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Edited Transcript of SFQ.DE earnings conference call or presentation 7-Nov-19 10:59am GMT

Q3 2019 Saf Holland SA Earnings Call

Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Saf Holland SA earnings conference call or presentation Thursday, November 7, 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 & Chairman of Management Board

* Matthias Heiden

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

* Michael Schickling

SAF-Holland S.A. - Head of IR and Corporate Communications

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Conference Call Participants

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* Alexander Wahl

MainFirst Bank AG, Research Division - Analyst

* Christian Ludwig

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

* Franz Schall

Warburg Research GmbH - Analyst

* 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 Q3 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. - Head of IR and Corporate Communications [2]

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Good morning, and welcome to the Q3 2019 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 questions.

Today's conference call is limited to 1 hour because we have 6 companies today from the automotive and capital goods sector, which have published their 9-month figure today. (Operator Instructions)

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

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [3]

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Yes. Ladies and gentlemen, a very warm welcome to our today's Q3 call. This is Alexander Geis speaking, and I want to jump right away into our presentation on Page 3, please.

On this page, you find the summary of our first 9 months in 2019, starting with bullet point #1. So we are confirming that sales and adjusted EBIT margin development is in line with our revised outlook. Secondly, Americas region, we can tell that the earnings development stabilizes due to major efforts being put in, in the program FORWARD. Thirdly, the China region. The reorganization is progressing according to plan, and you will get some more details later on. Fourth point, we have a continued high investment level, which supports our future growth and our operational excellence on a global basis. Our operating free cash flow, here, we can say that we resulted in a significant turnaround, which is then in positive territories, and Matthias will present details also here later on.

Our acquisitions of the years 2016 to 2019 helped to gain market share, especially in India and also Brazil. And last but not least, most importantly also for us, the management team is complete. Kent Jones, our President Americas, started in September of this year. And also, Christoph Günter, our President for the EMEA region, started in October.

Having summarized this, I would like to go to Page 5, please, and talk about the market development in the first 9 months of 2019. Starting on the left side, you can see Western and Eastern Europe. Truck, as mentioned to be, increased 3%, whereas it's a major drop in the trailer business in the ballpark of 15% to minus 20%. We can report here that our organic decline in the EMEA region in the trailer segment was only 4.9% in the first 9 months. That means we heavily gained market share here, which is then also good for our market -- for our aftermarket to come in future years.

Middle section, talking about North America. Here, you can see all-time high in truck, plus 14%, and a plus 6% in trailer. We, in both segments, outperformed the markets, mainly in the trailer market with our disc axle systems, disc breaks in North America.

On the right side, you can see truck in China declined by 2%, and trailer, also massive decline with about 15% to 20%. This is also mainly to a huge drop due to the implementation of the U.S. tariffs of 25% in May 2019.

So please go to Page 6 here. To round that up, starting with South America, you can see recovering also in 2019, with truck 12% and the trailer segment 27%. Here, I can report that the company, KLL, we bought in 2016 got a huge increase in sales, specifically in the bus and truck suspension markets. And also, we now will be adding fifth wheels to be implemented and sold into the South American market, especially in Brazil, very soon.

India, on the right side, minus 60% in both truck and trailers because normally, the sale of a truck goes along with the trailer. That was the -- a huge step, as you can see, and this is the worst of all the markets we are in now. The only good thing is that we further gained market share despite the decline, and we have now roughly 50% market share when it comes to axles in India.

On Page 7, you can see the financials for the group. Starting with the group results on the left upper side, you can see gray column, 2018; yellow column, 2019. Despite the challenging markets, we have a slight sales increase by 2.8% to a little bit more than EUR 1 billion now. If you see that on the right side, I'll jump a little bit on the right side, if we take out the FX effects and also the acquisition effects, so the year-over-year sales development is with minus 3.3%, slightly lower than in 2018.

If we now see the different quarters, I would like to comment as follows. Q1 was a pretty good quarter. We got a flat Q2 and a challenging Q3 quarter in terms of sales. If we now speak about the adjusted EBIT, on the lower left side, you can see coming last year from EUR 71 million to now close to EUR 67 million. So the EBIT decreased here. Also here, to summarize the quarters, it was a pretty good quarter 1, a flat quarter 3 and also here, a challenging quarter 3 mainly due to missing volumes in core market in Europe but also a little bit in India, but also some impairments in China, where Matthias will give you a little bit more light on later on in detail.

One point to mention is if you draw your attention to Q3, the gray column, the EUR 27 million last year, that was tempered by EUR 4.5 million medical plan release in the United States. So to compare year-over-year, it should have been EUR 22.5 million to now EUR 17 million, still a decline, we know this.

If you go to Page #8, please. We start with the different regions. Here, starting with EMEA, you can see on the upper left side, last year, a little bit more than EUR 500 million in sales. Now a slight drop to EUR 492 million. And as I mentioned before, if you take FX and also acquisition effects out, we have a decline of close to 5% organically. Also here, the quarters are pretty much even, best one we had in Q1, a slight decline in Q2 and also in Q3 now.

More importantly is decline in adjusted EBIT in the EMEA region from last year's all-time high of EUR 57 million to now close to EUR 47 million. This is mainly due to a heavy increase in SG&A starting in 2018 into 2019. I have to report that we already took counter measures, and they are in place since Q2, Q3. Not only we did not do that in the EMEA regions, but also, we rolled it out now into all entities in all the regions.

If you go to Page 9, please. This is the region America. Also here, starting with sales, upper left corner, huge increase by 17.6%. If you also here take the FX out, we still increased a very good 11% organically year-over-year. So our truck share has grown slightly, but the biggest gains, we did in the trailer segment, which is now, again, the disc break axles with air ride or mechanical suspension systems. So we have the complete system approach also now in the United States or in North America.

On the adjusted EBIT level, we can report that we have a jump from 6.5% in '18, which was quite a challenging year for us, to now EUR 26 million or 6.3% in adjusted EBIT percentage. If you here draw your attention, please, on Q1 and Q2, you see that last year was very flat, even a little bit negative. So in the first quarter, we had 5.2% adjusted EBIT jumping to 8.1%. I have to say, out of those 2Q numbers, EUR 8 million were steel price effects, means passing on the 2018 increases to our customers. We did not have that at all anymore in Q3, but also in Q3, we are good to report 5.5% or close to EUR 8 million. So we are in the middle of our FORWARD program restructuring. We are not all the way done, but we are progressing here.

And I have to also say here, if you see the adjusted EBIT number of last year with a EUR 6.5 million in Q3, please take the medical plan release of EUR 4.5 million out, so compare the EUR 2.0 million last year to the EUR 7.8 million. I think this is a good cause we are on, and this is more to come in the future.

On Page 10, please. We can see the numbers for the APAC region that includes also India, an increase in the first 9 months from EUR 65 million to EUR 69 million. This is mainly due to the full year effect of York. Please remember, we purchased York, and they are onto our P&L from last year's April on, so we didn't have the numbers in the first quarter. That explains the huge chunk also in Q1. So in Q2, it was pretty much flat or already a little bit declining, and it's now a huge decline in Q3. And as explained, that's due to the massive decline in overall markets, truck and trailer, in India.

Adjusted EBIT declined from EUR 5.4 million to EUR 4.1 million also here mainly due to the volume losses in our main market, India. A good thing here is that we started to cut SG&A already in Q1 and Q2, and you can see that, the development in percentage numbers from Q2 with 4.3% to now Q3 with 6.2%. So these measures are now in place, and we reacted quickly on the development in India.

Last but not least, speaking about China on Page 11, please. I have to admit and we have to admit, this is, at the moment, our biggest problem child in the group. By far, you can see here, starting also with sales, an unbelievable drop of nearly 50% in sales. This is 100% lost export business due to the tariffs. We have a very, very good fleet pull approach in the United States, and all container chassis being sold by major driller billers in China are equipped with our axles manufactured in China due to the implementation. And you can see also the development between Q2 and Q3. There was a further drop in May. There was implementation, and now we're facing the challenges here. So basically, we have to increase our import, our inland orders here in China.

If you see the adjusted EBIT, last year, slightly positive to now close to minus EUR 10 million, specifically pushed in Q2 and also in Q3, nearly EUR 9 million negative. This is due to major impairments we had to do in Q3 and Q3 -- Q3. But Matthias will speak about that just in a second and give you much more details on that.

Before I hand over, I would like to share some insights into what we're already doing in China. So basically, in Q2 and in Q3, we already closed 3 warehouses, consolidated into the new greenfield. We also closed 2 offices, 1 plant, Xiamen being the last plant will be closed in the course of this month, latest next month. And also, 1 office is left in Beijing. We are closing that now. And all activities will be drawn into our greenfield operation in Yangzhou, where we can announce that the soft opening of production is being done next week, so in the course of November, then we ramp up production here.

Hope this gave you a little bit more insight into the different regions. As I said, details to the China situation are coming now from 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 welcome also from my side. As Alex pointed out on his first page in the executive summary, our China reorganization is progressing according to plan. And as we go through the motions in executing the elements that Alex just described, we also discover more and more the need for impairments. I will quantify more and more in just a second for the benefit of the audience. But you see on this slide, which we included for the sake of full disclosure and transparency to the financial community, that we did record the second set of impairments during the third quarter because we have uncovered the things that the accountants need to record such impairments.

You see the list of impairments, beginning with inventory write-downs coming to accounts receivable and also covering a loss on the disposal of one specific fixed asset, which was a machine that we had planned to move into the greenfield as we had thought we could still use that piece of machine for a certain process step. We decided against that and will rather invest into new machinery, but that explains the write-off of around EUR 800,000 that you see in the column for the third quarter. If you add up those 3 numbers on the write-down/impairment side, you come to EUR 3.4 million. If you add an operational loss of EUR 1.4 million for the third quarter, that gives you the adjusted EBIT of EUR 4.8 million that you see there. I think this is a good data point for you because we did the same putting the second quarter into perspective, where the EUR 4.1 million loss were made up of EUR 1 million on the operational side and EUR 3.1 million on the impairment side.

From today's perspective, overall, we feel we will close the year with around minus EUR 13 million at the adjusted EBIT level, so we cannot exclude a smaller round of impairments towards year-end. And we will certainly continue to see an operational loss as we continue to execute the consolidation of the footprint but coming to a next great milestone next week, where we will see the soft opening of the new plant in China.

The last element worth spending some time on, on this slide is the goodwill impairment that we had to record. You see it in the third line from the top in the third quarter column, EUR 6.7 million rounded up. You see in the footnote the explanation that the goodwill impairment results from historic goodwill allocated to the China region in the course of the separation of the APAC/China region, which we executed at the beginning of the year, when we started to report China as a segment in its own right, and then we had to do a technical split of the entire goodwill that was originally allocated to the former APAC/China region jointly. If I may draw your attention to the more technical IFRS-based explanation in the quarterly report, there, you'll find additional information as to the technique that was applied.

Moving on to the next slide and, thus, an overview across the P&L. You see that China, and this is why I asked the team to re-include this here, has another major impact for the company that is the second line from the bottom. It is the performance on the tax side because the tax rate has shot up year-over-year from 25.9% for the first 9 months of '18 to 42.7% for the first 9 months of '19. This is mainly due to the fact that given that we do reconstruct China and restarted, that we have many unrecognized deferred tax assets on loss carryforwards from foreign companies, especially China, of course, which are not available to be offset in the future, which explains this jump.

In anticipation of the question from the audience, towards year-end, we currently feel that the tax rate will land between 43% and 45% given what I just described around the fourth quarter expectations for China. In having said that, please allow me to express the caveat that an estimation of these rates is always very difficult, but I think 43% to 45% is an adequate ballpark number. As for the financial results, you see an improvement. This is due to lower average financial debt due to the bond repayment that we have made, which obviously creates an overall positive impact.

If we now turn the page and come to investments and depreciation. Here, it is important to start with the comment that our investments continued at a high level, concentrating on optimizing processes and procedures, i.e., preparing the future. You see this expressed in the CapEx ratio of 3.7% of sales compared to 2.6% of sales in the previous year. Major regions for investment were China, the Americas and EMEA, EMEA being the German plant plus a new headquarter building to create a new working environment for our people, for the team here in Germany. And then, obviously, expansion and automation investments in Germany itself. The same on the shop floor side applies to the Americas, with a focus on the United States. And China, of course, is the greenfield.

Important to state in this context as well is the second bullet point from the top on the right-hand side in the text box, the fact that operating cash flow does cover this investment level at this point, which is encouraging to see. Obviously, the turnaround into positive territory on the cash flow side has enabled us to do this.

On the depreciation side, allow me one additional comment as to why the depreciation side has moved from EUR 21.4 million to EUR 39.6 million there, and this is due to the fact, you see it in the last bullet point on the right-hand side, to the IFRS 16 impact, number one; and number two, the goodwill impairment, which explains quite a bit of the movement already.

Turning the page and approaching the cash flow side of the house. You know that we always start this with net working capital. Here, I think the most important data point is that overall, inventories were 5.6% below previous year's levels despite the sales increase that we saw of 2.8%. Trade receivables were down considerably on improved cash collection. We didn't neglect our suppliers and paid the trade payables that were due, took home some early payment discounts along the way for this to balance this out and, overall, have a decreasing net working capital ratio year-over-year. You know that in the fourth quarter, this ratio normally comes down considerably, and that should then also take this number into the target range.

Turning the page one more time into operating free cash flow. Here, I would like to comment as follows. At EUR 44.7 million, cash flow from operating activities in the first 9 months of the year was significantly above the minus EUR 33 million level for the first month of -- for the first 9 months of 2018. The improvement, as just lined out, is mainly attributable to a lower change in net working capital despite the continued growth in sales, plus a much better cash collection on top of that. Investing cash flow for property, plant and equipment and the intangibles amounted to EUR 36.9 million as shown, which was the EUR 11.6 million above 2018. As a result of the 2 operating, our free cash flow improved substantially year-to-date. If you sum up the 3 gray columns for 2019, we are at plus EUR 7.8 million compared to the minus EUR 58.3 million in the first 9 months of 2018.

Needless to say, as you know, this year, I would rather deliver the positive numbers than to guide more concretely. But needless to say that we intend to close the full year 2019 above the 0, which is the sum of the 4 columns for 2018, and continue the positive trajectory towards the year-end.

On the next page, I have re-included 2 pieces of information because after our last release, we had, understandably so, a number of questions around balance sheet structure and the leverage level of the company. So I'm happy to spend a moment on these 2 topics as well.

Equity ratio remains well above the 30%. It has come down a little bit, now standing at 33.3%. That was the right-hand side of the slide. On the left-hand side, we're offering a visualization of net debt, which we perceive to be the most accepted way of calculating net debt. And you see the definition below the graphics. You see the numbers. But in doing so, I'm quick to add one data point around this because, as you can see in the headline on the left-hand side, we have included, for the sake of full transparency, the IFRS 16 impact on the debt side of the house. If, however, we take out the EUR 33.3 million, which is the IFRS 16 impact on debt, and you do the number crunching, which I can also do for you here and now, the number of EUR 2.6 million comes down to EUR 2.32 million. Why am I mentioning this in such level of detail? This is because in our credit agreements, we have frozen GAAP so that the IFRS 16 impact is not taken into account. And given this as well as the return to positive territory on the cash flow side, we're very confident at this point in time given what we know today with regard to how we manage our financial covenants.

The final comment that I would like to make before passing it back to Alex is that we're working on our 2020 debt maturities. The plan is to tap into the debt market to refinance the maturities and use such a transaction or a number of transactions to also even out our debt maturity profile, which currently still has somewhat unusual peaks. That needs a little bit of correction for the benefit of the company to make it a lot easier and smoother, for lack of a better expression, to serve the debt. Currently, our deliberations do not involve an equity component. We will certainly keep you posted on the progress made should any of these assumptions change.

And with that said, I would like to hand it back to Alex, who will talk a little bit more about 2019, 2020. Although it's not guidance time, but we would like to give you an update on the solid foundations that we're setting for the next phase.

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [5]

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Thank you, Matthias. If you please go to Page 18, you see our next steps, so basically, what we are doing next. Starting with China, as I said before, we have a complete new restart in China in our new headquarter, which is in Yangzhou. So we are going to provide competitive products for the domestic Chinese market. As you might recall, disc brake was introduced beginning of the year. There's another step coming in 2020, beginning of 2020. That's the introduction of air ride necessary for all dangerous goods trailers. We are going to win some new orders in the domestic Chinese market, and here, I can report that we could win, a really good sales expert leading our sales team. He's of Chinese origin and well-known in the industry and started already in November. Then we are going to expand strategic customer relationships where I am personally involved. And also, as Matthias mentioned, we are reducing the operating losses in China. So basically, as I said before, January 1 on, we only will have 1 location in China left. All the people will be sitting there, and from there, we do our sales and lead our operations.

Secondly, accelerate the efforts regarding program FORWARD, which is in North American plants, with focus on operational excellence to further drive the results in North America. Thirdly, improve our SG&A ratio worldwide. As I said before, also here, we already have launched massive programs to get prepared not only for the last quarter but also for 2020. And the refocus and the drive of aftermarket expansion in the core markets, both Europe and North America. Please recall that 25% -- or roughly 25% of our sales, global sales, group sales come from the aftermarket, whereas the biggest portion of EBIT comes from the aftermarket. And as Matthias just explained, enhance the free cash flow generation. We are further pushing this and also further securing a solid financial profile.

Having summarized that for the end of 2019 and also 2020, please draw your attention on Page 20. This is the outlook for the year 2019 plus 2020 in total, starting also here on the left side, Western and Eastern Europe. You can see the prediction do not change for the remainder of the year, specifically in the trailer business segment, a decline by minus 15% and 20%. In 2020, you see a flat year with a plus 1% in truck and a 0% growth in trailer. North America, middle section, after 2 record years, they also reported to have a decline, a massive decline in the truck business by 31%. This also will be challenging for us. The bigger portion of the business, we have in the trailer segment, which is reported to go down by roughly 18%. So our target is to countermeasure that and grow further. And also here, the increase -- massive increase of population in disc brake axles and suspensions will help to counterbalance that. China, on the right side, will remain challenging. Truck is reported to be a negative 13%, and trailer will be flat.

On the next page, which is Page 21, you can see the complete picture on the left side with South America. Also here, after 2 years in a row with increasing markets, also truck is reported to increase another 15%, where we have our biggest shares with the company KLL in both truck and also bus expansions. And also in trailer, it will be a flat year but still on a very high level. Last but not least, India will remain challenging for us after a huge drop in 2019. There is expected a further slight drop by 10% in truck and 12% in trailer.

On the next page, you find the summary of numbers for 2019. And I would like to ask you, please, to draw your attention to the middle section, which is the fiscal year 2019 outlook, the revised one. So we can confirm that the sales is being expected to be around flat to up to minus 3%. The adjusted EBIT margin, we can confirm it will be in the ballpark of 6.0 to up to 6.5 percent points; net working capital ratio, somewhere around 13% to 14%; and also our CapEx, with a little bit reduced CapEx of roughly in the ballpark of EUR 58 million to EUR 63 million.

On the last page, which is Page 23, we would like also to summarize our business model a little bit and confirm also what we are doing. Starting on the upper left side, I have to reconfirm this, that we are working and continuing to have our high aftermarket share. 25% of our global sales is coming from the aftermarket with good margins here. And also due to the population increases, both core markets, Europe and North America, in 2017, '18 and also '19, a further growth in the aftermarket is to be expected. #1 network in Europe and North America, we have more than 10,000 service stations and points of sale for our spare parts, and they, of course, help us to further grow here.

Secondly, on the upper right side, global footprint and local content. SAF-HOLLAND is one of the very few with a truly global footprint in all products we are selling. We have very strong core brands, namely SAF and HOLLAND, SAF mainly in Europe and HOLLAND in North America. And this is completed by strong region brands namely York, KLL for South America and also Orlandi for Europe, with international potential. As I said before, we have different brands for specific customer needs and different markets, and we have everywhere local application engineering to drive the sales in all the regions.

On the lower left side, good to mention is that we have a diversified customer base, saying here a large footprint into OEs and fleets of different sizes. Of course, we have big OEs. But since the last 2 or 3 years, we also heavily invested our business into the medium and specifically into the smaller customers to get a better and higher return on our product mix.

On the right lower side, you see new revenue sources. I think it's time to mention that with the purchase and the implementation of our digital trailer management, we have new sources of revenue with monthly subscription fees to help our -- not only our sales but specifically, our EBIT line.

Last bullet point, we would like to mention that we are further driving the lightweight aspect of our products. And here, I can report that we have disparate excellence, the absolutely #1 on a global basis and also the lightest. This is why our global customers like us, and we are further driving this.

Having said that, I think we are at the end of our presentation. I would like to thank you for listening to us, and I would like to give back to Mr. Schickling. Thank you.

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Michael Schickling, SAF-Holland S.A. - Head of IR and Corporate Communications [6]

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So thank you very much. We are now open to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Philippe Lorrain of Berenberg.

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

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I'm going to start with a question on the net debt to EBITDA. And thanks, Matthias, for precising that your credit agreement is based on frozen GAAP. I was just wondering whether, in this environment, you would consider, perhaps, at some point, to cut the dividend just in order to make sure that there won't be any problem on the covenant side.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [3]

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Yes, thanks for the question, Philippe. (foreign language) Of course, today, I cannot fully answer the question and you wouldn't expect me to because there's a very formal process around how you arrive at a dividend proposal. But to give you some color, let me phrase it like that. Given the current situation of the company and the market environment, both Alex and I will carefully rediscuss the company's approach to the dividends for this year and the overall dividend policy in due course. So that discussion still needs to take place. Bear with us on that. Today, it's too early to conclude on that. But what I would like to express is that we have given this topic some thought already, and we'll have a profound discussion with our Board of Directors around this.

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Operator [4]

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The next question is from Christian Ludwig of Bankhaus Lampe.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [5]

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I've got a question on the restructuring measures. Could you give us an indication of what kind of cash out these restructuring measures you have now put underway are going to cost this year and next year and what kind of positive effect you expect, the kind of size? In your outlook, you're looking at a European truck market which you believe is going to be flat next year. I mean other peers in that area are talking about minus 10% to minus 20%. So potentially, 2020 could be much worse than you are currently predicting, so there might be more to come. What's your view on that?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [6]

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So maybe Alex can start with the markets. I will then -- if he's okay with that, that is. I will then address the restructuring question.

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [7]

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Okay. Let me jump in into the question about the EMEA region, specifically the truck development. While sometimes it's good, sometimes it's bad to be the market leader, we are the #1 in truck fifth wheels in Europe, but if you see that in the context of the complete EMEA group sales, it's a minor contribution to this. So basically, if you see the share, the biggest share we have is in trailer and in trailer axles and suspensions, followed by the aftermarket and then lastly, by the truck sales we are doing or fifth wheel sales we are doing in Europe.

So basically, we gained a little bit market share in this year due to the increase of output in fifth wheels. Even if the market would be dropping -- and the numbers we got is our internal intelligence as well as coming from outside the markets. Even if the markets would be dropping a little bit further, we could, I think, counterbalance that. Please keep in mind we have now 2 models or 2 brands, not only the former Georg Fischer, which is now the SAF-HOLLAND fifth wheel for Europe, but also with the purchase of Orlandi in Italy, we have a second source for more price-competitive markets, where we are now in. I hope that answers your question.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [8]

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So if I may, I would move on to the restructuring question. And Christian, I will offer you the bridge in just a moment, but let me start by saying that the impairments, except for the goodwill in China, but the China impairments on inventory, accounts receivable, fixed asset -- loss on fixed asset disposal have all been booked in the operational result. They have not been adjusted for, for the reason that they don't need the adjustment criteria that we have set ourselves for the alternative performance measure there. But with that said, let me offer you the bridge from reported EBIT, which stood roundabout at EUR 39 million, to the adjusted EBIT of around EUR 67 million, which we showed on Page 7 of the presentation.

So the breakdown of this, and I will come to your cash-related question at the end of this, the breakdown of this is that you have a PPA correction of EUR 7.3 million. You have the goodwill impairment, which is the one that we corrected of EUR 6.7 million. And then you have a restructuring element and -- restructuring elements and transaction costs of around EUR 14 million. And if we take those EUR 14 million because they are the ones that have relevance on the cash side, they are split up into the Americas of roundabout EUR 6 million, Europe has about EUR 3 million, and China has about EUR 7 million. And then the math, obviously, doesn't add up, but there is a positive impact that we corrected from the APAC region because we need to be consistent there. So a gain from PMI activities, when we put together, when we merge entities or close warehouses that we don't show to our benefit, we also adjust that. Having said that, the majority of the EUR 14 million will lead to cash out because this is consultants' -- this is severance payments, both for management as well as staff.

I hope that suffices as an answer in terms of the breakdown to have offered the bridge and some additional insight into the composition of the restructuring.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [9]

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What I was trying to actually get, what additional should we expect for Q4 and potentially also for 2020.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [10]

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For Q4, this is a little difficult to guide at this point, Christian, and I would refrain from guiding 2020 in a quantitative way. Anyway, the reason I am a bit cautious on Q4 is that we have set many things in motion but, for the moment, are very focused on the execution of this. So the management discussion is more around executing the plan, in particular, in China and going through the motions of program FORWARD in North America. But the restructuring per se from these elements in Q4 will probably be a little smaller in nature, which leads me to a view into 2020.

As Alex indicated, the journey is not over yet. Program FORWARD is a multiyear program, which is why we call it a program and not a project. And also, China, we'll see some restructuring in early 2020, which is only due to the fact that we might not have executed 100% all of the motions that we're going through, which is the closing of the various locations plus the fact that even if you close a location in China with regards to staff and you consolidate, you still have expenses as you try to liquidate legal entities.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [11]

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But as of today, you would only -- from your current programs, only a small amount for 2020, nothing more is planned?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [12]

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Allow me to say without wanting to avoid the answer, a smaller amount than in 2019. I'm happy to take up that question again as we come closer to year-end or as we meet again in early 2020 because it is a little difficult to quantify. And the basic reason for that is both Alex and I but also Kent Jones are working on what we are prioritizing in 2020 under program FORWARD. And depending on the decisions that we make, that has different implications on my answer. So I'm not trying to avoid the answer, but it is too early to give it.

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Operator [13]

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The next question is from Yasmin Steilen of Commerzbank.

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Yasmin Steilen, Commerzbank AG, Research Division - Equity Analyst [14]

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So following the sharp deterioration of the Indian market and assuming that your European market forecast might prove too optimistic given the indications we also get from the OEMs from the other side, so how should we think about the goodwill and intangibles on your balance sheet, particularly from the Orlandi and the York acquisition? So I think combined, we have around, the equipment and intangibles, in the ballpark of EUR 26 million of your total assets. So maybe you can give us an indication on what is related to the 2 acquisitions and what you, in general, think about it.

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [15]

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Sure. Yasmin, thank you for the question. I knew this would come up. Let me try to keep my answer short. I am not concerned about a goodwill impairment on Orlandi at all. The company is developing very well and positively makes a very nice EBIT margin contribution to our bottom line. So that has a tick mark in my books, if you don't mind me saying so.

On the York side of the house, which mainly is, although that is not quite correct under IFRS, but if we keep it simple, is the goodwill allocated to the APAC region given the volatility in the Indian market. And that is why you asked me the question. The headroom that we have has come down. There still is a little bit of headroom. I don't expect an impairment -- sorry, I was looking at some notes there, an impairment as of today. But the reason I cannot fully exclude it 100%, and this is not to leave you with any fantasy on impairment, but it wouldn't be prudent for a CFO, is the fact that you know that the impairment decisions are always based on multiyear planning calculations to compare fair values, et cetera. And that is something that we are literally in the process of doing. Alex and I have budget meetings with the presidents of all regions tomorrow and our budget meetings with the Board of Directors in early December. Once we have -- and the budget meetings include the midterm planning, which gives us a better idea.

But if you ask me whether I think I still have sufficient headroom and how I look at the situation of York at this point, I see us gaining market share in this declining market, which makes me think positive about the positioning of the company in principle and our acquisition. And at the same time, let's not forget that with York, we shouldn't only look at India itself, we should also look at the existing footprint in export business of the company into other parts of Asia or the Pacific region as well as Africa. So while your question is perfectly valid in terms of the shrinking headroom, I still have some headroom on the goodwill. We will follow this closely. I still have some confidence that we can avoid it, but I cannot fully exclude this as of today. I hope that's an acceptable answer.

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Operator [16]

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The next question is from Franz Schall of Warburg Research.

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Franz Schall, Warburg Research GmbH - Analyst [17]

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Regarding the profitability in the Americas, how much of add-on costs do you currently face there or still left? And in China, you've stated that with the beginning of next year, you benefit from the plant relocation, et cetera. Is there any guidance on the margin in China? What can we expect there as a run rate?

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Matthias Heiden, SAF-Holland S.A. - CFO & Member of Management Board [18]

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So I will leave Alex to ponder on your second part of the question on China, which I'm also happy to take in a moment. But let me start with the add-on operating costs, Franz, and thank you for the question, which, of course, is an element that we had included in our reporting with that graphical visualization for a while. So I'm also happy to provide that data point.

For the first 9 months, the add-on operating costs were down to EUR 1.5 million in total coming from EUR 8.2 million, so a very significant improvement on that front. On that slide, that is what we referred to in qualitative terms as the operational efficiency gains from program FORWARD, among a few other things. In Q3 stand-alone, the add-on operating costs were at EUR 0.5 million versus EUR 2 million expense in the third quarter of 2018.

The reason why we still have them, and you might recall that in various conversations, I have pointed out that this line will not completely go down to 0, is that to take it down to 0, we would need to see a significant cooling off of the business, number one, including the supply chain. But also, we would probably need to make some additional decisions and execute on the program FORWARD to fully eliminate that. We're looking at that, as I mentioned earlier, but that's where we stand as of today.

And now I'm looking at Alex. Are you taking China?

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [19]

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Yes, sure. Well, of course, we are not guiding numbers for 2020 at this point of time. But if you see all the losses we did face, especially in Q2 and also in Q3, coming from operational losses, double structures and massive impairments, the plan is absolutely not to repeat that in next year. And we have a good feeling that this will not be happening again. If I would now be saying that in 2020, we will be at 10% adjusted EBIT, that would be a total lie.

We still have some changes ahead of us. We started with the restructuring in Q2 already. As I mentioned before, we closed a lot of offices, warehouses and took already a lot of cost out. Impairments are there. We cannot change this. But the plan is absolutely to come into more quiet levels in China by 2020. Will be the first quarter a little bit challenging? Absolutely. But the longer the year goes, the quieter it will be for us. This is the plan.

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Franz Schall, Warburg Research GmbH - Analyst [20]

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But if I understand you correctly, your restructuring measures are done in.China.

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [21]

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Well, not yet because we still have a production site in Xiamen, which we will be closing in the course of November. So basically, we are shifting the operational things from Xiamen into the greenfield, but as Matthias said, you then also have to legally close an entity. This will go some more months. And the last office we still have is in Beijing. This will be also closed in the course of November. All the people will be then moved. Our people will be then centralized into the greenfield. But of course, after you did that, you still have to deregister, handing over to the landlords. This will still go into Q1 of next year. But the major restructuring items are underway and being done already now.

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Franz Schall, Warburg Research GmbH - Analyst [22]

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Okay. Completely understood. Because for us as analysts, it's very important because after 9 months, you basically adjusted some 40% of your adjusted EBIT. And for us, it's important to look through the numbers and -- but there's still to come in 2020.

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [23]

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Yes, absolutely understandable.

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Operator [24]

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(Operator Instructions) The next question is from Alexander Wahl of MainFirst.

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Alexander Wahl, MainFirst Bank AG, Research Division - Analyst [25]

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Sorry, I joined a little bit later. Apologies if the question was already asked. But when I look to China, you obviously worked quite significantly from the trade disputes and the slowdown in your export business. As a greater premium seems more likely and China and the U.S. are discussing to roll back on the tariffs, how quickly would you expect your export business to be recouped? And the second question is -- or related to that is, are the supply chains, specifically among your customers in the U.S., still in place so that you would actually expect to regain the business?

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [26]

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All right. I'll try to summarize that a little bit and giving you a little bit more details into our China business the last couple of years. We are one of the dominant players in the United States, and other container chassis are mainly coming or came from China the recent years. We were the preferred supplier to the biggest trailer manufacturers in China, manufacturing the trailers in China using our excellent manufacturers in China, then to be completely exported to the United States. This, with the introduction of the 25% tariffs, just fell apart. We don't see that anymore. Only really small numbers here.

We think in worst case, so we don't think that these tariffs will go away in the course of '19 or 2020, so basically, the plan is to increase the domestic market for us, looking for new customers, introducing disc brake axles and air ride -- or on air rides to get more orders from the domestic market. This is how we are counterbalancing that. But given the fact with the tariffs that we don't know how it's going to develop in the future, we see the worst case for us, and we also plan with the worst case. If the tariffs go away or will be dropped to 10%, that would be great, but we are not counting on this.

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Alexander Wahl, MainFirst Bank AG, Research Division - Analyst [27]

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Okay. But -- so you don't think that within the U.S., the supply chains have been completely reset so that you would not be able to recoup that business even if tariffs would be dropped completely?

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [28]

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Well, basically, what's happened if you have a Chinese manufacturer with a tariff of 25%, they are now priced even with the container chassis being made in the United States. Of course, we saw an increase of trailer manufacturing when it comes to this dedicated product group coming from U.S. trailer manufacturers. But I'm pretty sure that our Chinese trailer manufacturers are also thinking about different ways of dealing with that because if you see the big ones, they also have a massive share with export to the United States, and I'm pretty sure they don't want to lose this.

So we have some talks with trailer manufacturers, how we could counterbalance that. But the good thing for us is, even if U.S. trailer manufacturers would be getting a bigger piece of their pie in the future, we would be delivering them not from China to China trailer manufacturers but from our U.S. operations then to the U.S. trailer manufacturers. Hope that helps.

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Operator [29]

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There are currently no further questions in the queue.

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Michael Schickling, SAF-Holland S.A. - Head of IR and Corporate Communications [30]

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

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Alexander Geis, SAF-Holland S.A. - CEO & Chairman of Management Board [31]

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Thanks, everybody.

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

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Thank you. Bye-bye.