of how fast we can deleverage. And without doubt, term after term, we will see more opportunities, but we are very ambitious that -- because 2020, we need to come down and maybe best opportunities are yet to come.

I can ensure you that at the M&A table, we receive more and more interesting opportunities associated to this bad situation in the market, where we've been on for 6 consecutive quarters with that falling market. But every quarter, we see certain sector players that are still withstanding, and there will be a moment where they will crumble, and so we don't want to rush. We are deleveraging. We are monitoring opportunities. We have a very long purchasing history over the years. And we will have -- I'm sure there are going to be opportunities, but we'll take it calmly. I think that the best is yet to come.

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Operator [12]

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Next question will be asked by Alvaro Lenze from Alantra Equities.

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Alvaro Lenze Julia, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [13]

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I have a quick question. I see that the growth CapEx for Q4 has dropped a lot to EUR 17 million compared to EUR 32 million in the previous year. Is this due to the calendar issue or the schedule issue? Or is it because you are reducing CapEx -- growth CapEx, in order -- are you doing this in order to remove bottlenecks in Golden (sic) [Golde]? So why do you have this growth CapEx reduction?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development & IRhip [14]

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Alvaro, the growth CapEx we refer to -- or to do with expansion of the greenfields that could be a new line in a factory or to double the space in a factory or to build a new factory whenever it's needed. This is absolutely necessary to have this expansion CapEx, and it's been more intense than previously because our organic growth has been more intense as well. And I refer to 2019 in the strategic plan or years like 2016, where the total CapEx was around 7% or in 2017, we were higher than what was usual, we even reaching 18% for total CapEx.

In 2018, we were near 7%. So apart from 4% of recurring CapEx, we have been devoting a significant part to the expansion CapEx that through those years, the organic growth of CIE has been very significant. So you will probably understand that after 6 quarters in the downfall, especially in India, we have a free or very important capabilities that require less expansion CapEx. So it's readjusting or readapting the needed CapEx to continue moving forward.

And considering the market context, the 4% recurring CapEx will always be there. We cannot reduce that. We need that. But it's true that we have had a 3-point-x percent over sales on expansion CapEx in an environment that we will have in 2020. It will make sense that it will be lower than what you've been seeing over the double-digit growth periods in CapEx.

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Operator [15]

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(Operator Instructions) There are no further questions in the Spanish room. We will move on to questions from the English

(technical difficulty)

The first question in English comes from Alexandre Raverdy from Kepler Cheuvreux.

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [16]

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I have three quick questions, please. The first one is on the margins. Do you expect to improve margins in all the regions in 2020 versus '19, especially given the current environment? The second one is a follow up, actually, on operating leverage, especially in China? Could you please help us understand how variable and flexible your cost base is in the country versus the rest of the group? And finally, on free cash and working capital, I see working capital was a boost in '19? What is the risk of this reverting in 2020? And where do you see risk and opportunities for each of the moving parts?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development & IRhip [17]

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Alex, with regards to the first question, and the margins for 2020, I have two reasons to say that you will continue to see positive performance or evolution. We have the proof of 2019. In 2019, in spite of a very complex market situation and having organic sales that have dropped margins have been amazing. And if it wasn't for the dilution of new acquisitions, you would have seen significantly exponential sales vis-à-vis the previous year. And secondly, and since there's been a dilution -- a significant dilution of the companies that we have acquired of over 200 points, this is another argument for you to see margins expansion very slowly. We need to consider expectations. We cannot expect to -- from CIE Golde to go from 9% to 14% overnight in EBITDA. That requires quarters, semesters and years, but you will probably see margins expansion of the acquired companies. That's on the one side.

With regards to China and flexibility, I think that we've had a very difficult year in China with very big volume drops. And in spite of that, we've seen margins in Asia that you see that we report them together. That is a very significant part in China. And that the margins have been very well sustained. So we mustn't think that the income statement for China is weaker or less flexible than in other areas. What's even more, if we talk about CIE Golde and about the acquire area in roofs, we spoke about this in previous occasions that in spite of the total margin of CIE Golde as low as under the 9% in EBITDA is unequal in certain areas. And with regards to CIE Golde China, it's above the average. So this is another proof to say that China is strong.

And you talked about the working capital -- you talked about, yes, working capital. We are not especially focused on working capital. We are focused, especially in everything to do with cash. CIE is not driven by top line, we're driven by bottom line and by cash. Everything to do cash, whether you call it generation, whether we call it working capital, working capital control on how we controlled financial discipline that requires to know when to invest and when to control investment. So I'm going to put it under the umbrella or something which is broader, which is -- always been important is generation and working capital. As you probably know, working capital has been a key factor or key variable in the main target, which is cash

(technical difficulty)

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Operator [18]

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There are no further questions in today's conference. Dear speaker, back to you for the conclusion.

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development & IRhip [19]

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Well, thank you very much to you all. It's Friday afternoon, you know where we are if you need anything. Thank you very much again.

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Operator [20]

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Thank you very much to you all.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]