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Edited Transcript of COIC.ST earnings conference call or presentation 24-Jul-19 8:00am GMT

Q2 2019 Concentric AB Earnings Call

Skane Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Concentric AB earnings conference call or presentation Wednesday, July 24, 2019 at 8:00:00am 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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* Klara Jonsson

SEB, Research Division - Research Analyst

* Mats Liss

Kepler Cheuvreux, Research Division - Former Equity Research Analyst

* Oscar Stjerngren

Danske Bank Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Concentric Interim Report January to June 2019. Today, I'm pleased to present David Woolley, CEO; and Marcus Whitehouse, CFO.

(Operator Instructions)

I will now hand you over to our speakers. Please begin.

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David Woolley, Concentric AB (publ) - CEO & President [2]

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Hi. Good morning, and this is David Woolley. Let me add our welcome to the meeting and we hope we can provide a good insight into how we see the world going forward. So let's start straightaway.

Let's go to the first slide and look at the agenda. Our program will follow the normal sequence of events. We'll start off by going through the highlights that we saw in quarter 2 of 2019. And after I've shown -- I've talked about the highlights, and I'll pass over to Marcus Whitehouse to talk about the summary of the financial results. After that, it will come back to myself, to give an outlook for how we see quarter 3 2019. And then finally, we'll come to the question-and-answer session, which hopefully myself and Marcus will be able to give some good answers.

So if we change the slide, and we look at the highlights for quarter 2 2019. Looking at the sales. The quarter 2 sales were down year-on-year by 8% after we delivered sales of SEK 533 million (sic) [SEK 553 million], again, currency gave us a small lift. If we talk then in sales in constant currency, we'll see that down year-on-year by 12%. And as we've talked about this a number of times over the last few quarters, the largest effect here is what we've seen has been the dual sourcing of a global OEM. And if we strip that effect away, then we can say broadly how sales are in line with previous guidance.

And then, if we look at group sales in terms of constant -- second quarter year-on-year. If we -- [if we strip] out that effect, we see it's broadly flat. The key point here I think is this fourth point. The book-to-bill ratio is down to 88%. Now in 1 sense, if we at the 2-year trend of this graph, we can see that we have a peak in Q4 of any year and we'll have the lowest point of Q3 of any year. So we're following the trend, the seasonal trend that we've seen year-on-year. And what we'll see is this 88% is lower than the number we've seen. So I think that sort of going to set the trend for the discussion going forward.

If we go now to the next slide. When we look at the indices for the overall market, the blended average of all of the sectors that we operate within, we can see that -- and we were talking about plus 2% year-on-year, but what we need to remember is that the growth rates are actually now a plus 2% were 3% than the indices we talked about in the first quarter. The indices are effectively starting to slope downwards and starting to soften as they go forward. And if we look at the -- our customers end markets, we can see across that blended mix, the end markets grew slightly. But what we see the difference between the indices and the orders we're receiving is -- our take is, we see that there is -- they've continued to manage their risk. We've seen reduction in inventory and we're seeing management in those schedules to actually try to reduce inventory. And what they're saying in person is consistent with what we're seeing in terms of schedules. So we see a gap now between what the OEMs were selling and what we as a Tier 1 supply to them at that same time.

If we look at the comparable sales by the end sector and then we'll start off with as we would normally would with heavy-duty and medium-duty trucks and looking at North America. Again, we can see that actually declined 2% year-on-year, but our actually -- our actual sales are lower than what the indices are saying. So again, I think we're ahead of the indices. I think the supply line, as a Tier 1 supplier suggest that what we're seeing is slightly less than that 2% decline.

If we go across to agriculture machinery, the end sector, this is mixed. If we look at North America and Europe, it's certain we saw the -- there was a drop in demand over that period. But if we then look at what we see in India and China, we've seen those markets, the emerging markets have remained relatively or comparatively bouyant.

Construction sector, again, we've seen this to be challenged now for a couple of quarters and it's gone down this year for certain. And we've seen that dip in most of the geographical regions around the world.

We pulled out India to talk about it separately, again, India is a good market for Concentric. What we've seen is all sectors have dipped down. There's a hard association with the extended period that the Indian economy had the general election, there's now a link to what's happening in a very heavy monsoon, but what we've seen is all sectors dipped down. And we expect it to bounce back, but there's no signs of that at this moment.

So if we go to the next slide. We move away from sales and we start to talk about earnings. As you will on the screen there, operating income came in at SEK 121 million against last year SEK 126 million. If we look in terms of percentages what we see is year-on-year we've actually achieved a slight increase from 20.9% last year to 21.9% this year. And the 21.9% is a good figure, of course, and we see it consistent if we look at the full year results of 22.1%. So it's within the right area.

We'll talk about the quality's margin. It is good quality margin. But we're pushing the business now very hard. We're using this Concentric Business Excellence tool to its limits to really drive the business hard as we're [seeing] lower sales. And so we're working very quickly to reduce our cost. We, of course, are reducing our inventory and we can hope for the best, but we're planning for a tougher [life] and what we're seeing that the business has done a very good job of optimizing its operational cost base.

Cash flow is one of the things that Concentric does pretty well. And the cash flow for quarter 2 was good as we delivered SEK 128 million compared to last year's SEK 142 million. Net debt was now down to SEK 102 million comparing to last year's SEK 132 million and we've got a gearing ratio overall of 10%. Slightly high, but as the next point would say, this is a quarter where we paid out the annual dividend of SEK 164 million. And we were successful to continue and resume buying back our own shares of SEK 50 million in the quarter.

The graph at the bottom shows the picture quite well. When we look at the peak in Q4, where we saw very strong sales and strong margin, that was the position where the dual sourcing changed most. And what we're seeing in Q1 and Q2 is that gentle softening. And even if you take away the dual source effect, it's flat at this moment.

So if we go to the next slide, we come now to the summary of financial results. That -- Marcus, will hand over to you.

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Marcus Whitehouse, Concentric AB (publ) - CFO [3]

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Super. Thanks, David. If we go to the next slide that shows the Q2 results group summary trading performance. And as David's alluded, we've had a good but challenging quarter. We're reporting sales at SEK 553 million. This time last year, SEK 603 million, down 8%. That decision by the global OEM affected our business by 12% on underlying and we were broadly flat as David reiterated on the remainder of our business. FX gave us a little lift up of 4%.

Operating income, we're reporting at SEK 121 million for the second quarter, SEK 126 million last year and down 4%. When we look at our year-to-date Jan to June numbers, we see that similar trend continue. Year-to-date, we're at SEK 1,119, whilst last year we were SEK 1,206, down 7%. And again, very similar trend that that decision by the global OEM affected our business year-on-year by 12% broadly in line with previous guidance and we had an FX gain of 5%. And again, for the first 6 months, our underlying business was broadly flat.

The margins both for the second quarter and the half year are around about the 22%. And as we said, they seem to have settled at that level, whilst the sales remain at this level in that second and half year.

Next slide please. When we look at our cash flow, again, a pleasing performance. We're reporting cash from operating activities at SEK 128 million and a good conversion ratio of profit to cash in the second quarter. When we look at the half year, our operating income before items affecting comparability was SEK 247 million and we generated an operating cash flow of SEK 230 million, 93%. Whereas we touched on in that first quarter, we've still got a little bit of a hangover on our working capital, as some of our customers have stretched payments and we're still challenging ourselves to get on top of inventories.

Next slide, please. When we look at our net debt, we are up at SEK 102 million at the end of the second quarter, down from this time last year, which was SEK 132 million and a gearing ratio of 10%. And again, down on this time last year of 14%. But as David said, we did pay the annual dividend out in the second quarter of SEK 164 million and we have restarted our own share buyback as we typically do in the second quarter. We were able to buy SEK 50 million of shares in that second quarter.

Next slide, please. This is the second time I've shown these slides and it's really just to reiterate the point. Our financials were affected by the implementation of IFRS 16 in January of this year. Predominantly, the effect has been bringing on leases, mainly associated with land and buildings on to the balance sheet, increasing our net assets by SEK 92 million, whilst at the same time increasing our net debt and therefore, gearing ratio.

Next slide, please. It should be noted that on a like-for-like basis, whilst we are actually at a gearing ratio of 10%, it would have been 1% on a comparable basis to what we reported in 2018.

Next slide, please. Which has also affected our operating cash flow. And this is really to do with the fact that we're depreciating those assets, that are now on the balance sheet. Whilst at the same time, we classify our lease payments as repayments of loans in line with the standard, but what it actually does, is it increases our operational cash flow on a like-for-like basis by around about 5%.

Next slide, please. Now this is an interesting slide. Little better than the IFRS 16 slides that I just went over. But what you will see on this slide is we are seeing less of the bold greens and greens that we've seen as we were talking about our results during 2018. And over the last quarter or 2, we've started to see them ebb down to our light green ambers. And as you can see on this slide, we've now got some reds, which are showing that our markets are slowing and not just, in particular, end applications, but both in end applications and regions.

So just looking at those quarter 2 results and starting with North America, we can see the truck, medium- and heavy-duty truck market had got a small decline. Whilst at the same time, both of that off-highway businesses, agricultural machinery and construction equipment also had a difficult second quarter.

Europe on the other hand has been able to hold at reasonably respectable growth levels during that -- that second quarter. Where again, our emerging markets have presented some challenges. South America, particularly medium- and heavy-duty trucks and construction equipment were difficult, whilst the ag market continued on reasonably strong.

David touched on India as well. India and we believe mostly affected by that, that general election that ran through the second quarter. Has been affected across all end sectors, but most notably the medium- and heavy-duty truck sector.

When we look towards the full year forecast that we've got what we see is broadly a weakening in the overall forecast from a full year growth rate of 4% down to 2% suggesting that, that second half will continue to be soft. The indices as they stand suggest that North America will pick up a little bit in the second half and Europe will ease off, whilst the forecast suggest that post-monsoon India will have a little bit of a comeback at the back end of the year. But we will wait and see and monitor what that position is as we trade forward.

Next slide, please. Looking at our segmental analysis by region, particularly the sales and book-to-bill ratio. David touched on it earlier. Last year, in the end of quarter 2, we had a book-to-bill ratio of 97%. We're now at overall for the group at about 88%. So we have seen that decline year-on-year. And we can see now that both of our sectors, both Americas and Europe are pretty much at that level. Americas is down at 89% and the book-to-bill ratio in Europe is at 88%. The year-on-year sales in North America have been predominantly affected by that decision by the OEM that explains [that] 21% year-on-year movement in sales. And our EBIT margins now have been able to stabilize around the 15% to 15.5% level at these current sales levels.

Europe on the other hand, we've seen overall flat sales, but our off-highway market sectors have been down in the quarter. And as we touched on early with the market, India has been a challenge, where again, we continue to manage our margins and we're seeing the continuation of strong margins within Europe.

Next slide, please. Robust financial position. I believe we still have a strong robust financial position at the end of that second quarter. We do have some challenges within our working capital, but we have been able to hold it at the levels that we saw at the end of the first quarter and they certainly are an improvement year-on-year.

Cash generation in that second quarter was strong at SEK 128 million, not as high as prior year at SEK 148 million, but affected by a lower sales performance. And again, when we're looking at our net debt and gearing, we see that, that seasonal pickup in the second quarter of our net debt as we payout dividend and restart our own share buyback programs. But we have a gearing ratio reported at 10%, comparable would be a 1% and we've had no adjustments during the second quarter for pensions.

Thank you very much. Next slide, please.

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David Woolley, Concentric AB (publ) - CEO & President [4]

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Okay. Thanks, Marcus, and that brings us to the slide saying quarter 3 outlook. And again, I'll waste no time to tell you how we see quarter 3 turning out. I'll start off with, again, the indices. And as Marcus was saying just a few moments ago, what we're seeing with the experts in terms of the indices, we can see a softening going on. So if we just look at the numbers there, basically, the first quarter was talking about plus 5%, the current one is now down to plus 2%. The whole of full year 2018, it was plus 7%.

Now the forecast within the full year was to grow by 4%, now that's backed off to 2%. So the indices are saying still broadly positive, but it's backing off. The second point is that the gap that we see between the OE sales figures and the purchases that the OEs are making from at least this Tier 1. We are for certain now seeing adjustments of inventory levels. We reported on it in Q1 and we're saying now it's more apparent in Q2. There's definitely extensive management of the inventory to prepare businesses for what happens to look like a slightly less certain economic outlook. And again, we're expecting this to continue going forward. Takes us to the third point.

And when we look at actual orders received in the second quarter, it indicates that our sales in Q3 will be lower than the previous quarter. And that's after we take account of the adjustment in working days across the summer season. We have been taking out capacity cost during quarter 2. And based on what we see, we will continue to take out capacity costs throughout the third quarter. And again, that would be in effectively all regions of the world. There's no particular region ahead of the other, we are taking the necessary steps to make sure that we're aligning ourselves very closely with the actual demand, and we too, as I mentioned, we're taking out inventory and softening demand on to our suppliers.

So when we look at the core markets, North America and Europe, again, they're still forecasting moderate though weakened growth for the balance of the year. And again, India, we think is something of an anomaly, that that major, major event of the general election pushed the economy sideways and backwards for a time, we expect it to come back, but we're waiting to see what happens post the monsoon. Overall, our guidance would be we see the truck segment as well as the construction segment weakening off towards the end of 2019.

So it comes down to -- I think when we were reporting in Q4 of 2018, we said at that time we felt like we'd hit the top of the cycle. It felt like the next movement was softer, and I think we're there. Our behavior, our business model, the Concentric Business Excellence is a perfect tool for what we're seeing now. We're taking necessary steps. We're in great financial shape and we expect that to continue.

So at this point, I would then move over to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Klara Jonsson from SEB.

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Klara Jonsson, SEB, Research Division - Research Analyst [2]

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I have a few questions. I'll just start with the EBIT margin expansion. I mean a very strong performance for another quarter. You managed to increase the margin by 100 basis points year-on-year, while your sales actually dropped 12% organically. So could you explain a bit the moving parts behind the expansion?

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

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Sure. I think it was the case that when we -- when we said in Q4, we really felt like the economic cycle had hit a peak, so we were feeling and sensing the next movement was down. We wasted no time at all. So in the businesses where we could take the opportunities to reduce workforce in line with temporary contracts or we could pull out overtime payments, premium payments. Anything we could do to address the cost base in a positive way, which was not going to harm our quality or deliveries, we did that. And we've been working hard across Q1 and hard across Q2. It takes some time for the savings to come through, but what you're actually seeing there is that effect.

We haven't increased prices anywhere. If it's a reflection of the economic cycle as well across 2018, it was very difficult to extract cost reduction from our supplier base because the supply and demand cycle is so strong. Within Q1 and Q2, we've actually found now success that we're finding some cost reductions from the supplier base, too. All things pointing to gently softening. We've worked hard, we've gone fast and the net result is we protected margin quite nicely.

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Klara Jonsson, SEB, Research Division - Research Analyst [4]

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All right. All right. And then, okay, I'll move on with some other questions. You mentioned that your end markets -- that your blended end market actually grew in Q2, but your underlying sales was flat, as I understand it. So are you losing market share in any segment or is it solely (inaudible) by OEMs taking down inventory that you're growing less than the market?

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David Woolley, Concentric AB (publ) - CEO & President [5]

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Correct. I think that's really -- is really is a key point and that's the 3 parts of that equation would be the dual sourcing effect versus what the indices are saying versus what orders we're receiving from the customers. So it's factual and we track the effect of the dual source. Business reduction on a monthly basis that hasn't changed in terms of what's happening there. The indices are still showing good OE sales, but again, we find it difficult to reconcile the gap between what the indices say and what we feel. And that's not for the first time over the 8 years I can talk about, there's often a dissonance, a gap between the indices and what we're seeing as orders. And this is where we're really boiling it down, so we've seen some, in certain cases, without giving customer names, we've seen some really aggressive movement on schedule [takeouts] even in month 1. And so...

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Klara Jonsson, SEB, Research Division - Research Analyst [6]

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Could you please provide any indication of which end market that's involving? Is it trucks or...

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David Woolley, Concentric AB (publ) - CEO & President [7]

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Okay. I can give a calibrated response. I think some of the sharper movements have actually been within the construction market, but there have definitely been some sizable, not dramatic movements on truck. So construction, slightly, more than truck, I would say, if I, again, try to calibrate it. So [what] the takeaway is, and I've spent quite a lot of time with customers face-to-face, and I think we hear it very clearly, we've got good sales, but we're protecting for downward movement and we're reducing inventory. So to us, the equations match and the gap is inventory and stock reduction. I don't think we've lost any other market share.

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Klara Jonsson, SEB, Research Division - Research Analyst [8]

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I hope it's okay that I go on with a few more questions.

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David Woolley, Concentric AB (publ) - CEO & President [9]

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Klara please, they're good questions, keep them coming.

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

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Great. So -- and then, we talked about (inaudible) and trucks, the inventory reduction maybe little bit here. Could you -- I mean the European truck market is the most important end market for you, that appears to have been doing okay at least from the market indices we're seeing in Q2, but what signals are you seeing for Q3 here for the European truck market?

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David Woolley, Concentric AB (publ) - CEO & President [11]

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Again, I think as Marcus was saying when he was going through the sector analysis, and he might want to come back and say something extra, we think the European market is holding up better. Again, if I go over 20 years of working within that sector, we've always seen that the American market is sharper to rise, sharper to fall. The European market is slightly more stable. It's holding up quite well, which is good. And we have to talk about this in calibrated terms too. The actual level of business, overall, is in really good shape. We're talking about downward movement, which I think is clear. But I think we are also seeing some destocking in the European markets, too.

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Marcus Whitehouse, Concentric AB (publ) - CFO [12]

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But just to [add] on, I mean, we look at those, those market indices and it does say [Europe] medium, heavy-duty trucks year-to-date up 4%, we're seeing a broadly similar position within our sales in that European market. But also, the indices are suggesting that, that plus 4% at the half year will be 0% by end of year. And that's the bit that we've just got to calibrate ourselves to is when we talk about softening in that market, indices are suggesting that Europe could cool a little. It's got North America coming back, but we will see. But at the moment, our sales are broadly in line with what we'd see within those indices.

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Klara Jonsson, SEB, Research Division - Research Analyst [13]

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All right. So -- I mean -- moving on to the guidance of lower sales in Q3 than in Q2, could you explain the moving parts behind this? I mean, I guess, that (inaudible) volume from an OEM will remain at the same level as in Q2 maybe. And maybe also we're seeing some end market starting to drop in Q3. Is that -- is that a good interpretation of that guidance? Or will the (inaudible) volume you stop seeing in Q3?

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David Woolley, Concentric AB (publ) - CEO & President [14]

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Okay. So where I'd sort of point to, to give that good guidance is when we go back to the book-to-bill. In terms of the -- where we see the peak of Q4 and the lowest point in Q3, we are seeing the book-to-bill weakening and 88% is slightly lower than we would expect in terms of a flat business. So the book-to-bill suggests a drop down, that where are the biggest gaps we've seen, the biggest gaps are in construction. And after that, it's truck. And after that, we've got this, again, slightly strange behavior in India where the general election seemed to have turned the economy upside-down temporarily, even though it was a great result that the current government goes forward and they are strong and they're consistent in their investment program for infrastructure. But that would be the 1, 2, 3, we've seen most movement on construction, followed by truck, followed by India. Again, that book-to-bill ratio gives us that gentle concern to say whatever we're doing in Q2, we've got to keep doing it in Q3, if that answers the question.

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Klara Jonsson, SEB, Research Division - Research Analyst [15]

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Yes, sure. And I just have one last question that you were actually starting to answer. In Q3 last year, we saw a pretty significant EBIT margin expansion. This is what you're really great at, delivering continuous margin expansion. However, we're entering really tough comparisons for the margin year-on-year now in H2. And on top, you have sales dropping quite heavily. So will we start to see margin contraction in Q3? And if not, how will you manage to know -- manage this?

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David Woolley, Concentric AB (publ) - CEO & President [16]

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Okay. So you're seeing and understanding our world very well. So the comparatives of Q3 last year and Q3 this year are going to be harsh because we were still climbing towards the peak of the cycle and now we're seeing a correction downwards of the cycle, so it gets tougher now. And whatever we're doing in terms of cost control, we'll continue. And history says we do this pretty well. Do I think margin will come under a bit of pressure? Absolutely, so we would expect to see a slight impact, but you know us pretty well. We're going to do everything humanly possible to make sure we keep on maximum speed controlling costs. And taking into account, I guess, Marcus will happily try to make that answer slightly more [numeric].

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Marcus Whitehouse, Concentric AB (publ) - CFO [17]

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Yes. I mean we guided for the end of '18 to hold it to the 22%, and we've -- I think we've done a pretty good job in this first 2 quarters of continuing that on. Going -- and I think our line was we could keep our OEM decision, that 12%, we could manage our cost base to that and keeping our underlying sales flat. If we do see the underlying creep down in that third quarter, then it will give some pressure to our margins. So as David said, we are taking action, we are taking cost control and taking cost of capacity out of the business in the third quarter. But I do expect to see some margin pressure as we move forward into Q3.

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Operator [18]

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And the next question comes from the line of Mats Liss from Kepler Cheuvreux.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [19]

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Just, well, follow-up questions, I guess, on good questions so far. Just to get some more flavor about the development during the second quarter here. Could you say something about the, well, the 3 months? I mean was there a similar development during the whole quarter or was there any sort of changes in, well, in June, for instance, (inaudible)

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David Woolley, Concentric AB (publ) - CEO & President [20]

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And again, very good question. The granularity was that, month-on-month, we could see the market tightening each time. Again, we -- as you will understand, we have monthly operations meetings and calls within the business. And month-on-month, we saw it tightening, we saw more news of slightly more aggressive behavior of trying to take out orders even within our 4-week plan period, which we fight hard against. And so we saw more incidences of that.

And the other thing, which then helps to calibrate our comments, we've -- the majority of our business sits in the truck business, of course, we've got some bigger players. But, overall, we have more than 700 customers from around the world in the 4 sectors. And to me, one of the factors was that there wasn't a sector that wasn't affected. And across those 700 customers, although, of course, some showed more growth and different successes for different reasons, there was a very good coverage to say that too many sectors and too many customers were behaving in the same way. So there was a statistical significance to what we're seeing and feeling as it was accelerating across the quarter. It is quite momentous, and again, we were working [throughout] with the teams, and the teams' doing a great job.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [21]

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Yes. Okay. And well, similar questions, I guess. But what about the daily production, will you sort of make changes (inaudible) during the second half now?

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David Woolley, Concentric AB (publ) - CEO & President [22]

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Yes. We can give some really good examples. Again, we've got quite a number of tools in our toolbox, and most of it's publicly available, too, so we can go through what we've done. As we've gone through Q2, things like taking off extra overtime, which is premium working, more costly, we didn't need to do it. Different areas, our manufacturing philosophy is to try to run any plant on 5 days a week in 3 shifts. Where it softened, we then, basically, some areas of the business would could come down to 2 shift. Some of the 2-shift areas would come down to one shift, so we're taking out capacity in terms of time.

I think I also mentioned in some of the more radical change areas, going back to 2008, that crisis there. We always maintain a part of the workforce, which is on temporary contract, and we've pulled out temporary contracts where we could and where we needed. Quite a peculiar tool exists in Germany is the so term (foreign language), which is a short-time working, and we instigated some short-time working from the 1st of July in one of the 2 German plants. So we've used a number of the tools, and to answer your question, whatever we've seen in Q2, we're looking to continue or even tighten that going into Q3.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [23]

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Great. Then, again, well, you lost this dual-sourcing contract last year and, I guess, you're looking for replacing that with another. Could you give some flavor or indication what you see maybe next year? Are there opportunities out there still for -- have there been any changes?

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David Woolley, Concentric AB (publ) - CEO & President [24]

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Again, one of the earlier questions is in terms of the downturn, have we lost market share, the answer is, no. In terms of where are we expending most resource in terms of engineering and investment and development, we are really full on, say, in our fundamentally basic market of the pumps we that make today are very much go forward, but we're really pushing hard on the electrification, and we've talked about it now many times. The introduction of the hybrid electric vehicles or fuel cell vehicles is still a low volume. We have, in one sense, a disproportionate amount of engineering time and prototype work going into that market. I think we've reported now over the last 6, 8 months more than 10, 12 contracts, that continues. The sales are low at this point, they have much more to do with 2022 through to 2025 and 2030. So we're confident to say we've got some good profitable growth of technology products coming up. There is an underlying shift from selling mechanically driven pumps to electrically driven intelligent subsystems. So again, we're pleased with the underlying trend. And of course, we want it to be faster, but the market will do what the market does. And in the meantime, we'll maintain our business and grow as it allows us.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [25]

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And you will be able to handle these opportunities with the current level of product development costs?

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David Woolley, Concentric AB (publ) - CEO & President [26]

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Absolutely. For instance, if you look at the electrification part per se, we've put in a production line, which has the capability to run past 30,000 or 40,000 units. And if we're producing somewhat less than that, we can run that cell much harder yet and we've also provisioned -- there is a another production line lying open in parallel to that line. So there is -- we've built-in latent capacity. We know the growth will come and we've invested into that and it's -- and is waiting for the volume to come up, as we expect with any product launch.

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Marcus Whitehouse, Concentric AB (publ) - CFO [27]

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And you will see, Mats, that the R&D percentage to sales has increased sort of year-on-year.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [28]

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Yes. Yes. So should we expect it to, well, stay on this level or do you need to maybe...

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

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It will definitely stay at this level, it has the potential -- depends on other work coming in, has the potential to increase further, but it will not go down from this point.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [30]

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Then again, looking at the profit and loss there, you have the share of net income in joint venture. I guess Alfdex is the main part. It was down year-over-year. Could you say something about that?

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Marcus Whitehouse, Concentric AB (publ) - CFO [31]

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Yes. I think we've got, certainly, capacity costs off setting up the Kunshan facility in China that we've seen within the first and second quarter, that has put a little bit of pressure on profit and cash performance of the business, gearing us up. But what we're seeing as we're moving forward is that it's probably not going to be as optimistic as perhaps we were hoping for 2019. And the reason for that is the Chinese government has taken it from what was a centrally driven decision to move quickly to a regional decision. And what we've seen within that is it means that, it's transitions slower from old technology to new technology. So we've got all of the right things in for the -- putting the lines in place and the costs and the investments have gone in. Will we see the full benefits of what we hoped in 2019, perhaps not. But the right trend [we'll wait] for the longer term as it moves into 2020.

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David Woolley, Concentric AB (publ) - CEO & President [32]

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And the other factor is that, again, is what we've been talking about, the Alfdex business is greater than 95% on-highway truck. And they are seeing and feeling exactly the same effects that we're reporting. Sales of trucks are still pretty strong, but the behavior beneath that, the number of components being bought into stock have corrected downwards. So again, we can feel that yet more sharply I think in Alfdex, which is much more focused on one sector.

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Operator [33]

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(Operator Instructions) And we have a question from the line of Oscar Stjerngren from Danske Bank.

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Oscar Stjerngren, Danske Bank Markets Equity Research - Analyst [34]

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Oscar Stjerngren from Danske Bank. A couple of questions for me. If you start with -- I mean it's difficult for you always to call the end markets and you're catching the negative trends. But if I just pick your brain on -- in your experience when this is kind of destocking that you see now for 2 quarters with your customers, how long does that typically last in this kind of downturns?

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David Woolley, Concentric AB (publ) - CEO & President [35]

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What a really good question. If we -- we've got 2 easy comparative points. 2008, no one wants to go there, and the destocking effect was so exaggerated the expression bullwhip happened. The market went down 1 percentage and the impact to the Tier 1s was just dramatic. It's not that. If we look at 2016, we saw maybe that downturn and the effect happening. We would expect that downturn or that destocking activity to probably go over 2, 3 or 4 months. The different sectors run at different speeds. In one sense because we're so -- sorry quarters, my apologies. So the destocking effect to be over 3, 4 months, the underlying capacity may be lower, that we can't guess. So I think we'd still see more destocking effect before we find out what the bottom point is before the correction will kick back in.

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Marcus Whitehouse, Concentric AB (publ) - CFO [36]

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(inaudible) absolutely to point out. We haven't got a correction that's happened within the market like an '08. We've got a steady decline in confidence. And what we're seeing is that steady adjustment of the OEMs, trucks, construction reacting to it. So we've seen it quarter 1, we've seen it drip into quarter 2 and we're expecting it probably to continue to quarter 3. But it will depend on what and where those end markets settle.

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Oscar Stjerngren, Danske Bank Markets Equity Research - Analyst [37]

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Yes, of course, of course. But it should be sort of aligned to their [end markets] towards the end of this year. Then we'll see what happens to end markets, of course, going to next year.

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David Woolley, Concentric AB (publ) - CEO & President [38]

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And that's that gap between, again, we would expect to see another couple of months and maybe the other quarter, whilst that correcting that level. And [other] factor, the indices still saying good sales, so the drop hasn't really happened yet. People are getting less optimistic on the growth, so it hasn't filtered through. One of the features that we, I would say, enjoy in the Concentric business is truck sales is really one of the leading indicators in economic movements, so we get to enjoy the front end of the business. So we tend to see slightly earlier than many sectors. So we see -- and there's no panic in there. We're doing all of the right things to correct the business. And following the questions from Klara earlier, whatever we'll do, the ambition will be to make sure that we protect margin based on the scale of what the movements are.

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Oscar Stjerngren, Danske Bank Markets Equity Research - Analyst [39]

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But do you think there's an excess inventory in some of these segments there? And I'm particularly alluding to construction equipment.

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

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I think 2018 was the best year we ever had. And I think whatever's been promised, each time there's a destocking, the OE say we'll never do this again, we'll never overstock. But the nature of the beast is when they -- the sales they receive for a let's say (inaudible) somewhat a buyer will come to -- come to the [cost of] supply and say, "Do you have one, yes or no?" And if they haven't got any stock, they'll go somewhere else. So they're driven towards having availability in the compounds. So whatever their belief is, we don't want to overstock. 2018 was a fabulous year. Sales, machines were flying out as quick as they could make them. And they were beating up suppliers, you can't keep up with us. Concentric did a fabulous job of keeping up, but the net result is when the market corrects, it's ouch, we now need to think about what we do next. It's not a criticism. I can't think how they could not run that cycle, but now they have the difficult task of getting machines out the door and keeping products from coming in.

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Oscar Stjerngren, Danske Bank Markets Equity Research - Analyst [41]

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Very clear. Just one follow-up from me on or additional detail question. Can you just please remind us on the warranty provisions that you had last year the second quarter, how large were they? And can you confirm that sort of warranties are more where they should be in the past quarter, in Q2 this year?

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

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Yes. Absolutely. We took a provision of around about SEK 25 million in the first quarter of 2018. That was the only notable provision that we've taken. The underlying rates are very low, around about like 0.2%, 0.3%. So quality of the product has been good. It's that one item that we've made a provision on.

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Oscar Stjerngren, Danske Bank Markets Equity Research - Analyst [43]

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Sorry, was that in the first quarter or the second quarter last year?

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Marcus Whitehouse, Concentric AB (publ) - CFO [44]

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It was in the first quarter of 2018.

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Operator [45]

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And as there are no further questions, I'll hand it back to the speakers.

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David Woolley, Concentric AB (publ) - CEO & President [46]

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Okay. Thanks for those questions. We can see there's a question online, and the question is from (inaudible) from Connor Capital. And your question, it alludes to the Alfdex situation, which one of the earlier questions goes to talk about, and that was exactly as expressed. The Chinese have done what they've done on every single emissions launch I can remember talking about over the last 20 years. They've come in very hard and they've taken a view to [soften] a little bit as it comes into effect.

The positive we can say is that when they launched, effectively, China 6, which is the same as Euro 6, maybe a bit tighter, they always said that we're going to introduce this in 2021 and 2022. Then they came up with the Blue Sky initiative to say, well, not only we're going to go to China 6, which is tougher than Euro 6, we're going to go early and pay premiums for it. They've considered that slightly more carefully. They've changed the [rules] slightly. And what we see is we've won business, the volumes are coming up, but not at the level they first indicated by making it mandatory, it's basically optional with some inducement, but not what they first promised. So it's still positive, but as we've seen China over decades, end up being slightly slower than everyone first thought.

Okay. Hopefully, (inaudible) that gives a decent understanding of what we see from the China market. There are no more questions coming in online. So unless there any other questions on from the calls?

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Operator [47]

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There are no questions.

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David Woolley, Concentric AB (publ) - CEO & President [48]

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Then it's the opportune time to thank everyone for taking the time to come and listen to us when you should be on holiday. Thank you ever so much indeed. Thanks for the super questions. And take care and talk soon. Thanks so much.

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Marcus Whitehouse, Concentric AB (publ) - CFO [49]

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Thanks all. Bye-bye.

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Operator [50]

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That concludes our conference call. Thank you all for attending. You may now disconnect your line.