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Edited Transcript of HLDX.ST earnings conference call or presentation 24-Oct-19 9:00am GMT

Q3 2019 Haldex AB Earnings Call

Stockholm Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Haldex AB earnings conference call or presentation Thursday, October 24, 2019 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 Q3 report 2019. Today, I am pleased to present President and CEO, Helene Svahn; and CFO, Andreas Larsson. (Operator Instructions)

I will now hand you over to Helene Svahn. Please go ahead.

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

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So thank you very much, and welcome to this call. The agenda is as following. I will first give an update of Haldex's future journey. And then our CFO, Andreas Larsson, will go through the Q3 results. And then I will comment on the outlook for 2019. And then we will close with answering any questions that you might have.

So as you know, I recently joined Haldex as CEO and my goal is to further establish Haldex as the world leader in selected areas moving forward. We have had a negative trend lately, but I'm convinced that we can turn this around, and I see 3 areas where I will focus to make this happen.

The first one is that we need to develop and communicate a clear and fact-based strategy with ambitious and credible goals. We also need to improve our internal and external communication. It must be easy to understand where Haldex stands today and also where we're heading.

The second area is that we have the opportunity to leverage on the disruptive trends. We have now 2 megatrends in the industry; electrification and autonomous driving. And this is an opportunity for Haldex since we have innovations and products that are well suited for these more advanced vehicles. And here, we are also ahead of our competitors.

The third area is that we need to improve and strengthen our current core business. Here, we need to understand our customers better. We need to sharpen our product portfolio, and we also need to improve our efficiency when it comes to, for example, production, sourcing and supply.

So on the next slide, I have summarized that I believe that Haldex is very well positioned to capture opportunities in this changing industry. We are an established and trusted supplier today of brake and suspension solutions. We are transforming from being a component supplier to a system supplier. Our business model has low risk since we have a diversified global base and customer base, and we also have a major aftermarket business.

And as I mentioned earlier, the industry is changing and we are in the front -- forefront of sophisticated braking systems for electrical and autonomous vehicles. We have a strong innovation track record and culture, and we have several strong development partnerships with strong partners.

We also have several value-creation possibilities in terms of, for example, sales excellence, cost reductions in supply chain and footprint optimization and new technology business.

And as the ecosystem is currently changing from being [formed] in the automotive industry in terms of electrification and autonomous driving, we see that corporations will be of higher importance than before. And here, Haldex has an exciting opportunity to take a leading position in certain areas based on our innovation and that we are transitioning from being a component provider to a system provider.

Some examples of our progress here is that we have recently extended our framework agreement with one of the largest truck manufacturers for the development of brake and suspension system for self-driving and electrical vehicles. Another example is that our electromechanical brake has been approved by Chinese authorities. We have also recently had an agreement with a Chinese bus manufacturer for test installation of electromechanical brakes in their vehicles. And we also have a number of meetings with potential new partners.

So it is important that we -- at the same time that we are investing in our existing product portfolio, that we're also moving towards being a more of a system provider. And today we spend a large part of our R&D budget in new technology and we also need to continue to do that to keep up the pace with the development.

So in order to enable to continue to invest in new technology while maintaining dividends and ensuring investments in existing business, we need to improve our cash flow from the core business. And to achieve our 10% margin target until 2022, three major improvement areas have been identified.

One is sales and marketing excellence. And here, we need to make sure that we serve the right customers with the right products to the right price. We also need to improve our processes internally. We need to improve our cost structures, streamline logistics and reduce the number of suppliers. We also need to optimize our global footprint and here is to gain economies of scale and reduce complexity and administrative costs.

So to end, I would like to summarize the quarter with 5 highlights, the first one being that the OEM markets are declining while we have stable aftermarkets. In North America, the build rates for trailers are down 1% while they are stable for trucks compared to the quarter -- same quarter last year. In Europe, the build rates for trailers are down 4% and for trucks down 2%. In China, the build rates for trailers are up 4% and for trucks also up 2%.

We have had growth in North America while we had a decline in Europe and China. So in North America, our total sales grew 2% and the aftermarket grew 5%. In Europe, we had a decline of 7% total sales and stable aftermarket and sales development. And in China, we had a 23% sales decrease and a 25% aftermarket sales decrease.

In terms of new partnerships and technology, we had, for example, a new agreement with Daimler which starts their series production of disc brakes together with us. And we also have several talks with other OEMs. We had, as I mentioned earlier, the Chinese approval of Haldex electromechanical brake systems and also an agreement with the Chinese bus OEM for [test] installation. And we also have the renewal of the agreement with one of the largest heavy truck producers in the world for development of technology for autonomous and electrical vehicles.

In order to meet the long-term target of an operating margin of 10%, we have initiated and are now running a margin-improvement program. A program structure is in place and the footprint optimization has been initiated.

In terms of our ownership structure, it has been improved. We are very positive that ZF has divested its 20% holding since it leads to improved competition and larger possibilities for larger transactions with big OEMs.

And with that, I will hand over to Andreas to go through the Q3 results.

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

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Thank you, Helene. I will then try to go through Q3 more from a numbers perspective and starting with sales.

This quarter we have changed the presentation slightly to have some more focus on the regions. And therefore, I will have some more detailed presentations on performance of each region as well. But I will start on a group level.

So looking at Haldex sales for Q3, we increased sales by 1% from SEK 1.270 billion to SEK 1.283 billion. Currency adjusted, this is a drop by 4%. So we are going down in the quarter, mainly coming from the OE segments, truck and trailer. Truck is down 11% in the quarter -- that is mainly coming from Asia. We have a drop in India, which is quite significant, and we have a drop in China coming from high levels last year from the changes in legislation that we have talked about earlier this year as well. Looking at the trailer market, we are down 6%, and the main drop there is coming from the EMEA region. And aftermarket, still growing 2%, which is very comforting for us to see. And this is driven by North America where we had a 5% increase.

Looking at the year-to-date numbers. We are in absolute numbers plus 3% in sales, but currency adjusted minus 3%. And we have more or less the same mix in Q3 as year-to-date. We see a growth in our aftermarket and we are dropping in our truck and trailer segments.

If we then turn to North America, we can see that the region had a growth of 2% in the quarter, so we are continuing to grow in North America and North America has, during the year, been the growth engine for Haldex. We are year-to-date on 5% growth as well. However, we see that the market is slowing down in U.S. So we are down to 2% growth in Q3 and we see market predictions for Q4 to drop around 10%, which will also affect our sales by around 10% on the OE. And for next year, we see a drop in build rates for more than 20% in the North American market. So that will be a challenging market for 2020.

Our growth has come from most product segments during the quarter. However, air control products have had slightly higher growth than the foundation brake products. The shift in -- the technology shift in the U.S. from drum brake to disc brake continues, but still on a very low level. Our disc brake sales has increased 100% compared to the same period last year, but we are still on very low levels. However, we expect it to pick up here during 2020.

Aftermarket growth is very good in the U.S. We are on 5% growth in the aftermarket, which is more than the market has developed. So we are gaining market share from our competition in North America.

If we then turn to Europe, we see here in Europe that we have some troubling market conditions starting in Q3 and then becoming even worse in Q4 for the trailer business. The trailer build rates are expected to go down 8% for the year, but in Q4 we see a drop to almost 20% in the trailer market. And trailer is very important for our European business, 80% of our OE sales is coming from the trailer market. So that is affecting Haldex quite a bit.

And consequently, we see the revenue drop in our disc brakes, which is mainly going to the trailers and that is also the products that we see the drop. We are continuously working on getting more activities into the aftermarket. We are flat on the aftermarket compared to prior years, but we are working on launching new products for the aftermarket to boost growth in that segment.

And as Helene said before, we are continuing to work on the concept phase with the leading truck manufacturer around our new FABV product.

If we then go to Asia and Middle East, we see that we have quite some drop in the market. We are down 23% in the quarter. In percentage, we see a big drop in India. It's not a huge market for us, but the drop is coming from lower demand in India with up to 50% drop in production of trucks in India during Q3. We are mainly selling brake adjusters in -- automatic brake adjusters and manual brake adjusters in India, so those are the products that is dropping in India. And also in Asia, China specifically, brake adjuster is the biggest product, and that was the one -- the automatic brake adjuster that was legislated in 2018 leading to high volumes last year, which we are not fully meeting this year.

Aftermarket is going down. But in Asia, we have very small sales in the aftermarket, so it is not significant for Haldex, that drop. And we are continuing to work with our joint venture in China, the EMB development together with VIE is continuing according to plan and that is then creating operational costs in the quarter of SEK 7 million.

If we then turn to South America, that is the smallest region for Haldex, but it is developing very well. We had 23% growth in the quarter and we expect the growth to continue. The build rates for 2020 is expected to continue to grow 9%, and on the truck [up] 15%, so we expect to see a good market also 2020 for South America. We are growing on brake adjusters here, which is the main product also for South America. And we are also increasing our presence on the aftermarket. So a good picture for South America.

If we then turn to the next page. We have, during the last weeks, announced 2 big footprint adjustments to Haldex, which is in line with the strategy that Helene talked about before, of increasing our profitability up to 10% in 2022. Those are the move of the automatic brake adjuster production from our factory in United States to Mexico, which will start now and will be finished by Q4 2020. That will, when we have finally realized it, give a saving of around SEK 25 million per year and the payback time will be around 1 year for this.

Then we have also announced earlier this week the move of our production of mainly air control products from Heidelberg in Germany to our factory in Hungary for the European market. This will be a saving of around SEK 50 million per year. We have not communicated any costs related to this yet because this is quite new and negotiations are ongoing, so we need to come back on that number. But we expect this to contribute very positively to the EBIT margins of Haldex for our journey to 2022.

If we then go into the earnings, I would say that the Q3 performance was on a quite good level given the worsened market conditions that we see in Q3. The currency adjusted net sales was, as said before, down 4%. Despite that, we managed to increase our gross margin by 1.1 percentage from 26.5% to 27.6%. That is both related to the positive product mix we get from our growth in the aftermarket at the same time as OE is dropping back a bit, but also coming from lower costs in our manufacturing relating to the positive result.

Operating income ended at SEK 68 million compared to SEK 79 million last year. However, those were burdened by [SEK 17 million] in onetime costs. So if we exclude the onetime costs, we ended at SEK 85 million compared to SEK 79 million last year. And the operating margin was, excluding one-off items, 6.6% compared to 6.3% last year, which was a slight improvement from last year. Including one-off items, we end up at 5.3% compared to the 6.3%. And we also measure our operating margin excluding investments or costs related to new technology and that we ended up 7.4%, and we are, on the first 9 months, 7.5% on that number.

Our net income ended up at SEK 37 million compared to SEK 58 million last year. So main drop here is SEK 5 million coming from the interest and SEK 5 million from the tax. Interest is mainly related to the new IFRS 16 regulation, which is creating interest costs. And on the tax side, we did in Q3 '18 an adjustment of our tax accruals related to the new tax reform in the U.S. that was launched last year, and we were over-accrued on that taxes the first half year of 2018.

Earnings per share is SEK 0.83 per share this year versus SEK 1.30 last year, and as I said, mainly related to one-off items and the tax and interests I just mentioned.

If we then turn page to operating margin, we see, as I said, that we are improving our operating margins compared to Q3 last year. However, Q4 is our weakest quarter and we expect it to be weak this year as well given the market circumstances and the drop that we see in North America where we will have a drop of sales in Q4 and also for the trailer part of the European business, which will affect our net sales for Q4. Operating margin on -- excluding new technology, as you can see on the right, quite stable on around 7.5% for the first 3 quarters.

If we then turn page to our cash flow, then we can see that we improved our cash flow slightly during Q3 compared to Q3 last year. And also Q2, we improved versus Q2 '18. Working capital is still on a higher level and it's mainly related to our accounts payable being on a lower level this year compared to last year. However, as you can see in the graph as well, Q4 is normally our best quarter when it comes to cash flow and we expect to see a big improvement of our cash flow also in Q4 this year, mainly by releasing working capital during Q4.

If we then turn to our financial key figures, we can say that we have increased our working capital during the quarter by 4% and that mainly related to lower accounts payable compared to the situation in June. Intangible assets have increased and that is the continued investment in product development activities and our new technology that we are working on, which has increased that. And those 2 together, working capital and intangible, has then increased our capital employed by 3%, and consequently then also our total assets and balance sheet has increased due to this.

Equity, a growth of 4%. Our net debt has increased around 4% in the quarter, mainly related to change in pension liabilities, which has increased due to the decreased interest rates, so our pension liability calculations have changed due to that.

Return on capital employed is on the same level as last year excluding one-off items, however, on a lower level when we include our one-off items, 7.5 compared to 8.2.

Equity ratio and net debt per equity ratio quite unchanged during the quarter.

So by that, I will hand it back to Helene to say some words around our outlook for the rest of 2019.

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

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Okay. Thank you very much, Andreas. Now if we move over to the outlook for 2019, due to the weaker market conditions, the forecast for the full year has been adjusted slightly downward. So the new assessment is that the net sales and the operating margin, excluding one-off items, will be somewhat lower than the previous year. And the assessment that we made earlier was that net sales will be in line with previous year and that the operating margin, excluding one-off items, would be in line or higher with previous year. So a slightly adjusted outlook for 2019, mainly based on weaker market conditions.

And with that, we would like to thank you for your time and we would like to hear if there are any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Kenneth Toll from Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [2]

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So the first question is regarding those product development costs you have for the joint venture in China. When we go into Q4 next year, do you think that the SEK 7 million per quarter is going to be about that level as well going forward or...

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

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For next year, we expect to have running development cost more or less on the same level, but we will start to take some more investment in investing in production capacity in China since we are getting closer to commercialize the product there.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [4]

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But that's more on the CapEx side rather than the cost side?

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

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Yes.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [6]

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Okay. And then I was wondering, you are now taking more restructuring actions to move production to lower costs and so on. But how are you prepared for a weaker demand? You talk about much lower manufacturing levels in Q4 and -- in North America, and we have also seen truck orders in North America and Europe coming down as well. So do you have other things to change? I don't know, shortened work weeks or temporary employees? Or what can you do in order to protect your margins in the short term, so to say?

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Andreas Larsson, Haldex AB (publ) - CFO [7]

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Yes. I mean, as you said, Kenneth, we will work on many items here. And we have already started to, in general, look at our cost structure and taking down the cost structure. And we can see already in Q3 now that we have started to adjust to the lower demand and actually coming in with our fixed costs around SEK 10 million lower than the same quarter last year. So we are, short term, adjusting our cost base. We are looking at working shorter time. We are looking at taking out temporary workers, and those activities to, short term, take down the cost. And then on the long-term basis, we are working on the footprint which we had just communicated, which is part of the activities to secure long-term profitability in Haldex.

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Operator [8]

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(Operator Instructions) Our next question comes from the line of Jeff (inaudible).

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Unidentified Analyst [9]

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I got a few questions just based on the statement that came out today on the results. The first one is regarding these cost savings. I think this is an annual cost savings about like SEK 75 million. I was wondering, I mean, when we should expect to see the impact of these cost savings in profitability? Are we thinking about next quarter? Or the first quarter next year? Just trying to get a sense like when we're going to start seeing the impact.

Secondly, the framework agreement with the major OEM, I understand it has just gone into the second stage. I was just wondering what the next steps are or what the next expected steps are in this agreement and the time line for it? What -- when should we start hearing about the next steps materializing?

And thirdly, this section regarding the divestment -- ZF's stake divestment in the company; and in that paragraph, there's a section that says that work is also underway to further improve the long-term ownership structure. I was just wondering if you could just elaborate a little bit on that section.

And lastly, the outlook for next year. The statement says it's going to be somewhat lower. I was wondering if it's possible to quantify that somewhat lower number. Is it down? I don't know, expected to be down 5%? Or 3%? Or 10%? So it would be great if you just could quantify that number, please.

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

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Thank you. Okay. I can start by answering the first question and then I hand over to Helene for the other ones. I mean the cost savings impact will mainly come forth in 2021. I mean we -- it will take quite some time to close down these production facilities. We expect to be ready in U.S. by Q4 next year; and in Germany, end of Q2 next year. And there will start to be effect, second half of next year, but the big effect will come in 2021.

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [11]

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So in terms of the framework agreements with one of the largest leading truck manufacturers, the planned next step is in Q1 2020 when we will hope to communicate further on this development.

And in terms of the long-term ownership, perhaps it is, of course, unacceptable that our biggest competitor also has the corner position. So we are working actively to solve this.

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Unidentified Analyst [12]

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Okay. I was just wondering, I mean what's the -- what that work entails. And are you engaging -- obviously, the structure of the ownership has changed a lot over the years in this company. So I was just wondering if you are engaging with institutional shareholders to gauge their interest in the company or -- so what's that engagement entails specifically?

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [13]

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No. I'm afraid that I cannot comment on that, but we have discussions also with Knorr-Bremse to how to solve this.

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Unidentified Analyst [14]

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Understood. Okay.

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Andreas Larsson, Haldex AB (publ) - CFO [15]

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You talked about outlook 2020. Did you mean next year? Because we didn't mention that in the presentation. What we talked about on the last slide was the remainder of 2019, but you were asking for 2020?

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Unidentified Analyst [16]

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I think, yes, maybe I should have been more specific. I thought the -- I was referring to outlook for the next year. I think -- yes, the statement says here, the outlook for the next year is reduced, it will be somewhat lower, so I was just wondering ...

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Andreas Larsson, Haldex AB (publ) - CFO [17]

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No, that was a misunderstanding. That statement was for this year. So we are actually ...

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Unidentified Analyst [18]

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For this year, sorry, my apologies.

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Andreas Larsson, Haldex AB (publ) - CFO [19]

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Yes, so we are stating that 2019 outlook is slightly down due to the changed market conditions that we see mainly coming from the North American market.

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Unidentified Analyst [20]

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Understood. And what would be the magnitude of that adjustment?

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Andreas Larsson, Haldex AB (publ) - CFO [21]

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We are not -- we don't see a big adjustment. We are at minus 3% year-to-date in net sales. We might expect to come down 1% or 2% more. And then our operating profit is in the range that we will probably not be more than 0.3, 0.4 down.

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Operator [22]

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

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

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Well, 4 or 5 questions there. First, regarding the move of production from Germany to Hungary. Do you need any customer approval for this move?

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Andreas Larsson, Haldex AB (publ) - CFO [24]

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No.

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

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Great. Secondly, about the aftermarket. I mean, you have mostly quite good growth there. And well, do you see a similar development in the fourth quarter? Or are there any sort of issues there with this inventory buildup, or so on, in the value chain that needed to be addressed during the final quarter?

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Andreas Larsson, Haldex AB (publ) - CFO [26]

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Can you state that question again, Mats? I didn't quite get it.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [27]

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Well, you posted good growth in the aftermarket and saw some market share gain. So I just wondered if this growth is sustainable and that you see -- or if you see any sort of risks with inventories in the value chain that sort of needs to be sort of reduced during the final quarter here?

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Andreas Larsson, Haldex AB (publ) - CFO [28]

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No, we see a quite stable development of our aftermarket. So we don't expect any issues here. Of course, on the OE side, when we see volumes build up, we need to adjust our inventory levels accordingly, which is always a challenge when you have a long supply chain of products. So it takes quite some time to stop that machine, but we have already reduced production to mitigate on our inventory levels.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [29]

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And then on -- well, production capacity for disc brakes in the U.S. I mean, do you have that in place now? Or is it something ...

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

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We are building up that disc brake capacity in Mexico still and the plan is when this take off, the first month will be supplied from Sweden.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [31]

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Okay. So you will do that throughout, what, in the next couple of quarters at least?

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

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Yes. Yes.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [33]

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And finally just about China, there you saw quite substantial decline year-over-year and I guess it's a tough comparison, but do you expect that to continue in the coming quarters or is there some sort of rebound there in the safety view of Chinese truck producers that they increase the use of automatic brake adjusters?

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

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I mean, long term, we see that the vehicles in China will have an increased safety and technological content. So long term, I mean, we see that we will be a more and more relevant provider in this area. But I think short term, regarding exactly this legislation, I don't see that we will have a rebound.

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

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No. I think what we will see is that the drop year-on-year will stop because it was Q1, Q2 2018 that was the really high month and then it started to drop off in Q3 last year. So we are going forward meeting less demanding comparison quarters, so to say, on the brake adjusters. But we expect still the price competition to be quite fierce in China.

And on the other hand, as Helene says, we expect as well over time that the penetration rate for automatic brake adjusters will go up in China, increasing that demand a bit.

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

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Do you have any sort of estimate there on what part of the trucks produced today are equipped with automatic brake adjusters?

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Andreas Larsson, Haldex AB (publ) - CFO [37]

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We haven't got the latest numbers, but the information we have is that the truck is around 60% to 65% while the trailers are at a much lower level, maybe around 25% to 30% penetration rate. That -- take that for what it is, that is not 100% confirmed numbers.

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

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And do -- are you able to keep the market share there? Or are there competitors moving into -- in your area? I mean, you have -- previously, you had some -- a very strong market position ahead of this legislation. Are you able to keep it up?

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Andreas Larsson, Haldex AB (publ) - CFO [39]

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Yes, I mean, competition is quite fierce there. But so far, we have not lost much market share in the last couple of months.

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Operator [40]

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Our next question is a follow-up from Jeff (inaudible) from (inaudible).

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Unidentified Analyst [41]

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I do apologize, I should've just asked the question when I had the chance for the first time. Just regarding Knorr-Bremse's ownership in the company, what is your understanding of Knorr-Bremse's stake in the company? And sometimes the data in Bloomberg or in the company might be a bit just out of date, but what's your understanding of how much they're holding in the company right now?

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [42]

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I mean, they are holding just above 10% at the moment.

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Unidentified Analyst [43]

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10%. Okay. Understood.

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [44]

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Okay. Thank you.

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Operator [45]

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Thank you. And as there are no further questions registered at the moment, I will hand the word back to the speakers for closing comments. Please go ahead.

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Helene Svahn, Haldex AB (publ) - President, CEO & Director [46]

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Okay. Thank you very much. Thank you for listening, and thank you for very good and interesting questions. And thank you, Andreas, for your contribution. And we wish you a nice day. Thank you very much.

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Andreas Larsson, Haldex AB (publ) - CFO [47]

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Thank you.

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Operator [48]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.