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Edited Transcript of GMM.DE earnings conference call or presentation 18-Mar-19 2:30pm GMT

Full Year 2018 Grammer AG Earnings Call

Amberg Apr 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Grammer AG earnings conference call or presentation Monday, March 18, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jens Öhlenschläger

Grammer AG - COO & Member of Executive Board

* Manfred Pretscher

Grammer AG - CEO, CFO & Member of the Executive Board

* Ralf Hoppe

Grammer AG - Head of Strategic Product Planning

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Conference Call Participants

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* Peter Rothenaicher

Baader-Helvea Equity Research - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Grammer AG conference call regarding the annual figures 2018. (Operator Instructions). Let me now turn the floor over to your host, Mr. Ralf Hoppe.

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Ralf Hoppe, Grammer AG - Head of Strategic Product Planning [2]

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Yes, good day, ladies and gentlemen. Welcome to our Analyst Conference Call Fiscal Year 2018. With me today, our new Executive Board's team since January 1, 2019, Mr. Manfred Pretscher, CEO and CFO; and Mr. Jens Öhlenschläger, our new COO.

Following their presentations, as usual, we have the opportunity to ask questions. So I would like to ask Mr. Pretscher to start the presentation, please.

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Manfred Pretscher, Grammer AG - CEO, CFO & Member of the Executive Board [3]

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Ladies and gentlemen, it's my pleasure to welcome you to today's analyst telephone conference on the 2018 financial year of the Grammer AG.

Jens Öhlenschläger and I will present the results of the past financial year to you.

As you know, my colleague Mr. Jens Öhlenschläger has been the new Chief Operating Officer of Grammer AG's executive board since the beginning of January 2019. Prior to that, he was the head of our successful console's division for more than 3 years. Before continuing, Jens will introduce himself shortly.

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Jens Öhlenschläger, Grammer AG - COO & Member of Executive Board [4]

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Thank you, Manfred. Good day, again, from my side, I'm Jens Öhlenschläger, I'm 54 years old, born in Germany, in Hasel. I am a graduated mechanical engineer. Finished technical high school in Darmstadt. (inaudible) while on more than 25 years on industrial and international experience, working for automotive suppliers with a broad international pattern. I was more than 20 years with an U.S. American headquartered company, started there as a clerk in the industrial engineering department. I'm a certified lean manufacturing Kaizen trainer, was production manager and was working as a plant manager in 3 different locations for the U.S. American company for a period of more than 12 years.

After this period with the U.S. American company, I moved to a Japanese automotive supplier where I was working over a period of 3 years, leading their global product line with more than 50 locations around the globe with an amount of 8,000 employees and sales of $1 billion.

Late 2015, I joined Grammer to lead the division consoles and armrests. This for a period of 3 years and since the beginning of 2019, now I'm in the function of the COO.

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Manfred Pretscher, Grammer AG - CEO, CFO & Member of the Executive Board [5]

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You have most likely read our press information of last Friday. The supervisory board of Grammer AG has appointed Mrs. Jurate Keblyte to the executive board and assigned to the position of Chief Financial Officer with effect from August 1, 2019.

Grammer is very proud to have gained Mrs. Keblyte as an experienced expert in finance and controlling as the new member of the executive board. With her international experience, she will help us to optimize our global footprint and boost our profitability and cash flow.

We are very happy to have filled a vacancy on the executive board and to strengthen Grammer senior management with a competent and team-oriented executive with this decision.

So going shortly to the agenda of today's telecom. So first we would like to talk about fiscal year 2018, Grammer divisions for 2018, the strategic highlights in 2018, Grammer's strategy for profitable growth, Grammer's strategy for leading innovations, and finally, we would like to give you an outlook for 2019.

Switching to Page #3. First, I would like to comment on the most important developments in 2018 financial year.

For Grammer, the stabilization of the shareholder structure has brought back our full focus on the operating business and the normalization of the order intake in our automotive sector. The sustained stabilization of our shareholder structure was probably the most important task for the company in the past years.

In 2018, Grammer AG has as well completed the largest merger and acquisition transaction in its history with the acquisition of U.S. TMD Group. At EUR 1.86 billion, Grammer achieved its eighth revenue growth in a row.

We also succeeded in maintaining the high level of the previous year's operating group EBIT at around EUR 76 million with an operating EBIT margin of 4.1 percentage points. EBIT of EUR 49 million for fiscal year 2018 was heavily impacted by nonrecurring effects, to this I will come on during the presentation in a bit, in a more detailed version.

We intend to propose a dividend of EUR 0.7 per share to shareholders for the 2018 financial year, enabling them to participate significantly in the company's profit.

In 2018, we have also managed to expand order intake levels significantly, and we are satisfied that our customers are clearly rewarding the stabilization of the shareholder structure.

So going now to Grammer Group Fiscal Year 2018, starting with Page 5. The group revenue continued to be successful. We have a growth strike in 2018 satisfying the Grammer Group in total. Group revenue grew by 4.2% year-on-year to EUR 1.86 billion. As already indicated, this means the eighth revenue record in succession.

Adjusted for negative FX translation effects, revenue was up by more than 6 percentage. Our growing group revenue was achieved against the backdrop of a divergent market environment. This was because the passenger car market in Europe and Germany declined in the second half of 2018, and in China the car market shrank for the first time in 20 years.

In particular, the Commercial Vehicle segment made a major contribution to the increase in revenue. The increase in sales revenues was mainly driven by a robust growth in the Americas and Asia regions. At 30.5%, revenue growth in the Americas was the strongest thanks to the acquisition of the TMD Group. At the beginning of the fourth quarter of 2018, the new subsidiary, TMD was consolidated within the Grammer group for the first time. Growth of 8% was recorded in Asia while European market reported a slight decline of 3%.

In the past 5 years, the Grammer Group has now grown by more than 30%, despite the sometime significant decline in demand in key commercial vehicle markets in earlier years. This shows that Grammer is already very well positioned internationally in all relevant markets and that it was right to consistently invest in global growth and capacity expansion in recent years.

Going a bit more to the figures. Operating EBIT. The 2018 financial year was impacted by a significant weakness in passenger car sales in the Automotive segment from the end of the third quarter as well as costs for numerous production launches in the NAFTA region.

Despite these typical underlying conditions, the group's operating EBIT dropped only slightly. At EUR 75.8 million, operating margin of (inaudible) EBIT only fell short EUR 4 million of the previous year's high figure. Reflecting this, the operating EBIT margin narrowed from 4.5 percentage point in (inaudible) 2017 to 4.1 percentage points in the fiscal year 2018.

Transferring this to the EBIT (inaudible) . Consolidated earnings before interest and taxes were burdened mainly by the already mentioned nonrecurring FX amounting to a total of EUR 29.9 million. At EUR 48.7 million, EBIT in 2018 was below the previous year's figures of EUR 66.5 million accompanied by a correspondingly lower EBIT margin of 2.6%.

On Page 7, you can the most important factors influencing 2018 financial year. So first, Grammer Group's 2018 earnings were heavily impacted by the nonrecurring FX amounting to EUR 29.9 million. This included in particular one of legal costs and consulting costs in connection with the takeover by Ningbo Jifeng, transaction costs in connection with the successful takeover of TMD and the charges resulting from the payments made under the change of control clause, due to members of the executive board as well as the closure of a site in Germany.

Weaknesses in the European car markets in particular where substantial declines in revenue emerged from the end of the third quarter in the wake of substitute sales on the part of various passenger (inaudible) . The decline in revenue there led to decreasing earnings in the Automotive segment.

The impacts of foreign currency translations, there was a positive of around EUR 3 million in 2017. In contrary, a currency loss had been recorded.

A positive EBIT effect was also generated by higher sales volume in the Commercial Vehicle segment, due to the strength of our core markets in Europe and the stabilization of the truck market in Brazil.

Moreover, you recorded a positive EBIT effect from the optimization of fixed costs and processes in specific production processes as well as efficiency enhancement, especially in the Commercial Vehicle segment.

Summing up, despite a typical market environment, our operating performance has again reached the high level of the previous year with operating EBIT of EUR 75.8 million. What does it means in terms of IFRS earnings per share? As expected, net income for the year declined as a result of the EBIT development. The financial result was slightly lower than in the previous year, chiefly due to interest expenses and loan -- on loan.

The tax rate for 2018 was a whole fell to around 33%. Dividend show this year too we would like to our shareholders to participate significantly in our success story. The executive board and supervisory board will propose to the Annual General Meeting that a dividend of EUR 0.75 be distributed for the past financial year. This proposal is based on the actual economic performance of the company in the past financial year. Overall, the payout ratio for the 2018 financial year is 39% of consolidated net income, slightly above our target corridor.

On the development of equity. A 30% increase in total assets, due to the consolidation of the TMD Group and the short-term financing of the purchase price. At the end of 2018, the group's total assets amounted to EUR 1.44 billion. Due to the first time application of the new IFRS 15 accounting rules, the equity item was reduced by around EUR 35 million. Accordingly, the equity ratio came to 22% at the end of the financial year.

The situation on net financial liabilities. There was a corresponding development of net financial liabilities as the 2018 balance sheet date. This reflects the increase in the credit volume for the purchase price financing of TMD, which is to be replaced by long-term financing in the current year as planned. The net leverage is 2.5. Adjusted EBITDA without nonrecurring would amount to a net leverage of 1.95.

After the successful TMD transaction, the Grammer Group remains on a very solid financial footing and has sufficient financial scope for future growth.

As well interesting capital expenditure. Capital expenditure totaled EUR 73.9 million in the 2018 financial year and was thus significantly higher than in the previous year.

Investments were made primarily in the expansion of production capacities and process optimizations in all regions. Summing up to nearly the same level as in 2017, and additional expenses occurred for the new Grammer Technology Center and group headquarters in Ursensollen near in Amberg.

At 4%, the ratio between capital expenditure and sales revenue rose slightly compared to the previous year.

Cash flow situation. Cash flow from operating activities grows significantly (inaudible) by EUR 67 million to EUR 136 million. Overall, working capital management showed strong improvements over the previous year, especially, in the fourth quarter. At EUR 64 million, free cash flow before our M&A transaction was also significantly higher than a year earlier.

Some information about development of our employees. Substantial 13% increase in the number of employees, due to [solid and clear position] of the TMD Group. The annual average headcount stood at 13,439 employees, around 22 (sic) [22%] of our employees will be Germany and form an important basis for our international expansion and innovation act.

Around 65% of all interviews were still employed in best-cross locations, specifically, in the low-wage countries like Serbia, Bulgaria, Czech Republic, Mexico, Turkey and even in China.

So I would like to ask Jens to continue with the presentation of the divisions.

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Jens Öhlenschläger, Grammer AG - COO & Member of Executive Board [6]

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While Manfred Pretscher was presenting the Grammer Group results, I will focus on the segment results, sales and EBIT-wise.

Starting with automotive Page 13. Development of the passenger car market and our main customers in 2018. Looking on the left-hand chart, you see the passenger car production in 2018 compared to the previous year. It was a small slowdown worldwide by 1% from 95 million to 94 million newly produced cars. Europe was as a whole down by only 1%, while China contracted by minus 4% the first time in many years. Also in North America, a slight decrease of minus 1% compared to the previous year.

Right-hand chart, worldwide passenger car sales by our main customers with most premium manufactures showed a stable development in 2018. You can see BMW, Mercedes, VW with a minor increase of plus 1%, while Audi and Jaguar, Land Rover been down by minus 4% (sic) [Audi down by minus 4% and Jaguar, Land Rover been down by minus 5%].

Page 14. The Automotive group segment remained on a stable cost overall and achieved a slight revenue increase of plus 1.7% to cover EUR 1.3 billion in 2018 financial year, which, however, is only -- could only be achieved by the acquisition of the TMD Group. Without the TMD acquisition, the market weakness in Europe would have led to a decline in revenue in the Automotive segment.

The revenue rose significantly in the Americas due to the acquisition of TMD group as well as the ramp-up of numerous of console product lines.

In Asia, revenue and market position were increased.

In Europe, we had to digest the decline in revenues due to the weaker market demand, especially, at the end of the third quarter in 2018.

Thanks to the consistent expansion of our innovative and high-quality product, the expansion of our internal presence and successful M&A transaction, Grammer Automotive has been able to grow by an average of more than 10% per annum over the last 5 years.

Page 15, operating EBIT, left-hand chart. The sharp decline in revenue from the end of third quarter of 2018 in Europe and the associated shortfalls in capacity utilization of the relevant plant had a significant negative impact on earnings and could not be offset by other regions. Overall, the operating EBIT settles from EUR 45 million from the previous year to EUR 37 million in 2018. Operating EBIT margin fell accordingly from 3.5% to 2.8%.

IFRS EBIT, right-hand chart. EBIT in the Automotive division came to EUR 38 million in 2018 financial year, slightly down by EUR 3 million on the previous year figure. Currency related gains of EUR 1 million arose in 2018. In contrast, the 2017 financial year was impacted by currency losses.

Page 16. As you already know, our order intake in 2017 was adversely affected by the known factors in our shareholders' structure at the time. This situation has fully normalized in 2018. Customers are rewarding the sustained stabilization in the shareholder structure with new majority shareholder Ningbo Jifeng.

In 2018, total lifetime sales revenues from the award of new projects amounted to around EUR 1.4 billion. Apart from dealing with our traditional customers, sales team, again, focused this year on new customers but we've been able to achieve a significant boost in new orders. The strong growth of the new international OEM customers is, therefore, also the logical and planned consequence of Grammer's internalization strategy.

This year too, the focus will be on expanding business with new customers in regions outside Europe. This is also a part of Grammer's global growth strategy with local managers -- manufacturers in the regions.

Second segment, Commercial Vehicle Fiscal Year 2018. Development of commercial vehicle markets and selected manufacturers in 2018. Left hand chart, the truck production in 2018 compared to previous year. Overall growth in all regions, except China, the largest market. Significant losses in China with a minimum of minus 5% in Commercial Vehicle production, following a 36% increase in the previous year. Stable development in Europe at plus 1%, U.S.A. with a significant plus of 15%. Brazilian market is clearly pointing upwards, again, albeit still at the low level in absolute terms.

Right-hand chart. Revenue development of selected manufacturers compared to the previous year. Tractor manufacturers, such as John Deere, AGCO and CNH continued to record encouragingly high revenue growth to the robust demand in agricultural machinery. The sales of trucks and construction machinery also developed very positively in 2018.

[Marked portfolio of] trucks likewise remained positive with our customers such as Jungheinrich and the KION Group again recording higher revenues last year.

Page 19. This gratifying market development and the increase in demand for Commercial Vehicles worldwide had a very positive impact on sales of suspended seats. The Commercial Vehicles segment achieved a very pleasant 11% increase in revenue to a total of EUR 600 million. The currency adjusted growth rate amounted to as much as plus of 15%.

Growth momentum dominated the year as a whole and our plants again had to manage a very high level of capacity utilization. All product segments in the Commercial Vehicles segment recorded a robust increase in revenue compared with the previous year. Brazilian truck market is also growing and the market situation has now fundamentally improved. On the other hand, it's obvious to say at this point that such high percentage growth rates in already well-developed markets cannot be continued [indefinitely].

Page 20. Operating EBIT, left-hand chart. The operating EBIT again rose disproportionately to revenue by 13% to EUR 53.5 million. At 8.9%, the high operating EBIT margin even improved slightly. Despite a very high capacity utilization of the plants, [special shifts and partial capacity bottlenecks by our suppliers] was possible to significantly improve EBIT thanks to a high operating leverage.

IFRS EBIT, right-hand chart. So IFRS EBIT also developed very positively. EBIT and EBIT margin are again well above the previous year's figures, rising from EUR 46 million to EUR 55 million of from 8.5% to 9.3%.

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Manfred Pretscher, Grammer AG - CEO, CFO & Member of the Executive Board [7]

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So concerning the strategic highlights. So we continued to systematically implement the Grammer Group's strategy of profit regrowth and increasing our enterprise value as well as innovative customer solutions in the past fiscal year.

So what has been the real highlight, you can find on Page 22. So the first, the acquisition of the TMD Group certainly was one of the big highlights. TMD generates annual revenue of more than USD 300 million with 1,700 employees at 9 locations in the U.S.A. and Mexico.

TMD Group develops and produces innovative product for visible and invisible applications for the passenger car industry. Grammer consolidated TMD Group for the first time as of October 1, 2018.

After taking into account cash and dragging in capital components, the provisional purchase price of TMD was USD 239 million or around EUR 207 million.

The TMD Group generated a 3-month revenue of EUR 69.1 million as of October 1, 2018. Following the TMD takeover, the largest acquisition in Grammer's corporate history, we have significantly expanded our market position and have now completed our North American footprint. A strong local presence has always been a key objective of Grammer's global growth strategy and has become increasingly important in the light of recent developments in the U.S. economic and fiscal policy.

A joined Grammer and TMD Group can serve the entire NAFTA region, combining customer proximity with competitive manufacturing cost as well as just-in-time and just-in-sequence deliveries. At the same time, the takeover enables us to gain broad knowledge of special production processes, which do we -- which we do not master today. TMD's product range will expand the existing portfolio and offer further advantages for composite solutions in the commercial vehicle business as well.

Our global presence offer TMD additional growth potential outside the NAFTA region. The TMD Group will support the Grammer Group's medium-term growth and profitability targets. This transaction is a further key component of our successful strategy and marks the expected milestone in the strategic transformation of the Grammer Group.

On Page 23. Some information on the shareholder structure, which was probably the most important task for the company in the last 2 years, and we can confidently say, task fulfilled.

So in May 2018, Grammer signed a business combination agreement, the so-called BCA, with Ningbo Jifeng Auto Parts our Chinese partner. The BCA comprises a legally binding arrangement and forms the long-term basis for the future of the Grammer Group. The BCA, thus, ensures the independence and successful further development of our Grammer company. Relations between Grammer and Ningbo Jifeng will be further intensified, which means that additional growth potential can be tapped.

The main pillars of the agreement are as follows. The continued independence of the Grammer Group, support for Grammer's good corporate governance, the employment level and production areas are to be maintained in the future and will remain in binding force for 7.5 years at all German locations and 5.5 years at all foreign locations. Continuation of the existing financing and dividend policy. Protection of our know-how, technologies and intellectual property. Jifeng supports the necessary R&D expenditures and our innovation strategic.

Conclusion. The BCA ensures the independence and future development of the Grammer Group. Grammer AG gains a strong and reliable anchor shareholder who supports the successful strategy of our company and contributes to the stabilization of our shareholder structure.

Some information how the shareholder structure has developed over the last years. Following last year's successful takeover bid, our strategic partner Ningbo Jifeng now holds an 84.2% stake in Grammer AG through an affiliated company. The chart on the right reflects the current status.

Grammer can, thus, focus entirely on the continuation of its successful growth strategy. What is the status of strategic partnership? Discussions are currently underway with Ningbo Jifeng in our cooperation committee about possible joint projects in China. These relate to the examination and evaluation of joint activities in the Chinese market, for example, purchasing activities and sales activities as well. However, both companies remain independent and fully autonomous.

On Page 25, as well some information about our global R&D strategy. Our new joint tech center in India in cooperation with our joint venture partner AllyGrow has been founded. The Pune location is considered to be the Oxford of India in view of the large number of perfectly trained engineers and -- that are available there.

Moving forward, the new Grammer joint tech center in Pune will make a significant contribution to boosting global R&D performance and efficiency. The new joint tech center will increasingly handle development activities for Grammer locations worldwide in the future. The joint venture AllyGram Systems & Technologies has moved into new modern offices in Pune, which were officially opened in December 2018.

Designed for the future, the joint tech center will have a capacity for up to 120 employees. At present, around 50 R&D experts are already working in our new tech center and supported as well from expatriates from Germany. A flexible and efficient global R&D organization is of crucial importance for Grammer so that we can take all our innovative products to market swiftly and efficiently.

Some sites and informations of our new technology center, the new headquarter of the Grammer Group. Our new technology center and corporate headquarters in Ursensollen just outside Amberg is taking shape. This is where the modern office building complex is being built with -- which in addition to corporate headquarter also includes comprehensive design and ergonomic laboratories.

For the first time, the core development activities of our 2 group divisions as well as the corporate headquarters will be under a single roof at a shared site for the first time. This will provide the physical basis for allowing the various departments to work closely together to optimum effect for unleashing a synergies effect and for improving the efficiency of the development processes.

In future, the 4-story office and administration building will offer around 700 employees a modern and contemporary working environment fitted with the latest technology. Grammer is investing a total of more than EUR 40 million into 2 phases of what is the largest construction project in its history.

As a leading component supplier, we see ourselves as an innovative development partner for the global automotive industry. With the new technology center, we will be able to additionally fortify our leading position for innovative interior solutions.

Some thoughts and ideas of Grammer's strategy for profitable growth. We will continue to consistently implement the Grammer Group's strategy of profitable growth. We will continue on our growth course, plan to achieve consolidated revenue of more than EUR 2.5 billion in 2023.

So in the field of automotive, significant growth, driven primarily by China and as well strong growth boost in America through the TMD acquisition will follow. Commercial Vehicles, therefore, we have a strong organic growth targeted of 40% by 2023. The sustained recovery of important markets and better penetration of the local Commercial Vehicle market and even the local dealer networks by expanding our presence in North America will be the main revenue drivers as well as new products we will bring to market in 2020, 2021.

With our joint venture partner, (inaudible), we will be able to achieve significant market share gains in the truck market in China. In the regions thanks to the robust growth outside Europe, China and America's and even America's will become increasingly important in the regional distribution of revenue. Europe (inaudible) of course, will remain the largest single market in the coming years, but China and America will continue to catch up strongly with high growth rates.

On Page 29. In order to achieve our earnings target of an operating EBIT margin of 7%, we must continue to improve our organic profitability. These include, for example, sharp increase in market share outside Europe, although, thanks to the TMD acquisition in the NAFTA region, additional growth potential with our Ninbo Jifeng in China, expansion of the customer portfolio and the stronger cross-divisional product offering, higher R&D efficiency supported by the tech center in India, process and value chain optimization in all areas and optimization of startup processes and ramp-ups. Consistent product portfolio management and target product transfers will as well be important. On the innovation side, we will later see a few examples of new interior concepts for future vehicle generations because the megatrends offer a high potential for interior specialist such as Grammer.

On Page 30, in addition to our own organic growth, we also made targeted acquisitions to expand our product portfolio and technology. Here we see the history what happened over the past years. Since 2011, we have completed several important transactions in all core product segments in order to further reinforce our inorganic growth and thus, further optimize our regional positioning, product portfolio and innovative strength and profitability. In doing so we have decisively strengthened our technical competitiveness and process know-how in a complementary manner. To this end, we have strengthened our regional positioning and market position in China and Europe.

Now however, our main focus is on the planned and smooth integration of the TMD Group, the largest acquisition Grammer has ever completed. This includes our status of integration, the reinforcement of our product book, innovative strength and profitability of the Grammer Group.

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Jens Öhlenschläger, Grammer AG - COO & Member of Executive Board [8]

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So Grammer's strategy for leadership in innovation. Page 32, please. So Grammer's innovation roadmap runs in tandem with the main trends prevailing in our industry. Due to the current megatrends in the passenger car and commercial vehicle markets, many suppliers will probably have to adapt their business models, whereas Grammer certainly will not. All trends will mean a massive upgrading of car interiors, interiors will become a main differentiation factor for the OEMs, interiors are the basis for the car of tomorrow. The megatrends offer interior specialists like Grammer a high potential in future vehicle generations. The interior will become a new living space for drivers and passengers alike. Interiors already define the well-being and comfort of drivers and passengers today. Autonomous driving will lead to a massive upgrade and expansion of interiors functionality.

Page 33. Today's development projects secure future innovation leadership, and we have developed numerous interior concepts and technologies in future vehicle generations. Surface and materials will adapt to the change possibilities of use in the interior, high-quality haptics, touch and feel remain important, especially, in the premium segments. Surfaces will be functionality operable and increasingly replace switches or rotary knobs.

Comfort features will gain enormously an importance, the interior will automatically adapt to the individual needs of the occupants. [Launched] seats, separate climate and sound zones, individual music and lightning (sic) [lighting]. Despite all the convenience and digitalization, safety will remain a very important topic in the future. New belt and restraint systems for the upper body and the head are indispensable, especially, rotating seats. In addition, the well-being of the occupants can be actively monitored with sensors located in the seats for instance.

Grammer will use the many years of experience in ergonomics and comfort to develop these innovative interior components and systems for the future.

We are currently working on many development projects in all our product areas. We have introduced to our customers numerous innovation trend and innovative applications. [Our goal is] to continuously optimize the comforts, safety and ergonomics, our products. Our products, we can positively influence the well-being and comfort for the drivers and passengers of a vehicle. Intuitive HMIs on functional surfaces with haptic feedback, digital interfaces as well as multifunctional adaptable driver and passenger seats for different driving situations are key elements of our product innovation roadmap.

As always, Grammer will continue to work on maximizing safety and comfort but with a combination of luxury and elegance as well as a look and feel that is appealing to vehicle occupants.

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Manfred Pretscher, Grammer AG - CEO, CFO & Member of the Executive Board [9]

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So let's come to the outlook 2019. So what is the market saying to us? So global passenger car market will continue to be challenging in 2019. As you can see, in the table, for Europe, no growth is forecasted in this year, it's a 0 growth. U.S.A., slightly negative, only in Brazil and slightly in China there is a positive trend to recognize. So the overall growth is expected 1% on the worldwide passenger car production.

The heavy trucks Commercial Vehicles, revenue expectations for China, the largest truck market, are influencing the world market as a whole.

In 2019, there will probably be a decline of minus 10%, but Grammer will continue its young-growth story despite this, coming out of our joint venture with the Jifeng Ningbo.

The market downturn in Brazil has come to an end and growth of plus 13% is expected in 2019.

The truck markets in Europe and the U.S.A. are expected to grow by 6% in 2019 as well. Agricultural and machinery industry, our key customers expect a good economic situation for agricultural machinery to continue at a high level with increases being registered in North America and Brazil.

And the other segments, other markets, such as construction machinery and material handling, should continue to post robust growth in 2019. This is also confirmed by the expectations of our customers, such as Caterpillar and Jungheinrich.

So the outlook for Grammer in 2019. Grammer expects the market environment to remain challenging and volatile, especially, in the automotive market. We are also expecting that the global economy is losing momentum and that the challenges facing car manufacturers and correspondingly the suppliers continue to increase. Accordingly, we will take targeted countermeasures and strengthen our competitive position.

For 2019, we forecast a moderate increase in revenue in the core business areas, and expect revenue growth in the group, including the TMD Group to more than EUR 2.1 billion.

We expect EBIT to rise significantly above the figure of fiscal year 2018 of EUR 49 million, mainly driven by lower special costs, our TMD integration and the better cost base.

We expect operating EBIT to exceed the level of fiscal year 2018, and thus, a further increase in the operating EBIT margin.

We expect an increase in ROCE as well above the 2018 level.

Development first quarter 2019 regarding to the new business year has been challenging as expected, especially, in the European Automotive segment. On the other hand, the Commercial Vehicle markets are continuing to perform strongly.

In the first 10 weeks, sales and profitability of the Grammer Group is developing as expected, with challenges in the Automotive segment and the positive performance in the Commercial Vehicle market. However, we have to closely monitor the market and the economic development in the next month as various critical events could have significant impact on our business.

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Ralf Hoppe, Grammer AG - Head of Strategic Product Planning [10]

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Okay. Thank you very much, gentlemen, for your detailed presentation. And now we are waiting for your questions. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question for today comes from Peter Rothenaicher calling from Baader Bank.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [2]

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Firstly, on TMD. What is your expectation regarding PPA charges for 2019? Second question, you have reached a very good margin in your Commercial Vehicles business. Do you see here for 2019, for 2020, the opportunity for ongoing margin increase? And then my third question is on your midterm planning. So if I remember, in the past, you mentioned some intentions to do portfolio management, so you have meanwhile acquired TMD, on the other hand there was indications that you might dispose some kinds of businesses now in your chart with the EUR 2.5 billion sales target for 2023. I do not see here anything like this, has this changed or do you still consider just disposing some businesses?

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Ralf Hoppe, Grammer AG - Head of Strategic Product Planning [3]

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Peter, thanks for your questions. I'll take the first one. PPA for TMD. In total, we have -- on our balance sheet, thanks to the TMD acquisition intangibles of EUR 78 million, we have, in addition to that, goodwill of EUR 72 million. As you know goodwill will not be depreciated, however, the EUR 78 million will be depreciated, so we expect approximately an annual amount between EUR 8 million and EUR 9 million PPA depreciation per year. Next question, margin in the Commercial Vehicles.

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Manfred Pretscher, Grammer AG - CEO, CFO & Member of the Executive Board [4]

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We assume that the margin remains on the high levels, so there will be no major deterioration, but on the other side, there will be no jump in the margin as well. So globally speaking, our healthy margin in Commercial Vehicle remains stable. And the third question was about?

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Ralf Hoppe, Grammer AG - Head of Strategic Product Planning [5]

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Portfolio management.

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Manfred Pretscher, Grammer AG - CEO, CFO & Member of the Executive Board [6]

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Portfolio management. So you know that we have applied a broader portfolio management in principle starting with headrests, consoles and now specific TMD products. And what I can say, we will be more selective in our future project, so we will not fight for each project, we will look but we will gain profitable business.

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Jens Öhlenschläger, Grammer AG - COO & Member of Executive Board [7]

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But there will be no major disposals of this as well. Selective activities.

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Manfred Pretscher, Grammer AG - CEO, CFO & Member of the Executive Board [8]

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No major disposals.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [9]

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Okay. And perhaps to your PPA expectation, do you consider to adjust your operating EBIT margin by this PPA charges? Or is this even considering PPAs that you expect an increase versus the prior year?

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Ralf Hoppe, Grammer AG - Head of Strategic Product Planning [10]

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We will not adjust the operating margin for PPA as of right now, so we assume, including the PPA depreciation, an increase in profitability.

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Operator [11]

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(Operator Instructions)

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Ralf Hoppe, Grammer AG - Head of Strategic Product Planning [12]

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Okay, obviously, there are no further questions, the presentation was very detailed. So again, thank you very much for your participation. If there are any follow-up questions, you have my details, feel free to call me at any time. Yes, good day here from Frankfurt and bye-bye. See you next time.

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Manfred Pretscher, Grammer AG - CEO, CFO & Member of the Executive Board [13]

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Bye-bye.