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Edited Transcript of SFQ.DE earnings conference call or presentation 8-Aug-19 10:59am GMT

Q2 2019 Saf Holland SA Earnings Call

Aug 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Saf Holland SA earnings conference call or presentation Thursday, August 8, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Geis

SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board

* Matthias Heiden

SAF-Holland S.A. - CFO & Member of Management Board

* Michael Schickling

SAF-Holland S.A. - Director of IR & Corporate Communications

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Conference Call Participants

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* Alexander Wahl

MainFirst Bank AG, Research Division - Analyst

* Frederik Bitter

Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst

* Miro Zuzak

JMS Invest AG - Investment Professional

* Philippe Lorrain

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

* Yasmin Steilen

Commerzbank AG, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the SAF-HOLLAND S.A. conference call regarding the H1 2019 results. (Operator Instructions) Let me now turn the floor over to your host, Michael Schickling.

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Michael Schickling, SAF-Holland S.A. - Director of IR & Corporate Communications [2]

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Yes. Good morning and welcome to the H1 conference call of SAF-HOLLAND. I'm Michael Schickling, Head of Investor Relations. After a short presentation held by our CEO, Alexander Geis; and our CFO, Dr. Matthias Heiden, you will have the opportunity to ask further questions.

I now would like to hand over the microphone to our CEO, Alexander Geis.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [3]

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Thank you, Mr. Schickling. Good morning, everybody, to our half year 1 presentation. This is Alexander Geis, CEO of SAF-HOLLAND. And together with my colleague, Matthias Heiden, our CFO, we welcome everybody listening to us today.

I would like to start on Page 2, please. And the agenda of today consists of H1 2019 at a glance. We'll come to that in a second. Of course, the financial performance for the first 6 months and the outlook for 2019.

Would you please turn to page along to number 3? So basically, our summary of the first 6 months 2019 is as follows. As you can see on the point number one, our sales and adjusted EBIT margin is on track. Secondly, Americas region, the earnings development stabilizes. The turnaround is underway. You can see that later on when we'll speak about the Americas region. Thirdly, the China region, we are doing a reorganization, which is actually underway in a challenging market environment. Fourth, we have a continued high investment level to support our future growth for 2020 and the years to come.

The operating free cash flow, we have a significant turnaround in the positive territories. Matthias Heiden will go into details later on. The second last bullet point to name is the acquisition of PressureGuard in the United States and also the Stara Group, which is in Sweden and in Finland, strengthened our competitive position on the product and also the market side. And last but not least to mention the 2 big orders we got beginning of the year for trailer axles in Europe, both in a low 3-digit million range strengthen our market position for trailer axles in Europe. This is good because this increases our population further, which is then good for our aftermarket business for the quarters to come.

I now would like to jump on Page 5, please, which is the markets before we go into the details of our performance. You can see here on the left side, starting with Western and Eastern Europe, basically, the first half year 2019, we saw a truck development of a positive 6% and a decline of 12% in the trailer production rates. The middle section, North America, you can see here further huge increase in the truck business with a positive 19% and also a 7% positive in the trailer business. On the right side, you can see truck in China with a slight increase of 3% but a drop in the trailer business of somewhere between minus 15% to 20% in China.

On the next page, to complete the picture of all the markets, we start with South America. Truck business gained a positive 9% and trailer, another 19% increase over already good 2018 year. India, on the right side, you can see the truck business dropped by 5% and the trailer with a massive drop of 36%. So basically, we can see there is a recovery in South America, but also big challenges in India, and I will speak about that in detail later on.

Having said that, please go to Page 7 to see our results. And I would like to start with the overall group sales. On the upper left side, you can see from last year, which is the gray column, EUR 640 million to now EUR 695 million which is the yellow bar, the orange bar. That's an increase of 8.6% or EUR 55 million. If you go to the right upper side, you can see there is a split coming from those EUR 55 million increase in the first 6 months. Acquisition had a positive effect of roughly EUR 34.5 million, then also FX effect of EUR 16.4 million and the remainder of EUR 4.2 million were purely organic growth, mainly coming from the Americas region.

Now speaking about the adjusted EBIT. You can see last year coming from a 6.9%, totaling $44 million to, in this year, an increase of 13.2%, which is now 7.2% adjusted EBIT equaling EUR 49.9 million. Basically, as you can see, in the first quarter, there was an increase of $4.5 million in adjusted EBIT. And in the second quarter, still a EUR 1.3 million increase and maybe also here coming from the Americas region. For those who are interested in, this is the total group sales. The split between OE and aftermarket was OE 75.9% coming from the OE business and 24.1% are coming from the aftermarket business.

If you now, please, go to the next page, you can see the business segment EMEA. We can report a slight overall increase influenced by acquisition effects, with $14 million, of course, no FX effects and an organic effect with minus 3.2%. Overall, on the upper left chart, you can see we increased from EUR 345 million to now EUR 348 million.

Speaking about the adjusted EBIT margin coming from a record high 11.5% or EUR 39.6 million last year to now 9.7% for this year or close to EUR 34 million. Basically, the adjusted EBIT margin in 2019, positive effect is coming from the companies we acquired since January 2018 last year. We have a negative effect, mainly driven by decline in volumes and higher personnel expenses in 2019. And also in last -- in the first half year of 2018, we had a reversal of warranty provisions, which was booked in, so we had a really good year last year. And now we are at 9.7%.

Speaking about the lower decline in volumes. I have to mention that we already adapted the shift models here in the main plants in Bessenbach, Germany, and reduced our temporary workers by more than 90% to, of course, adapt the shift but also have the costs under control.

Having said that, we would like now to come to the Americas region, which is on Page 9. You can see on the upper left side that the sales was very strong. There was an increase of 21%, coming from EUR 225 million last year to now a bit more than EUR 272 million. And having explained the truck market overall increase of 19% for the first half year and the trailer of 7% for the first 6 months, we have to state that we clearly outperformed the market in both in truck and specifically also in the trailer business.

To mention here that the organic effects were 31% -- EUR 31.5 million out of the total increase and also a positive effect was the development of disc braked axles business. We get more specification orders for those axles. To mention, here in 2019, the overall portion of the disc axles of the axle market in North America is roughly 15%. Majority of those 15% of the total market is held by SAF-HOLLAND, and it's expected that, that market is to grow by 2025 to 50%. So if we are able to keep that dominant market position in North America, there will be a good increase for us.

On the adjusted EBIT side, you can see basically the 0% is not an error for last year. We came in with a flat adjusted EBIT last year. And in this half year for 2019, we came in with EUR 18.2 million for the Americas region, which equals 6.7%.

You can see in the development of Q1 and Q2 with Q1 having EUR 6.8 million or 5.2% with now in Q2 EUR 11.4 million equaling 8.1%, we are on track. And you can see on the right side, specifically named the Project FORWARD that our restructuring projects kicked in now. We are getting control back and the numbers speak for themselves. So for us, this is a very positive trend, and we continue that trend also going forward.

If we go now to the next page, you can see the business segment APAC. Also here, a strong increase, but this is mainly driven by the York acquisition we did last year, so increase from EUR 34 million last year to now close to EUR 50 million. As you can see on the right side, the acquisition effect has been EUR 20 million. The organic effect, minus EUR 4.8 million. This is due to the market development in India, where we have our biggest market and sales contribution for the overall APAC region. Adjusted EBIT. We are here not happy with the overall margins. This is due to the missing volume in India. And the adjusted EBIT came in with EUR 3 million, which equals 5.9%.

Coming to the last business segment, which is on Page 11. This is China. I have to clearly say, at the moment, China is our problem child. Sales came in with just EUR 25 million, mainly due to, you can see it on the right side, declining export business of our Chinese customers following trade dispute between China and the U.S. For products we do in China, we get a 25% tariff hit. Once we export that into the United States, that hits us. And also, we can see that there are short notice cancellation and delays in orders coming from our customers. And also, we had temporary strike following the announcement of plant closures, I will explain that later on. So basically, we were not able for 8 to 10 days to ship and invoice product that would also hit.

Coming now to the adjusted EBIT. You can see this came in, in the first 6 months, with a negative EUR 5.1 million. First quarter, we had minus EUR 1 million. In the second quarter, EUR 4.1 million. Here, I have to mention that the run rate per quarter at the moment is roughly EUR 1 million negative. The difference between the EUR 4.1 million and the EUR 1 million coming from special effects you see on the right side. We have temporary cost burdens from duplicate structures. Specifically also the inventory and accounts receivable impairments we did in the second quarter and also the strike-related costs.

As I said, we are not happy at the moment with China. We do a restructuring and reorganization. We have a new President in China. He started -- Mr. Knott started in Q1, and the whole project is led by him and also our COO, André Philipp, who are now consolidating all our warehouses, offices and also our different plants we have into one location. This will be done in the course of the third and the fourth quarter of this year.

So the overall summary, please allow me to give you a little bit feedback on this. First of all, having spoken about China, we do restructuring at the moment with consolidating everything into 1 building. Secondly, APAC and India with upside potential in the second half of the year. Thirdly, EMEA is stable with still high margins. And fourth, most importantly, Americas is back on track with more to come.

So having said that, I would like to hand over to Matthias now to give you a little bit more detail on the other financials. Matthias?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [4]

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Yes. Thank you, Alex, and I will start doing that by looking at investments and depreciation. Investments in the property, plants, equipments and intangible assets amounted to EUR 24.2 million, which corresponds to 3% of sales. Focus areas of such investments were automation investments in the Americas in support of our Project FORWARD supporting our stride towards higher operational excellence levels. Secondly, our greenfield project in China that Alex just mentioned. And thirdly, our new office building, which we're doing the call from, as we speak, which we just opened here in Bessenbach in Germany.

What is happening at this point in time is that, in particular, André, our COO, and myself are closely monitoring the investment approval process to make sure that the CapEx investments flows to the right places at the right point in time. So we are carefully revisiting our original plans to make sure that we, number one, spent the money wisely in the second half of the year, but number two, also don't accelerate unnecessarily in the wrong places so that we keep focused in taking back our control. And in particular, that we keep the focus on the reorganization in China, in particular. As for the depreciation, if one does higher CapEx investment levels, we also see an increase in the depreciation level. I already told you we are at 3% of sales at this point in time. When looking at the increased figure of EUR 20.9 million at the end of half year 1, please note that EUR 4 million of this come from the application of IFRS 16.

Turning the page and moving to the net working capital ratio. This one improved from 14.5% at the end of half year 1, '18, to currently 14%, and this happened against the discussed sales increase of 8.6%. During the half year 1, the net working capital increase compared to year-end, but this increase was significantly smaller compared to the same period in 2018, which you can see from the chart. In total, 4.6% or EUR 9.3 million below the previous year's figure.

If we look at the components briefly, inventories are pretty much on the same level as last year despite the sales increase. Trade receivables are down by 16.9% on substantially improved cash collection. Trade payables were down compared to half year 1, 2018, yet if you look at the financial report where you can also see the comparison towards year-end compared to year-end trade payables were up by $21.6 million, which, of course, is a positive contribution towards net working capital ratio.

If we then turn the page and look at how this plays out on the cash flow development, we see a positive development with cash flow from operating activities for the first 6 months that came in at EUR 27.6 million, which was significantly above the previous year level of minus 30.9%. This improvement is, as shown, attributable to a sharply lower rise in net working capital despite our sales increase. Cash flow from investing activities I touched on was 24.2%. And taken together, operating free cash flow thus improved substantially from minus EUR 46.1 million to net EUR 3.4 million in the first half year of 2019.

For the sake of full disclosure because this was part of our discussion at the end of Q1, please note that the fact that volume of our trade receivables stood at 39.3 million at the end of Q2 versus 42.9 million at the end of Q1.

And with that said, I already turn it back to Alex again, who will talk a little bit about the outlook for the markets in the second half of the year and then our financial guidance.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [5]

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Thank you, Matthias. So then we can come to the outlook for the year 2019 for different markets we have on Page 16. Starting again on the left slide with Western and Eastern Europe, you can see that the market is expected to increase slightly on the truck side with a plus 1%, so basically flat. The trailer side is still reported to have a minus 10%. On the middle section, North America, you can see estimates for 2019, truck side, a strong plus 5% for the truck side. And on the trailer side, a plus 3% for the whole year of 2019. On the right side, speaking about China, you can see truck, minus 3%; and trailer, minus 15%. So basically, we can summarize that with a stable growth in North America, Western, Eastern Europe and China is weaker, specifically on the trailer side.

Turning the page to number 17, to get the complete picture, also here starting on the left side with South America, 2019 estimates on the truck side with a plus 11% and on the trailer side with a plus 5%. Last but not least, India, truck with a minus 11%, trailer with a minus 25%. So basically coming from the first 6 months with a minus 36%.There will be a recovery in India in the second half. This is mainly due to after election buy which the election was delayed. So orders are coming in, in the months to come, and there's also a prebuy expected for trucks and trailers until the end of the year due to some legislation changes in 2020.

Coming to the next page, our total outlook for 2019. And we can report under the actual circumstances, we are able to confirm our guidance for this year, which was 4% to 5% sales increase over the EUR 1.3 billion we had last year; adjusted EBIT margin coming from last year's 6.9%. We're still confident to achieve an adjusted EBIT margin around the midpoint of the 7% to 8% range; net working capital of 13%; and the CapEx, as explained, will be somewhere in the ballpark of EUR 68 million to EUR 70 million. There is no change in the outlook. And as I said before, under the actual circumstances, we are confident to reach that.

Having said that and to close the presentation, we come to Page 19, please. So basically to summarize and your key takeaways are: we have a mixed picture and outlook in the relevant markets; Americas region is well on track; in China, we do a reorganization, which is underway in a challenging market environment; we have a stringent focus on the net working capital management, as Matthias explained earlier; and we are confident to take back control of our performance.

Having said that, thanks for listening, and we are happy to answer your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Philippe Lorrain.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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A few questions from my side. So the first one really to start, within your sales growth guidance of 4% to 5% year-on-year, how much do you assess could be pure organic growth at that stage after the performance that we've seen in H1? That would be the first one.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [3]

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Okay. I can take this one, Philippe. Basically, what we are doing, what we are forecasting for us and working on is a further potential in the EMEA region. In the course of the last 2 years, we gave a lot of sales contracts with increasing shares in their production. So basically, we see more orders coming in specifically from the smaller and the medium-sized customers. This is the pure organic growth. And also, we have a ramp-up of disc axles for the U.S. we want to do in Germany to help to gain more market share also. This is the Americas region.

In the Americas, we have a further potential on both truck but specifically also on the trailer side. This then would be also organic growth. And as I reported earlier, in India, we see a better second year of this -- the second half of this year due to after election and the prebuy we can see. Last but not least, I also have to mention that after a couple of very weak years in the Middle East and also Northern Africa, there is a market recovery, key recovery we see. And also here, we will increase sales. And this has been also pure organic sales. Does that answer your question?

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

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Yes, partly. So the comment on EMEA and also America with market share gains, I understand is basically what you can grow on top of what the market gives you. It's basically that. Because ultimately, it's going to depend on the market volumes. So yes, it answers partly my question.

The second one was on North America, I got that you were speaking about penetration of the air disc brake technology of about 50% by 2025. So could you confirm I got that right? And also, what would be the level of penetration that you see right now for the technology in the market?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [5]

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Okay, basically, you've got that right. What I said is that we expect the total share of disc brakes for 2019 is about 15%, 1-5 percent. So 15% is disc brake, 85% is steel drum brake. And we see and others also do in the course of the year 2025, there will be a 50-50 split between disc versus drum, and we have a dominant role here at the moment. So basically, if you talk the 15% share of disc for this year, we have roughly 55% to 60% market share in North America for disc brake axles.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6]

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Okay. But I guess, when you speak about the 15% versus 85% for the drum brake, it's the markets kind of exposure right now, yes?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [7]

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Yes. 2019, 15% is disc and 85% is drum.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [8]

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Yes. Okay. Yes, it's just I had the impression from discussing with Knorr other players last year that we were already like shifting towards the 20, I guess, it depends what kind of specific region we take. Do you take Mexico also into account in North America?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [9]

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Yes.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [10]

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Yes. Okay. Okay. Makes sense. And then I've got 2 other small questions. I mean the first one is really like more like housekeeping. So if you could quantify the effects of the write-downs in China in Q2 between the write-down on receivables and the write-down on inventory, that would be helpful. And also if you could tell us if you expect some more issues like that to come and whether there is perhaps a read across as well for other players in the industry with that kind of behavior from customers in China?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [11]

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Yes. Philippe, it's Matthias. I will take those China-related questions, if you allow. I'm happy to quantify, given that we stressed the delta between the EUR 4.1 million and the one that you could call run rate loss at the moment, given the current situation. So the components are inventory impairments of around EUR 1.3 million, impairment of receivables of EUR 1 million and strike-related costs of about EUR 0.8 million. That gives you exactly the EUR 3.1 million, which are the delta between EUR 4.1 million and EUR 1 million.

You asked about a cross-read for the industry. I would be very careful to sort of go that far and make it a cross-read, let's keep it SAF-HOLLAND specific in this particular case because this does arise from the reorganization that is underway that Alex described. I wouldn't go as far as making it a cross-read at this point. You also inquired about can we expect more in the second half of the year. As a prudent CFO, I cannot rule that out. However, in order not to confuse you or raise any fears, of course, we have done some thorough analysis, and this is baked into the guidance analysis as well. But I cannot exclude that we show numbers again that talk about impairments in China. If we do, rest assured, I'm happy to quantify and inform you.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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Okay. Great. So I get fully the point that the strike is more SAF-HOLLAND specific. But in terms of the market development, I guess, that you observe really because of the escalation of the trade tensions. Perhaps the behavior of some customers in China towards the payment delays and so on and so forth has somewhat changed and that it makes the cash collection in the region a bit more difficult.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [13]

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Well, I certainly cannot ignore that such macroeconomic factors do play a role for everybody who is doing business in China, and in particular, also including our own industry. However, if we look at our own numbers at SAF-HOLLAND, they do have a history that have to do with the evolution of our China business, how we went into the market and where we stand today. More specifically, if you look at the Corpco business that we have been doing for a number of years, we have had customers who have heavily relied in this particular industry, in the bus segment and government subsidies, for long-haul buses. And those subsidies have gone down and down and down, that has led to an increase in the length of outstanding receivables.

We have -- with the increased focus on cash collection, we have looked into these situations again. In some circumstances, we do have payment plans in place. In other cases, we have customers where we have taken legal actions but -- and that is obviously the nature of an impairment. We also have to realize that some receivables will not be collectible. So that is why I stressed that some of these elements are specific. In terms of the overall payment behavior, I cannot really confirm that we see a trend that it is massively becoming longer. I think it's rather a question of how good your customer relationship is and how often you talk. We had a review call on China receivables as late as yesterday, and this is where what I was just saying was confirmed again by the China team.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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Yes. Thank you for the very comprehensive answer. I guess as well, I mean, that has to do with the customer mix anyway. And the last question is also like relatively simple one. The EMEA region, over the cycle in the current setup, where would you see the margin trending in terms of range over the cycle.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [15]

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That's a tricky question because, first of all, let's speak about the cycle. Even despite the fact that we came in with a lower sales compared to 2018, I have to say that 2018 was the absolute record year we ever had in the EMEA region for our products. So basically, we are coming back or we came back to a normal good level. And as you can see, despite the fact that we had to adapt some shift models and with higher personnel expenses, we still do the 9.7% we achieved, which is quite good. Of course, can it be better? Yes, we are working on much better shift models at the moment. We laid off a lot of temporary workers already because this is to buffer those extra shifts we did in 2018. So basically, the cycle is still okay. I do not expect that we are coming down another 10%, 15%, 20%, which would not be good for the market. So -- but 2019 is a normalized good year for us.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Okay. I get that, but it's going to be probably like if we take into account like some much weaker years plus some exceptional years like 2018. So around the level of margin that you're going to generate this year, we can basically draw a range, so if I understand that correctly?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [17]

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Well, basically, we do not report on the margin to expect in the future, but you can see with this 9.7% this year and last year 11.5%, we had some extraordinary effects in last year, which increased the margin further of last year, but somewhere in the range of 9.7%, which we are now, it's a normal year. But of course, we cannot comment on future margins to be expected.

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Operator [18]

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The next question comes from Alexander Wahl.

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Alexander Wahl, MainFirst Bank AG, Research Division - Analyst [19]

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My first one, actually, I would like to come back to Philippe's question. Probably, I missed it. But could you please help me with your expectations for organic growth? I understood all the individual components, but I would just be interested in a number.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [20]

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Alexander, it's Matthias. Maybe I can take that. I think we made it clear when we went out with the guidance earlier this year that we changed the guidance format. We're looking at total sales growth, and we do no longer guide on the distinction between organic and inorganic growth. We are happy to dissect that when we report actuals, but we will not give a number on organic versus inorganic growth today.

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Alexander Wahl, MainFirst Bank AG, Research Division - Analyst [21]

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Okay. Second question relates to the U.S. I just saw in your slides that production, truck production was up by 19% in H1. And the forecast is still only at 5%. So that obviously would imply that H2 gets much weaker. Alex, I would be interested in your view, whether you see, in your orders, any sign of such a significant slowdown?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [22]

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Yes, I can take this, Alexander. We do not see that at this point of time. We have a dedicated plant for all -- for instance, disc brakes, we do in the Americas, specifically North America and in the U.S. with all the big truck manufacturers. We are still at a very, very high shift model. So we should basically [book out]. We could sell more, if we could manufacture. And at this point, we do not see a drop in orders.

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Alexander Wahl, MainFirst Bank AG, Research Division - Analyst [23]

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Okay. Perfect. And the final one, just as some of your competitors actually indicated that in the Europe, H2 might -- the headwinds might increase. When you look at Europe specifically and compared to the situation you have seen in Q2 as regards current trading, do you have the feeling that your tailwinds get incrementally more stronger or do you still feel well positioned to offset any increase in headwinds with new projects you initially mentioned?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [24]

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Matthias, do you want to take this?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [25]

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Yes. Can I just reconfirm that you were specifically addressing Europe?

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Alexander Wahl, MainFirst Bank AG, Research Division - Analyst [26]

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Yes. Exactly.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [27]

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Yes, maybe I can start, and Alex can chime in. And I hope that I got the question, right? I have always said when I met you guys in conferences, road shows, calls, et cetera, that we believe that SAF-HOLLAND is strongly positioned in the market, especially in the European trailer market to stand tall against increasing headwinds. Those headwinds are certainly there. We cannot ignore them.

But you heard that we do have a certain level of confidence, given our market position and the specific customer relations to perform better than the market, which is to say, even if we see a downturn in Europe in the second half of the year, we believe we can perform better than the overall market. And I believe, if you look at the numbers for half year 1 on the trailer side, which is the more important segment for us in Europe, half year 1 production, which was the beginning of the presentation versus our own performance in half year 1, that is a proof point, and we are hopeful that this will continue in the second half of the year.

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Operator [28]

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One question comes from Yasmin Steilen.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [29]

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So first of all, on China, again, could you -- at first glance looks like you underperformed a little bit, the declining market. Could you quantify on the top line the effect from the organic sales decline and the strike actions in the second quarter, please? Sorry, if you don't mind, I would go over them one by one?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [30]

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No, No. That's fine. Yasmin, it's Matthias. First of all, thanks for the question. You find me pensive because it's a very detailed question that I must admit I do not immediately have an answer on, given the current situation in our own organization but also the overall situation in China. And what I mean by that more specifically, Alex pointed out when talking about the business segment that we had 8 to 10 days of strike. So if you look at the overall performance in the market, which we outperformed on the negative side, if you don't mind me saying so, then there is an element of explanation, number one.

Number two, let's not just hide behind the strikes. Let me just reiterate that it is also a challenging situation, given our own customer structure in China, which is why we repeatedly come back to the trade war situation, and that might be a little bit SAF-HOLLAND specific, but it is a fact of our life at this point that we do have a strong relationship, a big relationship with customers who export to the United States. So those 2 taken together give you the impact. I must admit I wouldn't be able to break it down to the strike costs right now. I would need to look that up and then average it out on loss of production per day. I'm happy to follow-up on that with the team, but I don't have it in front of me right now.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [31]

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Okay. No, excellent. But it's clearly that it's not severe underperformance. So just at least only slight underperformance versus the Chinese market, if you strip out the strike actions?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [32]

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Yes. Thank you.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [33]

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And Yasmin, let me please add to give you a little bit more insight into that. I think we were too dependent on the export business in China in the past. We have some big customers that have big business in the United States due to our fleet work we do there. The customers specify our products to be put under the trailers coming over to the United States. And due to the 25% tariffs, we simply could not continue doing that. So basically, we give up some of that business because if we don't earn money, we don't do it. That's a clear stickler I can give to you. And the team now is heavily working even more on gaining more customers and different product groups to sell in the Chinese domestic market to get little bit more independent from those export dollars we did in the past.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [34]

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And if I remember correctly, York had some 10% exposure to China already, so this -- would this be a level or kind of a small organization to build on to expand into the local Chinese market?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [35]

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Well, basically, York does not play a role in China. We took over a plant, but consolidated everything. So basically, the Qingdao plant, which was the York plant, a very small one, is just a couple of thousand axles per year. We closed that by the end of July to save cost, and we consolidated everything into our engine plants, where we also can do the axle product and also in our Singapore plant we do or in the Singapore facility we have. But York is not exposed to China, no.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [36]

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Okay, okay. Then I have a question on the U.S., if I may. So obviously -- yes, maybe a first indication on what we could expect in 2020, looking at Class 8 orders intake declining significantly year-to-date, more than 60% trailer down more than 40%. So I mean, obviously, it's a strong market, production sold out for '19. So therefore, the order intake might not be best or most meaningful indication or yardstick for what is happening in 2020. But what is your impression when talking to U.S. customers? What could we expect in terms of truck and trailer production in 2020? Because I'm basically concerned about disruption or correction coming.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [37]

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Yes, I can confirm, I have been to the United States 5 times this year, speaking with a lot of customers, both on the truck and on the trailer side but also fleet. And the consensus of everybody is that they have booked out in 2019 on both the truck side. So all truck manufacturers are booked out. They have a much weaker order income for 2020, but we are now in August. That's another 4 months to go, plus generally, 5 months. Typically, we do not expect a huge drop.

There will be a correction in the market. This is what we think but also our customers think because everybody says after 3, 4 years of really good growth, there has to be a correction. If it comes, we will see in 2020. On the trailer side, I can report that all our customers are booked out also in 2019. They are already accepting orders for January and February next year. Will there be a slight correction also at this point of time? We don't see it. On the truck side, I think so. There could be a correction because those numbers of manufacturer in 2019 were at a really high level. On the trailer side, we will see. But we do not see it at the moment.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [38]

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If I may quickly add, what is a little bit difficult to read in the marketplace at this point in time is given what Alex described about manufacturers being booked out is the order behavior of customers because they do get the confirmations for 2020. So what we have heard from the U.S. organization as well as our customers, when we speak to them directly, is that a lot of them have stopped ordering, which is not untypical because they usually start again after the 4th of July, but we will need to see the order behavior in the second half of the year to have a better read on this because some people said, why should I be ordering now. I get the equipment in 2020 anyway, if I may simplify that a little bit. So let's see how we can read into those numbers further as the year progresses. But I just wanted to round that off.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [39]

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I mean I've even heard from the other way around that OEMs don't accept orders from customers because customers are not willing to accept price escalation clauses on the raw materials and the OEMs have no visibility on the raw materials. So to some extent, even if fleet operators want to place an order, the OEMs seem to block it. So...

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [40]

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Yes, thanks for adding that. I can confirm that. We hear the same. There is a behavior like that with some of the OEs.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [41]

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Okay. Good to know. So it remains kind of a black box. Then with regards to WABCO, so by -- following the acquisition by ZF. Do I remember correctly that Knorr-Bremse and Haldex are by far the most important brake disc suppliers for you? So there's no kind of change in the environment for you following the acquisition of WABCO.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [42]

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No, there's no change. Here, we have to separate a little bit the trucks from the trailer business because WABCO would only be a supplier for our trailer axles for the disc calipers. We do buy some calipers from WABCO, but WABCO does not have, at the moment, the right product for us. They still have a disc caliper, which they launched some 10 years ago. It's too heavy, and it's too costly. So for us, at the moment, 2 dominant places and Knorr-Bremse of course and Haldex but not WABCO.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [43]

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Okay. Perfect. And then the last question, if I may, on free cash flow. So the development is a very encouraging signal. So -- and it seems like it's only attributable to improvement in the working capital and cash collection period so -- because I've noticed also that the amount of factoring has declined in the second quarter. Was there a particular reason behind this? And what level of factoring should we expect going forward?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [44]

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Thanks for asking that follow-up question. There is no particular reason per se other than my answer will now get a little technical. What you always have to bear in mind when you factor is the factoring contract and your customer portfolio, meaning the portfolio of receivables available for factoring. And it is just that what we saw in the second quarter is that we didn't have as many receivables that could have qualified for factoring in those jurisdictions where we do factoring. Sorry to become that technical, but that's how factoring works because every quarter you obviously restart the clock with your receivables portfolio, but that's the technical reason.

In terms of the volume to be expected, which was your additional question, I think -- and I'm wording myself very carefully because it obviously also depends on the development of sales. But the range that we see right now is probably the range that we will see in factoring going forward as well. The reason for that is that we have a set up now that I am very happy with in terms of the service providers and the terms and conditions that we were able to get from them. So we are happy to use that as a regular feature if the portfolio permits. But I'm confident that we can keep it at that level because otherwise, we will obviously have a different quality on the receivables side overall.

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Operator [45]

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The next question comes from [Johannes Reeves].

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Unidentified Analyst, [46]

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Yes. Maybe some follow-on questions. Maybe a little bit we discussed maybe visibility in 2020 in the U.S. How much visibility you have on the European market? You mentioned earlier on the -- you don't expect that the market sees the same downturn next year, but if it would be maybe a double-digit, it would be very bad for the industry. So far, what indications you get from your customers? How much visibility you have? You mentioned new contracts. You won other contracts also supportive for 2020. Maybe you can add a little bit on the situation in Western Europe?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [47]

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Okay. Thanks for asking. You're specifically speaking about the EMEA or European region?

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Unidentified Analyst, [48]

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EMEA, yes.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [49]

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Yes. EMEA, which is basically Europe, of course. Europe is the dominant market in EMEA for us. So we do not see a huge drop for 2020. There is a correction, as I said before, 2018 was a record year, but only for us. We outperformed. We gained further market share, but also for our customers. At the moment, we can see that specifically 2 biggest trailer manufacturers we have in Europe that they are losing more than others. This is due to the fact that the biggest loss is coming from the standard semi-trailers, so curtainsiders, which is the bread-and-butter business of the big ones. The smaller medium-sized companies, they're not that much focused on the semi-trailers or on the curtainsiders than the big ones because they are not interested in the volumes. So this you can see. If you see the really big ones, they lost over proportional. The medium ones or the smaller bigger ones, the medium ones and the smaller ones, they didn't lose that much. Some may be single digit but not in the double-digit range. We see also medium-sized trailer business didn't lose anything because they gain more market share. They are going in different countries in Europe. I cannot comment on 2020 because we cannot see it at the moment. The only thing I can see is that the 2 big ones overproportionally lost against the rest of the market.

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Unidentified Analyst, [50]

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What do you think, the signs from today, it looks more stabilization, maybe a slight decrease compared to this year's levels because last year had been extraordinary good. So that's maybe the most important takeaway.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [51]

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Yes. If we -- so basically what we did, we did the forecast for the end of the year for us. And typically, I only want to see the output of axle numbers as a first indication. And the forecast we came up with now is still a very good year for 2019 and then for 2020. But, of course, if you are coming from a record high year, everything lower is bad then. But in my point of view, even with the correction of minus 10%, it would be still a very good year.

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Unidentified Analyst, [52]

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What about the installed base of trailers? How is the average age compared to the past? And maybe therefore there must be, in terms of recovery, replacements compared to the past, this year is a record year. Now the average age is below we have been in the past in the average or is it still like it was 2, 3 years ago but because there have been some holdback before this strong year 2018 in your orders.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [53]

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So basically, if you see the installed base and the 2018 numbers, which were roughly 10% higher than the years before, you cannot change the age or massively change the age of the population in the marketplace yet because you have millions of millions of trailers out there. One factor I can mention here is that, specifically the big ones when they get back the trailers because they leased them out before. This is typically, if you speak, the Western European trailer manufacturers and only the big ones that take back the trailers somewhere between or somewhere after 4 years, that's normal age of a trailer, and then as a second life, they go to Eastern Europe, not specifically anymore to Czech Republic or Slovakia, but they go more to the eastern side, Russia. But Russia, they have a new rule in place since last year that you have -- that it's really expensive to import U.S. trailers from Europe at this point of time. So they have some issues to get rid of the older trailers, on the second-hand trailers, and that might cause also a little bit slow down at the moment, specifically for the 2 biggest trailer builders we have in Europe. I do not -- but I do not see a big shift on aging of the trailers nor in the one direction or in the other direction.

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Unidentified Analyst, [54]

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Okay. Regarding China, how long you think you expect you need to fix your internal own problems that you have there because it's a shift to the greenfield [fab], which is definitely a burden. In U.S., you need to compare below now you send, how should I say, firefighter team over to solve the problem. Therefore, what is your internal time table maybe to fix the problem? And how much you've learned even to handle this problem from U.S. because it's a comparable situation?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [55]

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Yes. So China is much smaller than the situation we had in the U.S. It cost 10x more sales, of course. But we learned a lot. And the team specifically working on those issues, they learned also a lot. I said before that we have a dedicated team doing this. This team is led by our COO, André Philipp. André has been living in China the last 11 years. He knows customers, he knows the marketplace. So he's the right person to do that.

Beginning of June, Mr. Knott joined us. He also has many years of experience working in China and the whole Asian region. They are dedicated only to do the reorganization. And I mentioned before, that we are closing down, already closed a lot of warehouses, offices, different production sites. Some are being closed by the end of July, specifically, warehouses we have in Beijing, Qingdao plant I mentioned before to Yasmin that we closed it already down. So it's empty now, and we handed it over to the landlord.

In our point of view, it did not make any sense to be spread all over China and have so many resources, particularly in all the corners of this big country. So we are now consolidating everything into our greenfield in Yangzhou. I have to say 2019, it will be complete. Yes, it will be complete, but we have to do it, and we will do it. And our internal target is that by the end of 2019, all the -- let's say, all construction areas, we had fixed and closed, and then we can go only with Yangzhou, our greenfield into 2020. This is the internal target. So massive reorganizations already underway in Q2. Also in Q3, we are still working on that. We want to start producing in the beginning of the fourth quarter in our new greenfield. Everything has been kept up so far. Time line, it's there, but 2019 will be bumpy.

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Unidentified Analyst, [56]

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Okay. But '20, definitely from the internal point, the key improvement.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [57]

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Yes.

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Unidentified Analyst, [58]

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2 short questions at the end. Steel prices, you mentioned them, especially in the U.S. How much maybe -- steel prices as they ease -- maybe the reduction in steel prices could help you also going forward the second half and 2020 because you're partly longer contracts, I think there.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [59]

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I'm going to give you a little different answers to this. Speaking about Americas, which is North America, U.S., with the steel prices. If you see the report we set out, the first half year, we gained EUR 18.2 million in adjusted EBIT. We have this since March 1, this FORWARD project running with a couple of pillars. First of all is direct and indirect material cost. We're working on that also on the plant side, and we are saving money. We did sign new contracts with suppliers. So savings are kicking in, also the lower steel price helps, of course. But if you got the lower steel price, you also have to give back to customers sometimes.

What we also did is we investigated all our customers and product groups with low margin or negative margin sales and corrected that and still correcting this in this year. But we also have a contractual passing on of the prior years' steel price increases, of course. And out of the EUR 18.2 million, you can basically say roughly EUR 8 million are coming from the passing on, EUR 4 million in the first quarter and EUR 4 million in the second quarter. But despite that fact, we also renegotiated better steel pricing terms with our vendors. So we also get money from the customers from the one side, but also have new contracts with our suppliers on the other side. And this is one of the reasons, of course, why we are gaining [cap] here and come up with the 6.7% in the Americas.

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Unidentified Analyst, [60]

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Okay. And finally, free cash flow, I think maybe even recap what you talked about working capital in the prior answers, you're also optimistic you have a clear positive free cash flow for the whole year. Is that right?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [61]

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I am optimistic for free, positive cash flow for the entire year. Sorry, I missed out the word there for a moment. Yes, but please don't nail us at this point on a specific number. I have always said over recent quarters, we will try to reverse the trend. I think what we have reported today is a good start, but we will need to be held accountable going forward that we prove that this is sustainable. But I -- from a CFO perspective, I do observe a higher focus and improved processes around these topics supporting it, both on the inventory side as well as the cash collection side, if you connect the dots, this is the result of the initiatives that we announced back in March, I believe it was, February, March.

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Operator [62]

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One question from Miro Zuzak.

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Miro Zuzak, JMS Invest AG - Investment Professional [63]

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The first one would be regarding the U.S. Can you hear me?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [64]

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We can, Miro. You're good.

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Miro Zuzak, JMS Invest AG - Investment Professional [65]

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Excellent. There was a new regulation regarding this hours of service in the U.S. coming into effect, I think, in -- as of July this year, which would relax again the rules a little bit, which have been implemented in 2018, which led to this also to this capacity in the U.S., which, again, triggered then all these order intakes in the trucks and trailers and on. Do you see any change in behavior in the ordering behavior because of this new regulation in the U.S.?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [66]

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Alex, do you want me to take that?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [67]

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Yes, of course.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [68]

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Okay. Sure. Miro, the clear answer is not at this point. Number one, I would argue, it's too early. But number two, I'll be quick to add by saying I do not believe that this will have a massive impact, given that the overall shortage of drivers continues to be there. And I think that is overarching, what you just described, if this may be being sort of the -- for lack of a better expression, the countermeasure to the introduction of the electronic locking device and the corresponding rules. So at this point, I wouldn't expect a massive change.

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Miro Zuzak, JMS Invest AG - Investment Professional [69]

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Okay. Then a related question. In the presentation, you have on Page 5, you have the production, which for H1 for the U.S., which was plus 19% for now, let's say, the Class 8 trucks. And then you have on Page 16, you have, on the other hand side, the outlook for H2, which is plus 5%. Now are these numbers comparable? Because to go from plus 19% for -- in the first year -- the first half of the year to plus 5% for the entire year would imply a minus 10% in the second half of the year, which seems to be like a huge decline compared to the first half of the year. Are these related to table?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [70]

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You are totally right. On Page 5, that was the truck and trailer build for the first half year, okay. Coming also specifically for North America from ACT, that was the ACT outlook. If you go also to Page 16, which has been the outlook for the whole year of 2019. So basically first half year plus the second half year, you are totally right, what you said that you could expect a decline in the second half. As I said earlier, we don't see that. We have booked out our customers, confirmed that they have booked out until the end of the year, that would imply that there would be massive order cancellations, which we don't see and did not hear about. But those numbers are not from us, those are coming from ACT.

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Miro Zuzak, JMS Invest AG - Investment Professional [71]

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Okay. Okay. Interesting. But still you have a tougher basis now in the second half, right, because organic growth in the second half of last year was clearly higher than in the first half. But do you still expect for the second half of the year a positive organic growth rate for the Americas segment?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [72]

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Yes, we do.

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Miro Zuzak, JMS Invest AG - Investment Professional [73]

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Okay.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [74]

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I can tell you why. Our exposure to truck is not that high. So if you see the total revenue we do in the U.S., 2/3 is trailer products related to axles, suspensions, we do both air suspension and mechanical suspension. We do loose axles. We have bumpers and landing gears, of course, and kingpins, couplers. And the truck side, which is roughly 1/3 of our overall business in the U.S. is driven by the fifth wheels and also by some truck suspensions we do. So our exposure to the truck is there, yes, but it's not that high.

And on the trailer side, I have to say with our still, at the moment, low market share, overall market share on complete systems, mechanical air ride and the axles, we are gaining more contracts. We could sign much -- many more contracts before we have the capacity. But we are totally booked out until the end of the year in our 2 plants we have for our trailer product, and we are ramping up capacity before we did not achieve this. We cannot get more orders, and there is room for many more orders. So we are driving more on the trailer side than on the truck side.

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Miro Zuzak, JMS Invest AG - Investment Professional [75]

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Okay. Excellent. On the earnings margin side, the EBIT margin side, you were able to boost it to over 8% now in the second quarter. Is this I understand, I mean, all the reasons that you've mentioned why this has increased. Most of them actually seem to be sustainable, like the lower add-on operating costs, the price increases that you could put through, also the ones in the aftermarket that you mentioned in U.S. and then Canada. Is this now the new profitability level that you would also expect for the rest of the year now given that you're booked out?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [76]

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Well, basically, if you see Q2 from 11.4%, you can deduct the EUR 4 million, which is passing on the steel prices. Basically, this is not our, let's say, our work with it. So you have to deduct that. So that would leave you with a EUR 7.4 million, which is still a good number, of course. We have still a lot to do with our project FORWARD. We just started that in March 1. There is some more potential we could get. And of course, we have to drive that. But we can, of course, not comment on the future margins to come in the second half year. But of course, if you see the past -- in the recent years we had in the U.S. at the normal level, we were somewhere around 8% to 9%, not saying that we are going to achieve this, this year, but this would be something we would feel comfortable with.

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Miro Zuzak, JMS Invest AG - Investment Professional [77]

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Okay. Now can you just give us an updated number regarding the restructuring charges that you expect for the second half of the year?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [78]

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Matthias, do you want to take that or you want me?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [79]

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Sure. I will take that question. I do not believe we have ever guided on restructuring charges going forward because that's the nature of restructuring that they are one-off. And I would refrain from doing so today. Because whatever number we put out there is probably not going to be the right one anyway, and then you will hold us accountable for it. What I can give you an update on it is that the first half year saw restructuring charges of EUR 8.5 million, EUR 5 million of which came in the second quarter.

And the reason for the increase compared to the first quarter is that we have made the decision to launch project FORWARD, which we then qualified as restructuring. We talked about this last time. You have the changes in the management board, which qualify as restructuring. And then we have the restructuring in China. Those are your major components in the second quarter. That's as much as we can say as of today. Please bear with us on this topic.

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Miro Zuzak, JMS Invest AG - Investment Professional [80]

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Okay. Then one last one. Actually I have 2 more, if I may. In China, there was quite a big hike, like half a year ago, about the new regulation coming into place as of 1st of January 2020 which regards the dangerous goods. Dangerous goods, which have to be transported with air suspension and disc brakes, if I'm not mistaken. Now you mentioned, obviously, these problems in China. Do you still expect to benefit in a substantial way from this new regulation in 2020? And if yes, by how much?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [81]

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Okay. Basically, if you see our product range and the area where we are good in, it's not for cheap guy. So we are not market leaders in low-cost axles. This is not where we are focusing on. If you see our total worldwide output in air suspension and disc brake, we are world market leader in this. This, of course, plays into our card here that from next year on all the dangerous goods has to be equipped with air suspension and disc. This is why we are opening the greenfield. This is where we are focusing on. And this is also what we want to sell in the future.

So we have a product road map for China. So for air suspension and disc brake, we have some -- we did some negotiations and also contracts with suppliers to supply us big components for that and very important components, so to speak, brake calipers, for China, and we are focusing on that. How much it will be, I cannot comment on because it's 2020, but this is purely our main focus in China.

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Miro Zuzak, JMS Invest AG - Investment Professional [82]

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Okay. But if I'm not mistaken, the new regulation for the disc brakes is already in place as of 2019 and just the air suspension is coming. So this year, you should already be benefiting from this. So do you see it at least in the market? I understand that you have some idiosyncratic problems there connected to, let's say, to your company. So do you see that the market is really picking up?

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [83]

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Yes, it is picking up also this year already with the disc brake. They combine the disc brake with the mechanical suspension. We are not good in China with mechanical suspension. With the new regulation next year with a combination disc and air suspension that will be better, but also this year already we sold axles and suspension systems into the market, yes. But as I said before, the legacy is that we were focusing too much on the export business. And you're seeing with Mr. Trump's 25%, we got a huge hit. And of course, we could sell much more, but we want to earn money and we have to earn money. And if we do have customers or product groups, if we do not like, then we don't sell it. Clear signal.

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Miro Zuzak, JMS Invest AG - Investment Professional [84]

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Okay. And the last question is regarding your guidance. You guide for the midpoint 7.5 percentage points. Now if you compare to the first half of the year, which was at 7.2%, that would imply that you end up with 7.8% roughly in the second half of the year. Where does this increase mainly come from? Is it just the gross profit margin, which is going to go up? Or is there any other cost line, where you see any significant changes in the P&L?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [85]

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Can I take...

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [86]

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Matthias, do you want to start?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [87]

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Yes. Sure. Miro, if I may slightly correct your statement just so that we are clear on the guidance. The guidance says around the midpoint of the range, number one. Number two, we said today that we are confident that we will meet the market expectations for the full year. In terms of where that comes from, I think we outlined that during the call in terms of what we perceive to be our situation in Europe, the continued path in the Americas, both on the top and the bottom line but overall, our efforts to strengthen the profitability of the company. And I think that should give sufficient clarity how we add on top of a decent half year 1 and half year 2 that allows us to meet current market expectations at the end of the year.

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Miro Zuzak, JMS Invest AG - Investment Professional [88]

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And you talk about the financial market, like the analyst expectations? Or what do you mean by that to meet the market expectations?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [89]

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That is exactly the right understanding.

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Operator [90]

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The last question for today comes from Frederik Bitter.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [91]

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So it's been a very long call. I have only 2 left basically. But if you could help me and us basically based on an update on trading in July and how that compares to June, just what you've seen in the order book, et cetera, in July.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [92]

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That's a very specific question, Frederik. Is there a background for your question that helps us to answer it because you know that we normally don't comment on particular months?

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [93]

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Well, I'll ask you to comment on July, though, just to get a bit of feeling for how you've started basically into the new quarter, I mean, if it's that of a quarter, it's still obviously a holiday, holiday month. But nevertheless, will be interesting also how you compare it maybe to last year in July?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [94]

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(technical difficulty) from giving you an answer because I don't want to introduce a pattern through which we start talking about months because I don't think that they are necessarily depending on which quarter end we are at, they are necessarily indicative for our performance of the second half year. Let me say overall that we did not have a bad month of July, I think it's fair to say, especially in the 2 big regions. However, and that is why I'm refraining from becoming more specific. It is sometimes a little bit surprising how orders and customer behavior slips from 1 month to the next. So I think we should readdress that question at the end of Q3. When we look towards year-end. I apologize if this was not what you were fishing for, but that's what I have for you at the moment.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [95]

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Well I have to accept it. Fair enough. And then maybe the last one is just an update on the income tax rate. You were expecting for the full year, obviously, 34% in H1, just so we have -- we can update our model?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [96]

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Yes. Appreciate the question. The -- just a small background recap. Tax rate went up to 34.3% compared to 28.7%. The reasons for that are unrecognized deferred tax assets on loss carryforwards from foreign group companies. This has to do, number one, with the requirements, the accounting requirements of IAS 12. Number two, a conservative earnings expectation. We will revisit this accounting assumption towards year-end because it depends on the development of the profitability in certain entities and jurisdictions where we have loss carryforwards. It could be possible that we can re-recognize, if you like, some of those deferred tax assets and to connect the dots that would mean that the overall tax rate comes down again towards year-end. That was the one impact.

The other impact are some specific regulations from our own structure in the U.S. and the foreign holdings of SAF-HOLLAND Inc. were under the Trump tax reform. We have incurred additional taxation with increased profitability. Overall, you asked about the assumption, it's a little difficult to guide at this point. But I don't expect it to be at the level that we are at, at the moment. I would assume for the moment that we will be around the 30%. And believe me, I will make every effort to move it below 30%, if I can. However, if I make profits and jurisdictions where I have to pay higher tax, so be it because we are a good corporate citizen. But if you can work with around 30%, Frederik, I think that is a fair assumption.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [97]

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Yes. Perfect. And is that a level you would also see in the next couple of years? Or is there -- or you should expect it basically to normalize to say something between 25% and 30%, perhaps?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [98]

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That would be a target corridor that I would be much happier with. It will depend on how the group will evolve in terms of how we structure it and where we grow. But that is a more normal target corridor, yes. But we should probably rediscuss that after year-end, where I'm happy to touch on that.

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Operator [99]

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That was today's last question. I pass back to Mr. Schickling.

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Michael Schickling, SAF-Holland S.A. - Director of IR & Corporate Communications [100]

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So thank you very much for participating. If you have any further questions, please do not hesitate to contact Investor Relations. Thank you, and have a good day. Bye-bye.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [101]

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Thank you, everyone.

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Alexander Geis, SAF-Holland S.A. - CEO, Chief Procurement Officer, President of EMEA & Chairman of Management Board [102]

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Thank you.