Earnings Call: Q2 2020

Aug 4, 2020

ladies and gentlemen, welcome to the Group H1 twenty twenty Results Conference Call of Schuster Group. A reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. At our reserved customers' request, this conference will be recorded and the replay will be available shortly after the call on the website. May I now hand you over to Renata Casaro, who will lead you to his conference. Please go ahead, madam. Thank you very much, operator. Dear analysts, dear investors, thank you very much, and good busy day for your time. Mr. Rosenberg, CEO of the Schaffer Group, together with Mr. Patak, our new CFO, will lead you through the second quarter twenty twenty results. Please take a second to consider our disclaimer because for sure our forward looking statements also include a number of factors and uncertainties, which are definitely beyond our control. Without further ado, I leave the floor to Mr. Rojassel. Guy, the floor is yours. Renata, thank you very much. Ladies and gentlemen, good morning to you, and welcome to our conference call for the second quarter. It's my pleasure to start by introducing Doctor. Klaus Patzak to you. You all heard the news that he joined Schaffler first of August, so he's on board now for one day. And we have clearly an opportunity now to introduce him to you. I hand over to you, Claus, for some words of introduction. Yeah. Thank you. I'm I'm happy to be here with on the on the phone with you. Some of you, I know, obviously, from my past, but I hope I will get in touch to as soon as possible. It's still for me of of obviously, one day too early to tell you something about the company. What I can do is that I briefly touch on what is important for me in general and what was important in my past career for me. And the first thing is that in the next couple of weeks, will try to understand and listen. There are three main topics I want to focus on in that respect. The first one is key responsibilities and accountability. Second one is sources and uses use of cash. And the third one is strengths and weaknesses of the portfolio. After having a grip on that one with regard to understanding these things, I typically focus on improving the performance culture together with my colleagues. And what I mean is performance culture that is clear targets, targets quick and decisive decision making, measurable results and then clear consequences. I also believe in productivity measures, which I can find in the P and L, And I'm a big believer in focusing a lot of internal discussions on forecast and forecast quality instead of just only looking back into the actuals. The third topic I which to my heart is resource and capital allocation. I believe that the big decisions here are important to bring the company forward. In general, I believe it makes a lot of sense to strengthen the strengths and the strengths are typically areas where the company has good technical competencies and what I call right to win. Then finally, that would be the fourth topic. I'm a believer in sharing the results, of course, with the owners. That's total shareholder return, which matters, but also to society and to the team, obviously. While I have joined Schaeffer that might be also something which is relevant, I think it's here four points. First one, I think it's, for me, a quite interesting combination of a stock listed company and a family owned business. Second is it's an interesting portfolio, specifically in these times where you have automotive together with industrial business. I think that can nicely pay off this balance. Third one is that I like to work for companies in transformational times because I believe this is opening opportunities for change, and I regard change as positive as a prerequisite for improvement. And fourth, obviously, I have talked to quite some people here, future colleagues and other major players within the companies and got to know them. And from my perspective, these are not only good individuals, competent individuals focusing also on quality work, but also a functional team there. And that is what I believe a good prerequisite for not only success but also fun working for this company. Mr. I give it back to you, Claus. Thank you, Claus. I trust that all of you will have a chance as soon as possible to meet Claus, and I'm really glad that he is now on board and that he will help us to steer the company forward. Now let me go to Page number five to give you the summary on the quarter. You have all seen the presentation upfront, and I will just put some color to it. Clearly, the quarter was exceptional in terms of the downturn we experienced as part of the corona pandemic. If you look at the top line, you saw that Automotive OEM was affected the most with minus 42%, Aftermarket slightly less, 31% and Industrial was minus 18% in the quarter. That led to minus 35% sales growth and a top line in the quarter of 2,300,000,000 If you judge that, I think we can say in the half year with 22% sales drop, that is in this environment a number that from our point of view shows that we have coped quite well with this crisis. I can also say upfront that we saw in the second quarter, month by month, an improvement in the top line. Month of April down minus 50% compared to previous year months. May '30 '9 percent, June now minus 13% and for July, we'll come back to this later on, there's even a further improvement. So we already noticed that the trough should be achieved and that we are moving in the right direction. EBIT margin in the quarter, minus 6.5% or €150,000,000 before special items. Also here, I would like to make one reference to the half year. If you look at the half year, it's still a positive number with €65,000,000 for the full group. That clearly shows that our measures have been successful in countering the negative impact from the volume driven downturn. It also shows one thing very clear. It's positive for us that we are not Automotive OEM only, but that we have the two other divisions. This has never become more clear than in the second quarter, both Automotive Aftermarket and Industrial with positive results in the second quarter in every month and clearly with an improving trend, I think is a clear achievement and shows that the diversification embedded in our business model pays off. Third bullet point, free cash flow. Also here, I think we can say we successfully managed our cash resources in a proactive manner. If you take the CHF $285,000,000 for the second quarter, that's clearly a negative free cash flow. But for the first half, if you add this together, you come to minus €148,000,000 and that is even better than the previous year. So it shows that we have, I think, managed quite well the drivers that are under our control, in particular CapEx, but also working capital. I would like to say already at this juncture that crisis is not over. We need to be cautious while we are carefully optimistic for the rest of the year. And therefore, it is important that our countermeasures stay in place and that we still remain focused on cost and capital management with a continued flexing of our cost base, a very strict working capital management when it comes to inventories and also strict CapEx prioritization. Number five, headcount is further down. We're clearly benefiting from the programs we have put in place. End of last year, you remember Jupiter that was increased 33,500 jobs less than at the end of last year, I think shows that the continuous improvement is continuing. And it's good to see that this is not only driven by Americas, but also by Europe. So we feel quite well in that respect. Does that mean that we are not going to put something additional into place? That's not the case. The fact that we are announcing nothing today in addition doesn't mean that we are not working and carefully considering structural additional measures, in particular as our countermeasures are more of a temporary nature. Then let me finish this first page by one key aspect regarding the business development. We already said this in the last quarter. It's in this troubled times important not only to manage the crisis, but also to look forward. And in doing so, we see significant opportunities for us both on the e mobility side, but also in the industrial space, think about the wind business or the rail business. And I'm proud to report here that it was that we gained success in a significant order intake in the second quarter for a premier OEM with a prestigious order for a three in-one e axle that really drives us forward and will help us to build the e mobility business going forward. As I said, ladies and gentlemen, we remain cautiously optimistic, but still cautious. And that's also one of the reasons why we decided not to give you and share with you any more precise guidance at this point in time. It's important to wait for July and August and understand how the third quarter will develop, and we will then reevaluate and decide whether we stay the course with this more qualitative guidance for the rest of the year or whether we come out with something that is more quantitative. But at this moment in time, it's, from our point of view, prudent to stay with our existing guidance. Quickly on Page six, I already mentioned some of these points, I will do them quickly. Substantial business improvement in June continuing in July, I think that's on the positive. China is clearly one of the driving forces in the beginning recovery. We saw for the first half a 3% plus top line compared to the previous year. What speaks for itself is driven in quarter both by Automotive, who had a very strong June, but also by the continuous growth in the wind business. The strict cost and capital discipline I mentioned, the liquidity situation is strong. We have abstained from any bigger refinancings. We think that with what we have with our available liquidity, we are very well prepared. Mr. Schreiber issued a little bit more of full time in Berlin. But with the situation we have today, we feel that we are in a very comfortable situation. I talked about the diversification. Let me go to the negative. It's obviously it was a difficult quarter. Sales, EBIT, FCA all affected. And clearly, the Automotive OEM division saw sales contraction during the lockdown period and has produced negative EBIT. Going back to the measures, as I said, the temporary measures are paying off. The uncertainty remains and it's obvious to us that we even more need to adapt our structures to market positions. There is room for improvement. As you know, we have adopted this policy of step by step. And as I said, we are as Claus has just joined, again, looking at what kind of structural options we will have. As soon as we are ready with this, we will share that with you. But at the moment, it's too early to give more details. Then please go to Page number eight, Automotive OEM. I think I already mentioned some of the key points. Solid outperformance in Q2, '2 '50 basis points. We all know that a quarter doesn't really determine outperformance. So if you take the first half with six forty basis points after a strong Q1, I think we are on the right track. It confirms that even in these troubled times, it's possible to outperform the market. And Matthias, who you all know, just confirmed in the morning that it looks like that both in China but also in The U. S, we sit at the moment at exactly the right platforms and that helps us to outgrow the market. The order intake I mentioned and also in particular, cost control is important. Without overdoing it, we need to stay the course when it comes to new business. And here, the successes in particular on the working capital, but also being more selective on CapEx, we'll come to this later on. I think all the other things I have already mentioned, the one number that you should also take from this page is the drop through rate. It's sequentially higher than in the first quarter. That's, I think, not a surprise to you. The 35% for Q2 is a number that we more or less expected, and it's now very important to make sure that in the next quarters, we further improve that number and stay the course with our cost flexing measures. Number nine is on the order intake. I think I said what I wanted to say one time 1.4x book to bill in this environment is, from my point of view, an achievement. Here are the two important products orders that we gained. The first one is this three in-one EXO system. It's an order intake of around €900,000,000 SOP in 2024, a premier player for us with a product that will clearly make a big difference and compete with the Tesla. For us, it's a prestigious order because we do for the first time an EXO incomplete. That means three in one from the mechanical to the e motor up to the power electronics. And then there is another one, a smaller order, but equally important, an eXO system with e motor and transmission, and with a high voltage hybrid solution. I think all of this shows that the colleagues and the teams around Jochen Schwerder have continued to perform. And our key USPs, in particular, the systems understanding the integration know how, all of this is much more rewarded by customers. So we really feel well that with the e mobility division, we are on track to also benefit from the growth trends that come in a post corona environment. Aftermarket, Page number 10, sales improved quite a bit in June, and it looks like that July is also continuing. Key drivers are the mobility rates and the mobility behavior. After lockdown, this is driving the business. With our reps that we are clearly seeing that there is a positive trend also driven by digitalization and digital offerings. The flexing of the overheads was strong here in this division when it comes to sales costs. Still, you all know that volumes were suffering and the predictability of this business clearly is something that needs to be further improved. Page 11 gives you some of the drivers. I think I can leave that for your reading. We have improved this a little bit. You also see for the first time an order book for the next thirty days that it's by nature of this shorter period a little bit volatile. What I can say is that the positive trend you see from the first chart continues in July, and we hope and we are carefully optimistic that, that will also help us to drive profitability in that division for the rest of the year. Number 12 is then Industrial. I said it and it's also circled here in red on Page number 12. Nine percent margin in this environment for the first half, I think, speaks for itself. Here we are benefiting from all the hard work from the past and clearly the exceptional growth in the sector cluster wins helped us quite a bit. If you look here at the overhead ratios year to date 2020, '19 point '6 percent, close to what we had year to date 2019, also tells you that the measures are successful and have clearly helped to stabilize the overall margin. However, it would be wrong to indicate that the Industrial division is not also negatively impacted by the overall environment, and we need to wait what the rest of the year will bring. The environment should not be interpreted in a way that the crisis is over, particularly on the industrial side, things will take a little longer to re go back to the pre crisis level. In terms of business development here, you know the order book chart, I just want to highlight three business development areas. On the one hand, we launched a new product, Scheffler Optime. It's a very interesting cost effective wireless condition monitoring solution that gets a lot of positive attention. We're active in the robotics space, and you all know that whale is one of our areas that are that is important to us and also something that we see positive as part of the post corona analysis. If you go to Page 14, a page that we shared now for the second time with you. It's a page with the utilization of our plants in the different regions. And you see here that starting with China, the recovery in China continued. We are back to 100% or expecting 100% also for the next week to come, and Industrial even above 100% compared to our budget. So that's really back on track. What is also visible from this chart is that Americas has seen a strong rebound starting in May. And what we see from call offs, in particular from our big automotive OEMs, is that that trend continues. The public impression that you get from the crisis management there may not be in sync with this, but the business development here indicates that Q3 will continue to normalize. And both divisions are running here more or less on stable capacity. In Europe, it's a little bit more mixed. We also see that in the summer break, people are using the holidays for some shutdown days. But also when you look at the three weeks here, it's definitely a positive trend. In the Asia Pacific, where the crisis is still developing, particularly in India, have a similar picture on holidays in Korea and more difficult situation in Vietnam and India, but also there in calendar week 33, everything going back to normal. So this page indicates again the crisis is not over. We need to manage carefully and with a strong focus on our resources, but there is a trend that continues in the right direction. Page 15 is the page that you recall. I don't want to go into too much detail here. This is the structure of our measures. And I think I mentioned most of the aspects already. For us, it's important that we stay the course here and continue with these tactical measures, while at the same time looking at further structural improvement opportunities. Page 16, I think, shows that we delivered what we promised. Chefla headcount is continuously coming down, 6,270 people below June 2019 or 3,500 since end of the year. That's something where we are now harvesting the fruits from the efforts in the last years. It goes together with all the other flexing measures that you know and that I'm not going to repeat on this page. Then capital allocation and CapEx, next page, Page 17. We are quite proud here that our measures have proven to be successful. You remember, in the first quarter report, we said it should be indicated should be around somewhere at EUR $650,000,000, euros a third down compared to the previous year, and that's definitely possible with €300,000,000 CapEx in H1. Our new capital allocation logic that we introduced last year, focusing more on the reinvestment rate, is paying off. And you clearly see when you go into detail that in those areas where we want to harvest, in particular, the traditional combustion engine driven businesses, reinvestment rates are much lower than industrial. Industrial is above one. And in these areas, it's even below 0.5. So I think we also here are on track without overdoing it because CapEx is, at the end of the day, the lifeblood of the business. But we can also for the rest of the year stay with these levels of CapEx ratio that you are seeing. Let me go to stop here and go now to Page number Chapter number three. This is normally the page that Dietmar has explained to you, page 19. And as Klaus is here only for one day, we thought it's appropriate that I quickly continue with some of the details. In future, it's self understood that he will present the financial details. Page 20, not much to add here. You see when you look at the chart of the right hand bottom side, sales per region, China in the second quarter plus 16%. I think that also explains the what I said before. And if you break this into pieces, it's not only wind, it's also a very strong development in automotive OEM in June and in May. So China is really back and it drives our top line. But also the other regions are improving, as I said, in particular also the region Americas. Gross profit earnings quality, Page 21, only one word here. You see that the part of the reduction comes from volume and to some extent from production cost. If you go to the little table, you also see how well aftermarket industrial cope with the reductions and there is clearly more work to be done on Automotive OEM. EBIT margin, Page 22, I already mentioned here. Let's look at the half year as well, and €65,000,000 in such an environment for the half year is, from my point of view, a remarkable achievement. I also want to point out here the hard work on overheads. If you compare the reduction year over year, it's €125,000,000 less. Clearly not possible to flex 100%, but the overhead ratio in this environment is below 20%, more towards 18.5%, and that's clearly the right direction also for the second half. '23 is a little bit more detail on Automotive sales division. You see here e mobility clearly also slightly impacted, but not as strong as the three others. That's a function of the buildup and situation. On the outperformance, I already said, let's not extrapolate a quarter. The 6% for the half year outperformance is the right number to look at, and we hope that going forward, we will stay within the 3% to 4% range. Aftermarket, spectacular here. The most important thing is that Michael clearly indicated that the business is picking up in a more sustainable manner, and you've done quite a bit. You see it from the selling expenses to manage its overhead cost proactively. In Industrial, you see it on the Page number 25. We have this polarized sales development. Clearly, wind is helping us quite a bit with a again, more than 30% growth rate in Q2. The other industrial sectors are still suffering, two wheelers the most sector over sector and quarter over quarter, we see improvements. And one of the key important things to watch out will be the development of the Industrial Distribution that is definitely picking up. And also, Stefan has done a great job here with optimizing his overhead cost base. '26 is more for reporting purposes. We wanted to share with you once again the reconciliation of the EBIT before special items and the net income, you know that we already impaired some of our goodwill in Automotive OEM in the first quarter. And so far, I don't see any more goodwill impairment needs. Headroom has improved a little bit. However, we are in planning a cycle now and we'll certainly revisit that as we follow how the crisis continues. Net income, negative for sure. I just mentioned the extraordinary ones. And that also means that EPS is at the moment negative with quarter of a euro in the second quarter. We now need to see how that continues to develop. But clearly, the net income is something that will improve in the second half as well. Free cash flow. Again, said we have decided not to guide differently than what we did in the previous guidance. So there is no quantitative guidance. However, let me share with you at with this Page 28 that we will do what is necessary to achieve a free cash flow before M and A in positive territory. You all know that we are not only experienced with this, but also quite ambitious. And here, the key drivers, CapEx, working capital, but also EBIT and EBITDA have been mentioned. Just want to quickly guide you to the free cash flow conversion ratio that is calculated on a last twelve month basis. Here, we are at the moment, we're at 34%, what is clearly a strong figure, stronger than in the past. And I do believe that we will be able to compensate for the negative free cash flow in the second half, so that a positive number is possible. Certainly not as positive as last year, 700,000,000 in the second half twenty nineteen will not be possible, But can be rest assured that this is one of the key numbers that I look at very carefully. Let's go to '29. That gives you a little bit more insight and was also one of the comments we received before the call, net working capital and different drivers here, inventory, receivables, payables. You recall from the last Q1 call that we indicated it will be very important to manage the key drivers of net working capital proactively, in particular receivables, payables on the one hand, but also inventories. We chose in Q2 to try to build a little bit of inventory. That's also why the number is with minus 1%, more or less modest, to be able now when the third quarter, the crisis and the recovery starts, to be able to compensate the receivable growth, and that will now be very important to manage the third quarter in terms of cash flow. I do believe if we want to achieve the target that I mentioned before, that the interplay between the third and the fourth quarter will be important. I personally see a stronger fourth quarter in terms of cash flow. One thing is clear for us, we're not going to mortgage the future, and we will also avoid, like we did last year, a hockey stick on CapEx or on working capital. So managing the three main drivers of the net working capital is probably one of the most important tasks. And I can say that our plants have performed exceptionally well when it now came to inventory reduction. Inventory reduction is continuing in July, and it has to do with the fact that we try to pull several levers at the same time. For example, smaller lot sizes be very close to the customers' demands and understand what's coming in. And so far, that sounds very encouraging. Now 30 is just additional information in terms of the quarter's development. I think I can cut that short. 31 gives you the balance sheet view on net debt and the leverage ratio. We believe that with 1.8x that we can show that the net financial debt situation is absolutely under control. As I said, we have refrained from any bigger refinancing transactions and feel that with our available liquidity of nearly 20% of last twelve months' net sales, we are in good shape. How will this number develop? It will probably slightly increase, but this is all a function of free cash flow and also EBITDA development. Let me stop here with the financial information and go to the outlook. The outlook goes a little bit more in the strategy and what we did in the last couple of weeks in terms of how should we go forward. We have, as you all know, a strategy dialogue event behind us, and we use the opportunity to stress test our existing strategy and ask ourselves what will change after the crisis and how will it look like post crisis. And I can say we see the crisis also as an opportunity because in this business mix with auto and industrial, there are certain areas that will give us further opportunity. Clearly, faster shifts to EV, cleaner ICE, individual mobility is one of the areas that will drive growth opportunities. The increasing investment in rail and public infrastructure is something positive for us. And we also think that sustained investment into renewable energy wins, but also opportunities in the hydrogen area will be good for Schaffler. We are very well equipped to participate in these sustainable solutions and the new growth areas. And we think the government programs that have been established are a proof point that if we can offer the right new technologies in these fields, then we will be one of the winners from a restart of the European and global economy. And that goes hand in hand with Page 34. Sustainability is very close to our hearts. It has increased in its strategic relevance. And you all know that we have implemented here a strong sustainability roadmap going forward, linked our targets to sustainability targets. Top management is compensated by achieving ratings and energy efficiency measures. There's a much more systematic approach to understand and analyze the stakeholder requirements. And we are and we want to be a good corporate citizen when it comes to all these developments around the globe that are covered under the abbreviation of ESG. And I really welcome the statement of Klaus, how important that is also from a company valuation point of view. Let me finish my presentation on Page thirty four thirty five and sum it all up. Despite this severe corona impact, we think the second quarter clearly showed that we can manage a business like ours in a crisis. The trend is improving. However, we need to stay tuned and careful on how to manage going forward. We have clearly pushed as a management team for looking at the opportunities in all divisions, business development despite the environment was positive, exemplified by the order intake in e mobility, but also in industrial. We are proud on what we can offer. Total flexing remains a clear necessity, and I said what I wanted to say in terms of additional structural measures. Coronavirus related uncertainty remains high. The crisis is not over, but we think we can manage it going forward if we continue to activate all our levers that are under our control. And on top of this, we think every crisis has also opportunities. And with what we're seeing, what's changing, our strategy is intact and will give us additional opportunity in increasing our growth potential, in particular, in Automotive but also in Industrial. With this, I come to an end, and I'll just share with you the Page number 36. We will have two digital roadshow days on Thursday and Friday and are envisaging a capital market update for you on in calendar week 48 after our nine months earnings release. With this, I hand back to Renata, and I'm looking forward to your questions. Thank you very much, Claus. Dear operator, we now are ready to go to the Q and A session. Thank you. Ladies and gentlemen, we will now begin our question and answer session. And And the first question we received is from Akshay Kaka of JPMorgan. Three from my side, please, and welcome, Doctor. Claus as well. The first one on Slide six, where you mentioned that you have to adapt to the new market environment and obviously look at your cost structure and do more. Claus, can you please share some more light in terms of what exactly are you looking at? That's that's the first one. And the second question is on Slide 23 of the presentation, the auto OEM bridge. To be honest, the drop through did come as a surprise, especially on gross profit because we are looking at a 50% drop through on volumes. Is it broadly possible to give us a split between volume, price and mix? Because I'm assuming that mix was positive in the quarter. That's the second question. And the third one is on Slide 14, where you kindly give us the utilization level of plants. Is it possible to shed some more light on auto OEM in Europe in July? How was that looking, please? Thank you. Okay. Let me start with the first one. And again, please accept that we have not finalized our analysis and are not ready to share any details. But when we talk about structural measures, you clearly need to look at the global footprint. You need to look at the volume expectation for the next years, in particular, OEM. And we also want to look one more time on where we can improve, if possible, on more structural measures in the overhead area. But that's what I can say at the moment. So please understand it's too early to share any further details. You know that we have always said if we need to do more, we will do more, but that's it for the time being. On Page 23, Automotive, you ask for the more detail. I can say it is predominantly volume. There's no real mix change quarter over quarter. And also price is not really relevant. So it's it's all driven by volume. That also makes it, you know, so so difficult to react forcefully. And please don't look at this only by quarter. Wait for the nine months and you will see that we will fight hard to bring the flexing forward and continue and optimize the drop through rates. In terms of 14, you asked for the European developments in the plan. And here, again, the capacity utilization level should not be taken only from a one week perspective. We are going into holiday seasons. And clearly, in some areas, there were partners that decided to optimize their utilization by partial shutdowns. That improves now. But the fact that it's red, it's just a coloring. I think you need to look at the trend going forward. And we feel that with all of what the global footprint can offer here, and don't forget Europe utilization is not only European business, it's to some extent also driven by other demands from around the globe. It's a complicated global footprint allocation. I feel quite good that we will step by step see all the plans go back to green. Thank you so much. And the next question received is from Henning Cosman of HSBC. Your line is now open sir. Please go ahead. Hi, good morning. Thank you for taking my question. I don't know if Matthias and Stefan are on the call, but otherwise, maybe, Klaus, for yourself, one for automotive and one for industrial. So in automotive, I appreciate you told us about the Capital Market Day now, but in any case, maybe this great order intake there for the 3PEX axle is a good opportunity to discuss a little bit. And not to make this about volume so much, but what you want to be and what you want to do in the midterm in the automotive OEM segment, especially also seeing that you do the power electronics now. So maybe you can discuss a little bit where you see this going. Also really interesting to hear you talk about the reinvestment rate. So maybe we can elaborate on this a little bit more. And then for Industrial, again, on the Slide 14, which I also really appreciate, I see that Europe and APAC and Industrial are back in the green now for the utilization rates. So I'm just wondering if that's representative and a good sort of exit rate for H1, entry rate into H2 or if there are any reasons to expect this utilization to drop again? And if it doesn't, if there's any reason to expect the margin to be much lower in H2 as compared to H1? Okay. Let me go to the first one. Again, we indicated that it will be a Capital Market update. Matthias and Stefan are actually on holiday, so they're not on the call. I'm happy to take your suggestion, Renata, for November and shed some more light on what's going on in Automotive OEM. The crisis has clearly two angles. On the one hand, the volume downturns. On the other hand, the turnarounds and the transformation go hand in hand. And the transformation is not over. It's in certain areas e mobility incentive, then it's obvious to us that this will drive us forward. And you have, for many quarters, always asked the question, can you perform even if you don't produce your own power electronics or own software? And and is it possible to compete with others in this area? And and exactly this mandate or this order that we achieved is a good proof for this. And I think also Jochen will go on the road with you, Renata, in the next weeks and then share a little bit more what's going on there. Our e mobility achievements are, from my point of view, really success. And how this unfolds over the next years is then a question that we can discuss at the next Capital Market update. But we feel that while we started late, we are now really where we should be in terms of competence and also our USPs compared to others. In Industrial, again, these are weekly indications. They are not meant to be directly translated into margin profile. I can say the order intake in the industrial side is definitely stabilizing. Don't get this wrong, the industrial side is also impacted by the crisis. You see it from the various sectors. There are improving trends, particular in Europe, but a week doesn't explain the second half. So as I said, let's remain cautious and let's keep the organization focused on the necessary countermeasures. At least internally, I don't want to see a situation where the crisis is called off and everyone goes back to normal. That's not the case. We need to be still very focused on cost and capital, and that works quite well. The key target is, as I said, a strong cash flow contribution in the second half. And if we achieve that, I think we'll see what the you will see what the third quarter will then bring and that's then time to judge also the Industrial margin development. But there are no specific plant holidays or such intended in industrial in the outer weeks that would push this utilization below 80% again? Well, again, let we are managing this more or less month by once, week by week. As I said, the crisis environment is not over. We are at the moment looking very, very carefully what's coming back after holidays. And again, therefore, I'm not going to say no, there is nothing anymore. That's not the case. You need to manage this very carefully at site. Holidays are still on. The business is back on track. That's for sure. But how steep the ramp up curve will be, let's wait and see. Thank you. I appreciate it. You're welcome. And the next question received is from Sascha Gomer of Jefferies. The first one would actually, again, a bit on the cost cutting. I know you cannot share much going forward. I was just wondering in terms of rate of completion, the RACE, GRIP and FIT program, how should we think about the rate of completion at the moment? That will be my first question. Okay. I don't have a number for you in the rate of completion. Again, as part of our strategic dialogue, we have said these programs are not over tomorrow. We'll use them as platforms and as a basis for additional measures when needed. And one of the learnings from the past was that we may have confused you with a little bit too much. Steering these efficiency programs by divisions, I think it's one of the key learnings we have from the past. And therefore, I would dare to say these programs are not just over. They will continue where necessary, And there's good success in terms of following and monitoring the different initiatives behind it. But a completion rate as such, I can't share with you, Lasher. Okay. Then the second question Let me maybe add something on the restructuring so that you also understand this. I mean, in a situation like the second quarter, and we should look forward and not so much backward. But in such a situation where it's really raining, you have to be careful that you don't overdo any type of restructuring. And that's why we waited. We said it's important first manage the crisis, see how it is developing. And it's now the time to review that and see what is the outlook for the next years. A restructuring is not a temporary measure. It's something that needs to pay off then in the years 2021 and thereafter. And the dimensioning of that is more an art than a science. And also with Klaus on board, we want to now take the time for us, summer holidays is over for me in the next weeks to really see what we can do. We know the drivers, we know where to look at, but to put that in a package and a program that we then can also, as good as possible, negotiate with our workers' council, that's something that needs a little bit of time. It also needs diligence because something that is done in hectic or with the wrong communication or with the wrong approach to our workers' council has proven to be not as successful. Therefore, again, give us a little bit more time and we'll come back to you. Understood. Thanks. My second question would be on short time work and equivalent plans, the benefits. Can you quantify the benefits in the quarter roughly in terms of maybe EUR 1,000,000 or basis points of margin or any of that? Well, we have it's a very good question, Batya, and we have chosen not to share that number. The number is important because if you think about this crisis, what is a once in a lifetime event from my point of view, we all know that the temporary measures and the temporary support that we get from these short term work and and other measures will go away and will vanish over time. And it's important to understand this gap if you now think about structural measures. That's exactly what I said before. It doesn't make any sense now to be too fast. We to go into in-depth analysis and that say what is falling away in 2021 and how do we compensate for this. Just to give you an indication so that you're not too disappointed about what I just said, it's the EBIT impact from COSTABEI in Germany is a significant two digit million number. It goes across the two divisions, but also impacts the relevant functions. And here, don't forget, we have a strong functional core. So areas like operations, but also the other bigger function have played an important role here. Let me also indicate that to you and that gives us a little bit of support for the free cash flow side. The cash flow impact is not fully synchronized with the EBIT impact. So some of the the money we expense to our workers is prepaid and you get the reimbursement with a two month delay. So that may be also an interesting information for you. It will support our free cash flow ambitions. And that's Q2, what I said. It continues in Q3 and Q4. We have not relaxed at the moment the request to all our areas to stay very focused. But probably the second quarter will be the most the toughest in terms of impact, and the impact will reduce over time. Appreciate the details. And then very lastly, and I apologize because it's a bit technical question on the accounts, but there was a EUR 25,000,000 provision reversal in the quarter and there was also quite a substantial increase in government grants. Is this included in your EBIT number? Or what was it? And how should we think about that? The reversal of the provision comes from the program, Jupyter. When we designed the program, we were a little bit more careful in terms of how much restructuring money we need. And the development at the moment shows that we don't need all of this to get the 1,900 people reduced. Therefore, we released it, was discussed with KPMG, and that is clearly reversed and outside the EBIT adjusted. It has to do with the fact that voluntary these voluntary severance programs are sometimes a little bit difficult to evaluate, but we're getting through this in a better well, with less restructuring costs than we thought. And the government grants, that's the detail where I cannot immediately say what what you're referring to. I'll I'll follow-up. That's okay. Let's follow-up because I there's nothing that I have on on my rate of view at the moment, and Renata will clear that with you. Thank you very much. Appreciate the detail. You're welcome. And the next question received is from Christophe Dasqueria of Deutsche Bank. Your line is now open, Please go ahead. Hi, good morning. Thank you for taking my question. A bit of a follow-up on Sascha's question relating to operating leverage or drop through in the coming quarters. You highlighted that a lot of the measures are obviously short term that you benefited from in Q2. And now with activity coming back in the market, we would expect at least part of the measures to fade. Can you keep up most of them? Or is it tough going into high activity levels? And then you also said there was not really a mix impact even though the e mobility revenues have not dropped as much as the others. Considering that e mobility or electrified demand is quite good currently also running into second half, should there be a mix impact in H2? Or is essentially all volume that you can gain back from that so positive that the volume impact offsets all the mix impacts? Thank you. Well, let's comment on the mix first. The e Mobility business is a growing business, and don't forget the business division e Mobility is not only e Axles, there are other products in this as well. And the when I said the magnitude of the gross profit decrease comes from volume, then that is still right. There's only a small mix impact. How this develops in the second half, I've not looked at this. I don't think the picture will change a lot. What we see, and I think that's the important message to you, When we look at the improvement that we, for example, get in China and in The United States, then the improvement there is very much from the more traditional products at the moment. So our 10R transmission, that is a GM and Ford transmission that goes into SUVs, that's one of the products that drives the recovery at the moment, and it has to do with demand for SUVs in North America. In China, it's clearly Geely, it's Great Wall. Also here, we feel that we are on the right platforms. How that's what that means in terms of mix, we need to see. But for the year 2020, e mobility in terms of mix is not really making a big impact both in the one or the other direction. Thank you. And just one follow-up on the working capital side. In the Q1 call, you pointed towards factoring being a headwind of, say, 80,000,000 to €90,000,000 in the near term. Now you had about €50,000,000 and activity is coming back already. Should we consider the 50,000,000 that you've seen in Q2 essentially as the full impact and that will reverse already in Q3? Or would you expect another headwind from It's a good question, Chris. You remember in the first quarter when we were in the middle of the crisis, I said we normally think about 200,000,000 as our umbrella. And I said my best guess at the moment is, together with Dietmar, maybe fifty-fifty of that 50 comes back, so €100,000,000 At the end of the day, this is a problem that is a it's a function of receivable development. The the the better the development on the receivable side, the more we can also sell into these into this ABCP program. And until May, we were exactly at the 100,000,000 level, but July then offered new receivables and we sold them into the program that was the EUR 50,000,000 additional free cash flow. Can I say something about how this developed in July and August at the moment? Not really. I mean, these are receivables of larger customers. It could well be that we get a little bit support from that in the third quarter. And if that comes, it will not come again in the fourth quarter. So it's a phasing question. For the second half, if we are optimistic, I could see that there's an additional €50,000,000 being sold. But let's wait and see. It's nothing that it's the only important cash flow driver. It's more additional support if necessary. Yes, sure thing. And just what I'd say from that is quite clear the expectation is that there is no additional headwind to come, right? So it could be neutral to positive. Think so, yes. But again, what I July looks good also in Automotive OEM. And for August, it's too early to say. The call offs we have from customers don't indicate a big summer break. But again, we're not through yet. Let's stay on the cautious side. Fair enough. Thank you. And the next question we received is from Gabriel Adler from Citigroup. It's Gabriel from Citigroup. My first question is on e mobility. Given your slide on the crisis reinforcing a faster shift to electric vehicles and the encouraging three in-one E Axle order this quarter. Could you comment on whether your capital allocation policy for EVs is changing at all as a result of the crisis? And how does your investment rate in e mobility compare to the rest of auto It's a good point. Again, we have so far not commented on detail in terms of how much capital is allocated to which business division. What you need to acknowledge is that e Mobility has a lower capital intensity because we're not producing every part and every piece of a EEX ourselves to say it has more sourcing parts than in our traditional businesses. What is important, and Klaus clearly said this, that we distinguish between the new opportunities, and there's no doubt that we will put the necessary capital in place. But in terms of like you said with margin, and Reinhard has said it several times, there's good and bad dilution in terms of margin. There's capital allocation that we definitely want and regard as necessary when it comes to strategic growth areas. And therefore, it's so important to manage the transformation very much from a capital point of view. And I think, as Claus said it, making the strong things stronger is a prerequisite. On the other hand, we need to stay disciplined, that's what we're showing in the traditional businesses. So maybe that's a directional statement, not more. But further numbers on capital intensity or capital invested in e mobility, I cannot share with you. Okay. That's helpful. And my second question was just on China because sales growth at about 17% in China was very strong. But the outperformance of 900 basis points is actually a bit weaker than the last two quarters where you saw greater than 20 percentage points. Could you comment on the trends in China that maybe a country can slow down in outperformance? Are you seeing any increased competition or pricing pressure in that market? Well, let me first once again say we you always have to be a little bit careful to take quarterly outperformance numbers and extrapolate and say this is now weaker or not. This is this is not fully synchronized with market developments typically. So rather look at the half year and there is clearly outperformance as we've more or less shown in the last years in China. And I can say the growth in China, in particular and also in the last two months, so May and July and June, was better than what we expected. So in particular, in June, we are significantly above the previous year. And let's also wait here now how the next two quarters come. There may be also, after such a crisis, a little bit of erratic moves in the one or the other direction. So let's not extrapolate too early on a month's development. It's more important to stay the course and remain cautious and not to call prices over too early. Okay. Thanks very much. You're welcome. The next question is from Sabrina Ri of UBS. Your line is now open madam. Please go ahead. Hi gentlemen and thank you for taking my questions and a warm welcome also to Klaus. So I just have two left. Just a clarification question on the outperformance. I know you've chosen not to provide a quantitative guidance, but maybe you could give some more color on outperformance. If we assume the minus 22% decline that IHS is predicting for 2020? Would it be fair to assume a similar outperformance as the average 6% in H1 for H2 because the 3% to 4% would imply a slowdown in outperformance in H2? That would be the first. And the second one is a follow-up to the previous colleague who asked about competitive pressure or pricing pressure. Could you maybe follow-up on that? Because some competitor has been quoting competitive pressure and the necessity for additional restructuring measures on the back of increased pricing pressure, specifically mentioned China. So if you could maybe update us on that if you've been seeing any different developments, not just based on the quarter, but just forward looking. Thank you. Yes. Thanks a lot. So let me start with your first question. How do we see outperformance? Again, we have said global light vehicle production for the full year 2020 light vehicle somewhere between minus 20% and minus 25% for the full year. And again, it's this is this is a number that will fluctuate. This all assumes that there is no further shutdown. If if there would be a shutdown, then these numbers definitely have to be revisited. It leads to something that is then, let's say, somewhere in the area of 68,000,000, 60 nine million cars. In the first half, you know we have seen a market drop of somewhere 33%. If you would go to this 20 to 25% and that basically halves in the second half, so we would somewhere be around, let's say, minus 11%, minus 12 minus 13% in the second half. And if you now think about us and say our Automotive business in total was in the first half somewhere around FX adjusted minus 26%, then that's the outperformance that I mentioned, 6%. How we will now perform in the second quarter remains to be seen. But I think to be on the really on the safe side, an outperformance for the full year of 4% plus should definitely be doable, taking into account that we were probably early on benefiting from the step by step recovery. And that has to do with the fact that typically when plants restart and OEMs restart their business, they start to they start with their engine plants and their transmission plants. So that pickup may have helped us a little bit, and we need to see how this develops. But I think somewhere around 4%, maybe 5% for the full year with this environment that I just explained should be achievable. Okay. That's very clear. Thank you. And then on price pressure, I can say we have not seen in our business, I'm speaking about the global situation, any extraordinary price pressure. We have the normal environment. I think it's fair to say that, in particular, in Q2, big OEMs were careful with suppliers and clearly wanted to make sure that their supply chain stayed intact. So there is normal price competition when it comes to new orders. And you all know that in this transformation, that plays a role. But anything that now would put even more pressure on us, I cannot confirm. I do believe that there's even a chance in this environment, if you are a strong supplier, if you have the right balance sheet, if you have a good diversification as we have to demonstrate your financial strength and become an even more trusted partner in this environment. And that also helps you to negotiate prices going forward. So it's not one dimensional. It's certainly quality. It's all the other USPs that we have. And that's something that we are also trying to play when it comes to more long term orders. Okay. Thank you. Very helpful. You're welcome, madam. The next question is from Kai Mueller of Bank of America. Your line is now open. Please go ahead. Hi, thank you very much for taking my question. And Klaus, welcome to Schaeffer as well. The first one is really on the inventory situation you mentioned in the second quarter. You said you had a slight buildup. Was that factored in and on a purpose? Or was that more a factor that maybe some of the demands you had anticipated didn't quite come through? And how do you think about that, obviously, going into the third quarter also in regards to your own shutdown period and your customers obviously having the summer break? The second point is generally with your conversations with the OEMs, we just obviously talked about your sort of expectations where IHS is. What do you hear from them for the second half? Are they all being extremely careful and planning to sell out more out of inventory, their own finished car inventory for the moment? Or is there an ambition and plan really to ramp up post the summer break and improve obviously the car sales for this year? Or is there more let's wait and see and just sort of see that 2021 will be a better year again? Well, I think, Steph Matthias would have more details that I can share with you, but we discussed it and there's not a universal answer to this that everyone is now ramping up and this is the answer of the automotive OEM industry. I think that the different companies are behaving differently. And the French of their views, The U. S. Colleagues do it quite differently. China acts in terms of call offs and orders in a very different manner. Don't forget the crisis was also for most of the OEMs an event that they have not seen so far. What I can say is the what you normally see in these extraordinary situations that we get more call offs than what makes sense to us just to have them in the system. That has been cleaned out now. And it's I think for us, we are we are very close to our big customers and understand what they want. We have engaged in numerous calls, understanding how to really read the signs. And I would say there is general optimism that the third quarter can be more positive. But we also should take into account the year is not over in the third quarter, let's wait for the fourth quarter. And while we are still fighting this crisis and the holiday season will be interesting to see what that means in terms of infection rates, it is clearly important that you work with scenarios and manage that site and do what is necessary to be close to the market development. And maybe that's then the lead into your first question. On inventory, Kai, I said in the first quarter call, what we try to do is when we saw the dip coming, we said that will give significant cash inflow from receivables that will be reduced. Now if we now go completely on the brakes with inventories, we will see a double whammy in the third quarter. That means receivables may come up. The dimension remains to be seen. And if you then all of a sudden have to produce inventories and can't deliver, then this is wrong. So we try to build a little bit more inventory in the first quarter and also at the beginning of the second quarter. But I can say now, and I have a chart in front of me that shows me my weekly inventory levels that in particular in Automotive OEM, we are reducing week by week at the moment inventory levels and benefiting a little bit from the additional buildup that we organized in the beginning of second quarter. How long this will hold, we need to see. But so far, this paid off. And as I said, for the plants, the plants have done an exceptional job here in doing also other operational measures in cleaning out inventory and making sure that lot sizes are reduced, that people work in a very agile manner. So hopefully that starts pays off and helps us also to achieve this overall cash flow target that I alluded to. Thank you. And then a follow-up question is really sort of more long term. Clearly, your order intake on the e axle contract, which is a three in-one Axle. When you speak to your customers and you talk about some of your contracts, I understand that's ramping in 2024, what is their debate with regards to what they want to buy externally, I. From suppliers like you versus how much they want to do in house? Because there's always this debate of how much do you do in house or buy the parts versus buying the full component. Now this is obviously a full full solution that you offer there. When you are in negotiations or when you are in RFQs, what do you think is the ratio between people wanting to do most of it in house versus buying the full item externally from a supplier like you? I think outside in, that's a very interesting question, but I can't give you such a ratio. It's very different by demand, by car, by platform, by customer and also by their own competence. And it's a question of how competitive is the offering and what can the in house competition really do. And we have always claimed to be a supplier that is innovative and also good with industrialization. Don't forget there's a hell of a difference between designing an EXO and making it in a sustainable growing high volume manner. And it's also a question of how much risks many how much risk is an OEM going to take when the necessary experience is not there in house. So this is not one dimensional. It's a case by case thing. And I can say we are proud of this new procedures contract. It has been a long negotiation and it's something that will take some years to take off. But again, we will give you more insight on the capital market updates, what this is and why it is so important to us. Perfect. Maybe just a quick follow-up on that. Can you give us any sort of sense in terms of the margin levels of these contracts compared to your existing business? Well, it's one of your questions that always comes. And I have to ask your understanding. I also have to say here, we're not giving that information on a case by case basis. What I can tell you, and you know this from the past, we have now nearly a year of experience in ASA with our new Capital Committee. Claude will join this and he said all the right things about Performance Management. And he also said the right things about it's not only the existing business accounts, but making the new business even stronger. And making it stronger is a function of our competitive position and that's what we have built over the last years. We are definitely seen as a trusted partner in these much more complex products. And you know that we want to make money with this and that is not a function of the first year. It's a function of a long term view on how to further improve offerings, costs, but also industrialization benefits. Very clear. Thanks a lot. And the next question received is from Daphne Vincent of JPMorgan. Your line is now open madam. Please go ahead. Just two very quick ones for me. The first is on comments about digital distribution channels in the aftermarket, and I was hoping that you could clarify that, I guess, in context of a lot of these small distribution channels having more issues during COVID nineteen and more people going to DIY. And then my second question is related to your outlook on just the general structure of Schaeffler, especially given the volatility in the Conti share price. Maybe any comments on deleveraging the IHO entity over time, that would be helpful too. Okay. Let me tackle the first the second question. Again, this is a Schaffler AG call, and you all know that Schaffler AG is not invested in Conti anymore since several years. If you're asking about the IHO, I can only say what we said before, no comments on any transactions before we launch it. And therefore, any speculation on Conti or selling shares or whatsoever is definitely nothing I can comment on. Digital service in the aftermarket is something where you I have to refer back to Renata and maybe for a separate conversation with Michael. What we indicated in this deck is at page is, I think, on page number 11. There you see that our rep service, that is a digital service for garages and workshops. It's a portal that people can access from the outside, rep explores call, and that clearly shows that the activity is increasing. And I can also say as part of our overall strategy, we see that in particular in the aftermarket, but also in industrial, the digitalization is a positive trend for us. But if you want more detail on digital services, I think it's better to take it offline and discuss with Renata and Michael directly. Okay. That's great. Thank you very much. You're welcome. Okay. If there are no further questions, ladies and gentlemen, thanks for all your questions. Thanks for following us. I would like to close the call here with two or three sentences. Again, it was an exceptional quarter. I think we showed that we know how to run a business in this crisis. I'm very pleased and look forward to the cooperation with Klaus. I think we will form a strong team and share the complete same view on how a CEO and CFO team should work together. So that's really, for me personally, a big step forward. And thanks to us for participating today. I also would like to extend my personal thanks to Renata and her team, but also all the other teams in divisions, regions and functions for the continued hard work in this crisis. Don't forget, it's still a crisis. There are many people suffering around the globe from the impact, And we are blessed with resilience and a strong team approach to drive and to continue to drive what we want to achieve in this environment. So thanks a lot to everybody, and we look forward to the next encounter and our next conference call on the Q3 results. Thank you very much. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.