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Edited Transcript of LEO.DE earnings conference call or presentation 13-Nov-19 9:00am GMT

Q3 2019 Leoni AG Earnings Call

Nürnberg Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Leoni AG earnings conference call or presentation Wednesday, November 13, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aldo Kamper

LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division

* Ingrid Jägering

LEONI AG - Member of the Board of Directors & CFO

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Conference Call Participants

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* Akshat Kacker

JP Morgan Chase & Co, Research Division - Analyst

* Christian Ludwig

Bankhaus Lampe KG, Research Division - Head of Research & Analyst

* Christoph Laskawi

Deutsche Bank AG, Research Division - Research Analyst

* Frank Biller

Landesbank Baden-Wurttemberg, Research Division - Investment Analyst

* Marc-René Tonn

Warburg Research GmbH - Senior Analyst

* Michael Punzet

DZ Bank AG, Research Division - Analyst

* Pushkar Tendolkar

HSBC, Research Division - Analyst of Global Autos

* Tim Schuldt

Pareto Securities, Research Division - Research Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Interim Report Third Quarter 2019 of Leoni AG. At our customer's request, this conference will be recorded. (Operator Instructions) I now hand you over to Mr. Kamper, who will lead you through this conference. Please go ahead, sir.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [2]

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Thank you, and good morning, ladies and gentlemen. Welcome from my side. I'm joined today by CFO, Ingrid Jägering, who, as you know, joined us in August. Before I turn the call over to her to take you through the figures in more detail, let me first summarize the period.

Overall, the third quarter continued to be challenging due to the weak market environment. Motor automotive as well as our industrial customers were impacting -- impacted, resulting in lower volumes at both divisions. Operational performance issue at select WSD locations compared to Q3 2018 further weighed on our results. We also saw an increase year-over-year in wage cost and in planned ramp-up cost. However, we are making good progress with implementation of VALUE 21 to address both our performance-related issues and to counteract external headwinds. We are on track to deliver the EUR 500 million of annual gross savings from 2022. We already implemented measures related to more than EUR 150 million of annual gross cost savings, that we will likely see the benefits of from next year onwards.

We booked EUR 53 million of VALUE-21-related costs in Q3, largely related to the announced head count reduction in high-wage countries. Through a very constructive dialogue, we're able to quite quickly reach an agreement with our workers' council, and we are already reducing employee numbers in the fourth quarter. EBIT, excluding exceptional items and VALUE 21 costs, was negative EUR 15 million. Free cash flow of negative minus EUR 12 million in Q3 improved substantially versus Q2 and also year-over-year, as expected. We still have a lot to do. The market remains very challenging, but it's also clear from our results that we are on the right path and are making good progress.

Let me now turn it over to Ingrid to take you through the details.

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [3]

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Thank you, Aldo, and good morning to everyone on the call. Thank you for joining us today. Let me start by looking at the development of sales in the third quarter. As Aldo already mentioned, we have seen weaker demand across almost all of our end customer industries year-over-year. As a result, reported sales were down by 4.2% year-over-year. Organic sales for the same period was down by 4.7%. If you'll remember, Q3 2018 was already impacted by a slowdown of the automotive market, but even versus these easier comps, we continue to see a decrease in demand. We expect this trend to persist in Q4 and into 2020, with muted demand from both automotive and industrial customers.

Let me now turn to our EBIT development. Reported EBIT for Q3 was negative EUR 67 million. This is in large part due to costs related to VALUE 21, where we are making good progress. Costs related to VALUE 21 were EUR 53 million in Q3. These costs were primarily related to head count reduction in high-cost countries. Additionally, we had exceptional items of just under EUR 10 million related to the preparation of the carve-out of WCS and financing advisory costs, which were offset by the reversal of an accrual, resulting in a small positive EUR 1 million exceptional item in Q3. This resulted in total exceptional items and VALUE 21 costs of EUR 52 million. We will provide more details on VALUE 21 later in the presentation.

Excluding exceptional items and VALUE 21 costs, Q3 EBIT was negative EUR 15 million. This development was driven by a number of factors. First, lower volumes due to the weaker market environment accounted for a negative EUR 15 million year-over-year. Operational performance issues at select WSD locations compared with Q3 2018 resulted in a further negative EUR 13 million impact. This includes a more significant share of early-stage projects than in the comparable period last year. Early-stage projects are, by their nature, less profitable. As these progress, we expect the profitability to improve. And as Aldo stated, we are making good progress on VALUE 21 to directly address our operational issues.

Salary inflation resulted in an additional EUR 14 million burden. EUR 4 million is related to planned ramp-ups in Q3. We also had a number of other items that weighed on our operating results in Q3. This was primarily related to the reversal of accruals taken in Q3 2018. These resulted in a negative EUR 7 million impact year-over-year. We are working hard to address the operational inefficiencies and are confident that we're on the right path here.

Let me now take you through the divisional performance. First in WSD. Q3 is traditionally the weakest quarter for the division, and this year was made worse by the external environment in the automotive industry. Organic sales were down year-over-year by 3.6% at EUR 701 million, which outweighed the sequential operational improvement made in the division. We also booked EUR 34 million of costs in Q3 related to VALUE 21. This resulted in an EBIT, prior to exceptional items and VALUE 21 costs, of negative EUR 30 million in Q3. Through VALUE 21, we are addressing these inefficiencies by reducing our cost base and focusing on those projects and customers with a greater strategic value.

On the WCS side, we also saw organic sales down by 6.4% year-over-year, with nearly all customer industries impacted. WCS sales in Q3 amounted to EUR 454 million. Reported EBIT in Q3 was negative EUR 8 million. This was the result of exceptional items and VALUE-21-related costs being booked in the period of approximately EUR 23 million (sic) [EUR 20 million]. The largest portion of these costs came from initial steps to restructure our oil and gas business. Excluding these exceptional items and VALUE 21 costs, EBIT was positive EUR 15 million in Q3 and stable sequentially. Year-over-year, EBIT of the WCS Division was impacted by a lower contribution margin due to the lower revenue.

Additionally, WCS moved into the Factory of the Future. We now have more than half of the employees on-site and are very pleased with the development and the advantages this new location brings. Free cash flow continued to improve significantly, both sequentially as well as compared to Q3 2018, leading to a negative EUR 12 million in Q3. The decline in net income year-over-year was more than offset by strong net working capital management.

CapEx during the period was reduced, but we continue to need a high CapEx level to ensure proper support of committed ramp-ups. We also had a number of adjustments for noncash items related to VALUE 21. These are predominantly related to provisions for head count reduction. Looking ahead, we expect free cash flow to develop positively with the full year result to be at or around the level of the first half of 2019, as previously communicated.

Let me now turn to the balance sheet. As a result of the negative Q3 result and an increase in total assets of EUR 140 million -- EUR 184 million related to IFRS 16, our equity ratio declined to 21%. Gearing at the end of September increased to 157%. Due to the better development of free cash flow in Q3, the increase in financial debt slowed down significantly. At the end of September, financial debt stood at just under EUR 1.2 billion. Liquidity at the end of September 2019 was EUR 583 million. This decline versus Q2 is a result primarily of the scheduled repayment of the approximately EUR 49 million tranche of the Schuldschein, the promissory note, in September.

Just to reiterate what we stated in the Q2 call, the shift from long-term to short-term liabilities is related to drawn funds from our revolving credit facilities, which are treated as short-term debt. We would only need to renew our revolving credit facility, at the earliest, in 2023.

Let me now hand it back to Aldo.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [4]

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Thank you, Ingrid. And let me now provide you with some more details on VALUE 21. We continue to make good progress implementing key initiatives. After only 2 quarters, we've already started to implement approximately 35% of all initiatives as at the end of Q3. This will deliver more than EUR 150 million of annual gross cost savings, with the majority already positively impacting our result next year, with a full run-rate effect expected in 2022. We continue to expect to implement more than half of all planned initiatives by the end of 2019. This means that we are well on track to achieve the sustainable annual gross cost savings of EUR 500 million by 2022.

This rapid implementation will help us address our own internal operational inefficiencies as well as the external headwinds that we are facing. As a result, we have already booked approximately 60% of the total cost rate of VALUE 21 in the first 9 months of 2019. In Q3, the costs were predominantly the result of head count reductions, as Ingrid outlined. Through a constructive engagement with the employee representatives, we are able to almost completely avoid compulsory redundancies and rapidly move forward with rightsizing in our organization. Looking forward, looking ahead, for the full year, we expect costs related to VALUE 21 for 2019 to be in total of around EUR 100 million.

In addition to cost savings aspect of VALUE 21, we're also progressing well with our strategic focus. The carve-out of WCS is moving forward as planned. We anticipate further costs similar to Q3 of approximately EUR 10 million related to the preparation of the carve-out of WCS and the financing advisory costs to be booked as exceptional items in Q4. We continue to evaluate the best future ownership structure for the WCS.

On the WSD side, we are clearly focused on managing growth with order intake at the end of Q3 at EUR 1.6 billion. You all know that within the framework of our VALUE 21 program, we're focusing on cash, not growth. And this means, with regard to new orders in the Wiring System Division, that we're more selective and aiming at more profitable projects.

However, when we first communicated the controlled order intake goal of EUR 2.5 billion to EUR 3 billion for the fiscal year 2019, we didn't believe that it actually would be possible for us to give back bigger projects to our customers if these projects no longer fit into our strategy. But it is precisely what we were able to achieve in October. We were able to work with our customer to give back a large project we have previously been awarded that no longer met our financial expectations and our current capabilities.

At the same time, we won a new and more profitable project that benefits our focus. This demonstrates how strong our relationships are with our key customers. It should also help us to better manage our growth and improve our profitability in the medium term. If we include this development into our order intake, by the end of October, it would be EUR 1.4 billion.

Another example of the Leoni's unique position with our key customers is our support for VW's ID.3 program, which is now starting to ramp up. It's a significant project for Leoni and for VW as ID.3 is the first in ID. series and a critical part of VW's future electric auto portfolio and strategy.

So if we look to the full year 2019, we are reiterating the outlook provided at Q2. External market environment remains challenging, but we are making good progress in addressing our operational issues, focusing on cash management and rapidly implementing VALUE 21. There's a lot to do, and we're not being complacent, but we are demonstrating that we can turn the business around and see positive indications for the future.

Thank you for your attention so far, and we will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Akshat Kacker of JPMorgan.

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Akshat Kacker, JP Morgan Chase & Co, Research Division - Analyst [2]

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The first one is on the business plan for WSD. How do you think about consolidation in the wiring systems or harnesses industry? Is it possible? Does a spin-off or a carve-out of the 2 business entities help in bringing in a strategic investor? Or do you think WSD's balance sheet is as such, self-sufficient, not only to deliver the order book, but also invest in future products? The first question is on that.

The second one is I've been surprised by the headwind amount on salary inflation. When I look at your planned footprint, roughly 15% of your WSD plants are in Eastern Europe and even a smaller amount of that for WCS. So I would have assumed a EUR 10 million headwind number probably for the full year. But this number comes as a big surprise. So trying to understand what's happening there. And the third one, although you've been here for more than a year now, can you discuss these ongoing operational issues at plants? I really find it difficult to understand what's been going on at those plants.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [3]

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Okay. Thanks for your questions. In terms of your first question, consolidation. I mean the harness division -- the harness business is basically an industry where we have 5, 6 relevant players that usually are in the panels of our customers. I think if you look already at this number, you can see that it is not so simple to see a consolidation move here being possible with our key customers. We have quite high market shares, somewhere between 25% and 40%. So if any meaningful other player would join forces with us, we would, in many cases, be a majority supplier, and that would lead to melt-off effects so I think the chances of consolidation in the industry for us, but also for others in this industry, are limited, just given the fact how the business is structured or the industry is structured right now.

In terms of the headwinds, of the salary headwinds. Yes, this is a continuous struggle. No question. Especially in our Eastern European facilities, we see a very rapid increase or very high increases in the salary rates partly driven by legislation of double high -- high single or low double-digit numbers, partly also driven by basically availability issues as people out of Eastern Europe migrate work-wise into Western Europe and also the competition for labor in Eastern Europe is intensifying. So to keep our organization stable, we have to obviously play ball here and also offer competitive wages to our workforce.

And that is unfortunately a high number that we are seeing here, again, mainly driven out of Eastern Europe, also a bit out of North Africa, where usually, the compensation of the exchange rate has helped us more than in the last quarter. In that sense, also the inflation rate there basically fell to the bottom line, a little bit more pronounced than in earlier quarters. The operational issues, I mean, it's a difficult business to be in. It is a highly manual operation and fluctuation in your plants basically leads that you have to fight and fight, again and again, your way into a productive state of manufacturing. In the stable sites, for example, in North Africa, where our workforce is quite stable, this is good to achieve. And also here, we see high productivity and high continued operational excellence.

With what I said before, in Eastern Europe, even though we are paying wages that our market conformed, the fluctuations do cause, again and again, disruptions in our manufacturing operations, and we need to over and over deal with it. And secondly, the high number of new programs that we're bringing in also -- obviously also doesn't make it easier. We have to get these into operative mode and continue to work on the efficiencies there. And that takes time. So in that sense, it is something that we work on very consistently but where you also have to redo it again and again in some of the plants based on the fluctuation that is at hand here.

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Operator [4]

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The next question is from Christoph Laskawi of Deutsche Bank.

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Christoph Laskawi, Deutsche Bank AG, Research Division - Research Analyst [5]

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Three, if I may. The first one, you just highlighted that you have been able to give back a bigger project to the customer and score a different one. Are there any one-off costs associated with a change like that? Or is it just essentially part of a negotiation? And since it's doing better for the customer and for you, it's basically for free? The second question would be on the free cash flow. You indicated that Q4 free cash flow will be up, and you, I think, guide for a neutral second half of the year. OEMs are really managing cash tight currently. And I was wondering, the working capital improvement that you've shown in Q3, can you replicate that in Q4 on top of what would be the usual seasonality?

And then going into next year, I think restructuring payouts will probably come out or will probably be out in Q1. And then you also have the debt redemption ahead of you, do you see any issues that could be coming up there? Or do you feel fairly comfortable with the negotiations that you currently have with the banks? And a last question on the market outlook for 2020. We've seen other suppliers giving an indication that ranges between, say, down 5% for global production as the most negative to, at best, flat like Conti, for example, yesterday stated. Do you already have an indication that you would give or a base case that you currently assume, especially in the light of a lot of ramp-ups that you have? Could there be a risk of core loss being even lower than expected or ramp-ups being slower than initially targeted?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [6]

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Okay. Let me start with your last question first, perhaps. Obviously, the market is muted. We see a similar picture as the other automotive suppliers. And also in Q3, our industrial customer base also started to more broadly see a decline. And we also expect in Q4 that we will see similar, if not even slightly higher, reductions versus same quarter last year in Q4. So that does indicate that the market is still very muted for next year.

I think for the cable division, especially given the high number of ramp-ups, I would still expect us to show growth. But obviously, the market being, I should say, slightly down to, at best, flat, obviously this market backdrop doesn't help to push the top line, but there will be, I think, still growth, given the high number of launches that we are going through, and that will support us next year. Will those come at the volumes as forecasted? It's very hard to tell. It is really dependent model by model. We see a couple of models that are doing well and where the customer is pushing even for higher volumes than they originally ordered. Obviously, on average, we see lower numbers as the overall number shows. But it really is a bit of a bet on the platforms that you're on.

I mentioned the ID.3 for VW, I think you're seeing the weight that they are pushing -- they are putting behind this in their marketing efforts. I hope that also will benefit us on other programs, the jury is obviously also still out. So it is, at the moment, a period of high uncertainty, and we have to continue to watch it very closely. On your question on the project giveback, we were able to negotiate that without any cost involved. Obviously, it needs to be a clean handoff to the supplier who's taking over here. And we are supporting that obviously professionally, but it was a very constructive dialogue with our customer.

I did bring this topic up because I think it's important. It shows that we're able to do these things. At the same time, I also don't want to be overenthusiastic. It's a very rare case. It is not simple to do as we obviously have our contracts in place that we need to service and we know our responsibility in the supply chain. But if you're early enough in the project and you realize that this one is not working, then in a good exchange like we are showing here, here and there, you are able to give projects back. And obviously, in our drive to optimize our order book and our outlook for the future, this is an important step for us.

On free cash flow, on the working capital. As you said before, there is obviously the usual seasonality that we also would expect for the fourth quarter. Yes, OEMs are managing their cash. And that basically will have mainly do with their call-offs and making sure that they don't overproduce, so to speak. So I would -- if there's an impact, more see that on the revenue side than on the inventory side because usually we are able if the -- as the customers are shutting down over Christmas, to also anticipate this and bring our inventories down quite significantly at the end of the year. And usually as the customers only ramp in the second week of January, we can start to ramp already on the 1st of January, and then basically fill the pipeline again with products ahead of the needs of our customers. So we'll watch this very closely, the call-off schedules, and optimize our inventories accordingly. For the refinancing question, I would hand over to Ingrid.

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [7]

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Mr. Laskawi, you had a question in regards to how the discussions with our banks are going. And I can report that we are continuing to have very good and very constructive discussions with our creditors, with our banking and financing partners. So that is moving all very, very well.

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Christoph Laskawi, Deutsche Bank AG, Research Division - Research Analyst [8]

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Follow-up question, if I may. In case we would see a further deterioration in 2020, do you see potential for VALUE 21 to be upsized? Or is this essentially all that you need to do, even if the markets worsen a bit?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [9]

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Well, it depends a bit on where you look. I mean obviously, in terms of the structures in, for example, in our headquarter structure, we really have to try to downsize it to the best possible amount, and I would say that what is left over now is not, unfortunately, that volume-adjustable anymore because we are basically at the core of what we need to be able to deliver as an organization in our overhead functionality. Obviously, where there is a need and an ability to compensate further is in the plants and in the structure that are more directly tied to the volumes that are being used here.

Anyway, we are in the process of finalizing the measures for our best-cost country. Head count reduction as we just moved to the high-cost country the 500 -- more than 500 people that we have made redundant is in high-cost countries. The best-cost countries, we are finalizing that piece. And here we are already giving out higher targets to also account for the lower volumes that we are seeing. So we are already, in that sense, addressing it where possible.

And the other pieces of VALUE 21 in purchasing, in claim management and so on, we are driving to the optimal extent or we were driving as hard as we can. And obviously, we are using also here the potential headwinds to try to turn them into better negotiation positions towards our suppliers. They also need to skew their volumes or if our customers reduce volumes, we are also going back to our customers and where our contracts allow, also obviously also ask here for compensation. So it's not a fully flexible number that they can just flex the volumes, but we do have levers to adjust it according to the volumes that we are seeing.

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Operator [10]

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The next question is from Marc Tonn of Warburg Research.

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Marc-René Tonn, Warburg Research GmbH - Senior Analyst [11]

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A couple of questions from my side as well. First, it would be on coming back to cash flow and the impact from VALUE 21. I think you mentioned 60% of costs already are occurred, EUR 100 million target for the full year. Can you give us a split about the cash effectiveness on how much negative cash flow from the program you are expecting in 2019? And how much in 2020? And I think there should be no more presumably in 2021. Secondly, also with regard to cash flow, you had to use, let's say, pretty high CapEx to bear to expand your production footprint, mostly in 2018 but still also this year. Perhaps some indication what you would be planning for next year in terms of CapEx to get some feeling on where cash flow may go next year. That would be the first question.

The second one is on -- coming back on the situation at wiring systems. Yes, it's very helpful that you provide these waterfall charts with where the drain to earnings is coming from. But it was just traffic, they were operating leverage of 30% compared to the second quarter when we, let's say, like-for-like, what would have happened in terms of earnings there. You speak of volatility when it comes to the projects, some running pretty good, others weaker due to the overall market weakness. That's also there some indication on how you think going into 2020, on how the situation will look there because as you said, you will see growth from the projects, but it will be very unevenly distributed. How -- so the question then would be, how can you adjust to such a scenario? Let's say, being underutilized in 1 plant and being, let's say, overutilized in another is, most of the time, is not the best situation. So have you any flexibility there? And what sort of will your measures be there?

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [12]

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All right, Marc. Let me start with your first question in regards to cash flow impact of VALUE 21. As Aldo said, we expect costs related to VALUE 21 to be around EUR 100 million this fiscal year. Out of that number, a little bit north of 60% is related to restructuring cost. And these restructuring costs are booked as EBIT impact, but not yet as cash flow impact because the cash flow impact will follow early 2020, the moment where the people truly leave the company. So it will start in Q4 this fiscal year, but the majority of that portion will move into 2020 from a cash flow perspective.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [13]

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Okay. Let me take the other 2 questions. I think the first on footprint, you're right. So basically, we are finishing up the last facilities and with ramping in the last facilities next year out of the existing order book and the drive that meant for adding more manufacturing space. Now we are taking down the growth rate to market levels. We're basically simulating that in our models, and we're seeing that with the footprint that we are now putting in place. Basically, we have no need for further new factories out of the order book in '21 and after that for the next couple of years. So in that sense, we will start to see a step down in CapEx in '21, '22. Next year, also already lower than this year.

On your question in terms of imbalanced or undistributed demand and what it means for the plants. Obviously, you're right. I mean it is not an easy equation if one country demand goes down and my ramps are in other country. In a number of cases, I would say the inability to compensate as is within the same country, for example, in our footprint, Indonesia, some of these new large programs are ramping there. We already have a very large existing footprint and the factories are fairly close together. So here, we can shift around also labor and management resources where the dispense is too big where it goes across country boundaries. Obviously, we will have to deal with that individually and flex wherever possible with our workforce.

And that is possible. We have also done that in the crisis of 2008 where in a number of our facilities, we reduced the number of working hours dramatically when demand went down. And so we have an ability to flex. But obviously, lower sales do have an impact on the bottom line. And that's why also it's so important that we keep fighting very hard on the VALUE 21 side to generate the cost savings across all measures to also help to deal with these headwinds.

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Operator [14]

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The next question is from Frank Biller of LBBW.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [15]

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The one question I have on the growth rate for next year. So Ingrid just talked about reduced business in both segments WCS and WSD as well. And so now, I'm asking you the 2020 growth rate, just assuming stable markets in the automotive market, are you still thinking of an outperformance against the market or going with the market here?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [16]

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I think for the cable division, we will see growth in line with the market. For the cable -- for the harness division, we will definitely outpace the market based on the order book and the programs that we are putting online.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [17]

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So all-in-all, you're still expecting a growth for the whole company?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [18]

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As long as the overall downturn...

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [19]

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Flattish market, I assumed, yes.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [20]

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Yes. On the flattish market, yes. The assumption on the flattish market, yes, then you'll see growth next year.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [21]

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Okay. And the other question is on exceptional items. So the one major thing is VALUE 21 here. And in your bridge here, it was assumed a EUR 52 million negative in the third quarter. So EUR 53 million was the other figure you gave for VALUE 22. What is other exceptional items? Was there a slightly positive impact or negative ones or ramp-up costs here?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [22]

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Ramp-up cost would be on the left side on the operational items where we showed additional ramp-up costs, the EUR 4 million versus the same quarter last year. On the other exceptional items, we can talk to Ingrid.

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [23]

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Yes, we had a very special impact this quarter. We had a positive special item in releasing a -- an accrual for a non-risk contract of a positive EUR 10 million, and this offset negative special items in regard to carve out costs and refinancing costs. So therefore, you're right, the special item was about plus EUR 1 million. And that was basically by 1 big item of release of an accrual offset by 2 items in regard to carve-out costs and refinancing costs.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [24]

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Okay. And for the remainder of the year, there's no special items here estimated expect -- besides anyone?

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [25]

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Yes, we are still expecting some special items in Q4, especially in regard to further carve-out costs. Obviously yes, we are still in preparation for the carve out. We are trying to finish that by the end of the year, all these preparations. So there will be still carve-out cost happening in Q4. And also on the refinancing side, we will see some costs that will be accumulated in Q4.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [26]

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And the magnitude is the same range as in the third quarter here, about EUR 9 million, EUR 10 million?

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [27]

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I would -- yes, I can confirm that.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [28]

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Okay. And next year, nothing more coming from these carve out costs in here.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [29]

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If it's there, then it's a significantly lower number.

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [30]

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Yes, correct.

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Operator [31]

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The next question is from Christian Ludwig of Bankhaus.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [32]

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I'll kick it off with a couple of questions on the order intake. You mentioned, Aldo, that the $2.5 billion to $3 billion target. I'm not quite sure I got it. Is that still in place? Or I mean, you're at EUR 1.6 billion after 9 months? That's a big jump in Q4. Is that realistic? And then also, when I look at the numbers, you increased your order backlog for high-voltage production by EUR 500 million from Q2 to Q3, but you only increased your order intake by EUR 100 million. I assume it probably has to do with that -- a gross number not -- or a net number and that you also -- you said you gave something back. But just let you confirm that, that is actually the place what happened there.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [33]

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That is correct. And the overall number is probably about EUR 0.5 billion lower because of the shifts that we are making in the order book. So the expectation for the year would be to end up with -- between EUR 2 billion and EUR 2.5 billion for the total year.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [34]

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Okay. And then on VALUE 21, the gross savings there, which you reported, of which 30% are basically tackled or in the bag for, we said, it will impact next year's P&L. How much of those gross savings do you believe will actually come through to the bottom line? Is half a good number? Or what are the expectations there? What should we be expecting?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [35]

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I think it's a little too early to talk about the guidance for next year. We will have to do that at a little bit later stage in time. But obviously, there are still meaningful happenings to deal with. You've seen the wage number that we've shown for the quarter here. I would assume also wages to be a major topic for next year. We are seeing, obviously, the headwinds out of volumes and partly out of material cost increases. So definitely, by far, not everything will fall to the bottom line for the overall program. We had indicated that about 1/3 would fall to the bottom line by 2022, that gives you a kind of an order of magnitude and it depends a bit on the specific headwinds then in 2020 on how that exactly plays out.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [36]

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Okay. Then last question. One question on the CapEx. I would have assumed that already next year, due to the fact that you said your footprint is basically set, you don't need no investments. We see a significant decline in CapEx. But now it sounded like that you only expect a slight decline in CapEx next year and only a bigger step downwards in 2021. Why is that?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [37]

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No, there is already a meaningful step next year, and it goes down further than the year thereafter.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [38]

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Meaningful being, let's say, EUR 50 million?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [39]

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Something of that magnitude, yes.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [40]

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Okay. And final question. Could you give us any update on the WCS carve-out, timing-wise, when we can expect some news flow there?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [41]

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No. The carve-out is being prepared and is progressing well. At the same time, we are also obviously preparing for the various options for the sale of the division. And as we said before, that is something that we will very carefully prepare for and execute. We are seeing overall good interest, both from financial investors as well as strategic investors as well out of a variety of regions. So overall, we feel confident that we see a good demand for the asset. And we will then very carefully evaluate our options as they start to materialize, and that will then drive the timing of the transaction and also the nature of the transaction being the whole sale, being the partial sale. I think the IPO piece that we also have on the agenda is it, given the current environment, a less likely solution. But we will still look at a transaction most likely in 2020. However, also, it is clear. It is a very available asset to us. And I think also for the potential buyer. We need to find a good home that also allows us a strategic development of the cable division into the direction that we envision. So it's important to find the right home and that they find -- that they achieved a meaningful cash inflow to also support the strategic development of the harness division. And we will look at that as the options become available.

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Operator [42]

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The next question is from Michael Punzet of DZ Bank.

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Michael Punzet, DZ Bank AG, Research Division - Analyst [43]

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I have 2 questions. First one, on your order book. We heard from some other suppliers, let's say, have adjusted their order book by roughly 10% due to the weak market assumption. Is this something you also could do in coming quarters? Or have you already adjust -- made some adjustments to your orders? And the second one is on Wiring Systems division. The operational performance, was that still burdened by Mérida in Q3? Or is -- or are all the problems fixed, and it's running at normal profitability levels?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [44]

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On the order book, we have not made any adjustments yet due to the order book. Obviously, we continue to monitor that and if we feel that the market downturn is more sustained and longer term. Let's take a look at that as well at the moment. For the forecasted period that we get from our customers, obviously, we reflect those numbers into our forecast, into our guidance and the overall longer-term order book that goes out 5, 6, 7 years. We have not made adjustments yet.

On the operational performance topics, I can say that the special burden out of the ramp-up situation, Mérida has significantly improved, as we had indicated at the end of Q2. So we still have mid-single-digit number burden in Q3. The plant is running fine now. We are fully supporting our customer. Quality is okay. Output is okay. Obviously, you still have to continue to work on efficiencies here to make this young plan a successful plan. So that is part of the operational burden that we have shown here. The other part is what I explained before in -- mainly in Eastern Europe.

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Michael Punzet, DZ Bank AG, Research Division - Analyst [45]

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Okay. Maybe another question on VALUE 21. You mentioned that you will book cost of roughly EUR 100 million this year. Or should we expect the additional EUR 20 million in the next year? Or should we expect maybe a bit higher number?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [46]

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No, we still see that we will stick to this total number that this range is still valid. So yes, you should expect roughly EUR 20 million to be booked next year.

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Operator [47]

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The next question is from Tim Schuldt of Pareto Securities.

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Tim Schuldt, Pareto Securities, Research Division - Research Analyst [48]

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I have actually one question left with regard to your refinancing situation. Could you give us some more details what you have due, let's say, over the end of this year and next year? Because as you mentioned in your short-term liabilities, there is the loan included, which is actually not short term. So just that we have a feeling how much you have to refinance or use from your existing credit portfolio.

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [49]

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Thanks for that question, Tim. The next big refinancing portion is going to happen in March next year, as we already indicated a couple of times. And until that time, nothing else is happening. The company, we reported an available liquidity of EUR 583 million as of September 30, and this is an adequate finance cushion to deliver the full potential of VALUE 21, and we are continuing in the same time, to have very constructive discussions with our creditors, with all banks, with all lenders that are supporting Leoni.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [50]

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The portion in March, just to add on that, is EUR 170 million in March in the full chain and then another EUR 25 million in November. So those are the 2 numbers that I think also in previous calls, we have mentioned.

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Operator [51]

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The next question is from [Alistair Cornus of CLOE].

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Unidentified Analyst, [52]

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And just a couple for me. Usually, you disclose during the call or you're asked, how much of your receivables have gone into factoring? And is the factoring available amount included in your undrawn credit lines? Or is that some extra liquidity that we can think about? That's the first one. And the second one is, you've been asked about CapEx levels going forward. And you've mentioned a slight step down. You also disclosed CapEx separately for WSD and WCS. Should we be expecting the step down more on 1 of the 2? Or will it be for 2? Could you just give us a rough guidance there?

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [53]

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Yes.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [54]

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The second question I hand over to Ingrid. The step down will be bigger on WCS. They are big in -- the high investment level was driven by the factory of the future. As Ingrid outlined, we are now moving into the factory of the future, so that CapEx is behind us. And they will return to normal CapEx levels that they had in the earlier years 2014, 2018 before this additional big expenditure in the factory of the future came into their CapEx expenditure alliance. So there, the step down will be even more pronounced than the step down for the harness division, where we still have to invest into equipment to support the launches that are coming up.

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [55]

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In regards to the factoring, yes, our factoring programs can be considered extra liquidity. And the amounts in Q3 amounted to, for our factoring program, around EUR 210 million. Additionally, on the supplier side, we have a reverse factoring facility in place, which is roughly EUR 140 million end of Q3. Both factoring programs, factoring and reverse factoring, fluctuate, of course, with the amount of top line and top line -- with the amount of top line development behind. So you will see these amounts fluctuating from quarter-to-quarter. For Q3. In the end, it was EUR 210 million on the factoring side, EUR 140 million on the reverse factoring side.

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Unidentified Analyst, [56]

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Just one additional. What is roughly the minimum cash balance you need to run the business day-to-day?

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [57]

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Well, on -- like we have true cash on hand, it is roughly EUR 100 million, EUR 120 million that we see in our bank accounts quarter after quarter. So that's the amount of cash on hand that we need to operate properly across the globe in our roughly 90 legal entities.

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Operator [58]

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The next question is from Pushkar Tendolkar of HSBC. We cannot hear him at the moment. (Operator Instructions) So the next question -- you're in the queue again. So you can talk now, Pushkar?

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Pushkar Tendolkar, HSBC, Research Division - Analyst of Global Autos [59]

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This is Pushkar Tendolkar from HSBC. My first one is on your EBIT bridge. The operational performance issues, because of the profitability of the early-stage projects, is that on expected lines? Or this was sort of a surprise in Q3? And on the ramp-up costs, when do you see that normalizing, maybe H2 2020 or before that? And the next set of questions on the free cash flow, a bulk of your FCF generation came from net working capital. Was this because of some particular changes, structural changes that you have made, let's say, to receivables, et cetera? Or this is just normal course of business? And last one on dividends. When do you foresee the only resuming paying dividends?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [60]

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Let me perhaps start with the ramp-up costs. As we are going through the launch and supporting the growth that I spoke about earlier, we will still see ramp-up costs in a similar magnitude next year as what we are pursuing for this year. The number of launches goes down a bit, but there is a number of fairly large programs that we're launching that needs adequate support. So only the year after, you will see a meaningful step down in ramp-up costs in 2021 versus what we had this year or expect for next year.

On the dividend, I think given the overall liquidity situation, I would not expect that we return to dividends immediately. We obviously want to show a solid financial performance and a solid liquidity position before we pick that up again. At the same time, it is a decision that we make on a yearly basis. So we will look at where we stand in the beginning of next year when we have the financial numbers all together and then make the final evaluation. But the likelihood, I would say, given the current financial that we are looking at for the first 3 quarters is that most likely, we will not pay a dividend for this year either.

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [61]

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Yes. Let me comment on our improvement in free cash flow. We have taken extremely good care of our liquidity in the last month. The improvements in free cash flow is due to good management of our inventories, good management of our overdue receivables getting those cleared out. And in general, we are trying to optimize the normal course of business as we go. It has been the focus, especially from the CFO community in the last 3 months here, to really tighten cash control and cash management here. And it's all in the normal course of business.

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Operator [62]

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The next question is from [Malayna Shae] of Amundi.

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Unidentified Analyst, [63]

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Regarding the factory after the EUR 210 million made in -- during the Q3, you have still EUR 610 million of trade receivable on your balance sheet. And still, I wonder what was -- if you were capped in your factor facilities? And what's the maximum factor you could have done in Q3?

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Ingrid Jägering, LEONI AG - Member of the Board of Directors & CFO [64]

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We are currently capped at this current amount. But of course, we are investigating, and that's rightfully analyzed by you, we're investigating of utilizing more of our receivables that are still on the balance sheet into factoring programs. We are in talks there with potential interested parties to increase our factoring volume overall. It's, of course, dependent on the region these amounts are located and the customer structures behind it. So you cannot expect the full volume of EUR 600 million to be tapped into. It will be a portion of that, and we are working to realize those volumes as well.

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Operator [65]

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We have a follow-up question from Pushkar Tendolkar of HSBC.

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Pushkar Tendolkar, HSBC, Research Division - Analyst of Global Autos [66]

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This is on your 2022 targets. If you could just guide us on what is your underlying assumption for automotive production for your 2022 targets. And if the market development is lower than these expectations, are you still able to reach those margin targets? Or would you require more savings than the EUR 500 million that you have already guided for?

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [67]

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Obviously, when the volumes come down in '20, they would structurally come down and it gets harder to reach the target. And we have to continue to look for additional savings as we are doing on a day-to-day basis. I think we had -- we are off to a very good start, as we said in the Q2 call, that's a full EUR 500 million is underlined by specific measures. And that only after basically 2 quarters, and we're putting a lot of that now into action. We're pushing the teams, obviously, to look for more. This is a 3-year program. We're only 9 months into it, and we already have secured the EUR 500 million in detailed measures. So we will continue to work hard to continue to improve this number to deal with potential headwinds from a volume side.

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Operator [68]

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If there are no further questions, I hand back to Mr. Kamper for the conclusion.

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Aldo Kamper, LEONI AG - Chairman of the Board, President, CEO & Head of Wiring Systems Division [69]

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Okay. Thank you. And thank you again all for joining us. I hope you could see that while the external market environment remains challenging, we are delivering on our strategic objectives and on the steps that we promised to do that we actually do them. We are making good progress in implementing key initiatives out of the VALUE 21 program. And this will help us to address the operational issues that we have within our business as well as to combat the external headwinds that we're facing, as we just spoke about. We continue to focus very heavily on cash and are seeing positive developments of this in the third quarter and expect a further improvement in the fourth quarter. Our relationships with our key customers remain strong, and our position as a unique partner for them is highly valued. We look forward to speaking to you and meeting with many of you in the upcoming weeks and months. As Ingrid is now on board, I also have again more time to be on the road and reach out to you, looking forward to those discussions. And thank you very much for your participation in the call today. Thank you so much.

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Operator [70]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.