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Edited Transcript of HLDX.ST earnings conference call or presentation 23-Apr-20 9:00am GMT

Q1 2020 Haldex AB Earnings Call

Stockholm Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Haldex AB earnings conference call or presentation Thursday, April 23, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Larsson

Haldex AB (publ) - CFO

* Helene Svahn

Haldex AB (publ) - President, CEO & Director

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Conference Call Participants

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* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Mats Liss

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Haldex Q1 Report 2020. (Operator Instructions)

Today, I'm pleased to present CEO, Helene Svahn; and CFO, Andreas Larsson. Please go ahead with your meeting.

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [2]

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Okay. Thank you very much. Most welcome, everyone, to this earnings call for the first quarter of 2020. And with me on this call, I have Andreas Larsson, our CFO. And if we take the next slide. The agenda of today is that I will start by going through the highlights of Q1. And then Andreas will go through the global and regional performance as well as the financial position. And then I will end by going through our key priorities moving forward. So if we then move to Slide 3. So we're waiting for Slide 3. Can you please change to Slide 3? Okay. Thank you.

So the market conditions for this quarter were weak, and our currency adjusted sales dropped by 14%, and our adjusted operating margin was 3.6%. Weaker results for this first quarter is an effect of declining market in general and we saw that already in Q4, but it's also partly the effect of COVID-19 pandemic.

So if we move into the effects of COVID-19, so next slide, please. I will start by a comment on the effects of the COVID-19 for Haldex. And these are strange and uncertain times. And our top priority at Haldex is the health and safety of every employee. We are monitoring the development of the COVID-19 around the world. We follow the guidelines and the recommendations of local, national, international health authorities, and we are taking the necessary precautions in each country.

We have a COVID-19 task force with people from the general management team that meets digitally every day to review the status and also decide on action. And being a global company, we were first affected in February when China closed down Wuhan and restricted travel. We had to close our factory in Suzhou, but we were able to reopen just after 12 days. And this is thanks to the efforts put in by the team on the site, and the negative effect was kept to a minimum. However, these COVID-19 measures impacted the demand, which declined significantly, especially in February. China is, however, quickly recovering and the market volumes rose by 10% in March. And from our perspective, both sales and operations are almost at full speed.

In March, the wave of the infection came to Europe, where governments took large measures to lower the rate of the spread of the virus. Many truck OEMs closed their factories, while many trailer OEMs continued the operations but at a slower pace. All our sales and production facilities were affected, and we saw a significant drop in sales in March and -- in Europe. To mitigate the situation, we closed our distribution center in Weyersheim for 14 days, and we were partly offsetting this by delivering directly from our factories. Weyersheim was opened again the 7th of April, and it's slowly ramping up the operations. We have also announced a furlough in Landskrona, which affects almost all employees. The rate of the new COVID-19 cases is declining in Europe and governments across the continent are considering to responsibly reopening the society.

The situation in our largest market, North America, is similar to Europe. The new builds fell significantly in March due to lower demand. But as the transport is classified as an essential business sector, there has been a continuous demand for services and spare parts in the aftermarket. So Haldex has increased the aftermarket sales by 9%, and this is thanks to our high service levels and agile organization, which has been able to cater the demand of the customer needs.

In response to the negative effects of COVID-19, Haldex has decided to implement a general cost savings initiative to protect our profitability going forward. This program will affect all parts of the business, including personnel reductions and significantly reduced travel costs and other FTE-related overhead costs. Haldex has also decided to reduce the capital expenditures with approximately SEK 100 million in 2020.

And as CVOID-19 has had a significant effect on operations, and with the exception of China, we expect even weaker sales in the second quarter. So although we hope for a broader recovery in the second half of the year, we have withdrawn our forecast for the full year. And we have decided not to announce a new forecast until we have a better picture of the timing and the speed of the recovery of the market.

Next slide. So now I'm on Slide 5, long-term structural savings program. So as communicated earlier, we are committed to reach an adjusted operating margin of 10% by the end of 2022. And I'm pleased to see that our cost-saving initiatives and -- such as the portfolio optimization and footprint projects are progressing according to plan. But to lower our cost base even further, we have decided on a new long-term structural savings program, and this will add an extra annual savings of SEK 100 million. These measures will reduce the cost base and the number of employees. And the scope and the nonrecurring costs related to this program will be announced at a later stage. So if you look at the table, you can see that the total portfolio of the structural savings is now estimated to provide an annual saving of SEK 203 million. And we hope to get back with more details about the saving programs in the middle of May. Next slide.

So we have also filed an antitrust complaint to the European Commission and the Brazilian Competition Authority against our largest shareholder, Knorr-Bremse. And the complaint concerns Knorr-Bremse's ongoing shareholding in Haldex and its negative effect on competition in several markets. This situation affects Haldex both in discussions with potential customers and investors and also our relations with our current customers. And we do not want to speculate about the outcome of this filing, but we remain positive. Next slide, please.

So Heidelberg negotiations. So the negotiations with the unions in Germany regarding the closure of production in Heidelberg and the relocation of R&D were finalized. So the production of EBS and air suspension products will be moved from Heidelberg in Germany to Hungary. R&D will be relocated to U.K. and Sweden, and the relocations will take place in the second and third quarters of 2020. The total cost of the restructuring program is estimated to EUR 14 million, and this is about SEK 156 million, and this is in line with our expectations.

Last point, we have had successful winter tests of the scalable brake system. So our focus on new technology and product development remains high, and we have managed to pass some important development milestones in concluding the successful winter tests regarding our scalable brake system. The results were above expectations, but given the impact of the COVID-19, the customers' decision processes have been delayed. However, now when the large OEM trucks are starting up gradually, and we remain positive that this will move forward.

And with this, I will hand over to Andreas Larsson for financial highlights of the quarter.

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Andreas Larsson, Haldex AB (publ) - CFO [3]

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Thank you, Helene, and good morning, everyone. I will walk you through the sales and profit performance for Q1 here for Haldex, also do a short summary of the main activities ongoing in the regions and finish off this financial section with a little things around the cash flow and our net debt situation.

So if we start at Slide 8, I will start to walk through the sales in Q1. And as you can see on the waterfall graph on the right side, net sales decreased, currency adjusted, by 14% in Q1. The OE business dropped 26%; trucks, 35%; and trailer, 20%. The drop in truck sales is mainly related to the weaker demand in the North American market as well as us also losing the OE part of one of the bigger customers, PACCAR, while the trailer segment is mainly driven by drop in the EMEA region.

Asia as well had quite a drop in Q1 related to the COVID-19 virus. As Helene mentioned, the production facility was closed for 12 days in February and then slowly started to ramp up during February. However, during March, the activity levels has been back on good levels. And end of March, we are almost back to 100% production in Asia. So Asia fell 24% in Q1. However, in the month of March, we had a growth in Asia, which was positive.

Again, I would like to emphasize the importance of the relatively big share of aftermarket that we had in Haldex. This business is less cyclic than the OE and reduced the sales volatility related to the change in market conditions. And in Q1, we managed, despite the difficult market conditions, to grow our aftermarket by 2%. And it was thanks very much a lot to the strong performance in North America during Q1.

As said before, the main effect in Q1 drop was related to the lower build rates and the lower market demand that we anticipated already in Q4. So the COVID-19 effect have, except for China, not been that visible in Q1. North America had quite limited effect during Q1, they started to get effect by the really last parts of Q1. And Europe started to see the effects the last 2 weeks of March as well, where customers started to shut down, and we were forced to shut down the Weyersheim distribution center. And that, of course, affected both the OE and aftermarket sales in Europe the last 2 weeks. However, we still expect second quarter to be the quarter where we have the biggest hit of the COVID-19 virus. We also had some positive currency effect due to the weak Swedish krona. So the total sales decrease -- reported sales decrease was 12%.

If we then change to Slide 9, I would like to go through our operating earnings. And looking at our EBIT, they dropped from SEK 97 million or 7.2% in 2019 to SEK 43 million or 3.6% in 2020. Of course, the main driver for this drop is the huge volume drop that we had in Q1. That was partially offset by product mix and the strong aftermarket, where we have higher margins that compensated part of the volume drop.

In 2019, we also divested a small business called Rotary Connectors in Germany, which gave a positive other income effect of SEK 10 million in 2019 and was part of the strong Q1 result in 2019, which we don't have this year. JV activities in China related to the development of the EMB, together with our JV partner VIE, is progressing according to plan, and thus generating an increased cost of SEK 7 million compared to prior year.

In addition to the mentioned effects, we also have made, in total, SEK 11 million in savings compared to last year, and that is related to lower material costs and reduced fixed manufacturing costs. Our SG&A costs were, currency adjusted, slightly higher compared to prior year in Q1, and it was mainly related to the activities we heard Helene talk about before as well, the strategy work, the product portfolio work and the preparation of the cost savings programs, which all of those activities has been quite intense during Q1.

The first quarter, Q1, also had around SEK 13 million in onetime costs. They were evenly split, I would say, between costs for closing the Friction Center in Harrisburg, U.S., and legal costs connected to the owner situation in Haldex.

If we turn to Slide 10. There is an earnings slide, which is describing the earnings a little bit different way than the bridge I just went through. And the highlight I would like to make on this slide is the improved gross margins. The gross margin has improved by 1.6% compared to Q1 2019 and is a result of the resilient aftermarket with improved product mix, lower material costs and the reduced fixed production cost overhead that we have had during Q1.

Looking at our earnings per share, they were almost at 0 in the quarter, and the big effect of that was, of course, the lower sales volumes, which reduced our operating income as well as a big negative currency effect in the financial items related to the weakened Brazilian real.

That was the overview of the sales and earnings. And by that, I will talk a little bit about performance in the different regions. So if we go to Slide 12, there is a summary of the regional performance. There will also be available slides, one per region for more details in the appendix, if you're interested in that.

Regional performance in North America then. In Q1, we had a drop of 13% in sales totally. And the big effect, of course, came from the soft OE demand that was expected already in 2019, and on top of that, the PACCAR OE business, which had an effect in Q1. However, the aftermarket kept very good in North America in Q1 and grew 9%, which was really good. Market is expected to stay slow over the year and the build rates are indicating drops of around 50% in both the truck and trailer markets. From an operational perspective, we have, as I said before, closed the Friction Center in Harrisburg during Q1, that was the third out of 4 planned closures of Friction Centers that we have made, but that work has continued according to plan and will continue for the rest of 2020 according to plan.

Europe. Europe had a decrease of 14% in total sales, 19% in OE, 7% in the aftermarket. The aftermarket had a good trend, January, February, where we were in line with prior year. However, with the closure of the Weyersheim distribution center as of March 23, that affected the aftermarket deliveries the last days of March here. Weyersheim has again opened as of April 7, with starting up activities and gradually ramping up the business, even if we are still far from full usage of Weyersheim.

During Q1, in Europe, we also finalized union negotiations around closure of the Heidelberg production facility. The costs ended at EUR 14 million, which were quite in line with our estimated costs of EUR 13.7 million, whereof the vast majority were accrued in 2019.

As a consequence of the Heidelberg closure negotiations, we have been forced to purchase the building in Heidelberg, which have had a cash effect in Q1 of SEK 54 million. The building will, however, be sold again, and we have a buyer for the building, but the timing effect is that it will probably be at end of Q2 or beginning of Q3.

Asia, Middle East. As said before, Asia was the region that was actually quite affected by the COVID-19 in Q1. China was down 21%. India was down 41%. However, China recovered during March, and activity levels are, as I said before, in a good level, and we expect Q2 to develop well in China as well. India is still suffering from poor market conditions and is not expected to recover within short. However, India is still a very limited part of Haldex and will not have that much effect of total Haldex.

The JV around EMB in China, together with VIE, continue to develop according to plan. And we had also products showing good results in the winter tests in Arjeplog in Q1 in relation to this.

If we then move over to South America, we were in Q1 in sales flat compared to prior year. However, market prediction right now is that due to the corona pandemic, the positive development we have had in 2018 and 2019 in South America will change to a decrease in 2020. In South America, the profitability is also hurt by the weak Brazilian currency real development against the U.S. dollar since much material is bought in U.S. dollars and invoiced in real, that will have an impact as well. And as you can see on the graph here, the main regions for Haldex is North America and Europe, and those are the 2 most important regions standing for more than 85% of our total sales.

If we then turn to our financial position and a little few words around cash flow and net debt on Slide 14. Cash flow is -- has a very strong seasonality, as you can see on the graph on the left side, where Q1 is the weakest quarter, where working capital normally is built up quite a lot. However, the cash flow has -- the operational cash flow has improved compared to 2019 and is mainly a result of improved working capital. Investments, however, were on a higher level in Q1, but is mainly related to the temporary effect of the purchase of the Heidelberg building of the SEK 54 million I mentioned before. And cash flow will continue to be a main focus for Haldex during 2020. And as a result of that, we reduced the investment plans for 2020 with SEK 100 million, as Helene mentioned, and we are also taking measures to reduce costs during the year.

Finally, a few words on the net debt situation, and...

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [4]

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(foreign language)

Hello, Andreas? Okay, since that we lost Andreas, so I will then move forward to talk a little bit about our key priorities going forward. So then we'll move on to Slide 16. And of course, the key goal for me is to secure a strong and agile Haldex moving forward. And some of our key priorities are, of course, to follow the COVID-19 pandemic and to follow it closely and then take actions to protect our profits moving forward.

Since we have a large drop of OE demand in North America, we will focus on the aftermarket, especially in North America. We will also put a lot of focus on securing the launch of the new EBS for trailers in Europe, which is planned for January 2021. We are also putting a lot of efforts on the commercialization of our scalable brake systems, and that includes the EMB that is moving forward to production in China. And also the Fast Acting Brake Valve systems that is also taking the next step together with our customers.

We will continue to put a lot of focus on our portfolio optimizations to make sure that we are active in attractive market segments and also in the right product niches for Haldex. And as we mentioned several times during this call, we will, of course, have a very strong focus on costs and our long-term structural cost program. And then finally, we will also, as a priority, of course, secure the long-term funding solution with banks and other lenders.

And I would like to end this call by stressing that -- the importance for Haldex to focus on what we can do in these difficult times. And it's really essential that we keep on going. And also when the whole world economy is fragile, opportunities open, and then it's very important that we are motivated and engaged. And Haldex was founded 1887, and we have overcome many crises, and adaptation to new market conditions and technological changes is part of our DNA. So it's very important that we don't stand still and wait for others to move, and my sole goal is to make sure that Haldex emerge from this crisis as a stronger company.

And with that, we will move on to questions. Andreas, are you back?

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Andreas Larsson, Haldex AB (publ) - CFO [5]

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I'm back. Apparently, I fell out somewhere. I'm not sure where. Sorry for that.

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [6]

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So we will move over to questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Mats Liss from Kepler Cheuvreux.

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

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Can you hear me?

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Andreas Larsson, Haldex AB (publ) - CFO [3]

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Yes.

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [4]

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Yes.

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

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Great. Well, a couple of questions, 4 or 5, I guess. But first, the cost reductions you mentioned, the SEK 100 million cost reduction. And could you indicate the cost to implement that?

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [6]

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So at the moment, we are detailing this program, and we will come back with the details in the beginning or middle of May. So we don't have that at the moment.

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

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Good. But I expect the savings are more long term, it's not sort of short term, I guess, like implementing for some -- those kind of measures. It's more of structural measures that you...

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [8]

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No, it's long-term sustainable savings, and our goal is, of course, to keep the onetime costs down as much as possible.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [9]

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And then the next couple of quarters, as you indicate, will be affected by the reduction in production of your customers. But do you expect that you will be able to reduce costs at the same pace? Or will you sort of fall into losses in the coming quarters?

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Andreas Larsson, Haldex AB (publ) - CFO [10]

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Well, maybe I should answer here. I think -- of course, we expect Q2 to have, as I said before, the biggest effect on the sales drop. And in such shorter time, we don't expect to be able to fully compensate from a cost-wise the drop in net sales. So that will have an effect on the P&L. However, we will do whatever we can to be as careful as possible around the spend during 2020 here, short term, and then also implement these savings programs gradually during 2020, which are then also the long-term savings program.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [11]

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Okay. Great. And then about -- just to the -- about the cyclicality or seasonal cyclicality of services. I guess you saw a good performance there in the U.S. and you focus on growing that part. Could you say something about the development there in the first part of the second quarter? Have you sort of developed as you expect? Or...

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Andreas Larsson, Haldex AB (publ) - CFO [12]

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Yes. I mean, we don't have the data yet for April. But of course, when we need to do radical actions like closing the Weyersheim distribution center, short term, that will also hit the aftermarket, of course. But that is more a short-term effect, which we think will come back rather quick when we can reopen again. So of course, if there are actions that we need to take from the authorities, it will have a short-term effect as well, but we don't expect service to drop generally in 2020.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [13]

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But do you feel that you'll gain market share? Or could you say something about the development compared to competitors there?

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Andreas Larsson, Haldex AB (publ) - CFO [14]

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I think for the North American market that we have gradually gained market share over a competition by focusing on the aftermarket and being -- deliberately focusing on the aftermarket. Otherwise, I would generally not -- I don't have general information otherwise to say that we are, in the other regions, gaining or losing market share.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [15]

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Good. Then you mentioned the CapEx, you mentioned that you will reduce CapEx in some SEK 100 million. In what areas? Or is it more delaying investment programs? Or is it -- well, could you say something more about that?

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Andreas Larsson, Haldex AB (publ) - CFO [16]

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Yes. I would say it is mainly delaying investment programs, but it is also down prioritizing things which we don't consider as our most important projects to work on. So for example, we are postponing the ERP implementation in North America. We are postponing some investments related to sourcing, and we are also stopping some investments which we don't think are strategically important. However, I think it's important to emphasize that we have not reduced any strategical product development work or strategic capital expenditures in supply chain related to our strategic projects.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [17]

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Great. Then coming into the financials a bit. You mentioned the impact there of the, well, Brazilian currency. But I guess, well, it's difficult to forecast, I guess. But you took the -- took a one-off or you had the impact in the first quarter and -- well, could you say something about the potential impact going forward? Is it sort of -- it depends on currency development? Or is it something that you already see that will be charged to the second quarter as well?

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Andreas Larsson, Haldex AB (publ) - CFO [18]

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No, I think it's -- we don't expect that -- real to worsen even more, of course, you never know with currency. But that financial effect that we have on the financial items in Q1 was related to revaluation of U.S. dollar-based loan. And that, of course, is an effect of the weakened real. If it stays on this level, there will not be any more effect. And if it starts improving against the dollar, we will have a slight positive effect on the finance costs. Then, of course, what we don't see in the P&L but which is then hurting the margins are then the purchase items that we purchase in dollar and then sell in real. That is, of course, hurting the margins in South America, even continuing as well in Q2 if the currency stays on this level where it is now.

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

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Okay, great. And finally, I mean, you write in the report, the negotiations with the banks are delayed some brought by the virus. Could you say something about that situation?

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [20]

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Yes. So the banks wanted us to present the Q1 and also to present the long-term savings program. So we are in continuous discussions with them. And now with this presented, we will keep on with these discussions forward.

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

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Great. And just a final one, about -- I mean you have this scalable brake system going on with one large customer and have program and development being affected by the virus, I guess. Could you say something there?

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [22]

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So we had very successful winter tests in February and March. And now we are in the next phase in the customer discussions, and they are somewhat delayed because of the COVID-19.

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

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But the -- well, the tests were positive and the intentions are good, I guess, or it's more...

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [24]

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Yes, absolutely. I mean, they were over expectations. And I was myself taking part up there. And it was an amazing time, actually.

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Operator [25]

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Our next question comes from the line of Kenneth Toll from Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [26]

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Yes. So Mats actually asked most of my questions. But maybe to continue discussing the scalable brake system a little bit. So it's moving forward with this customer you have with winter tests and so on. How about the interest from other potential customers? Is that also being delayed, those discussions?

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [27]

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The technology development is progressing, and we have the dialogues with customers. So in terms of the technology, it's moving forward, but it's more next phases that are somewhat slower in the discussion mode at the moment.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [28]

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Okay. Then also on this more structural cost reductions that you plan to implement or present in May. My guess is that you will have the most severe impact of this COVID-19 in the second quarter. And presenting those cost cuts and then it takes some time to implement and so on. So the cost savings should come later than Q2, I would guess. So what are you doing to mitigate the more sort of near-term challenges you have in Q2? You have some layoffs in -- or furloughs in the Swedish plant, but do you have similar actions in other countries?

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [29]

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Ken, so you're correct, the long-term savings program, we will implement during Q2 and Q3 and hope to be ready after new run rating going into Q4. But as we also mentioned, we are taking more short-term actions more related to the COVID-19, where we have other types of savings that will be implemented much faster and in effect much faster, so reduced travel, reduced consultancy, advertising and these sorts of things.

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Andreas Larsson, Haldex AB (publ) - CFO [30]

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And using the government activities like furloughs and things that -- programs that governments are initiating in these difficult times as well.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [31]

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Okay. And then finally, when you talked about the North American business, Andreas, you said that -- so some of the decline in sales was due to some lost business with PACCAR. I don't have that on the top of my head, but what happened there?

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Andreas Larsson, Haldex AB (publ) - CFO [32]

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It was -- I mean the OE part of PACCAR, they had changed the sourcing for the -- mainly the actuator product. So we are not selling that to them anymore. It was a rather low-margin business that we have and still supply the aftermarket to PACCAR.

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Operator [33]

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And as there appears to be no further questions, I'll return the conference to you.

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [34]

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Okay. So if there are no further questions, we would like to thank you for your participation today. And with that, we would like to close the call. Thank you very much, everyone.

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Andreas Larsson, Haldex AB (publ) - CFO [35]

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Thank you.