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Edited Transcript of NOEJ.DE earnings conference call or presentation 6-Aug-19 12:00pm GMT

Q2 2019 Norma Group SE Earnings Call

Maintal Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of NORMA Group SE earnings conference call or presentation Tuesday, August 6, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Schneider

NORMA Group SE - CFO & Interim Chairman of the Management Board

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Conference Call Participants

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* Christian Glowa

Hauck & Aufhäuser Privatbankiers AG, Research Division - Automotive Sector Analyst

* Ingo-Martin Schachel

Commerzbank AG, Research Division - Head of Equity Reseach

* Philippe Lorrain

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Tim Rokossa

Deutsche Bank AG, 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 conference call of NORMA Group SE regarding the presentation of the Q2 results 2019. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Dr. Michael Schneider, CFO, who will lead you through this conference. Please go ahead.

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [2]

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Yes. So thank you very much for handing over to me. Ladies and gentlemen, a warm welcome to the Q2 conference call of NORMA Group, and it's a pleasure for me to welcome you. Let me perhaps introduce into that meeting a little bit different as we did that in the past because we have a different, let's say, group here now presenting the Q2 figures and information to you. You all know that Bernd Kleinhens, our colleague in the Management Board and CEO of NORMA Group, left NORMA Group end of July by mutual agreement with the Supervisory Board. I take over on an interim basis, the CEO function from Bernd Kleinhens on an interim basis additionally to my CFO responsibility. Of course, I'm proud and honored that the Supervisory Board asked me to do that. And I'm looking forward to take that challenge once again on an interim basis as CEO at interim and CFO.

And so far, let me start into the highlights of Q2 2019. Page 2 of the presentation. We had sales in the second quarter being up by 4.6% at EUR 289 million, and we generated an EBITA out of that EUR 289 million by EUR 40.9 million. That means 2.6% lower than last year on a year-to-year basis. That means a margin of 14.2% in the first -- excuse me, in the second quarter 2019 versus 15.2% in the last year's second quarter. We had a positive development in the net operating cash flow, which was EUR 28.8 million in Q4. And we have to keep in mind that this cash flow was generated despite of the decrease of ABS and factoring programs by EUR 15.3 million, as we mentioned in the past that we reduced in 2019.

Balance sheet. Equity ratio as of June 30 decreased to 40% versus the 31st of December figures, 40.9%. And we have a net debt as of June 30 with an increase of 19.7% to nearly EUR 478 million. This also includes an impact from IFRS 16, that's a reclassification of EUR 40 million and a dividend payment of more than EUR 30 million in May 2019.

The organic growth of around 1% to -- minus 1% to plus 1% is the guidance 2019 for the organic growth, which we published on the 19th of July. Plus -- around plus on the organic growth, EUR 13 million from acquisitions, and we expect an adjusted EBITA margin of now more than 13%.

If you look on the development of the organic sales on Page 3, we have an organic decline still in the second quarter, which improved versus Q1, so that we see an organic growth of minus 0.4% in the second quarter, and overall, for the first half year, minus 2.3%, so a sequentially better development in Q2 versus Q1 2019.

You see the regional split shown on the bottom left-hand side of the page, we had 45% of our business in EMEA, 42% in Americas and 13% in Asia Pacific. And we see the sales development for the first half year coming from EUR 549 million first half year 2018 to EUR 565 million in the first half year 2019 -- organically, minus EUR 13 million; acquisitions, plus EUR 13 million; and currency impacts, EUR 15 million, adding up to a change of overall in the first half year, EUR 15.7 million, which means 2.9% sales increase, sale of organic, minus 2.3% in H1 2019. The overall effect from acquisitions, 2.3% in the first half year, and currency impact, 2.8%.

If you look a bit deeper in the regional split on Page 4 of the sales development, we see that the organic growth, that's the upper part on the right-hand side. In EMEA was minus 2.1%. Americas was nearly around 0, minus 0.4%; and APAC, minus 9%, mainly driven by automotive business, especially in China, which significantly went down in the first half year 2019. This weak environment in the Chinese auto sector mainly contributed to that development.

I go to Page 5, coming from that organic growth development to the margin perspective. Based on that low sales development, we had a first half year 2019 EBITA margin of 14.3% in the first half year. And we see details of that development on Page 6. Of course, this margin is not the margin level we are happy with. It's the lowest level that we are showing since the IPO of the company. And so far, first half year 2019, 14.3%, of course, not happy, influenced by a couple of factors, which we see on Page 6 of that presentation.

And we see on Page 6. Looking into the different profit components. That our gross profit in the second quarter went down by 100 basis points versus Q2 2018. We have 30 basis points versus H1 2018 that we are lower. Most important reason for that is some inventory write-offs, which we include in that gross profit development, EUR 2 million to EUR 3 million of devalued inventories in that gross margin and gross profit of the first half year 2019. We see that the personnel costs, the personnel expenses are at 27.8%. We came from 28.7% of sales for personnel expenses in the first quarter. We went down in the second quarter, which is a good development with 27% of personnel expenses. And we roughly reduced in Q2 around 160 people between June 30 and March 31.

Looking to the operating expenses, net expenses from its other operating income and expenses. We have to see that we have an impact from IFRS 16 reclassification, it's around EUR 5.6 million, positive in the OpEx. On the contrary, we have an impact in depreciation of EUR 5 million though we first time included the depreciation in the chart here so that we can clearly see the development of the IFRS 16 reclassification in OpEx and depreciation. And if you, for example, would eliminate this IFRS 16 impact of EUR 5.6 million, you would have had a slight increase in OpEx to 13.4% of sales versus 13.1% in 2018 first half year. Main reason for that slight increase are some freight costs in the course especially of ERP system introductions in the company at Latin America.

As mentioned, depreciation 5% impact in the IFRS 16 component. If we exclude that, we would have had 2.7% of depreciation in terms of sales in relation to 2.4%, which is then related to the CapEx that we did in the last year. Overall, adjusted EBITA minus 170 basis points in the first half year, 16.0% to 14.3% in the first half year related to the topics inventory write-off, personnel expenses and even OpEx in the first half year 2019.

If you look on the adjustments on Page 7 that we showed in our adjusted EBITA, we have operational adjustments on EBITDA level mainly based on the rightsizing program that we published. And thereof EUR 7.8 million for employee benefit expenses in the course of the rightsizing program that we initiated. And then we'll see starting 2021, the referring improvements with the full amount already starting 2019 and 2020 was a part of that overall cost reductions, that full amount in 2021. And the EBITA, including EUR 1.7 million adjustments coming from depreciation PPA. And on EBIT level EUR 11.2 million amortization PPA. So that overall in the net profit, we have EUR 16.1 million of adjustments in the first half year 2019.

On Page 8, we see the impact of these developments on earnings per share. This is a negative development. We have adjusted earnings per share in the first half year 2019, going to EUR 1.60. That means a reduction of 10.3% according to the development of the net income. And on the reported earnings per share basis, we have a reduction of 27% going to EUR 1.09 based on the reported net income development.

In terms of net debt and net debt ratios, which we show on Page 9, we have an increase in net debt by 19.7% to EUR 478 million. We also have to be aware of this IFRS 16 development here. Based on that IFRS 16 regulations, we show additionally EUR 41.2 million as the additional net debt. Net debt also including EUR 35 million dividend payments in 2019. And because of that, leverage increases to 2.4x. We have to be aware that if we exclude IFRS 16 regulations on a comparable basis to last year, we would be at 2.2x. But including IFRS 16 regulations, it's 2.4x as of June 30, 2019. Equity ratio, mentioned earlier, decreased to 40% also including the dividend payout in May -- once again, EUR 35 million paid in May as dividend payout.

Coming from debt -- net debt development, having a look on net operating cash flow, Page 10 of that presentation. In the first half year, we had a net operating cash flow of EUR 28.5 million versus first half year 2018 at EUR 16.4 million. So we see a positive development in the net operating cash flow.

And we also have to keep in mind that we have also here some impact from IFRS 16 if we look in the single lines, but even from factoring and ABS programs. Overall, we reduced -- as we announced, we reduced the factoring amounts by 13.8%. So if you would compare H1 2019 net operating cash flow with the previous year, we would have to add these EUR 13 million, nearly EUR 14 million to the EUR 28 million, which is then around EUR 42 million in relation to 16 last year, EUR 42.3 million.

CapEx spending of EUR 24 million mainly for manufacturing facilities in all regions. So that overall, first half year, EUR 28.5 million and on a comparable basis, EUR 42.3 million cash flow generation, net operating cash flow.

On Page 11, we show what we introduced last quarter the first time, the impact on NORMA Value Added and return on capital employed to clearly focus on our value creation key figures. We see for 2019 first half year, a NORMA Value Added of EUR 21 million. Based on the development in sales and margin, we have a reduction versus last year. First half year 2018, we are EUR 31 million. 2019 first half year, we are EUR 21 million.

And looking on return on capital employed. On an adjusted EBIT basis, we have shown the previous year's amount. So looking on value creation in 2019, NORMA value EUR 21 million versus EUR 31 million in first half year 2018.

I mentioned -- and I will go to Page 12 now. I mentioned the rightsizing program, which was launched, which is in the phase of being implemented, which works well. This rightsizing program pertains the optimization of our production landscape. This production landscape has grown rapidly in the last couple of years, also as a result of acquisitions, and we have to look on to our organizational structures and further standardization of processes and systems worldwide, which is part of that. And we want to save costs out of this optimization program. This also contains personnel costs and OpEx. We address this optimization program on all divisions, all regions.

And of course, we make sure with that rightsizing program that our midterm and long-term targets are fulfilled, midterm and long-term targets also keep in place after Bernd Kleinhens as CEO left. Of course, we keep our mid- and long-term targets for which NORMA Group is very well positioned. The benefit out of that program is expected to result in positive contributions to EBITA of EUR 10 million to EUR 15 million being the full amount starting 2021. And we also already communicated that the total cost volume for that program is in the range of EUR 10 million to EUR 15 million in total, where we a part of that already had in 2018. Rightsizing program going on very well.

With that, I come to the outlook on the full year basis on Page 13. We expect a moderate organic growth in the range of around minus 1% to around plus 1%. Additionally, EUR 13 million coming from acquisitions. We have an adjusted EBITA margin of more than 13%. We see this 13% as the lowest level from which we will improve after 2019. You see also as mentioned, the strong decrease in earnings per share and a NORMA Value Added between EUR 30 million and EUR 40 million meanwhile, while we have our net operating cash flow of around EUR 90 million. Our dividend payment will be between 30% and 35% of adjusted net profit for the period, as we also had in the past. This gives the short snapshot on the NORMA Group development in the first half year.

And with that, of course, I'm happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We've received the first question. It is from Ingo Schachel of Commerzbank.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [2]

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I have two questions. So the first one would be on your profitability this year. Of course, when we look at the quarterly results release, we obviously see margin decrease in all segments and then across several lines of the P&L. I think on the base of it, it's still difficult to localize why the margin decrease is so strong. I think in the past, you've seen a couple of periods in which you had seen some organic revenue decrease, but never a margin decrease of this magnitude. Can you help us localize the business areas in which this margin decrease was particularly pronounced?

So especially by product area, how much of that has occurred in NDS, water management, [water pipe] maybe Kimplas or if it's really an EJT automotive-related aspect? And if that's the case, would you regard that as a structured area of pricing pressure that you're seeing in automotive? Or would you rather see it as a pricing pressure in very specific parts of your automotive business and new product categories?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [3]

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Well, thank you very much, Ingo, for the question. I think we have a couple of topics that we have to see looking into the actual profitability and also in the guidance that we give. First of all, we saw that we have some inventory devaluations that we took on the first half year at around EUR 2 million to EUR 3 million, which hurts us. It's based on that sales development, where we see that we might have some risk in the inventory level, so that we devaluate -- devalued these inventories based on the sales development. Then when we look into Asia Pacific region, with that decline in the market and the sales decline, we also see that we have a steep margin decrease in Asia Pacific driven by that automotive business, mainly China.

On the other hand, we also have some positive developments, not to forget. If you look into the water management, U.S., which increased in the high single digit, nearly double-digit area, so that there are also some positive impacts. Nevertheless, inventory write-downs, we had personnel costs in the first quarter, which still, let's say, hurt us where we still expected in the first quarter a steep increase of the business, which did not come. And so far, this hurts us on the personnel costs side where we acted and reduced 160 people in the second quarter. But these topics are driving our business. Inventory, APAC, and of course, part of special costs looking into introduction of ERP systems that we have and especially expect in the second half of this year, where we introduced ERP systems in Latin America and in Europe where we have some extra costs on these issues.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [4]

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Okay. So also on the automotive side, you would not see additional pricing pressure as reasons for the margin decrease, but rather the issues you mentioned? Or is pricing also playing a role?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [5]

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No. These topics that I mentioned is -- are the main topics. I would not see a significant additional price pressure from the automotive market [that] we have a significant price pressures [since years], but I would not see a structural change in pricing currently. It's more driven from the overall, let's say, business volume side, automotive volumes sold and from internal cost aspects.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [6]

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And then maybe one question on the departure of Mr. Kleinhens. I think he was with NORMA for many years and has made also I think, a few positive achievements during his time at NORMA. And of course, you had to revise your guidance, but I think many other companies did that as well and the CEOs are still there. So can you tell us what your understanding is what the Supervisory Board thinks Mr. Kleinhens might have done differently or more quickly? Or why the decision was made to terminate his contract?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [7]

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Well, first of all, Bernd Kleinhens has a huge experience, 28 years, he was with NORMA Group, contributed crucially to NORMA Group's position today with a lot of great part he drove. And so far, of course, from my personal point of view, he did a very good job and developed NORMA since, let's say, its beginning as publicly listed company. Bernd Kleinhens and the Supervisory Board found a mutual agreement that Bernd Kleinhens has left. It was his decision.

Which reasons, which discussions with the Supervisory Board, I really cannot answer. This would then be a question to the Supervisory Board. But from my personal point of view, I really cannot comment on that because I'm not involved in these detailed discussions. And so far, please accept Bernd Kleinhens' huge contribution, huge experience. He decided in mutual agreement. That's it from my side.

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Operator [8]

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The next question we've received is from Philippe Lorrain of Berenberg.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

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I would have three. So once at a time. The first one is to bounce back on Ingo's question with regard to the internal cost issue. So to which extent does the introduction of a new ERP system in Latin America, which I think is not like a very big region in terms of sales and earnings contribution, bring the whole group's profitability to derail, especially as this issue had not been flagged before in conference calls? So if you could quantify on that side, that would be great.

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [10]

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Yes. Philippe, thanks for the question. Happy to take that. Of course, introducing ERP system is not necessarily only a question of size of the company in Latin America, if you are talking about Mexico. Nevertheless, to introduce a ERP system in these countries is, let's say, a challenging project. We see around, well, EUR 7 million to EUR 8 million in that area that we might face in the course of 2019 driven by, let's say, extra costs in special [phase] that we have and additional manpower and extra hours, et cetera, caused by the introduction of this ERP system. So EUR 7 million to EUR 8 million, overall recent extra freight and some personnel costs in terms of extra hours for the introduction of that ERP system.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]

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Okay. Great. To follow up, just directly on this one. So these EUR 7 million to EUR 8 million of special costs is something that we're going to see as cash cost during H2 and is only also Latin America or South America? Or does it cover the whole ERP issue that you have as well in Europe? And the second part of that follow-up would be on whether you will see similar costs in H1 next year.

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [12]

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Well, we have not a one big bang introduction of ERP systems worldwide. So we introduced it step-by-step in different companies. [We mean] might have introduced, I'm not as slightly sure, I think, 9 or 10 companies with that ERP system. And so far, this amount is related to one entity in Latin America. This is not covering other countries. So this concrete amount, EUR 7 million to EUR 8 million related to one concrete project.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

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Okay. Great. But does that mean that we should expect these costs to actually continue then as long as you introduce ERP to other regions as well? Or is it just really related to that specific region where you had kind of a problem with that specific project?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [14]

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Well, we try to learn out of these introductions. And so far, we also try to minimize these future costs for these ERP systems. And then so far, this should not be an ongoing issue. Nevertheless, who introduced an ERP system in a company, there might be some additional costs. In that case, it's extraordinary to be very open, EUR 7 million to EUR 8 million addressed to Mexico in that case.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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Okay. Perfect. Then the second question was just I know that you had this inventory write-down in Q2 this year, and that seems to follow the restocking in Q3 2018. And I wanted to know, first, what impact your book in the Q2 numbers from the inventory write-down? And also secondly, how should we think about the margin development in relation to the restocking, destocking, and also inventory adjustments going forward?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [16]

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This inventory write-down was an amount EUR 2 million to EUR 3 million in Q2. We try to be on the cautious side in that inventory valuation. And then so far, we included in that profit development, EUR 2 million to EUR 3 million of inventory write-downs. Restocking, destocking, I would not see a structural issue in these developments that we see. We now once again try to be cautious in the valuation of our inventories and to put EUR 2 million to EUR 3 million in. Structural effect from destocking, restocking, I would not yet see.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [17]

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Okay. Great. So I understand the EUR 2 million to EUR 3 million should be [likely] the one-off part and from there, we are going to see but nothing is [corrected?]

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [18]

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Well, from today's view, correct.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [19]

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Yes. Okay. Good. And the last question is when you [profit once] earlier in July, you basically implied that there would be a shortfall in adjusted EBITA of around EUR 20 million to EUR 25 million, EUR 25 million if we really take the 13% adjusted EBITA margin that you have now in the forecast. At the same time, you reduced the net operating cash flow guidance by about EUR 10 million despite the reduction of the factoring and ABS program volumes.

So I suspect that one reason why the cut in cash flow guidance was not as severe as the cut in EBITA guidance might be related to the fact that according to IFRS 16, you basically booked the leasing-related costs as depreciation via the P&L and in the financing part of the cash flow section. So am I right with that assumption? And if not, how does the difference between the EBITA guidance cut and the cash flow guidance cut [comes?]

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [20]

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Well, if you look on the cash flow development, we also want, and we think it's the right way to further reduce factoring and ABS programs. And in that case, we also have the, let's say, flexibility to reduce further factoring and ABS in that case. And of course, if you have no growth, we also can try to collect cash, but the reduction is mainly addressed also through the flexibility of reduced factoring programs.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [21]

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But I understand if you reduce the factoring programs, that's probably going to be a cash drag on your operations, which is partly compensated by the fact that you have no major increase in underlying net working capital. Yet the cut that you have in the net operating cash flow guidance is only EUR 10 million. So it seems like the cash flow is going to be compared to the previous forecast EUR 10 million better than the profits. And I was just wondering if part of that starts coming from the fact that you recognized more D&A in the operating cash flow section and you booked the leasing-related costs actually in the financing section of the cash flow.

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [22]

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Well, I think there are a couple of reasons. As you mentioned, IFRS lines might be one reason. Overall, I think we try to be on the safe side of that development in that guidance. This drove us to take the cash flow guidance a little bit down.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [23]

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Okay. And then perhaps just to finish on that one. So that doesn't mean that you are significantly going to reduce your CapEx spending?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [24]

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Well, of course, we align our CapEx spending to the business situation. On the one hand side, we do not want to cut the tree we are sitting on. On the other hand, of course, we try to -- no, we must reduce capital employed in terms of working capital, inventories, receivables and also have to monitor closely our CapEx.

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Operator [25]

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(Operator Instructions) And we've received the next question. It is from Tim Rokossa of Deutsche Bank.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [26]

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It's more or less two follow-ups, but I think they are really crucial for investors that are currently considering to increase their position in your stock or actually thinking of fully going into it. Mr. Kleinhens was an impressive guy to me always in the past, right? Already doing the IPO process, I think I've met never anyone in my entire life that is more enthusiastic about clamps and connectors. He really did breathe the NORMA DNA. Within becoming CEO, I think there was the absolute natural success in planning and then 1.5 years later, he already moved on and resigned. There's no statements by you as to the reasoning why.

I understand that you are probably the wrong guy to talk to about this, but please do take it back to your Supervisory Board and come up with some sort of statement because I think what you're doing with this is just really raising suspicion that there's something going on with the company and something that maybe Mr. Kleinhens has wrongly decided about. It might just be completely unnecessary, but it is something that really moves your investors with this. So I don't really expect you to say anything else on the previous question on this, but just more of a statement, I think, that will be really crucial if you want to regain some trust with the investor community.

And then secondly, and this is my question. I must say, I still struggle a bit to understand why you performed so weak for a while now. As you know, I know automotive companies quite well. So I completely understand the weakness on that segment. But all the acquisitions that you've done in the last couple of years, you've done exceptionally, actually diversified your away from autos. So NDS looks good. I know that U.S. trucks are certainly very, very strong. We're seeing other industrial businesses performing quite well as well, like we've seen it in Schaeffler's industrial division this morning, for example.

So what really is your main problem here? Is it a combination of different internal cost issues that you also just touched on? Have you grown too fast? Were you too late in really understanding the base volatility coming to your end markets, most of them at the same time? Have you reacted too late to your capacity adjustments? Did you really not integrate your acquisitions as good as it used to be in the past? So what would you say, in a nutshell, is really the main problem on the growth and EBIT side of NORMA at the moment?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [27]

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Well, Tim, thank you very much for your two questions. To your first remark, of course, we will address that issue of Bernd. Once again, Bernd took the responsibility for the development over the last 1.5 years. He decided to leave the company in mutual agreement with the Supervisory Board. And by taking this responsibility, and of course, I will address that situation. With that, he also gave a lot of space for additional changes that we need for the future. And this leads over to the performance over the last while.

What we saw is that we grew very nicely, grew significantly in terms of sales, in terms of number of companies, also in the past and since the IPO. I think what -- where we have a lot of potential for improvement is to have some consolidation of these companies, standardization of processes and procedures, harmonize cross-location processes and discuss our location structure and further strengthen and focus our portfolio in the e-mobility and water. I think this is a topic that we must focus on in the future, harmonizing cross-location processes, improving our organization to make cross-regional and cross-location processes more efficient. This is what we have to do.

If you look into the short-term development, we saw that with the assumption in the first quarter that we have a quick recovery in 2019, we had an increase in personnel based on the assumption of growing very quickly. We also have to think about our growth assumptions that we have. And so far, align our structures, align our processes to this, let's say, growth that we expect for this year and, for sure, 2020, 2021, also will be a very challenging atmosphere, challenging business we are in. And so far, processes across locations and regions harmonize it with these harmonized processes, think about the number of people working at NORMA Group, et cetera.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [28]

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So is it fair to say, if investors do ask you why they should invest into NORMA, that the business model is still completely intact but maybe the problem was just that you grew very fast and now all of a sudden there is volatility in a couple of your end markets combined. Now you have to readjust the company and then it comes back to a level, ultimately, of 17% EBIT margin, decent free cash flow generation, all that NORMA was known for in the past?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [29]

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Very clear statement. Business model of NORMA Group is 100% intact. Long-term growth targets are stable as we had in the past. We will align our business. We will align our structures and our processes. And then we will go back to old profitability levels. 13-plus percent EBITA 2019 is the lowest level. We will be better step-by-step in the future, described by the costing and rightsizing programs plus additionally on that some, let's say, positioning projects in terms of locations, location processes, in terms of product portfolio, in terms of organizational structure.

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Operator [30]

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The next question is from Christian Glowa of Hauck & Aufhäuser.

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Christian Glowa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Automotive Sector Analyst [31]

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I have just one question left. We've seen recently very weak order intake for truck OEMs. Can you please remind me what is your exposure to truck sales? And how do you see the current order intake situation?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [32]

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Well, if you take the exposure to truck sales worldwide, we have from our overall sales roughly 14%, 15% of group sales in truck business with a focus on Americas. Overall, Americas has around 13% of the truck business we are exposed to. So that U.S. truck business currently is also a driver for our business -- was in the past and probably also will be in the future.

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Christian Glowa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Automotive Sector Analyst [33]

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Yes. Sure. I mean all the companies have still deliveries up, but the order intake is quite significantly down year-over-year currently. So how do you see your order situation in this business? And can you remind me, please, what's the lead time?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [34]

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Well, when we look into the truck business, we would expect also based on LMC figures that we, this year, still see a small increase. But moving into the new order intakes, looking onto the new LMC figures, we see a downturn or would expect a downturn in 2020 truck business. And if you take 2020 truck business, for example, to look in the next year, if you take NAFTA, we have LMC figures of minus 15.4% in 2020 regarding NAFTA truck business. And overall, looking on to LMC figures, EUR 5.6 million going down. So this would be the scenario for the truck business 2020.

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Operator [35]

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The next question is from [Julien Barteau] of [First Call Advisors.]

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Unidentified Analyst, [36]

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Three quick questions. The first one on the guidance for EBITA. That, let's say, around your guidance, that would mean that H2 is significantly lower compared to H2 '18. So did I understand right that those ERP-related costs you talked about are included only in H2? Or is it throughout the year? And secondly, based on what we just discussed, is the U.S. truck weakness also going to hit you toward the end of '19?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [37]

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What will hit us in H2 2019 is most of that part of ERP costs in H2 and overall market, mainly automotive and even especially China.

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Unidentified Analyst, [38]

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But what will be worse than H1 -- because H1 was pretty tough, right? So what will go even worse than H1? Because that would mean that you go even worse, right? Because that would mean that H2 EBITA is lower than H1.

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [39]

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Yes, that's right. If you take EUR 7 million, EUR 8 million of additional ERP costs in the second half of the year, this is an impact. And we lowered our sales expectations for the second half year, which is also nearly half of that impact -- mostly driven by ERP, but also from relatively weaker market position.

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Unidentified Analyst, [40]

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Okay. And last one on the -- because I don't think you -- I don't really get that. When you talked about the guidance for operating cash flow, is that based on the old operating cash flow, i.e., without lease repayments that are way down below on the operating cash flow statement?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [41]

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That's right. It's [based on the book.]

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Unidentified Analyst, [42]

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It's the old one, right?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [43]

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Yes.

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Operator [44]

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The next question we've received is a follow-up question of Philippe Lorrain of Berenberg.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [45]

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So if I take the example of a company like Stabilus, I mean this company has cut its already growth outlook cumulatively by 800, 900 bps since their first guidance earlier this year, yet the margin outlook was cut only by 50 bps. I know there are some differences between the 2 business models, including the exposure to raw mats, other input costs and so on and so forth. So I guess the question here is does part of your current margin pressure come from the fact that you passed on higher raw mat costs to customers over the year, and this results in a mathematical margin compression. And have you done any work on trying to assess the effect of the input cost pass-through on your margin so far? And if yes, could you share that with us?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [46]

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Well, Philippe, we passed on the higher raw material costs in the past to our customers for alloy surcharges, thermoplastic materials and even plastic materials. Nevertheless, you must see that the raw material costs for nickel and chrome [you might be] referring alloy surcharges improved in the quarter for the last couple of months. So of course, if you have [to refer] increases, we go to our customers. But currently, we have a phase where we see some positive development, mainly in ferrochrome and nickel development. And so far, there would not be that necessary reason to negotiate on that.

Even thermoplastic materials, polyamide 6.6, polyamide 12 improved, so that we are -- regarding the raw material side, of course, in constant -- in discussions with our customers, but not currently in the pressure situation. Our pressure comes more from the, let's say, operating business side, inventories, ERP system consequences, launching and requiring additional freight costs, personnel costs, et cetera.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [47]

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Yes. But I guess, over the past few years, the net pricing situation has that been a little bit tougher because of all these raw mat inflation that you've seen and the fact that you needed to pass that through to the clients, i.e., you're working already with a certain margin pressure that might have actually increased over the years, and that's on top of the fact that you need operationally to make the business a bit cleaner following this stream of acquisitions?

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [48]

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Of course, exactly. Yes.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [49]

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Okay. So it's going to take probably some time to actually digest all that put together.

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [50]

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Of course, it will take a little bit of time to digest everything of that. Nevertheless, we are in a good way to do that. And you see from the raw material side, I -- let's say, a little bit more relaxed situation.

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Operator [51]

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As there are no further questions, I would hand back to you.

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Michael Schneider, NORMA Group SE - CFO & Interim Chairman of the Management Board [52]

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Well, ladies and gentlemen, as there are no further questions, I thank you very much for participating our Q2 call. Once again, we summarized the situation of 13% EBITA, more than 13% EBITA, lowest point going up, business model intact, completely in line with our long-term development. And so far, we will have the referring improvement in the future. Thanks very much for participating, and happy to talk to you next time.

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Operator [53]

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