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Edited Transcript of COIC.ST earnings conference call or presentation 6-Nov-19 9:00am GMT

Q3 2019 Concentric AB Earnings Call

Stockholm Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Concentric AB earnings conference call or presentation Wednesday, November 6, 2019 at 9:00:00am 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 - Equity Research Analyst

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Presentation

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

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So good morning, and welcome to the Concentric Q3 2019 Interim Report. As in previous reports, it will be run by myself, David Woolley, the CEO; and Marcus Whitehouse, the CFO. And so let's begin. We are going to follow our very typical agenda. I'll start the proceedings by taking this through the highlights of Q3 2019. After that, I'll pass over to Marcus to talk about the summary of the financial results. And then it'll come back to myself to tell you how we think quarter 4 2019 is looking to land.

After that, as usual, we'll do the Q&A within the room, and we'll go to the phone lines after that.

So if we go to the first of the slides, the highlights, so to speak, of quarter 3 2019. Q3 was a very tough quarter. I think we were indicating across Q1 and Q2 that the market was feeling tougher and getting tougher; well, Q3 landed, it was a tough one. The sales in the quarter were down at the headline level of 26% year-on-year at SEK 463 million. And again, that's after adjusting for a 2% gain on foreign exchange.

Tough comparison. Q3 '18 was our best quarter ever, but that's a reality. If we take away the effect that we've much reported about the dual sourcing that we enjoyed last year, if we take away the dual-source effect, we can see that the market and the sectors that we deal with year-on-year are down by 19%. So the numbers are still tough in whichever way you look at it.

What caused it? Well, I think it's not breaking news. The demand reduction that we are seeing, take away the dual-source effect, is affected by 2 real things. The end market activity is reducing, whether that's truck sales, sales of construction equipment, whether it's handling equipment. The end markets are definitely softening. But on top of that and probably more severe is this effect of the customers' destocking programs. As they see the market going down and their order intake has softened, they are working hard to take out stock. So I think as this has been said in previous years, there is almost now a bullwhip effect of a smallish reduction at the front of the supply chain gets magnified by the time it hits people like us and other suppliers. So we're enjoying that particular movement in the market.

If we look at the graph, of course, as usual, the light-colored bars show that development of sales to show that very tough quarter 3, but the book-to-bill has made an interesting but strange move. We would, over the last, I don't know, 9 or 10 years, expect to see quarter 3 is our lowest order intake of any year. It's increased slightly, and I don't know whether that's just an adjustment as people have destocked extremely hard, and there's a bit of a bounce back, but that trend is slightly different to what we've seen in the last 10 years.

If we move to the next slide, then we'll start by talking about the published market indices, those figures that talk about our end markets and where the end markets are going. And the movements here are sort of significant because if they look at the end market indices for our sectors, our geographies, basically, quarter 3 with 2% down year-on-year, and that's the first of the quarters where the market indices have set negative movement. They're sort of catching up with our world.

The Q3 in absolute terms is 4% weaker than Q2 in the end market, so we can see that trend is now starting to come through. And I think if we go to the next point, where we talk about our customers are now reporting order intakes that are significantly down year-on-year, we understand 2 things: one, why they're destocking and destocking quickly. But also, I think that they're taking those precautionary measures to say we've got a great backlog and we're eating the backlog and that backlog is starting to run out. So they're starting to see their producer numbers come down as well as the destock programs.

For Concentric, let's look at sales by the end sector. Construction equipment is -- basically of our sectors, Q3 has shown the hardest hit of all of our sectors. And this isn't any particular market, I'm afraid. If we look at our core markets of North America and Europe, construction has been quite hard hit. Agricultural machinery globally all -- towards all geographies have seen ag come down somewhat. So it's always a good sector for us, but it's down in all areas of the world. And last but not least, when we look at the medium- and heavy-duty truck sector, that continues to have that challenging market. And again, public information, I think some of the truck manufacturers have gone out with some dramatically lower order intakes in Q3 compared to last year.

And again, it's the catalyst for the -- how quickly can we destock. We put a special mentioning for India. India, for us, is an important market. We've been in India for 25 years, and we know it quite well. That market is quite heavily suppressed. As we followed the track through India, some of our sales there were down 40%. And at first, it was down to general elections. It was down to, monsoon is too heavy. I think the reality is becoming clear that the availability of funding, of finance tightening has happened and the capital sales or capital purchases have backed or other way off. So even India is suffering quite badly in a global market sense.

So the next slide, the earnings, what's left? Okay, what we see? Q3. Operating income was SEK 91 million, down against last year's record of SEK 142 million. We managed to maintain income levels in the quarter at 19.8% against the prior year 22.9%. And if we look at the third quarter up to year-to-date, then the results are still at 21.4%., so it is coming under pressure the -- as we say in the next point.

We've responded -- as anyone that follows Concentric for a level of time, we've responded quickly and decisively to say this is a reality, it's our reality. We have an extremely flexible business model and we've been pulling out cost rapidly. Taking out capacity cost, certainly taking out head costs, challenging every cost that we don't need in the business. At the same time, we like to think it's at an intelligent level. I'm going to talk later about good news on electrification. So our engineering spend and our development spend is carrying on at pace.

Cash flow is -- as it's been said many times, profit is a matter of opinion, cash is a matter of fact. Cash, of course, suffered from the lower sales in Q3, but at SEK 98 million, we generated more cash than we generated profit, and that's quite normal in a down cycle. As we're managing our cash very well, we're starting to spin out more cash than profit. The team have done a super job. Of course, changes in legal reporting and we -- pensions were somehow impacted. And so although it's not a cash impact, we've had to put more of a pension pressure onto the balance sheet. And so we can see our gearing, including pensions, has increased from 13% up to 20%.

On the next point though, if we look at real net debt and our gearing ratio, excluding the pensions, we're actually SEK 451 million in the positive situation. So our gearing is actually minus 44%, again, where the team are doing a very good job to control reality of cash. We continued in the quarter of buying back our own shares. We completed another SEK 50 million, SEK 100 million year-to-date. So again, it works well, and we'll continue to do that. The graph is (inaudible). And then the good news. We've been talking a lot over the last 2 years about electrification. And again, it's important for our investors to understand in one sense, it looks like a threat that electrification -- electric vehicles, hybrid vehicles are a threat to the diesel market. And the question rightly to Concentric would be, is that a threat? And absolutely not. It's a huge opportunity. Because what we've been announcing over the last, I think, 12 months is a series of programs for electrohydraulic steering applications. Fantastic operations for steering on hybrid and electric vehicles. We've been quietly announcing electric water pumps on vehicles to cool batteries. We've been talking about electrically powered oil pumps to cool those big electric motors. If they're not that efficient, then they need to be kept cool. So we've seen a fantastic increase in opportunities for electrification. And ultimately, we're going to see more electric applications on the side of diesel engines. So we're excited about it.

The announcement -- the press announcement we put out in the last week or 2, basically, for us is breaking ground. The wind when it blows to generate solar electricity, the sun for solar electricity, it doesn't always give energy when you need it. So there's been a growth around the world in these battery storage areas. And these are the so-termed gigawatt storage areas, and we generate so much energy and put this into batteries, batteries get hot. And when you release the energy to use it, batteries get hot again. So there's a market in there for water cooling and we're supplying the water pumps driven by electric motors. So for us, in very simple terms, we've taken our advanced systems that we've developed for trucks and buses and construction machines and applied it to what is for us a new end market and a new customer using this intelligent flow control. It's sort of exciting.

The market around energy storage is set, we believe, to increase -- compared to 2019 increase by 15x by the time we get to 2030. So it's a growing market. And we're in there as an early adopter, generating reputation, reliability and performance. If we look at this project alone, and we're not allowed to say with whom this global player is sadly, but we see that's going to be worth about SEK 100 million over the next 3 years. So we're into the market, and it talks quite nicely to our strapline that we've -- again, we've always had that smart technology, smart innovation leads to sustainability. And this is a beautiful example of how we're getting into the sustainable energy cycle as well as electric diesels.

So at this point, I'll take a rest and pass over to Marcus to talk about the summary of financials.

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

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Super. Thank you, David. Good morning, everybody. Yes, as David touched on, Q3 indeed has been a challenging quarter. We're reporting this morning that our sales are SEK 463 million, down 26% and benefiting still from an FX tailwind of 2%. And our operating income overall has been reported at SEK 91 million, down 35%.

And as we touched on earlier, that decline in sales in the third quarter has put pressure on the margin. It has reduced it down to 19.8%. The first time it's gone below the 20% limit since the quarter 1 of 2018, but still at pretty good high levels, given the scale of drop of sales that we're having. And again, testament to the teams that we've got within Concentric to work quickly to address a changing market and changing dynamic. When we look at the year-to-date position, we're reporting sales of SEK 1,582 million, down 13%, benefiting still 4% from FX on the year-to-date numbers. And operating income is at SEK 338 million, down 13%. Again, year-on-year drops were again well-managed dropout on reduced sales. And really pleasing to see that the operating margin for the first 9 months is at 21.4% and broadly in line with what we've seen for the first 9 months of last year.

We've touched on cash flow. Cash flow has been good. It's been strong in the third quarter. There's still work to do, as we'll touch on later, but we're reporting SEK 98 million as an operating cash flow, stronger than our operating income at SEK 91 million. And more importantly, pleasing to see that the first 9 months now that ratio of almost 1:1 of operating income to operating cash is almost there. And as I say, a little bit of work to do in that fourth quarter to get it to where we wanted to be. But again, the business is still generating a good, strong operating cash flow from our business.

David touched on it. Net debt probably needs a little bit more explaining. We're reporting SEK 207 million. And yes, there are 2 things that are going on. One, which is in this quarter. And we do have remeasurement of pension liabilities due to falling discount rates that we're seeing across all of the territories where we've got a pension scheme. And that's about SEK 140 million of the SEK 207 million that we have taken in the third quarter. But equally, it's important to note that we had a pension and accounting change at the start of the year with our leases that we had to bring on to our balance sheet, increasing our assets [but] equally, increasing our net debt. Both of those effects have increased our gearing by 13% for pensions, 9% for our accounting change, which really means actually underlying net debt is at very similar levels to where we started the year. And that's encouraging because, again, it shows that we're still managing our cash and our financial performance tightly in difficult markets.

Speaking of difficult markets. David touched on it earlier, but we have seen our markets fall each quarter this year. Quarter 3 has been the first quarter we've seen negative growth. And this graph does give a really clear graphical image with those oranges and reds that are showing negative growth. And the diversity of what we're seeing, it's not just in a particular region, it's not just in any particular sector. Very clearly, showing we've got a global impact for a whole variety of different reasons.

So if we just walk through quickly focusing on the third quarter. North America, we saw a little bit of extra growth in demand within the market in the third quarter at 3 of the 4 sectors. Europe, on the other hand, saw negative growth across the board. And Europe is an important market for us, most notably in that construction equipment sector. It really tightened in that third quarter.

South America, demand stays pretty much constant, but a relatively small market for us. But India isn't. India is an important market. And as David touched on it, it has had some challenges this year. Second quarter, it was all put down to being the general election and the impact that had, but probably underlying in that second quarter was that brewing banking issue and tightening of liquidity, which has stifled funding into projects and has limited the capital purchases within the market. And we've seen that, as you can see on there, right the way across the board: ag, construction and notably truck. And China continues with little or no growth within the market.

When we start to look at the 2 regions, and again, understand what that market impact this had on our business, we can say our sales are down in the third quarter, 38% year-on-year constant currency in Americas; 14% year-on-year in Europe. But again, we've got to remember, Americas has been heavily impacted by the dual sourcing decision. And when that's removed, the impact that we're seeing in the drop in sales in that third quarter is pretty much balanced across both regions, again representing it's not just one territory, it's not just one issue.

The book-to-bill ratios, both reasonably healthy, both above the 90%. But with that drop in sales, we do see that drop in margin. And both regions have seen a small clip on the margin, but again both at relatively healthy high levels. We've touched on cash flow and pleasing numbers at SEK 98 million and yes, down from prior year. But the areas I just wanted to touch on here is the working capital. And we said there's work to do.

Our working capital level, the level highlighted green in the box above, is certainly lower than it was last year, testament again to the work that was done, but still remains perhaps a little higher than where we wanted. And that is driven really around the inventories, and the inventories do need some work. We've got work to do. The drop in sales has left us with a slightly higher balance at the end of third quarter than we would like. And again, it's one of the focus areas for our fourth quarter.

Net debt and gearing. We've touched on it, both David and I, and explained that movement from SEK 37 million to the SEK 207 million. Again, the graph that we've got under there with the black line, which is showing our net debt excluding our pension liabilities, is the one that I really want to draw the eye towards because it does show that this business consistently is running a negative net debt position excluding pension liabilities for, as you can see, a considerable period and certainly, a relatively stable period as we've gone through a difficult [4] quarters. Really pleasing to see and good to report.

So overall, a challenging quarter, but one where the balance sheet is still in a very strong position, but with a little bit more work to do on working capital just to get tighter as to where we'd like it to be by the end of the fourth quarter.

Okay. I'll hand you back to David.

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

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That's super. Thanks, Marcus. And so we come to what we think we see looking at Q4 for this year, the outlook as we run towards the end of the year. And basically, if we start again with the published indices, as we said, they're weakening. And the Q3 was the first year-on-year reduction. The full year forecast now has been taken from a 2% growth year-on-year. The indices are now catching up to say, well, actually, we think, flat year-on-year. And typically, the indices are backward-looking, rearward-looking and based on new equipment sales. Our order bank, our orders are based on the Tier 2 receiving new orders for the future. So that's 2 down to 0, feels right and possibly somewhere to go just yet.

We talked about the core markets. For us, North America and Europe. Again, we don't see any improvement in Q4. Basically, we're showing the order intake marginally up. I think that may be actually an aberration. I think that's a movement in the order bank, basically, after some very heavy surgery for the customers.

India and China, don't escape it. What we see, what we feel is a global phenomenon. It's -- it really is a global effect. Heaven knows where it goes. What we can do is talk about what we're doing within the business. And we've talked so many times about the Concentric Business Excellence program. It's a great tool for improving the business, growing the business. But in a downward-facing situation, Concentric Business Excellence is a fabulous tool to say, how do we take cost out of the business quickly? How do we take money out of the business, take -- protect cash, protect profit, but don't damage the core of the business.

And again, that clue towards electrification is we are extremely busy and I think we've announced 9 or 10 contracts. There are more contracts to announce. So we're protecting the core operation and the core development of the business to say we take a 10-year view. Whatever is happening now, it's a 10-year view business.

So the mechanical words, say, if we look at the level of orders we received in Q3 indicate the sales in Q4 are going to be at a similar level, so that similar, quite well pushed down level, I'd have to say, but it's not showing worse yet.

From my personal point of view, I don't think the destocking is finished. So therefore, our efforts within the business to control cost and heads is not finished either. We're not going to hang back and hope it gets better, we have our plan.

We'll come back to that very good order with a global OEM to look at energy storage markets. We've just announced that we've won the business. The great news is even better. The orders have already started, so we're actually making sales of this project within Q4 with some quite promising sales out of this product in 2020. It doesn't change our world. It's not significant enough to do that, but it's generating our efforts towards electrification and growth within the new market is working quite nicely.

The final thing to say is what we always say, whatever is the situation, we're absolutely well positioned to actually cope with whatever the market comes for us on the short term or the long term.

At which point, we'll then pass over to any questions on what we've just said.

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Questions and Answers

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Unidentified Company Representative, [1]

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Yes, and let's start with questions from the audience and [Lynette] will help you with the microphone.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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Mats Liss, Kepler Cheuvreux. Well, starting with a couple of questions. At first, looking at the product mix and the sales there, you saw a quite substantial decline in your Concentric engine products, but the other segments like the Alfdex and Licos components held up pretty well. Could you shed some more light there by -- I know -- I mean the Concentric engine products are more related to the dual sourcing, but could you say something about the outlook for the other 2 also?

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

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Okay. Good morning, Mats. Thanks for coming. I think what you can see in there is that the difference is phasing on timing only. I think that mix about the construction market going slightly ahead. Engine products go into construction and trucks. I think some of the truck market is catching up on some of the construction.

If we look at the Alfdex business, has already been in the press, headcount reductions have been going on there too. So I think it's just a phasing difference. And I think the mix will come back and join itself again over the next quarter or 2. So there are no massive changes, no worrying changes on mix. It really is just all over our global business and we're cyclical in all our markets, some go slightly ahead of the rest, but they can back together at the end of it.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [4]

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Okay. Then again, you have this 40% exposure to the truck market, and I guess, well, a substantial part of it is U.S. based. And next year, we will see production coming down quite substantially for, especially the heavy trucks, I guess. And then again, looking at mix there with the Concentric engine products coming down so substantially. Is it possible that -- while the impact of -- due to the inventory reductions have come earlier, and you won't see that dramatic decline next year. I mean reduction is -- could be expected to...

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

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Really good question because we spent a lot of the last 8 and 10 months looking at those trends. And what -- first to qualify, the truck market, whether it's Europe or U.S., since the 1950s, has been heavy -- heavily, heavily cyclical. The U.S. market has always been more aggressive in terms of peaks and troughs compared to Europe. But Europe follows just in a less exaggerated way. And what we've seen over those years in other turndowns is that the destock effect, that bullwhip effect, small change at the end -- at the start of the chain is a massive kick by the time it comes to companies like Concentric. We saw order intakes in Q1, I think, publicly available data for Cummins. I think what they said in Q1 that their order bank intake was down 53% year-on-year in Q1, so we all saw it come in, and we felt the destocking coming through.

Your real question is the real question that we have and -- has the destocking reached its bottom? And do we now see orders coming back to support the ongoing demand? My opinion for what that is worth, which is very little, is I don't think that destocking is finished. I think we're going to feel it across Q4 and into Q1. So risk of being accused of being bearish, I think there's some destocking yet to happen, and that's what we're planning to do.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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A similar question there also. You mentioned the production rates are down low single-digit percentage points. And I guess, your sales is down quite more, and is the difference that destocking impact?

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

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That bullwhip effect. Below the market is talking about a few percent, we're talking about much more.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [8]

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And you keep your market share, I mean?

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

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Yes, absolutely. In electrification, we're actually growing market share. That does -- that's not worth great deal at the moment.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [10]

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And finally, just about the pension liabilities. Do you see further -- well, impact going forward?

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

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It could be. It really is geared to discount rates, and we've seen those drop. If the global economy does start to struggle, there could be further pressure on interest. There's very little movement in most of the areas to actually go now, but the Fed could still drop rates and it could still impact our liabilities in the future. So yes, there is a risk depending on what happens with the global economy.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [12]

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But up until now, is there sort of market-to-market adoption you have made?

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

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Yes.

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

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Certainly. Thank you, Mats. Are there any more questions?

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Unidentified Company Representative, [15]

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Okay. We can go to the telephone conference. Operator, do we have any questions?

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Operator [16]

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We have a question from the line of Klara Jonsson of SEB.

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Klara Jonsson, SEB, Research Division - Research Analyst [17]

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So I mean your orders dropped -- or your sales dropped quite substantially in the quarter, driven by, as you said, customers clearing inventories across regions and markets as well. But can you comment on specific -- I know you can't comment on specific customer development, but could you explain how much of a total top line is like your 5 largest customers? And what end markets are this in?

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Marcus Whitehouse, Concentric AB (publ) - CFO [18]

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We wouldn't normally comment on what is the impact of the top 5 customers. I think it's fair to say given where our spread is though that they are all affected. And we have seen the same sort of impact in North America and Europe and rest of world. So it isn't isolated to one particular region or one particular customer. It's a fair spread. [Prequelly,] you can draw from the report that was issued that the construction equipment sector has probably had the hardest hit for us. So customers, of which there will be some in that top 5 that represent that sector will have been hit quite badly as they have taken corrective action, both on production rates and stock.

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Klara Jonsson, SEB, Research Division - Research Analyst [19]

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Yes. All right. So construction equipment. Okay. And then looking at your EBIT margin, we saw quite a lot of contraction in Q3, some 300 basis points year-on-year down. On the other hand, you saw some 400 basis points in your expansion last year in Q3, so it's still a good performance if we add this up. But with the volumes dropping this fast, and you're mentioning that you're working on taking out costs, should we still expect to see the same development for the margin in Q4 as you have quite tough comparables there? Or will cost savings start to kick in then already?

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

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So the program of cost reduction is really still ongoing. And when we look at profit dropout, it's one of the key operating metrics we use within the business. We always try to think that in an up or a down market, we basically, on an upmarket, try to push it 30% to 40% drop-through to profit, high-grade profit. On a down market, we challenge ourselves to get a 30% drop out, even 25% dropout. What we're seeing year-on-year with a dramatic movement in sales, we've managed to achieve about a 30% dropout. We've still got some stretch left that we have more costs coming out. So as we see the comparative Q4 '19 to Q4 '18, it's still a tough one, not quite as tough as Q3. So we are hoping that we should be able to hang on to that 30% dropout. We're running very hard to stand still, is an expression.

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

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Yes. And just to expand on that, Klara. We have indicated within the report that the sales level in Q4 will be similar to Q3. And therefore, we'd like to try and manage that margin as best as we can to Q3 levels going into Q4.

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Klara Jonsson, SEB, Research Division - Research Analyst [22]

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All right. That's a good answer that I won't expect and a lot of different developments in Q4. So my next question is about the order you talked about. So this contract for electric cooling pumps for this leading global OEM, these kind of products are relatively new to you? Do you think that this contract, in particular, will be a door opener for other contracts like this?

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David Woolley, Concentric AB (publ) - CEO & President [23]

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We're absolutely confident. We've used our leverage within the truck and construction market to sell electrified pumps with a lot of success. And the fact that the larger volumes were based on emissions, and they're based on emissions limited around cities, so 2025 will give some much more impressive sales revenue. But the reputation we've generated for high-performance pumps, extremely reliable fit and forget intelligent pumps, that information has gone sideways into those related markets. So yes, once we're in the energy storage market, as we are now with one of the top players, we do expect that our reputation and sales will keep going sideways. So we are quietly excited. But in real terms, the volume kick up is more like 2025, as more legislation comes in and more of the carbon-neutral -- CO2-neutral efforts start to really gain traction. So it's a great investment. As we're a 10-year business, so some of the sales will come back later than we want, but we're glad they're there.

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Klara Jonsson, SEB, Research Division - Research Analyst [24]

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Yes, all right. So the 15x growth in this market will come after 2025, I guess?

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

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Basically, yes, it will keep growing. We think of 2025 and we think it will hit its peak from what we can see now in 2030. And the other thing we talk about electrification. Again, we've got to be very careful how we message to the world because we are so closely associated with diesel engines. It is constant is that bad news, but what engine manufacturers and truck manufacturers and digger manufacturers are doing now is fit in batteries even onto diesel engine trucks. They need electrification. They call it mild hybrids, but this electrification of the diesel truck is substantial. So again, we're working hard now 5 years and 6 years time, mild hybrid or electrified diesel is a very important part of our portfolio. So it really is an opportunity rather than a threat.

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Klara Jonsson, SEB, Research Division - Research Analyst [26]

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What is your competitive advantage versus other players within these types of products? It's a new product for you. So how do you sell your product?

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

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No. If we start at the pump end, our reputation over decades has been to have ultra-high performance high-efficiency pumps that reduce the energy take of the engine. So ultra-high efficient pumps save fuel. They don't waste parasitic losses of engines. So our reputation starts there. In terms of -- we have virtually 0 warranty in reality, so we know our product is fit and forget. So that reputation on the pump is rock solid.

The fact that this growing market has meant there's been a number of players connecting electric pumps -- electric motors to pumps has caused some quite spectacular failures in the market, and we've had opportunities to go in there to fix ongoing problems and the solutions we're bringing to the market have worked absolutely. And there is -- again, we're generating our reputation for high performance, high quality, low warranty. So we very quickly said we can couple the pump to a high-grade electric motor. Within the motor, there is a controller. There is software. There is a brain within the system, which basically gives intelligent flow control, which talks to the engine ECU. So you can now do many different things to control the pump absolutely. And we've got some fairly neat tricks. Whatever we're pumping, if we're pumping water or oil, we can take that from the cooling circuit through the electric motor to cool the electronics because the normal failure mode for electronics is overheating. It's why you don't -- you leave your mobile phone out in the sun, it will fry it. Overheating electrics is a big failure mode, and what we've developed is a system whereby we can cool the electronics with the pump.

I think that's probably capturing most of the competitive advantage.

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Klara Jonsson, SEB, Research Division - Research Analyst [28]

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Yes. That sounds a bit of promising, actually. Okay. So what kind of margins do you have today for this product?

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

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We would describe them as being typical of the rest of our business. It's neither embarrassingly high or it's neither embarrassingly low. So it deserves a place in our portfolio. Not breaking news, it's what we've said in the past, we have worked desperately hard on acquisition processes. And we've said we'll look for acquisitions in different geographies and within technology. So you can imagine that our efforts on acquisitions is possibly focused around electrification too with no breaking news to give.

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Klara Jonsson, SEB, Research Division - Research Analyst [30]

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So if we just focus on the margins, so already it is, you have basically group level margins on those kinds of products?

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

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Yes.

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

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Yes.

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Klara Jonsson, SEB, Research Division - Research Analyst [33]

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Yes. All right. And then I just have a last question about Alfdex. This has been an important contributor to your EBIT margin expansion over the past years and should continue to do so if everything is progressing according to plan with the volume ramp-up in China that you're doing. Could you talk a little bit about how this is progressing?

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David Woolley, Concentric AB (publ) - CEO & President [34]

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Absolutely. The joint venture, Alfdex, is a fabulous business, and it's going extremely well. In terms of its concentration on sectors, it is heavily, heavily, heavily concentrated on truck, Europe and U.S., now China. So the current downturn and destocking in that market is, of course, impacting them. The fact that there's been some erratic growth, if that's the best expression. There's been some erratic growth in China, that is absolutely a positive thing with similar margins in China with a lot of growth potential. The long-term future will remain to be extremely promising as electrification of that product is underway as well. You wouldn't be surprised to hear. We've got to get through this, whatever, 2019, 2020 is, but it will remain to be a valuable part of Concentric and the alignment of our customers and markets will continue and both businesses will strengthen the other.

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Klara Jonsson, SEB, Research Division - Research Analyst [35]

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So I mean you previously talked about the volume increase that you're doing in China starting to ramp up basically in Q4 this year, and then you hitting full capacity basically in 2020 of 300,000 units if I'm not mistaken. Is that still your plan now?

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David Woolley, Concentric AB (publ) - CEO & President [36]

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It absolutely was the plan. The Chinese government did change the rules on emissions legislation, not for the first time in the last 25 years, I can talk about. They changed the rules real-time from, it will be compulsory to it is a good thing to do. So we've seen -- we've put down 4 production lines within China. So we have the capacity to deal whatever the market needs. But there has been a drawback on what we need right now from our Chinese customers. But what we've seen in the last quarter is a sharp influx of orders. So erratic but the trend is upward. It's not the numbers as originally emissions law would have dictated, but it's now a valuable contribution to what we're doing, and it's coming up.

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Operator [37]

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(Operator Instructions) And there are no further questions on the telephone at this time. Please go ahead, speakers.

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Unidentified Company Representative, [38]

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Okay. I think we have one more question from the audience here. Please go ahead.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [39]

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A follow-up here on the electrification, I guess. And I mean looking at the P&L here, you have product development expenses, which are sort of pretty stable. But given the opportunities you have, should we expect those to sort of increase gradually now when you see these -- all these contracts and so...

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

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They will increase slightly. The numbers you're looking at real-time would be some of the expenditure on conventional product has eased off. Some of the electrification development has increased and as that goes forward, there is a chance that there is a possibility even a probability, it will increase. But bear in mind our business model, we, Concentric, heavily believe in co-investment in technology with our customers.

And although we may do the design and own the design, but for us to validate a project, we need to see customers co-investing into development. If we didn't do that, we would have a lot more projects, but not necessarily more sales. So there is a joint investment and that somehow moves that development figure around a little bit because that co-investment doesn't show in what's happening.

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

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Yes. And well, production capacity in these areas. Is there a need for investments going forward too?

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David Woolley, Concentric AB (publ) - CEO & President [42]

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We've already laid down one full production line at one of our facilities, and we believe that, that will have the capability to make up to something in the order of 25,000 to 30,000 units. So line 1 is down, and we are planning line 2 and line 3, when the market really needs it. So the investment has happened and it's in and it's waiting for more volume.

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Unidentified Company Representative, [43]

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Okay. And I believe that we have some questions from the webcast. [Lynette?]

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Unidentified Company Representative, [44]

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Yes, we have. The first one is similar, I guess, from the question that you got earlier. But how does the situation in the battery market differ from other markets in terms of competition and profitability and potential?

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David Woolley, Concentric AB (publ) - CEO & President [45]

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No. From what we see -- again, we're an early adopter in the hybrid electric vehicles. We're, of course, now an early adopter in energy markets. What we see is those margins at this point are similar. Certainly, what we're selling is giving very similar margins. Going forward, as that market develops and that may change, but we can't see far enough to say so just yet. We do know that with the increasing number of gigawatt energy storage solutions around the world, there will be that rapid growth. And again, so for now, we think similar margins. And I haven't got anything else to say, why should it be too different.

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Unidentified Company Representative, [46]

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Okay. Next question is, are you interested in acquisitions? And if so, what types of business is on the top of the list? Does they increase pension liability impact, financing capacity with respect to deals?

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Marcus Whitehouse, Concentric AB (publ) - CFO [47]

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Okay. I'll take the question. The first is, yes, we are interested in acquisitions. We've openly stated over a number of quarters now that we are looking to acquire either geographical expansion or technology. I think within the report that we've just issued, we're pointing that our energies are probably moving towards the electrification sector. So we can start to acquire more of the skills that we need to grow in that growth sector and harness it.

To answer the second part of the question is, does this remeasurement of pension liabilities affect us? Overall, no. We have still got a huge amount of cash on the balance sheet that can probably easily fund the types of acquisitions that we want to make in the near future. But equally, we have facilities in place with our banking partners to access further funds if we need. So in answer, no, it doesn't.

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

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And we have a small and dedicated team who are processing an increasing number of businesses, and it takes a lot of our working weeks these days to process and looking at the targets. The eventual success is, absolutely, I think, assured, which one and how big with probably electrification is very interesting.

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Unidentified Company Representative, [49]

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No further questions here.

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Unidentified Company Representative, [50]

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Okay. Thank you, [Lynnete.] David, any closing comments?

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David Woolley, Concentric AB (publ) - CEO & President [51]

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Yes. As usual, we would like to thank the people for attending. We'd like to thank the people for listening and sending in the questions. It's been a pleasure as always, and we look forward to see you again in the next quarterly briefing. Thanks so much indeed. Thanks, everyone.

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Marcus Whitehouse, Concentric AB (publ) - CFO [52]

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Thanks, everyone. Bye-bye.