Earnings Call: Q1 2020

May 6, 2020

Dear ladies and gentlemen, welcome to the Q1 twenty twenty Results Conference Call of After the presentation, there will be an opportunity to ask questions. At our reserve customer's request, this conference will be recorded and a replay will be available shortly after the call on the website. May I now hand you over to Renata Castaro, who will lead you through this conference. Please go ahead. Thank you very much, operator. Dear analysts, dear investors, thank you very much in this busy day for your time. Mr. Rosenthal, the CEO of the Schaffner Group and Mr. Eirik, CFO, will lead you through the first 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. Rotofert. Claus, the floor is yours. Thank you very much, Renata. Ladies and gentlemen, thanks for joining the call this morning. We're happy to present our Q1 results in this uncertain and challenging times. Let me, without further introduction, immediately go to our first page. Page number four has the key messages. I think it's fair to say that the results of Schaffler AG in the first quarter are robust despite the coronavirus pandemic outbreak. And what is clearly outstanding here is the strong free cash flow of €137,000,000 that we will explain in more detail. Very quickly through the key messages, the group sales minus 9.2% are affected by the coronavirus environment. Automotive OEM affected the most. Certainly, Aftermarket was a surprise here with slight growth, while Industrial kept up quite well, but had also good comps in Q1 twenty nineteen that to some extent explains the reduction there. The margin, we basically protected the lower end of our guidance that we suspended. Here both Industrial and Aftermarket delivered good margins with 10.717.1%. And then on the free cash flow, already mentioned the number. Key drivers was CapEx prioritized and also a reduction in working capital. We are clearly benefiting here from what we initiated Deepma last year. The CapEx discipline, the focus on working capital and free cash flow generation has helped here in that first quarter. When you look to the free cash flow conversion ratio that is above 40%, don't get this wrong, this is not the new target number. It's simply a last twelve months calculation where the fact that typically the first quarter in the previous years was a negative free cash flow quarter plays an important role. However, I would like to use the opportunity here to stress how important we think is free cash flow generation these days and how important it is to protect free cash flow and also our very comfortable liquidity position. There are three, a little bit unusual things that I would like to mention that also explain the special effects in this quarter. First, you all know that we have continuously improved our headcount and further reduced it. This has also continued in the first quarter. And I'm happy to say that we are or that we were lucky that we started already end of last year to negotiate an additional voluntary severance scheme with our workers' council. We shared with you at the March 10 when we published our full year results, the target of 1,300. Meanwhile, we have been able to expand that number to 1,900, of which 1,700 come from Europe from Germany and 200 from a European neighbor country. This is a little bit extraordinary because normally in such a crisis, it's not possible to negotiate such schemes with workers' council. Everyone is focused on saving jobs and weathering the crisis. So we just took the opportunity to extend that triggered restructuring costs and restructuring provisions on the one hand, but it also gives us some support for the next quarters to come that we can further optimize our cost base, not only through tactical cost measures, but through these structural improvements. The second peculiar thing this quarter was this goodwill impairment that may have come a little bit as a surprise. It's a reflection of our approach to carefully and to some extent proactively manage our balance sheet risk. When we started into the crisis, Deepa and myself did a review of the full balance sheet and said, where do we have potential risks? What could happen in this uncertain environment? And we decided that our balance sheet could be strengthened if we proactively impair the goodwill. We you may recall this, we had €600,000,000 goodwill on the books end of last year, more or less half Automotive OEM, half the other businesses. This is in particular driven by historic acquisitions from the past. And we did the normal valuation work here and said the uncertainty that is coming allows us to clean up parts of this goodwill. This does not mean that we are not holding on to our Automotive OEM business. The opposite is true. We just wanted to take out risk early on because we expect that the world will not be the same in the next years and therefore also planning will be more challenging. Last point is then on the dividend. We have decided to confirm our dividend proposal. The virtual AGM happens on Friday and we think that's a justified move when you look at the strong balance sheet and also the good liquidity position. On guidance, we like most of our other peer companies have decided to give you a directional guidance, but the specific guidance needs to wait until the visibility improves. I think I can do Page number five rather quickly, Renata. It's the usual page that explains the pros and cons, only highlighting two or three issues here. Our e Mobility business is continuing well. We see a lot of demand coming in for new projects. The guys have worked even with Helm Cameras to go through testing during the last weeks and months. So that is clearly something that is on the positive. Outperformance these days, we need to be a little bit careful. The 11% should not be used to extrapolate, but it shows that we are slightly better than the market. Automotive aftermarket, I touched here the first quarter is not representative for the quarters to come because the shutdowns in the industry, the garages and the other workplaces and stations could not work in the last week. So that will also see then show an impact in the second quarter. Industrial, wind is exceptional. And as we're expecting a recession, also the Industrial will see some more difficult weeks ahead. However, the order intake that we measure on a twelve month basis, Dietmar, is good and shows that the Industrial business will serve also going forward as a diversification element in our business mix. Free cash flow mentioned already, clearly on the negative side, the crisis hits us. We are expecting lower organic growth. It triggered the goodwill. And on the automotive OEM, don't expect that the sales will come back that quickly. So it's even more important that we continue to flex our cost base. Maybe more interestingly is Page number six to give you some color. That's a new page out of our standard outside of our standard reporting. What we want to bring across here and some of you remember that from the last quick capital market update. This is a page for our global footprint. I'm proud to say that in this week all our 75 Scheffler plants are reopening and capacity utilization is building up. If you see this green, red and yellow, it shows again that we are benefiting from the fact that we are not an automotive supplier only, but that we have a more balanced business mix and also the regional setup helps us to manage this crisis. Just to explain the table very quickly, you see in the circles the number of plants we have in the region and for the division there. For example, 10 plants in automotive OEM Americas, including Mexico, all are working again. And the boxes then give you the capacity utilization that we saw in calendar week 2018 that we are now expecting for calendar week 2019, '20 '3 percent and also in calendar week 2020, you see the number. What this page shows is that China is in this calendar week, but also for the next calendar week well on track to go back to the normal capacity utilization, 100% plus for industrial driven by wind and more than 90% by auto. I would say China is probably eight ten weeks ahead of the other regions. So Europe is building up in auto, while industrial is coming in a little bit softer for the next weeks, not a surprise. Asia Pacific, our smallest region, very much also impacted by India. The auto business is small there, pretty stable. This is in particular Korea, where we have three plants that are performing well. On the industrial side, the yellow there is a little bit driven by the India experience where the plants had to be shut and now capacity is rebuilding. And then on the auto side in Americas, you see that they are lagging behind and that we need to see how that builds up, while the industrial that is a smaller business there is running somewhere between 8090%. Hopefully, that gives you an idea of how this is going forward. We are monitoring this on a weekly basis and are happy to share this information also going forward. Let me say here this ramp up is a managerial challenge. We have done this before, but I can assure you we are a strong operationally oriented team and have our hands upon the wheels and the eyes on the road. So I think we will get this done quite successfully. However, we do expect that the ramp up will go step by step and that we will not reach the pre crisis levels soon. Now on the Automotive OEM part, I think I will do this rather short to allow more time for your questions. You can read the messages here. The outperformance was strong and Dietmar will talk about this later on. The focus here is clearly on flexing the cost base in the right manner. Automotive Aftermarket, next page. I think what we can say is that the first quarter clearly benefited from strong sales growth in the region Europe. The margin was 17.1%, definitely points in the right direction. And here also our efficiency programs, the program GRIP started to pay off with the reduction of selling and admin expenses. However, going forward, do not expect that this continues in the second quarter. Also the aftermarket will be hit by the environment. Industrial, also here the key messages have been shared and DeepMod will show this later on. We clearly benefited from the very strong growth in the wind sector. The impact from the crisis is limited in the other sectors so far. And the big question is how does it will build up going forward? Again, if I look at our order intake, it looks to me that the situation that comes from this global recession may sound a little bit more dramatic than what we are going to experience in the next quarters. 10 is also a new page. Just to share with you some insight on how we look at market indicators at the moment, I think you all follow as we do IHS figures, global LVP numbers are somewhere around 70,000,000 cars, a drop of 22 for the full year with a dramatic drop in the second quarter. We need to see how we can decouple from this. Then aftermarket, an interesting chart here that shows a source from Apple, the level of mobility, similar indicator like congestion indices and it's obvious like the light blue line at the end that mobility in terms of people driving around has clearly dropped and is now recovering in China First. So that will be an important indicator for also the activity in the aftermarket because the more people drive cars, the more they need to be repaired. Industrial, the latest Oxford Economics projection minus 5% for the world, stronger in The U. S, less strong in China. So this minus 5% from my point of view is not a bad indicator. In this environment, and this is also a page outside the normal reporting package, what counts is the disciplined execution of countermeasures. This on page 11 is like a CEO dashboard that I wanted to share with you. First priority clearly is to make sure that people stay safe and healthy. We are on a solid track here. The number of cases has dramatically reduced. And the most important thing is now that the health and safety measures are in a very disciplined manner applied when we start to ramp up. Second key priority is to support our customers. And before I come to capital discipline, let me say this very clearly. This crisis is also an opportunity. It will come to an end at some point in time and it's now the time to understand how the world will change, what the markets and our customers will do and how we best adjust to it. So one of our key priorities is clearly to support our customers where they need us. That's part of our supplier mission. However, there are ample opportunities to address the key levers of profitability and in particular free cash flow. We have shown last year that we can flex our cost base and that's what we're doing with great focus, in particular, short time work, only in Germany, but also similar instruments in other jurisdictions. Just to give you a flavor here, from our around 30,000 people in Germany, we have applied for about 45% short time work. That in itself says not really very much because for the financial impact it's important to understand the intensity of the short time work. You can apply for one day of a week, you can apply for five days of a week. So you are very flexible in doing that. And we'll come back to that later on. But I think we have really set up a system that helps us here to react in a very flexible manner to also the potential ramp up. Talked about the structural improvements, that's a good thing. It will help us on a mid to long term to further optimize the cost base, what is definitely necessary and possible. And then on top of this, we have put in place a strict regime regarding spending control measures. Let me explain that in a little detail. What we have done, we have basically looked at the different components of our cost base and said, we want to save a percentage, a significant percentage of what we call the non production material. The non production material covers the corporate services, think about travel expense, think about consultancy costs. It also covers the planned areas, it covers tooling, it covers maintenance. And I think I can say this here, we want to go up to 15% of this non production material that is not 100% directly P and L relevant. There's also a little bit of inventory here, think just for about buying wreaths or something like that. So that's a pretty strict measure. And I think we'll see the benefits from this rolling in the next quarters. Capital discipline, it's all about reducing, but in particular reprioritizing CapEx. I indicated this already this morning. We think we can run this year with two thirds of last year's CapEx. So last year was 1,000,000,000 If you prorate the €1.64 of the first quarter, that's probably a good indicator and it will help us to manage the rest of the year. Working capital is more an art than a science, Dietmar. It's probably the most challenging part of the equation because in some areas you cannot assume like you cannot do structural headcount reduction programs these days that it's possible to further increase working capital efficiency, but clearly lower volumes will also reduce working capital need. You have some distortion because of the receivable sales programs. So that's something that I think we can do. And the idea is that we, in total, should end up with lower working capital than end of last year. Liquidity, I already mentioned, is the most important thing. The liquidity position is robust, very comfortable. And really a big thank you to Dietmar that he increased our working capital lines, our revolvers end of last year as part of the refinancing of bonds. The balance sheet is strong and goodwill impairment is a proactive balance sheet risk management step. I always praise the low complexity of this Treffler balance sheet. There are no really unusual transactions on it and therefore low complexity is an advantage these days. In the interest of time, let me do the next pages rather quickly that just give you further information about what I said before. This is the headcount figure, another drop here in the first quarter and this will continue to go down. Page 13 gives you the usual table with some additions to intangible assets, property, plant and equipment. You see the 164,000,000 the 5%. And you also see in Q1 that there's a more balanced allocation of CapEx between Automotive OEM and Industrial. Industrial is building up, in particular also outside Europe because we want improve our footprint. This includes also some of the wind localization projects. Next one is then on liquidity. I think everything is already said. The 16% available liquidity of last twelve months net sales, Dietmar, is a good and solid figure. It has improved, you see it here compared to the previous quarters. And we have a robust debt maturity profile going forward. With this, I hand over to you, and thank you for your attention. Thank you very much. Good morning, and welcome also from my side. I'm glad to have the opportunity to provide your insight into the details of our financial development one more, but also the last time today. And let me jump directly to Page number 16, where you can actually some more information on the sales development. We ended up in first quarter with €3,300,000,000 which is a decline of minus 9%. And Klaus already indicated major impact coming from the Automotive OEM side with the plant closings of our customers and subsequently also our reaction, especially in Europe and Greater China. On the industrial side, we have the decline, the decreasing demand in Europe, but also and this was also already highlighted, a very strong performance in the wind industry, not only in China, but especially in China. We had a really good development considering especially market condition in the automotive aftermarket, where I will get back to later as well. Then let's move on to Page number 17, and then you there you can see the gross profit development. And for sure, it's no surprise that the volume decline on the top line on the sales side is also having an impact on the gross profit development. We see a drop in the gross profit to EUR $799,000,000, which is equal to 24.3%, and it's a drop by around one percentage point. And as you can see, the majority of impact is coming from volume loss, but also on partially on the mix side with ramp up costs in EX L hybrid systems. In regards to pricing, it's normal pressure or normal price reductions that we have in Automotive OEM, and we could even continue the positive development on the Industrial side. Finally, that leads to the situation that gross margin Auto OEM is at 19%, Aftermarket 35% and Industrial at 31%. Then let's move on to Page 18, where you see the EBIT margin development. EBIT in the first quarter of EUR '2 '15 million being equal to 6.5%. Major impact coming from the already explained decline in the gross margin development, especially in the automotive OEM area. On the automotive aftermarket and industrial side, our EBIT margins even improved. But we compensated the impacts coming from gross margin developments as well with savings on overhead costs and having had some positive FX impact. Nevertheless, overall, looking to the three divisions, Automotive margin before special items of 2.5%, Aftermarket with 17%, a sudden increase compared to previous year, and also Industry with 10.7%, compensating the negative volume impact as well and realizing the growth. When we go then into the details of the divisions and we look to Page number 19, on Automotive OEM, we see the sales that was achieved amounting to €2,000,000,000 which is a drop of minus 12. But we can also see that our business division, e Mobility, could well perform in that market, just realizing a drop of minus 1.8%. And Klaus also already indicated, and you can see here more details, that we had a strong outperformance against the market in the first quarter, especially driven by outperformance in China. And on the right side, you can see then when looking to the overall picture of Automotive OEM that we, on one side, have a negative gross profit impact. But to at least a significant amount, we could compensate this with savings in the overhead areas and with some positive FX impact as well. So that finally, we already mentioned 2.5% EBIT margin could be achieved. Then let's move to Automotive Aftermarket, Page 20. Sales development, as said, plus 1.5%. So sales amounting to close to EUR $450,000,000, especially driven by Europe with a plus of 5.6% and having had to face then declines in the other three regions. You can see that on one side, in our independent aftermarket was basically flat. OES increased compared to previous years or year. But we have to be aware that last year, there was, especially in the first half of the year and in the first quarter, weak OES market. So this is also explaining that we have a positive base effect now for this year. And looking to profitability, as already mentioned, EBIT margin of 17.1%, actually being generated, the improvement by positive sales mix that led to an improvement in gross profit and savings on the overhead cost side. So this is from a sales but also from a profit development, a positive development in the current market in the first quarter, but being aware that the second quarter will be even more challenging. On the Industrial side, Page 21, we achieved sales of €828,000,000 which is a decline of 7.5% compared to previous year. We can see that with the exception of China, all regions has been hit, and China was especially strong, growing by 21%. And you can see on the lower left side what we already explained that especially wind was supporting in an excellent way compensating the decline in sales in the other more cyclical sectors. On the right side, you can see the development of the EBIT. As mentioned, EBIT up to 10.7%. And you can see that basically, the decline in gross profit being caused by volume decline was compensated by savings in the overhead area with some positive FX impact so that finally, we could increase then the EBIT margin even compared to the first quarter of previous year. Then when moving on to Page 22 and now picking up what Claus already explained, two special impacts that we recorded in the first quarter. It's on one side, additional restructuring expenses for the voluntary severance scheme in Europe, especially, we increased the provision here in conjunction with the programs raise and fit related to Automotive OEM and Industry. And the second topic that we see in here is the goodwill impairment that we did in the division Automotive OEM triggered especially by the uncertainty related to the coronavirus pandemic. Yes, with this, I would move on then to the net income development on Page 23. And first of all, our net income before special items amounted to EUR 103,000,000, plus EUR 103,000,000. Yes, it's a decline compared to previous year, where we recorded EUR 169,000,000. And of course, then as already explained on the previous page, then the special impact restructuring, the enhancement or expansion of the voluntary severance scheme and the goodwill impairment had a negative impact so that when looking to the net income after the special items, we see a drop of the net income to minus €184,000,000 Positive, nevertheless, even in this more challenging market environment, we could now realize the shareholder value add in the first quarter on the long term twelve months consideration of €328,000,000 Then moving on to the next page, those yes, already talked about free cash flow as well, and we are really, yes, I would say, proud, maybe strong, but we are really satisfied with the development that could be realized, a positive cash flow of €137,000,000 even being equal to a free cash flow conversion ratio of 41%, CapEx ratio being down to 5% with strong capital discipline, but also with a strong focus on the important topics and not sacrificing on the future and also keeping a strong eye on the working capital development. On Page 25, you can see more details, but we already explained this. So I would move on directly to Page number 26. You can see there the net debt development. Net debt as per end of first quarter, '2 point '4 billion, being reduced compared to end of the year due to the positive free cash flow development. In addition, we could complete our green Schuchard transaction with a volume of around EUR $350,000,000. Then so this was also successful in the current really difficult market conditions for the AppMarket leverage ratio at 1.2. So that also highlights that we are currently working in an area where we do feel comfortable. We are prepared for the future. Yes, and with this being said, I would hand back to you, Claus. Dietmar, thank you very much. '27 is now, ladies and gentlemen, just a quick summary. Q1 result is robust. You heard it several times, we see our current setup as a clear competitive advantage to this environment. We use the opportunity to further lever our efficiency programs and are now fully focused on the tactical cost and free cash flow protection measures that have been further strengthened without jeopardizing our customer business. Liquidity is robust and that's necessary because the Q2 will be tough, certainly not a walk in the park, but a quarter that requires a very flexible and modular response. That's what we are prepared for. And that's also where I see the managerial challenge. AGM will happen. There's apart from the dividend that we mentioned, one important other aspect that you may have noted from the invitation, we will or we have presented to our shareholders a new remuneration scheme for the Executive Board team. And you have more detail on this in this backup of the presentation. I'm not going to go into all details here. The only thing I would like to mention in careful negotiations with our Supervisory Board and Mr. Schutler as the Supervisory Board Chairman, I think we have further upgraded this compensation scheme, took into account all the considerations and recommendations of the various agencies. Just one or two remarks, we are moving from a defined benefit scheme to a defined contribution scheme. We have incorporated a share ownership guideline that forces the management team to invest one time fixed annual salary, in my case two times my fixed annual salary directly into shares with a payout prerequisite for the LTB, so a pretty strict scheme. We have also improved the long term bonus requirements with a little bit more generous target achievement ratios and replacing cumulative free cash flow by EPS. So if you go into detail here and if you're interested in more detail, let's wait for the May 8. But I think it's definitely a good scheme to further foster shareholder value creation. Let me finish here by once again saying guidance will be provided once visibility comes back. What is more important these days is clearly three things. What counts is liquidity. What also counts is that our DNA, let's call it DNA is intact. Fighting spirits, the technology, the brands, the customer intimacy with all the headwinds, I think this is a proven team of colleagues that can weather such a crisis. And that is not only the Board, it's the whole organization. We invested a lot in our leadership teams at the moment with lots of internal communication. And I'm happy to say that the organization is prepared and resilient enough to come out of this crisis, hopefully even stronger than we went in. This is it. We are now open for your questions. Thank you very much. Thank you. Then we will now begin our question and answer session. Once your name has been announced, you can ask a question. If you find your question is answered before the decision to speak, you can dial 02 to count your question. If you're using speaker equipment today, please lift the handset before making your selection. We've received the first question. It is from Gabriel Adler of Citigroup. Please go ahead. Your line is now open. Hi, good morning and thanks for taking my questions. My first question is around the operating leverage. Clearly, the restructuring program that you've put in place and the cost reduction has really helped reduce the drop through and the operating leverage in the business, and we can see that in the margin resilience in these quarterly results. My question is, do you think that this level of under 20% operating leverage for the group is sustainable even as we move through Q2 and the impact from this crisis intensified? And then I'll take my second question answered. Well, it's clearly one of the most interesting questions, but it's a ratio that is very difficult to predict because it depends on a variety of different things. Our three businesses have all different operating leverages. The regions show different reaction. It's a question of how flexible do the colleagues react to the buildup of demand and capacity. So please accept them. I can't give you a final number here. What I can say is that we are fully committed to flex the cost base further and that is what counts. On top of this, addressing also the fixed cost base and trying to protect the cost base by strict spending control that will also help. But on the other hand, we also need to make sure that we follow the customer demand. So it's a qualitative answer to a question that you would like to put in your model, but I cannot just say, yes, it will be in the next quarters the same logic and the same outcome as in the first quarter. Sure. Understood. Thank you. And my second question is around the auto And maybe I can add here for all ratios in this environment, it's always a risk because this is uncharted, unprecedented. It's a little bit difficult just to apply historic, you know, relationships to the future. So the most important thing is that you really understand the data here and that we do the right things going forward. Is separate definitely the leverage ratio. That's the one we look at. Okay, understood. And then on outperformance in the auto division, it would be very helpful if you could expand on the main drivers that supported the strong outperformance. Understand that China was clearly the key regional driver, but some more detail on what the broader drivers for that trend were and particularly whether you were seeing OEMs building inventory ahead of shutdowns that perhaps could reverse in Q2, meaning that outperformance weakened in the second quarter? Maybe I start and then Dietmar adds a little bit of color. Also to be honest, also the outperformance, it's something that we need to put a little bit into a crisis perspective. Outperformance at the end of the day is very much a function of what happens with big key accounts. And I think VW is, as you know, one of our biggest accounts. Geely is a very important account. It's it's the second thing is what kind of projects are running and how does that help. I can, for example, indicate that in several main projects related to transmission engine business, gained a higher delivery share that helps. We have in some areas preordering of OEMs to build some safety stock. In general, there's always this tendency that customers put sort of too optimistic data into the system where you need to be careful that you're not now building too much safety stock yourself. Clearly, think in that what Dietmar said, the strong presence, the strong sales organization, the fact that we have some of our large projects in China in these days helps for the outperformance. Let's see how this rebalances. You want to add something? No, I think this was a very comprehensive explanation, Jonathan. I mean, general, we said we always told you it's somewhere around 400 basis points. So take this as an outlier and let's see how when it normalizes, how we then understand it from there. Order intake will come in the first half and maybe that is then a good basis for further discussion. Great. Thank you very much. You're welcome. Thank you. The next question is from Christoph Lovkawi of Deutsche Bank. Please go ahead. Your line is now open. Hi, good morning and thank you for taking my question. The first one will be on working capital. You already said it's more art than anything. But still looking at your Q1 print, which was quite good, but also helped by, I think, an uptick in the receivable sales program, which you alluded to seeing some adverse impacts currently. The first one would be, do we have to expect a headwind in Q2 and Q3 from that program? And looking more on a full year basis, should we expect inventories, which have been up in Q1 a bit to come down with the lower demand situation? And given your spread between receivables and payables, overall, should we expect a decent cash inflow from the lower activity actually? Thank you very much. It's a very good question. Let me give you some color. As you all know, working capital is basically two things. It's the financial supply chain that is receivables and payables and it's the inventory side. Then we all know working capital is basically driven by volume and it's driven by, let's say, the working capital efficiency. And would and then you have the third components are things like a receivable sales program. When I mentioned this at the beginning, I'm not saying that we stopped that, but I think we have just to take into account that going forward, it will be more difficult to have the same volume of receivables to be sold into the program than before because simply the volume of receivables and of eligible receivables goes down. So I think you will expect from most of the players that have these programs that the volume will come down a little bit and that means nothing else that there is a little bit of liquidity outflow. Our program DeepMore is not very large. It's a new program. We've always been careful to handle it in a certain range. And I would say, if we can keep it at 50% of what we had in the previous year, then it's probably not a bad target. So that will impact a little bit. Now if you then look at the two other components, I think in these days when you look at receivables and payables, there will be a volume impact. In a second quarter when all of a sudden sales come down dramatically, you also see then cash inflow because the receivables get lower and others get paid. So that's an impact that we're expecting in the second quarter. On the other hand, on the payable side, again, I think it's not really wise to assume that you can further optimize your efficiency on payable side by extending what is called your DPOs because no supplier in this environment would not cry if you now say we're paying you later. So managing that carefully, if this is a wash in terms of the efficiency then it's already very good. I think, Dietmar, we have to be a little bit more conservative on the Financial Supply side. Then on the inventories, it's a question how you manage the quarters. And here my view is that if you want to compensate the positive cash inflow from lower receivables that is out of the financial supply chain, it may make sense to build up a little bit more inventories in the second quarter because when sales come back, let's say third, fourth quarter, there will be a cash drain. If you then have the the inventories there, then that could be something how you organize and manage the phasing of the different elements of the working capital. That's why I said it's more an art than just mathematics. And again, our view is that we should be able to bring, except for this compensatory impact from the sales programs, that we should be able to bring working capital below what was the end of last year. Whether this is 10% or more or a little bit less remains to be seen, but that's at the moment how we look at this. With these volumes drops that we're expecting, except for the impact from the sales receivable program, it should be possible to control working capital below previous year level. Thank you for the very detailed answer. It's well understood. The second one would be on CapEx. You point towards a cut of around 30%. Now that there is a couple of ramp ups coming in the second half and CapEx most likely will be committed for that, can you go much lower than the 30%? Or is it essentially where you would see the need for a smooth ramp up of new projects and also coping with the ramp up of the OEMs now. Well, also here, I mean, don't forget, we're cruising through an environment where, from my point of view, flexibility is and let's say, a modular detailed approach is the most important. Can you go much lower? Yes, maybe, but the consequence is that you then just start to jeopardize your future opportunities and that's what we definitely don't want to do. It's completely foolish now to think that the crisis will never come to an end. So it is really critical here to see how you adjust this big portfolio of investment projects. Some of our orders that we have put out can at the moment not be fulfilled because of the environment. Some we may even push harder. We have a situation in China where in the wind area, our Chinese colleagues say, you know, can you move faster because we get all this demand and we need to build up faster. So it's it's a it's not black and white. It's very much about flexibility, modular, and a differentiated approach. On the other hand, if I don't if you don't give DeepMAR a type of a target here and say, this is what we wanna see, then it's also wrong. That's why we said two thirds of last year as a ballpark number where we wanna go to is what we can also share with you. But it may change over the course of the year. It definitely needs to be in sync with the customer demand. But people now understand also since last year and that's the beauty of this CapEx committee that Deepa and myself run that this is very serious and the controls we have that nothing is overspent and that people don't follow what we're saying are strong and the commitment to do this right is definitely there. Thank you. Last one from my side and probably also tough one to answer. Looking at the mix and the negative impact due to the e mobility business, do you expect that negative mix impact to improve in the second half or rather worsen? Given that you ramp up scale, it might have potential to ease a bit Or Well, I think No. Can step in. So first of all, yes, the ramp up costs then will ease. That will be a potential for improvement. On the other side, we need to see the volume development and how this unfolds in regards to the demand of the OEMs. So it's difficult to predict right now. Absolutely understood, yes. Fully agree. It's a long term, mid term investment. We are well on track with our e mobility projects and it's not a question of half years, it's a question of two or three years. All right. Thanks a lot, guys. Thank you. Thank you. The next question is from Henning Kaufmann of HSBC. Please go ahead. Your line is now open. Yes. Hi, good morning. Thanks for taking the question. This is Henning from HSBC. Yes, I mean the question has been asked, but obviously excellent to see how much you were able to variabilize the costs and the drop through on the automotive side and protect cash. So that's great to see. Can I just maybe ask a little follow-up with respect to the R and D? And that's something that stands out. You were able to save a lot of overhead there. And I think, Klaus, you said it just now with respect to the CapEx. At what level that starts to impact future business? So if you could just maybe say a few more words on the ability to save R and D there going forward as a part of variabilizing that overhead cost? That's my first question, please. Henning, thanks for the clarification. I mean, R and D is part of the overall exercise. And also here, the most important thing is to do this in sync with customer projects. We have not put out a number here in a sense that it's also two thirds. But I think you saw from the numbers that they are to some extent driven by what we did last year. At first quarter, it doesn't it's not only what happens in March. So also here, we have gone through a detailed project review with Ube Wagner and have said these are the ABC projects. These need to be prioritized and pushed through. I think I mentioned this in the last Capital Market update. We had projects where large customers said, please continue, where certain testing things were done with home cameras in the office where meetings were not possible. So it's also here the same differentiated approach. R and D in particular in the large e mobility things is definitely out of any spending control sense that we are cutting here just proportionately. But in other areas, yes, we can be a little bit more cost conscious, and we can also postpone. So that's what I can say at the moment. But I'm not going to say two thirds. This is for CapEx. No, that's great. Thank you. One small house housekeeping one, maybe. It's great that you're breaking out now the adjustments with respect to the restructuring programs. Could you just share if there's anything more budgeted for the remaining quarters of the year? Or should we not expect any adjustments for restructuring in the further course of 2020? I think, Dima, the answer is you never say no. But I think the large adjustment that we now made with this €53,000,000 for that basically impacts all the three divisions. That should be it. I don't see any larger restructuring at the moment, at least nothing that is planned. Whatever happens in the last of the year, we need to see. But I can say if you target if you're asking about layoffs, I think with this 1900, we have, I think, already paved the way for further structural improvement. And I can only share with you to discuss at the moment layoff problems unless you are forced to with workers' council is nearly impossible because they definitely want to make sure that you save jobs. And first go through the crisis. Whatever happens in the second half, I don't know, but I think we are very comfortable with this 1,900 jobs that we can further reduce with the blessing and all contracts signed by employees. So that's a good thing. Maybe Henning, just to add briefly, we continue, of course, with our programs raised with them, it's also provided some insights in that conjunction at the beginning. The crowd is prepared. The are built up already last year, but we need to see them moving forward in case things change. We will, of course, anticipate that. Sure. And lastly, maybe if I can ask about this Automotive Summit with the chancellor yesterday. I don't know, Claus, if you were part of the meeting yourself, but if you could maybe share a little bit your perspective, either some feedback, maybe what was discussed if you were there or if you've heard feedback and also maybe your general view, if you don't mind, as to whether you think incentives would be a good thing or not in Germany? Henning, thank you very much for the question, and thank you very much for being so respectful that you think I was there. There were no suppliers there. There were only OEMs, so I was not part of it. But we have a very strong new lady who runs the VDA, and we have been informed afterwards. What I can say is what the VDA officially says, it's it was a good meeting. It was very constructive. There is a sense that the German government should support the German automotive industry. There was no conclusion and no final agreement on the best instrument, but I think the overall mood there and the willingness to cooperate is is what counts. And let's see what what comes out of this. It's good that people really carefully think what's the best instrument and how do we kick start and restart demand in this environment. Okay, great. Thank you. And glad to see the excellent execution. Thank you. Thank you. The next question is from Sascha Brummer of Jefferies. Please go ahead. Your line is now open. Hi, good morning. Thank you for taking my questions. The first one would actually be again on your cost cutting execution. We touched most of the cost lines, and I understand that selling is a bit more flexible because there's logistics involved. But can we also talk a bit about admin because that was more or less flat, around €140,000,000 over the last quarters. Do you think that there's some more potential going into Q2 to cut those costs as well? Or am I right to assume those are a bit more fixed? Sachin, let me respond to this. When you rightfully look at the P and L structure and look at COGS, cost of goods sold and overhead and then R and D selling and admin. What we look at, we look at the internal structure, how we allocate costs to functional responsibilities. And the fact that admin is was not coming down compared to the previous year. Maybe a result of certain IT spend, it may be a result of certain investments into future projects there. But it doesn't mean that we are not 100% cost conscious on the indirect areas. Parts of the indirect costs are anyhow in the costs. And I can only sort of mention here once again the impact of short term work. We have on purpose that short term work is not only relevant for the plants, it's also relevant for all the indirect areas. My areas, DeepMask areas, we have all sent people in these admin functions home. And in short time working, you will see the impact of that in the second quarter. But don't forget, this is not like that there is a big fat corporate center that sits there and does nothing. We have gone through various exercise to streamline certain things. It's not about headcount so much. It's more about getting certain structures even further optimized. This is about processes. This is about, you know, better backups in certain areas, and we're definitely targeting this area. So don't get this wrong. It's a good point. You don't see this in the first quarter, but you will see it in the next quarters to come. Very clear. And then my second question is related to what you already talked about with CapEx being reduced. How should I think about the impairment in that regard? Have you kind of decided to stop certain products or exit certain markets and that's where you can save CapEx and be more prudent, but that's now what we've seen in the impairment? Or is it just related to you took down volume and that's why you have to write it off, so no kind of exit positions? Thanks for the question, impairment. No one has asked it so far. I mean, you all know how impairment works. Typically, that happens in towards the end of the year when people do replanning exercises because you you normally need a triggering event. And and here, we we argued with our auditors that the crisis as such is a triggering event. As I mentioned, we looked at the balance sheet in the first quarter and said, where do we have risk? How can we address these and mitigate these risks? And as you know from the annual report, we had about €600,000,000 goodwill on the books. Broadly speaking, half half Automotive OEM, Industrial and Automotive Aftermarket. So then looked at where is this goodwill coming from. And in the automotive side, you all know that we have not been a company that has acquired in a very expensive manner big companies, we have acquired small companies in the last years with a very modest level. So you will not be surprised if I share with you that most of this goodwill was historic goodwill. We then said if we can avoid a situation where we are coming out of this crisis and all of a sudden we are conservative to be planning going forward and the impairment test then leads to the fact that we have to write off something, then Lars take the hit now and be proactive and clean up the balance sheet and be out of the woods with these situations. That's why we basically wrote off most of the goodwill, but it has nothing to do with CapEx allocation in a sense. It has nothing to do with how we prioritize investment. It's a more sort of thoughtful, risk averse, proactive approach to manage a potential risk on the balance sheet to clean it up, to run it in a very low complex basis and to make sure that this doesn't come up. Whatever the crisis is going to bring, we all don't know at the wrong moment in time. Understood. Very clear. And then my last question. I mean, in in China, there are plenty of battery electric vehicle manufacturers. So I was just wondering about the health of your EV order book. How much of that is actually with kind of smaller start up companies, and how much is, like, with large, well established players? Just wondering about the the risk in your order book given the the kind of hit that China took in q one. It's a it's a good point, Deepa. Maybe you need to help me. We have in in our risk analysis, I've not seen any insolvency risk from from customers in China. When we're doing the things with the bigger players, we've always been careful there. But, you know, I would assume that you would not put Geely in in in in that bucket. So would say, you know, from my point of as far as I know, we can definitely look at this one more time. There is no risk in that area. Yeah. Great. Thank you very much. You're welcome. Thanks. All the best. Thank you. The next question is from Victoria Beer of Morgan Stanley. Please go ahead. Your line is now open. Hi there. Just one, please. Could you help us a little bit thinking about where auto aftermarket has been trending in April and May? Obviously, we can get a good feel from the production numbers on the auto OEM side. Do you think that's also a reasonable guide for how we should think about auto aftermarket, obviously, just looking at the looking more at the Europe production there? Or should we think about that differently? Thanks. Victoria, it's a very good question. And we don't have similar market production forecast as we have for light vehicle production. Generally speaking, I think we can say, Dietmar, it's more in sync with the production numbers for OEM than I thought. And the drivers are different because here the shutdown has, at the end of the day, led to a situation where even if people wanted to repair their cars, they couldn't. And our business is, as you know, very much an independent aftermarket. Our customers could simply not get the material and therefore maybe slightly softer than what you're expecting from the IHS numbers where the second quarter globally is 47%. I would say in Europe, that is for Europe, that's probably a little bit too much. But it's definitely hit in the whatever 30% to 40% range. Great. Thank you. But that was April. Now let's also the second part of the answer is, if something comes back quickly, then the aftermarket is definitely one of these areas because, you know, structurally, could argue people will save money and not spend buying new cars and rather repair. That's one of the arguments. And also the way back is easier because it's a, let's say, it's a faster delivery driven business where if now the whole shutdown situation, all the restrictions disappear, then you have to be there. Great. Thanks. You're welcome. Thank you. The last question is from Kai Mueller of Bank of America. Please go ahead. Your line is now open. Thank you very much for taking my question. The first one is really following up from some of the questions that were asked earlier with regards to the quota by the short term working schemes. Can you quantify maybe a little bit how much that benefited you in Q1 already? Because you said, obviously, that will be mainly a benefit in the second quarter as a first question. Okay. Let me start with Lewis. I mean, Kurzanbeit, the large impact was, I wouldn't say minimal, but not really big. Had some Kurzarbeit that we already used at the beginning of the year, but it's a small number. It all started it will start will impact stronger in April and May. That has also to do, Kai, with the fact that we agreed with Workers Council that we would before we go into a more broader application of Kurzarbeit, we would run down existing over time, we would run we would think about Ulf's target. We, for example, negotiated something where we said people will be sent, whether they like it or not in some sort of forced holiday to reduce holiday holidays that we normally reserve for. And and that, you know, I think explains why this is a little bit the the phasing of this is slightly different than the discussion we have at the moment. So the the bigger impact will come in in April, where probably half of the month is where it really started to count and in May. And then also, if you really want to go into detail in terms of cash flow, we go and pay in advance and then get repaid by the agency. So the P and L impact and the free cash flow impact, it has also a little delay. In general, if you say, I think we can use it as a rule of thumb. If we have 200,000,000 per month personnel related costs in Germany for 30,000 people, we have applied for 40 to 50% of that workforce cost of ice across all the different levels. That's also different maybe for other companies. It's not only for the workers and the appliances, also for what is called the Germany Artemisarbeiten. So it's a pretty broad spectrum with a very disciplined spending control behind it. And, you know, if if you can save through something like this with all these extra payments you have, 10% of your cost base in a month, then that's not then that's not bad. Because don't forget, not everyone works for a short time. There are people that work only two days, some work three days, some go back. We need to see how the phasing now works, but maybe that gives you a little bit of a ballpark figure. Okay. Okay. And then just coming back to your write downs, you obviously outlined them quite well earlier. But just you obviously said you used COVID-nineteen as a trigger moment. Is that did you then add to your accountants that, that obviously changes the long term growth outlook for the industry as a whole? And can you actually specify what these businesses were where you wrote down the goodwill? Said these were all transactions, but what were they particular product groups that they were relating to? No. We looked at the we looked at in our case, it's pretty easy because our cash generating units are structured in a way that we can look at the overall automotive division. That's what we do. So this is not that engine is impaired and transmission is not. This is the whole mix that we looked at. And it it was, from my point of view, a reflection of the fact that the pressure on on automotive OEM in terms of volume and future development in the next years is there. So that's how we try to solve that. Okay. Perfect. And then maybe just one follow-up is we obviously saw price has been in the third quarter slightly lower what is always expected. Has there been any changes in terms of pricing that you can update us with also your customers, obviously, especially in regards to the much lower volumes you're experiencing? And when we think about your projects, when you now tender for projects, I don't know that much happening anyhow. Are there higher hurdle rates you're looking at just simply because of the uncertainty you're facing with in the coming years? I think, Cai, it's two very relevant questions. I think I can say on the pricing front, this was not a priority. I have not heard about anything that where the pricing was was dramatically different in particular and also than before. Also applies for projects. The the situation at the moment is that we try to help our our big customers. They wanna see that we perform. They are here and there concerned about stability of of the supply chain. We have always said we will be a a very good citizen in in in that respect. And therefore, I think this is a premature question, if I may say so. This is not the what we're dealing with at the moment. In Industrial, but more driven by decisions from the past, there is a positive development in terms of prices, but that's more a reflection of first quarter of what we decided, discussed end of last week. Perfect. That's very helpful. Thank you. You're welcome. Thank you. The next question is from Akshay Kapur of JPMorgan. Please go ahead. Your line is now open. Thank you. Just two left on my front, please. The first one on the order intake under the RACE program. I'm just wondering, one thing normalized, when do you expect the bidding process for the RFQs to pick up for the second generation of EVs, especially in Europe? That's the first one. And the second one is on raw materials. Do you expect any benefits across the three divisions? Or are they mainly pass through index contracts there? And on that front, if you could also discuss the pricing environment on in the industrial division, please. Thank you. Yes. I think on raw materials, maybe Dietmar, you can add. But the what I would say as a more general direction, there is a little bit of support from the material cost side at the moment, in particular on the steel side. How this will unfold during the rest of the year, we need to see. Pricing on Industrial, already said. Maybe I can add there, the lower oil price is helpful in certain areas. So let's not expect too much there. It still should not deviate us from the fact that we need to actively manage the cost base. In terms of RFQs, I would contradict a little bit. That's not it's not the case that there are no RFQs anymore. There are in this situation from the various customers' requests for projects, probably fair to say even more than we ever have. And not only from the big ones, but in our case, get more and more interest in particular from the eMotor side and the big ones that we have done there. So we feel quite happy with the capacity utilization of our R and D teams and of the what's happening there on the sales side. So let's wait what the order book will look like. Again, don't forget these large contracts don't come every quarter. But as far as I know from Jochen Schroeder, we feel quite comfortable that we can again deliver on our promise with the 1,500,000,000.0 to €2,000,000,000 And maybe just to add in that regard, the momentum that we gained last year, then from the acquisitions that we did on the Eldo Tech side, usage of our compact dynamics entity, this is really very positive, was perceived. We are working on a couple of new projects together with existing customers, but also with new customers. And as Lars mentioned, Jochen Schroeder is confident that we can continue the track that we actually did last year and also be successful with new orders then accordingly this year. And maybe on the raw material side, very briefly, yes, we have tailwinds in the first quarter, and we at least do expect to continue to a certain extent also for the remainder of the year. Pricing environment Industrial, we could realize or continue positive development. But of course, with the positive tailwind by the raw material, then argumentation to support our position actually is getting weaker and people then actually see customers getting back to us. And also considering the current situation, ask for concessions. Understood. Thank you for the color. Thank you. The next question is from Jenna Permalay of JPMorgan. Please go ahead. Your line is now open. Hi. I just have two questions left. The first one is on your bonds that are June 2025. If you could share some color on your plans regarding these bonds and if you would be potentially be concentrating any additional liquidity raising in the future? I have to say the line was somehow interrupted. Would you please repeat your question? I didn't get the first part. I understood the credit event, but to be answered precisely, can you please repeat? Sure. I hope the line is better now. I was wondering if you could share any color on your plans regarding your bonds that are June 2025? Qualibull this year? Again, the bonds in 2025, we have we have not decided what what we do after that. You know that there was an intention to to use the fuel chain inflow maybe to further optimize the maturity profile, but that decision has not taken and has been postponed for the time being. The profile is robust, the credit is sound, so we'll come back when the dust has settled. Right. Thank you. And just finally, how comfortable do you feel regarding your covenants, especially as we navigate the short term impact in Q2 from COVID-nineteen? The covenants, well, we're doing our liquidity stress tests. I don't see any risk at the moment at the covenant level. But once again, it's unprecedented territory. As I said before, we need to be flexible and modular and it doesn't change what I said before. The liquidity position is sound and I think our credit stands and is in good shape. Got it. Thank you. Thank you. The next question is from Michael Schmidt of ODDO BHF. Please go ahead. Your line is now open. Yes. Thanks for taking the question. Just one quick one. It's on your Industrial segment. I mean, wind test was obviously a stellar performer in Q1, but certain wind turbine manufacturers have cited in the last days still or coming supply chain disruptions and some headwinds, all that the situation in China is maybe different. But from your perspective, how will wind develop for Schaffler in the remaining year? Well, what we see in particular from China is that the demand for wind turbines for even larger projects is intact. And I don't see any deviation from this trend at the moment. And there's obviously enormous growth potential in this area. There are not many other companies that can provide bearings and solutions for these onshoreoffshore turbines. And I think there's this is one of the positive opportunities for us. Okay, great. Thank you very much. Thank you. As there are no further questions, I would like to hand back to you. Okay. Then let me finish this call with a big thank you very much to my colleague, Dietmar. You all know that he is leaving us. Unfortunately, July, this will probably be his last call. Dietmar, you have always been a great support, a great colleague in getting these calls done, and I I wholeheartedly thank you for all your support also to me personally. And I think I'm allowed to say this here in this group. So thank you very much for listening, and thank you very much for following this last release for Deepa. Thank for the appreciation. And also thank you very much from my side for your attention, for the good and intensive interaction that we had over the course of last three years. We will have additional opportunities during the coming days with the virtual roadshow. So I'm already looking forward to that. Yes, let's move on. Good. You very much. All the best. Stay positive. Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.