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Edited Transcript of COIC.ST earnings conference call or presentation 4-Feb-20 12:00pm GMT

Q4 2019 Concentric AB Earnings Call

Stockholm Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Concentric AB earnings conference call or presentation Tuesday, February 4, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Woolley

Concentric AB (publ) - CEO & President

* Marcus Whitehouse

Concentric AB (publ) - CFO

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Conference Call Participants

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* Björn Enarson

Danske Bank Markets Equity Research - Head of Equity Research of Sweden

* Klara Jonsson

SEB, Research Division - Research Analyst

* Mats Liss

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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David Woolley, Concentric AB (publ) - CEO & President [1]

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Good afternoon, and welcome to the Concentric Interim Report for Quarter 4, 2019 and the view over the full year. Today, the presentation will be made by myself, David Woolley, as CEO; and also by Marcus Whitehouse as CFO.

So let's get straight into the presentation. The agenda, we're going to cover in normal format. As it's year-end, not only will we talk about the highlights for quarter 4, we'll take an overview of what the full year 2019 did. And once I've given that overview and summary, then I'll pass over to Marcus, who will take some more time to give more detail behind the financial results and a better explanation of what we've been doing. And then after that, he will pass back to me to give a view on quarter 1 2020 outlook. And as usual, after that, we'll then open the floor to questions and answers. So here we go.

The highlights. If we look at the Q4, and we start with sales. The Q4 sales shows the tough condition of the market and it was down 26% year-on-year at SEK 430 million. And this was after adjusting for currency, which gave a 3% gain and sales in constant currency were down 29%. The underlying group sales were down year-on-year by 24% if we back out or remove the dual source effect that we've spoken about over the whole of 2019.

Reasons for this, I guess, are fairly obvious, but to talk about it. We've seen demand impacted by this continued softening of the market in all sectors that we're operating in -- within actually. And this has been compounded, as the Americans would say the bullwhip effect, the lower demand hurts, but then the destocking programs gave pain on top of that, which has kept our business very busy managing the effects of that smoothly.

If we then move over to look at the full year sales. They're actually down 17% year-on-year, basically bringing us into the Concentric-only sales of SEK 2.1 billion -- SEK 2 billion against the prior year, SEK 2.4 billion. And again, that's after adjusting for the currency of 3%. So take that one out, we have an underlying minus 20%.

The underlying group sales were actually down year-by-year by 11%. If we -- again, we take away the effect of the dual sourcing. So all in all, it was a tough year. We'll talk about the gradient across the year.

When we came out of 2018, we said that that was a peak, and we saw that '19 was going to get tougher. And that graphic at the bottom of the slide will show you that quarter-by-quarter, we saw the tightening of the market and the softening of the market compounded by that destocking effect.

The last point on here is the book-to-bill. And again, over the past many years, we can see that the fourth quarter of any year gives us a bounce. It gives us a kick up after people have done a destock for year-end and then they place orders for Q1. So the book-to-bill shows us 99%. And again, that was an increase in order coverage from 94% in Q3.

So from sales, we go to the -- our sales to what the indices want to talk about. Again, we're consistent in which indices we used. And the published indices, suggesting that our end markets and the regions that we served for quarter 4 were actually 2% down year-on-year. So eventually, the indices caught up with what was going on across the globe and basically, this was the second quarter of negative year-on-year growth for the indices. And again, we believe that is emphasizing the direction of travel, that downward trend.

Again, when we talk to our customers on that very frequent basis, they are continuing to report that order levels are down significantly year-on-year, and there's some quite dramatic numbers, which are already being published across the industries.

And I think the takeaway point that we have is, although destocking is maybe reducing now, we don't think it's finished. And we think that we're going to feel destocking impact in quarter 1 2020.

If we take a look at the sectors that we're operating within, the ag machinery and industrial application sectors, I think they were the hardest hit in this quarter, and we saw sales down in both North America and Europe.

If we then move to the construction equipment. Well, this sector has, again, been having a very difficult last 3 quarters. And again, this continued to provide those challenges in most sectors globally.

Third point. If we talk about the medium and heavy-duty trucks, which is the major part of our sales. Still down but this time, at least by single digits. Again, it's a stronger performance we saw in Europe comparatively year-on-year. But again, the -- the slight improvement in Europe was more than offset by the very weak and continued weakening in North American markets and in India.

A point on India. Again, we've reported it in the past, although the underlying economy in India should be very strong, what we see is this lack of liquidity of funds and cash is really strangling the market. And again, we see that continuing for the foreseeable future. The only uptick we saw in this market was construction, something to do with the infrastructure investments.

Now if we go to the next slides. We'll talk about the earnings. What was left after the sales, after the cost of operation. Well, if we look at the Q4, the reported operating income was SEK 134 million against SEK 140 million from the same period last year. Again, as a group, our teams worked well to maintain operating margins at high levels. In fact, in the quarter, we reported 31.1%, clearly very high, and we'll explain that a little further later. And that 31.1% compares against the prior year of 24.1%. And if you look at into the full year. For the full year, we've reported 23.5% against the prior year of 21.9% on a full year.

If we look at the operating margin in this quarter. What we will say and again, Marcus will talk more about it, but we did take the opportunity to release a warranty provision. There had been some concerns of products in the field, which we were able to fully demonstrate it was an application issue rather than the Concentric product. And so we released that warranty provision back to profit.

So if you look at the underlying profit margin. After operating margin in the fourth quarter, it was 23% and the full year was still a very respectable 21.7%.

The graphic, again, will show that profit development. You can see the kick up in Q4. And again, we'll talk more about that, the impact of the provision release and a few other things, which have moved that up. But again, overall, not a bad development in quite a tough trading condition.

Then we move over to cash flow. And again, historically, we're seeing Concentric is pretty tight at managing cash. And we've done a couple of things in the quarter to take the opportunity to do some witty, positive things. So if we look at the cash flow from operating activities. Clearly, it was impacted by lower activity, lower sales. And we also took an opportunity to repatriate money from India, and that incurred a withholding tax charge of SEK 29 million, basically by using -- making an internal dividend.

The cash flow for the quarter, therefore, the remaining cash was SEK 58 million against the prior year SEK 136 million. The full year cash flow, looking at operating activities, again, had to be affected by the lower sales. But again, the business returned SEK 396 million against the prior year SEK 554 million, the prior year being our best year ever, of course.

When we look at our net debt, this is now actually SEK 54 million against the prior year of SEK 12 million. And this slightly increased our gearing to 5%, minus 1% last year same period.

Our net debt and gearing ratio, debt and gearing. If we take away the pension liabilities, we see that our net debt is minus SEK 445 million and gearing is actually a negative 39%.

The next point. We've been carrying for some years an external term loan of SEK 175 million and we took the opportunity to pay that loan down. It was a loan we weren't using and we were paying facility costs to hold it open.

Last point on this slide. We continued to buy back our own shares. In the quarter, we bought back SEK 36 million, taking the year's total to SEK 136 million compared to SEK 146 million last year.

Then we thought it was probably a useful point to talk about an update on the strategic activities that we have going on around electrification. Some of this is a repeater, but some of it is new as well. We've said a number of times that this is a growing market. It's strategically important for Concentric. We have fantastic pumping products, and now we're doing a great job of coupling those pumps to electric drives, to electric controllers and software to manage what the pumps do.

And I think if we look at our mobile product. The product goes into trucks, on-highway, off-highway trucks and buses. I think the mobile market is where we are and doing very well.

And our second point states sort of the obvious. We're leveraging our current relationships around the world with our customers. And we're becoming one of the go-to choices to actually use our product on this rapidly growing market. The product is proven to be exceptionally reliable, super performance, very efficient, and we talk about things like this super-efficient product gives a very, very low drain on the batteries, helps to extend the range of the vehicle, which is normally one of the biggest challenge on any electric vehicle.

The third point there is good news. In the quarter, we made another press release. We've won another contract with another global truck and bus manufacturer, and this is supplying an electrically driven and controlled water pump to condition and monitor the batteries. This time, it's another first. This time, it's rather than onto buses or construction equipment, it's actually going on to midsized electric trucks. And the sales are not glamorous but it will generate, we feel, SEK 150 million over the next 4 years and is another great opportunity to earn our space in this rapidly growing market.

The next point is basically moving away from the mobile product, the on-highway, off-highway. And this is the release we made before. We're seeing the opportunity to use electrically driven pumps, water pumps in energy storage. Now these are clearly static in industrial applications. And clearly, they can save energy on normal power generation from gas or nuclear, even. But of particular interest, it's really got great use on the renewable forms of energy, the green energy, the sustainable energy. Because as you all know, that the solar energy and wind energy doesn't have to be generated at the point you need it. So these battery packs are being generated, the batteries need temperature control, heating and cooling, and the product we've now won and announced that win has been a fantastic first. And again, not dramatic sales, but SEK 100 million over the next 3 years.

And the last point we say on this slide is, again, we put a press release out there to try to help people understand what electrification means to Concentric. And in simple terms, if we look forward to 2025, we're saying that we think that electric products could amount to as much as 20% of the Concentric group sales. So it remains interesting and exciting and very, very strategic.

So at this point, I'd like to pass over to Marcus to take us through the summary of the financial results.

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Marcus Whitehouse, Concentric AB (publ) - CFO [2]

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Super. Thank you, David. Good afternoon, everybody. There's quite a bit going on in this quarter, not least, the market conditions that we have experienced. But as David has already talked on this, there's quite a number of items within the financials that I just want to take some time and explain to you all.

Yes, quarter 4 remained challenging. Most of our end markets are either declining or have destocking programs on. And therefore, our sales in the fourth quarter are reported at SEK 430 million, down 26% year-on-year as reported. For the year, we got to just over the SEK 2 billion mark, SEK 2.012 billion, down 17% against the prior year. Both periods, both full year and quarter were affected by 3% tailwind from FX.

The operating income. We reported at SEK 134 million, down 4% in the quarter and SEK 472 million, down 11% for the full year. As David has already touched on, this has benefited by us releasing a warranty provision to the P&L. We'll touch on that a little more what that underlying impact to the margin has been. But the pleasing thing that it -- that we have is an operating margin percentage of 31.1% in the final quarter of the year, up 6.3% from 24.8% and for the full year at 23.5%, a gain of 1.4% on the full year of 2018.

But just taking a moment to work out what that impact of that warranty provision release that we've had. Well, the top graph that we've got there is quarter 4. And we reported, as I just mentioned, 31.4% (sic) [31.1%]. The warranty release effectively increased that margin by 8.1%. And therefore, the underlying margin would have been 23% in the quarter versus 24.1% in the prior year. The full year effect of that warranty provision release has been 23.5%, as reported previously, and an impact of 1.8%. So our underlying margin for the full year would have been 21.7%, just below what we reported last year of 21.9%.

Looking at our cash. Yes, cash was low when you look at the pure number, in the fourth quarter. But David has already mentioned that we have a dividend that we have taken out of our India operation, and repatriated a significant amount of cash within the group. And with that, was a withholding tax payment that has impacted our cash flow from operating -- operations in the quarter. When we look at the full year. The 2 boxes there that I've highlighted, have both been impacted, one positively and one negatively, by the things that we have talked about. Now we aspire to have a cash generation 1:1 to operating income, and here, you can see that they are not but we do have an operating income that has been inflated by the warranty provision release, whilst at the same time, we've got a cash flow that has been suppressed by the withholding tax that we've had to pay. Eliminate both of the 2, and you are broadly back to a cash generation to operating income of 1:1.

The net debt has fallen back to SEK 54 million. You'll note, those that follow us, that in the previous quarter, we took some pension remeasurement losses of quite a sizable amount in the third quarter as the discount rates continued to drop over the year. Well, those discount rates have recovered a little in the fourth quarter. And with our actuarial assumptions and our pensions that have been done for the full year, that's pretty much reversed in the final quarter. So our gearing ratio for the full year is 5% versus 1% in the prior year, an increase of 4%. But again, it should be noted, we won't dwell on it -- but it should be noted that we have been subject to an accounting change in 2019. And the impact of IFRS 16, accounting for leases, increased our gearing by 8% in the year.

Now we've touched on it already, and this is a chart that we use each quarter. You can see that the market conditions we're experiencing are represented on the graph that we are looking at. Lots of oranges, lots of reds, that are denoting that markets are contracting between 1% and 10% or 10% and over. So just going through those. We can see within North America, one of our key end sectors, it's been mixed, but we can see that the medium, heavy-duty truck market has slowed to just 1% in the final quarter, whilst the construction market had declined by 8%. Europe broadly remained steady, demand across core sectors, apart from the medium heavy-duty truck that declined by 4%. South America, reasonably steady growth has been reported within the indices. Whilst India remains a little suppressed by the banking crisis and just that lack of liquidity, and that's impacting agriculture and construction but also the medium, heavy-duty truck market, whilst China continues to have mixed messages and little growth.

Now we've got the segmental analysis by region. And here, you can start to see some of the graphs are spiking around, again, with the release of the warranty provision. So let's just walk through them.

The Americas, quarter 4 sales are down 42% year-on-year, again, impacted by our dual sourcing decision that was taken, but pleasing to see our book-to-bill ratio is holding pretty much flat at around about the 90%. Margins that we're seeing have stayed pretty much around the 15% mark for the last 3 quarters. There is a spike in quarter 4 as we released that warranty provision back to the Americas business. Briefly, if we were to exclude that, we would see a margin provision -- a margin of around about 14.5% in the quarter and 14.9% for the full year.

Looking at Europe, sales down 7%. But again, book-to-bill, just over the 100% and has demonstrated the usual seasonal trend of it picking up towards the back end of the year going into quarter 1. And again, just looking at the margin, remaining pretty much flat, bar Q3, over the year at a very respectable level.

When we look at our cash flow and our working capital as a percentage of sales. Again, we can see low cash generation. We've touched a bit on it already, only SEK 58 million in the quarter. And we can also see our working capital as a percentage of sales spike up towards from minus 1% to plus 1%. Again, both have been impacted by the 2 large items that we've been talking about, withholding tax and the warranty provision. And I've got a couple of more slides just after this one, but we'll try and demonstrate what those positions would have been without withholding tax and warranty provision release. But looking at our net debt and gearing, again, you can see our overall net debt has dropped back as we have reversed the pension losses, remeasurement losses that we took in quarter 3 to a pretty much like-for-like year-on-year at the close of quarter 4. Gearing is down at 5%, and that also reflects the repayment of that external term loan that David mentioned earlier. Again, just looking at our gearing ratios, excluding our pensions, remaining pretty much flat and certainly in a very, very healthy position.

Now let's just take just a couple of minutes, just to look at the underlying cash flow. The little brown box that I put on the top there in quarter 4 represents the withholding tax payment and again, gets it back towards the levels of cash generation that we saw in the third quarter, albeit on slightly lower sales in quarter 4. Equally, I've put a dotted line in there to represent where our trade working capital would have been, had we not released the warranty provision. And again, it shows it is pretty much stable throughout 2019 at around about that minus 1% level.

So a lot going on within the numbers, a trading challenging condition but pleasing to see over the balance of the year that despite of market conditions, the business has been able to manage cost, maintain its margin and continued to generate cash in line with our expectations.

I'll hand you back to David.

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David Woolley, Concentric AB (publ) - CEO & President [3]

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Thanks, Marcus. So you get the picture. 2019 was a fairly tough year. As those of you who follow Concentric regularly, you know that all our markets are cyclical. The majority of our business sits around the truck market and the truck market is early cycle. So in the downturn, the trucks would feel it first. And we felt the destocking ahead of that.

So 2019 was difficult. But I take a moment now, though, to thank the team. We have a fabulous team within Concentric working incredibly hard to control cash, to control profit, to give excellent support to customers, and they did it in a year which could absolutely protect margin in quite a sharp downturn. They protected cash at the same time. And they were very busy in and actually winning new business around electrification, be it construction or truck or bus. So thanks to the team, super results for '19 against a very tough backdrop.

So -- but now it's time to look into the future. 2020 is here, and we'll give you our views on how we think quarter 1 will turn out.

So can I start by looking at the -- again, the published market indices that talk about our markets. They showed there was a further weakening in Q4. I think we sort of expected that, and that showed the second quarter of negative growth across all sectors over the year, of 2%. And again, the same indices, those same indices for the full year actually downgraded the year-on-year negative to minus 1%, worse than the previous output of flat. So the indices are saying, yes, we can see where the market's going, and it's having a tough time.

The second point. If we use the same indices to say how do the same indices view a full year of 2020, well, what they're saying is the prediction in the Americas and Europe and rest of the world, they're expecting or predicting a further softening of about 4%. So the indices are saying, it doesn't get that much or better, in fact, get worse in 2020.

The next point is what we would like to say that our reality is. Based on the orders that we've received in Q4 2019, we get the indication that our sales in quarter 1 2020 will be slightly higher than the sales in Q4, and that's even when you take account for the extra working days in the first quarter.

When we look at the last point there. Our core markets, North America and Europe, they're not showing significant improvement in quarter 1 2020. But it feels that the destocking that we've spoken so much about across the whole of 2019, the rate of destocking does seem to be softening, suggesting we think that we're coming to maybe at a level point where we can, again, see the growth we have through electrification starting to help us in more of a flat, still tough year.

Okay. That's everything that we like to say. And basically, I would then like to throw it open for questions.

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Questions and Answers

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David Woolley, Concentric AB (publ) - CEO & President [1]

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So are there any questions on the phone lines?

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Operator [2]

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(Operator Instructions) And first, we go over to the line of Mats Liss at Kepler Cheuvreux.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [3]

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Congrats on the very fine earnings. Just a question here, looking at the Page 9, I guess, in the presentation pack, and I just wanted to check the impact of the -- well, release of the warranty compared to the underlying operating income. It still saw the same or it's sort of -- well, you mentioned that the EBIT margin was 23%, and -- excluding the one-offs, if you just could confirm that one.

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Marcus Whitehouse, Concentric AB (publ) - CFO [4]

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Yes, Mats. Marc Whitehouse. Yes, we've got an underlying 23% in the fourth quarter but it should be noted it's not drawn out as a nonunderlying effect item, but we did have a very strong quarter in quarter 4 with Alfdex sales, particularly in China. And that did push on the margin. If you remember, I think we reported about 19.8% in quarter 3. And I think if you look for what was the underlying margin of the business, I would suggest it was near to the 20% mark than the 23%. But we did benefit from some really super sales in that fourth quarter with Alfdex. And as you know, there's no sales, but we do pick up the operating income. So it does benefit the margin.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [5]

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So the operating income before items affecting comparability there, is that SEK 134 million is sort of SEK 99 million if you take the...

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Marcus Whitehouse, Concentric AB (publ) - CFO [6]

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It's SEK 99 million, if you take off the warranty provision release. That then translates into that 23% margin. But as I was just trying to point you towards, we've also had a strong Alfdex reporting in that quarter as well, which doesn't include sales, but does include operating income.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [7]

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Yes, great. And then if you just could, well, comment there. You mentioned that the inventory correction was -- you were done with that -- or your customers were done with that. And the outlook -- is it the same situation in both the Americas and Europe?

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David Woolley, Concentric AB (publ) - CEO & President [8]

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Mats, it's David. And I think what we're saying is the effect of destocking is softening. We think it's still there, and we think we're still going to feel a bit more of this in Q1, and we look forward to see what happens in Q2. The customers are -- again, the customers are stabilizing their schedules out, we feel, based on what comes through the order banks. Is there a -- is there a greater effect in any customers or any markets? Well, I think what we've said typically, over the years, we've seen that the U.S. market has been more volatile, more volatile to take down stock, more volatile in Q4 to pull down stock at the year-end, and more volatile to try to put demand back in afterwards. So I think the U.S. customers have been more moving around on stock but we've seen it in both areas. And I think the key takeaway is, it's still there, but it's softening off.

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Operator [9]

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Our next question is from the line of Klara Jonsson at SEB.

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Klara Jonsson, SEB, Research Division - Research Analyst [10]

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So I mean, could you give us the update on Alfdex progress in the quarter? If I understand your comments correctly, you had a nice Alfdex quarter in Q4 '19 as well, right?

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Marcus Whitehouse, Concentric AB (publ) - CFO [11]

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Yes, we did. We had a good level of sales in the China operation with Alfdex. So we did enjoy some good income that came in during the fourth quarter.

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Klara Jonsson, SEB, Research Division - Research Analyst [12]

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Could you quantify that, maybe?

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Marcus Whitehouse, Concentric AB (publ) - CFO [13]

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Without referring back to the pages...

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Klara Jonsson, SEB, Research Division - Research Analyst [14]

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Just trying to understand how much of the -- you said that ex that your margin would be some 20% versus 23%, excluding the warranty provision, right?

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Marcus Whitehouse, Concentric AB (publ) - CFO [15]

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Yes. Just give me one second. Yes, if you look just at the year-on-year, you will have seen that we will have had, in the month or in the quarter, SEK 26 million of profit taken with the Alfdex. Same quarter last year was SEK 16 million. So that extra margin on lower sales is effectively giving us a bit of a margin bounce in that fourth quarter.

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Klara Jonsson, SEB, Research Division - Research Analyst [16]

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And how much of that will extrapolate into 2020? And then -- I know that you were supposed to ramp up Alfdex volume starting Q4, right, and then you're going to ramp them up further in '20. But how is the outlook there? Do you see still strong demand into Q1 as well?

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David Woolley, Concentric AB (publ) - CEO & President [17]

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I'll see if I can give a fairly good answer. When we made the press announcement that we laid down for new production lines in China to take on the needs of China 6 emission standards, we saw that with the downturn in China and the slight softening of the legislation or a new interpretation of the legislation, we didn't much get the level of sales that we expected. So again, 2019 was compounded by the invested growth we made didn't come through quite as we hoped.

However, what we did see, and Marcus was saying, in quarter 4, the Chinese market lifted quite nicely. The demand came through. And again, it's -- I think there are some more government incentives to push the sales of certain products. And to answer your question, we think the level of activity that we saw in quarter 4 in China will be continued across quarter 1. I don't think it will go much higher. I don't think it will go much lower. I think we've got a fairly steady beat against Q1. And then clearly, we're trying to work out with the customers where that goes next.

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Klara Jonsson, SEB, Research Division - Research Analyst [18]

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All right. Okay. That sounds good. And then my next question is about the sales part of the lost customer's volume that you announced in 2018. Is that now fully in the numbers or do you still left -- or should we still expect some negative contribution on growth from that in Q1?

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Marcus Whitehouse, Concentric AB (publ) - CFO [19]

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No, no, that should be pretty much fully in the numbers. The vast, vast, vast majority of that all closed out at the end of 2018.

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Klara Jonsson, SEB, Research Division - Research Analyst [20]

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So how much of that was actually impacting Q4 organic growth? Just so that we get an understanding of how much organic underlying it was.

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Marcus Whitehouse, Concentric AB (publ) - CFO [21]

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Let me just go back to the presentation, please, give me one second. So I think we've got within the quarter. We said that the sales in constant currency were down 29%. Underlying group sales were down by 24% after separating the effect. So effectively, in the fourth quarter, it's 5% is what's due to the dual sourcing.

And if you remember, we touched on this earlier, and we said it was going to be a little bit heavier in quarter 1 and quarter 2, and it would be feathering down as we went through the year.

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Operator [22]

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Before going over to the next line, which is Björn Enarson at Danske Bank. (Operator Instructions)

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Björn Enarson, Danske Bank Markets Equity Research - Head of Equity Research of Sweden [23]

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On the -- looking at the backlog situation, and you're talking about that it may be softening, and you would see a little bit improved situation in that sense during Q1 and then we'll see what happens. Can you quantify the impact in Q4?

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Marcus Whitehouse, Concentric AB (publ) - CFO [24]

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Very difficult to give an absolute quantification in quarter 4. That's not really possible. It's really more around the sentiment of what we've seen in the ordering patterns that we've seen from our customers. As David touched on, we get the feeling that, that's softening? Well, that's very intangible. And it's very hard to put hard and fast numbers to it. But it does feel like that we're going back towards a more normalized order pattern, albeit probably not fully in quarter 1, but it's starting to approach that. That's the feeling that we're getting in the day-to-day business.

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David Woolley, Concentric AB (publ) - CEO & President [25]

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And Bjorn, if I would add to that, as we said, we know that our business is very cyclical. But what we see is that the various sectors we operate within move at slightly different timings. Truck, over 40% of our sales, is always the first mover in a slowdown and always the first mover in an uptick situation. So in terms of the destocking events, we've seen trucks started it first. The construction sector pretty much came in 3 or 4 months later. So they're moving at different phases. And so to Marcus' point, it's hard to be very accurate because the 4 sectors we're moving within are moving slightly different. So it is that sentiment that we're giving you.

Q4 is double impacted because there is a destocking as the world rightsizes itself for demand. So that's the destocking we've seen across the whole of 2019. But every Q4, and particularly with American customers, we see a further hit as people try to push down inventory for the year-end results. So Q4 for us was probably quite predictable. And so in Q1, we have that slightly reverse in terms of the year-end destocking, but we think the overall destocking is still there, lesser, we think, lesser, we think. And it's not gone. And that's why we're very keen to see what happens as we see the orders, as we move towards quarter 2.

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Björn Enarson, Danske Bank Markets Equity Research - Head of Equity Research of Sweden [26]

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And I recognize this from the truck side of business is and a little bit on the construction side as well. And on the ag side, can you give some color on that market as well?

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David Woolley, Concentric AB (publ) - CEO & President [27]

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Again, the ag market moves, again, a slightly different phasing because they have their peak in the northern hemisphere in Q1. They have the peak in the southern hemisphere in Q3 as you have the summer and the harvest seasons. So they move out. And what we've said in this report, perhaps predictably, we saw that Q4 was tough for ag because Q1 of the year and start of season is where it gets more interesting. So again, difficult to quantify, we felt it slightly more. And I think we saw it was one of the toughest-hit sectors. But again, we expect to see ag will naturally come up a little bit in Q1, Q2 of the new year.

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Björn Enarson, Danske Bank Markets Equity Research - Head of Equity Research of Sweden [28]

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Yes. For seasonal reasons?

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David Woolley, Concentric AB (publ) - CEO & President [29]

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Absolutely, seasonal and cyclical.

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Marcus Whitehouse, Concentric AB (publ) - CFO [30]

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Correct.

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Operator [31]

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We have a final question, and that's back to the line of Mats Liss at Kepler Cheuvreux.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [32]

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Just looking at the long-term here and you have the 20% electrification book there up until 2025 when it be 20% adding to. And I just wanted to check, if you mean that those 20% are also to put on above or including the sales, if you expect the current market to continue at the current levels, then we could add this 20% on top of everything?

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Marcus Whitehouse, Concentric AB (publ) - CFO [33]

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Yes. I think we know that the electrification, as we've said, is going to be additive overall. There's going to be a little bit of substitution in there as some of the pumps come off and be replaced with others. But we definitely see that the electrification will be additive to the top line of the business over the coming years as we start to get that new technology onto different platforms.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [34]

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And do you expect the profitability to be similar to our current business?

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Marcus Whitehouse, Concentric AB (publ) - CFO [35]

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Yes, the business that we are winning today is at very similar margins to what we've got on our today business. So we don't see any dilution within the business at this point in time.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [36]

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And you sort of -- I mean, what's the lag between order and delivery? The orders you take today, are they sort of to be delivered in 2023 or...

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Marcus Whitehouse, Concentric AB (publ) - CFO [37]

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It can -- again, it can depend. Some of the orders that we are winning may go in 2021. Some of the orders that we have won, we've won in the early part of the year and we started shipping in quarter 4. So it can depend in terms of winning an order to when we actually start supplying.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [38]

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And when do you expect to see -- I mean, to -- well, get the confirmation that you -- well, the underlying orders that confirm that you will reach the 20% in 2025? When do you see that? I mean, given the lead time between orders and delivery.

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Marcus Whitehouse, Concentric AB (publ) - CFO [39]

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Well, we've announced, we've won some significant contracts that are the first big stepping stones to that objective. But we're -- again, we're saying 2025. This thing is going to ramp exponentially as we move forward. So we're going to make good progress during 2020 and 2021, but it's the out years where we really feel that the volumes through the electrification are going to come through. But it's absolutely vital we're winning those contracts this year and next year to be able to meet our growth objectives.

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David Woolley, Concentric AB (publ) - CEO & President [40]

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I think, Mats, what I would say to try to help the understanding of the situation. Because most every bus we're going to go on to, most every power pack, most every axle or truck, these are brand-new electric products. And I think what we've learned over decades of experience is if they say, launch 2022, what we build into our model is it will probably slip a year, the volumes won't be as aggressive as the customers would be saying. But then once we've netted that slight delay out, once we've netted off the slower growth curve, we come back to the numbers that Marc is talking about. We don't know what the market activity will be in 2025, but we fully believe that electric products will be constituting 20% of whatever we sell.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [41]

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Okay, good. Then David, coming back to China there, I guess, you mentioned the Alfdex run rate. I interpreted that -- I mean, it will sort of add to earnings at similar level as in Q4. Is that how you see it?

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Marcus Whitehouse, Concentric AB (publ) - CFO [42]

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No. I think it's certainly got the right level of sales. But we -- again, with Alfdex, we did enjoy some really rich margin that came through in the final quarter. So I wouldn't take the level of income as representative of what it is going forward. But as David touched on, we definitely got the right level of sales that we'll enjoy going forward. So it just was a very rich quarter for Alfdex.

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David Woolley, Concentric AB (publ) - CEO & President [43]

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And again just -- sorry, Mats, just try to help understanding, if we say that Concentric is about 40% truck on-highway, Alfdex is 95% truck on-highway. So we've seen a nice upturn in terms of a rush towards the Q4 in China. But of course, we're feeling absolutely what's happening on U.S. truck and European truck. And again, the indices tell us that, again, the main markets of U.S. and Europe for them is also going to have a slightly tougher time.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [44]

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Yes. But you didn't experience sort of any prebuying impact in the fourth quarter in China? It was sort of business-as-normal, almost?

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Marcus Whitehouse, Concentric AB (publ) - CFO [45]

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No, I think it was almost the reverse of a prebuy. We were expecting that the sales would ramp up earlier into Q1 of the year. And again, it was a change in the interpretation of the Chinese law, which meant things would slow down. And so what this is now is a reinterpretation on certain trucks, certain applications to say, right, we can fit that, and they've done that. So it's like the post-buy almost.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [46]

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Yes. And finally, we are still in China there. I mean, we have it -- disease corona? Is it affecting you? Well, how do you see that coming to you?

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David Woolley, Concentric AB (publ) - CEO & President [47]

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Our Chinese operation is small compared to the rest of the business. And we -- since we launched that business in 2004, and we then combined it with Haldex business in 2008. We had a very clear policy of China for China. So we buy the raw goods, semi-finished goods in China. We assemble and test in China and sell to Chinese customers. So it's almost wholly contained. So it's a terrible situation, and people are very worried what's going on. But in a commercial sense, in the business sense, I'm sure that there has been impacts because the government have shut down the businesses. So our business in Suzhou is on an extended holiday until the 10th of February.

So it will impact, but it won't impact us outside of China. And basically, as it's not a major part of our business, it will affect but in a small way. And clearly, we're waiting to see, as the situation unfolds, what happens next because it does feel like the situation changes on the daily basis.

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Operator [48]

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So okay, that was the last question from the phone. So back to you.

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David Woolley, Concentric AB (publ) - CEO & President [49]

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That's super. Thank you. And I understand there's no questions coming through from the web. In which case, I'd like to take the opportunity to thank you for your listening. Thank you for your questions. Thanks very much, and talk to you again in the next quarter. Thanks, so much. Have a good day.

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Marcus Whitehouse, Concentric AB (publ) - CFO [50]

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Thanks then, bye-bye.