Edited Transcript of ZIL2.DE earnings conference call or presentation 19-Feb-20 1:00pm GMT

Preliminary Q4 2020 Elringklinger AG Earnings Call

Dettingen/Erms Feb 27, 2020 (Thomson StreetEvents) -- Edited Transcript of ElringKlinger AG earnings conference call or presentation Wednesday, February 19, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stefan Wolf

ElringKlinger AG - Chairman of the Management Board & CEO

* Thomas Jessulat

ElringKlinger AG - CFO & Member of Management Board

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Conference Call Participants

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* Akshat Kacker

JP Morgan Chase & Co, Research Division - Analyst

* Christian Ludwig

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

* Christoph Laskawi

Deutsche Bank AG, Research Division - Research Analyst

* Frank Biller

Landesbank Baden-Wurttemberg, Research Division - Investment Analyst

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Presentation

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Operator [1]

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Dear, ladies and gentlemen, welcome to the Preliminary Figures Fiscal Year 2019 of ElringKlinger Group. At our customer's request, this conference will be recorded. (Operator Instructions) May I now hand you over to Dr. Stefan Wolf, CEO, who will lead you through this conference? Please go ahead, sir.

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Stefan Wolf, ElringKlinger AG - Chairman of the Management Board & CEO [2]

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Well, thank you very much. Hello, ladies and gentlemen. Welcome to our conference call on the preliminary and unaudited figures of the fiscal year 2019. The agenda today is as follows: I will start with the most important headlines for the reporting year 2019, and a quick wrap-up on (technical difficulty) my colleague, Thomas Jessulat, our (technical difficulty) will walk you through (technical difficulty) figures, and after that, I will close the presentation with a few words on our current fiscal year 2020. And of course, as usual in our conference calls, you will have the opportunity to ask questions after that.

Well, let me start, for the fiscal year 2019. We noticed the following headlines with respect to our business. We saw top line growth of 1.6% to EUR 1.727 billion. Organically, sales was up by 0.5%. This represents an outperformance of global automotive production, which declined by 5.6% in the same period. Our EBIT pre-PPA came in at EUR 63.2 million. EBIT margin pre-PPA at 3.7% in (technical difficulty) was at 5.9% (technical difficulty) Q1, 2.5% in Q2 and 4.8% in Q3 2019. So you see a constant increase over the quarters. The internal cost-cutting program had a very positive impact as well as the expected real estate sale in the fourth quarter. Operating free cash flow improved remarkably to EUR 175.8 million due to our disciplined CapEx spending and our consequent working capital management. As a result from the strong operating free cash flow, we were able to reduce net debt for the first -- third consecutive quarter to now (technical difficulty). In view of the (technical difficulty) which weigh on global auto markets, we have successfully implemented our efficiency program, which includes our strict cost-cutting measures, the free cash flow optimization measures and the ambition to reduce net debt. Furthermore, we are leveraging synergies and building forces to improve productivity, especially in our production locations in North America. Our action plan in this region is being driven forward with success and according to schedule. Moreover, we completed the real estate sale in Q4 2019 in Hungary, which led to our operating income of (technical difficulty) inflow of (technical difficulty). Well, after that, let's have a look at the market development, the global automotive markets.

The global automotive industry has undergone a difficult year, hit by declining production figures in China, trade war worries between the world's 2 biggest economies and the lasting need to invest heavily in new technologies. Based on the production volumes of light vehicles, that's passenger cars and light commercial vehicles, global markets decreased by 5.6% in the fiscal year 2019, which is really remarkable. In China, trade disputes and the protests in Hong Kong burdened the economic prosperity.

(technical difficulty) sales to materialize so that the (technical difficulty) recovery about 2019. In addition, the Chinese government had significantly reduced its subsidies for e-vehicles in mid-2019. Further cut is also expected for July 2020. For ElringKlinger, a market downturn in such an important market as China directly impacts the earnings figures. Nevertheless, ElringKlinger saw stronger sales in the second half of 2019 compared to the first half of 2019. In North America, we saw the (technical difficulty) the decline is mainly attributable (technical difficulty) and the popular city SUV generated an increase in the light truck segment. The Fed lowered key interest rates to support economy 3x in 2019. The overall market was affected by the above-mentioned trade conflict between the U.S. and China throughout the whole year 2019. As a result of the strong demand for ElringKlinger products, the company outperformed the market significantly in this region and continues to operate on a high group cost level. In the European Union, we saw a decrease of 4%. Numerous political and economic instabilities are weighing on economic cycles. In addition, tariff and trade barriers on international markets (technical difficulty) the ongoing uncertainty (technical difficulty) concepts and diesel car bans continues to burden the entire industry here in Europe. At ElringKlinger, sales decreased in line with the market by 4% in Europe, excluding Germany, supported by a strong aftermarket business in Eastern Europe. Sales in Germany even declined by almost 8%. So much from my side to the overall headlines of the fiscal year 2019 and the markets. And I would like now hand over to my colleague, Thomas Jessulat. He's going to explain the financials. Mr. Jessulat is our [CFO].

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Thomas Jessulat, ElringKlinger AG - CFO & Member of Management Board [3]

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Thank you, Dr. Wolf, also a warm welcome from my side. With regard to the (technical difficulty) ElringKlinger had outperformed the markets (technical difficulty). Sales grew by plus 1.6% on a reported basis and plus 0.5% organically, whereas global auto production dropped by 5.6%. We have noticed a tailwind from foreign exchange markets. Additionally, we have to consider an M&A impact in Q1 2019 from the Hug divestment closed in February 2018. All in all, sales came in at EUR 1.727 billion. On Slide #5, you see the earnings development on EBITDA level. On an annual basis, it has been down (technical difficulty) or 7.9% (technical difficulty). As you all know, there were external as well as internal factors which affected earnings. Among others, raw material prices are still on a high level. Nevertheless, we have noticed tailwind in this area. Second, trade conflicts resulted in additional tariffs and duties which have been partly reimbursed. Almost EUR 4 million in Q3 and more than EUR 2 million in Q4 were part of that refund. Third, market slowdown, especially in China (technical difficulty) sales and low earnings contributions in (technical difficulty). And last but not least, the ongoing high demand in the former NAFTA region led to extra costs in the North American locations, and we have established targeted measures to counteract the effect on operations and at the end on earnings. We have been successful. Earnings have improved quarter-by-quarter in 2019. This quarterly improvement in earnings is also to be seen in the EBIT margin pre-PPA, which continuously went up from (technical difficulty) to 5.9% in Q4 (technical difficulty) Successful completion of the real estate disposal supported earnings in Q4 by EUR 8.6 million. The industrial park in Kecskemét has been sold to 2 Hungarian partners, and we have closed the deal on December 20, 2019. Adjusted for this disposal, market margin would even stand at 3.9% in the fourth quarter. It is not a perfectly quarterly result, but with regard to the market weakness, it means we could largely withstand the market (technical difficulty) of our extensive efforts (technical difficulty).

Coming now to Slide #7. I have just mentioned our efforts. As you all know, we have set up an efficiency program at the beginning of the year in order to improve the financial metrics of ElringKlinger. One part of the program was to realize a disciplined CapEx approach. This does not mean a radical, bullheaded principle like safe CapEx at any cost, but rather a clear focus on projects associated with our strategic new business areas, particularly E-Mobility or structural lightweighting. We will manage the growth in the classical business years, in order to tap the potential of the new technologies. Having this in mind (technical difficulty) has been spent in a disciplined way. It (technical difficulty) which represents 5.3% of total sales. Our ambition to get a double-digit figure has been successful. Another part of the efficiency program is the optimization of the net working capital position, which has been reduced to 24.5% on sales coming from 33.4% by year-end 2018. Inventories have been brought down by a centralized approach of raw materials by the sales of tools (technical difficulty) of existing stocks in the global location. (technical difficulty) been lowered by stricter enforcement of overdue accounts and the partial use of financial instruments, which amounts to slightly more than EUR 60 million. Moreover, payment terms of supplier contracts have been extended. All in all, net working capital is down to EUR 423 million coming from EUR 568 million by year-end 2018.

Now I'll turn to Slide #9. The achievements in CapEx spending and net working capital release contribute to a significant improvement of the operating free cash (technical difficulty) into the positive range after my (technical difficulty) in 2018 also reached a triple-digit number with EUR 176 million in 2019. After a strong second quarter with EUR 99 million and a good third quarter with EUR 31 million, the operating free cash flow achieved healthy EUR 65.7 million in the fourth quarter 2019. By the way, this does not include the cash inflow from the real estate sales of (technical difficulty) which is typically not included in our operating free (technical difficulty). Due to the remarkable operating free cash flow, financial liabilities have been repaid. Net financial debt now amounts to EUR 595 million, which implies a net debt-to-EBITDA ratio of 3.3%. On March 31, 2019, this ratio has still been on a level of 4.7%. In Q1, we have concluded an agreement with 6 domestic and international banks on a syndicated loan. The agreement covers a total (technical difficulty) EUR 50 million over a minimum of (technical difficulty) the path of optimizing our financial metrics and repaying debt also in the upcoming years in order to prepare ElringKlinger for the future. Having said this, I now turn back to Dr. Wolf.

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Stefan Wolf, ElringKlinger AG - Chairman of the Management Board & CEO [4]

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Well, thank you Mr. Jessulat for the explanation of our figures. So far, markets have seen no improvement in the underlying fundamentals with political and economic uncertainties remaining high, and that means the ongoing year 2020. This includes factors with direct or an indirect impact on the automotive industry.

Let me give you some examples. The first good example is the Brexit. Now finally, the U.K. has left (technical difficulty) 31, 2020 (technical difficulty) to be (technical difficulty) of the Brexit story. If trade agreement is not reached within the transition period until December 31 of this ongoing year, there is still the risk of serious economic consequences. Another really severe risk is the coronavirus, which is in China right now. The impact on the automotive industry cannot be fully assessed yet. But it is clear that there will be an impact on Chinese and -- on the Chinese and, of course, on the global economy, but it remains totally uncertain to which extent. The next weeks will probably give us a first indication on this. In addition, (technical difficulty) between the U.S.A. and China remains (technical difficulty) global economy. Last but not least, the low reliability of auto forecast, which we have seen in 2019 could continue in 2020 as there still is a high unpredictable volatility on global markets.

In summary, ladies and gentlemen, the current business climate can be considered challenging and exposure to many different influencing factors make it increasingly difficult to issue accurate forecast. Therefore, we will (technical difficulty) January and February 2020 and will include (technical difficulty) for the fiscal year 2020. Thus a detailed outlook for the current year will be provided on the day of the release of the annual report on March 30, 2020.

Well, ladies and gentlemen, thank you very much for your attention. Thank you for listening to me and Mr. Jessulat. And the two of us are, of course, as every time in those calls, more than happy to answer your questions. Thank you.

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Questions and Answers

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Operator [1]

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The first question is from Akshat Kacker, JPMorgan.

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Akshat Kacker, JP Morgan Chase & Co, Research Division - Analyst [2]

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Two quick questions, please. First on raw material price trends. You talked about already seeing some tailwinds. Is there a number that you can share for Q4? And what do you expect as benefits for 2020? That's the first one. And the second one, Dr. Wolf, can you talk about the opportunity to cut costs in NAFTA? You mentioned that in the press release as well. Can you share some more details around that, please?

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Stefan Wolf, ElringKlinger AG - Chairman of the Management Board & CEO [3]

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(technical difficulty) of course, we are presently in programs where we try to cut costs. That is, of course, personnel costs, also travel expenses, all kind of the different issues that we have. And this is not only related to the NAFTA area. We did this last year on a broad global basis. We continue this year on a global basis to cut cost here. And as I said, this is a general approach here. And we really track it, track it very, very closely (technical difficulty) to help us in cutting all those (technical difficulty) program and ongoing project, and that is, of course, what we do. With regard to raw materials, I really don't know. I have no figures here, yes? So -- and I don't know if Mr. Jessulat has figures. We saw some decreases, some increases in materials. So basically, I would say the -- what we had to pay for raw materials was basically the same as the years before. So we did not really see a tremendous decrease in raw material prices.

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Operator [4]

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The next question is from Christoph Laskawi, Deutsche Bank.

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Christoph Laskawi, Deutsche Bank AG, Research Division - Research Analyst [5]

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Christoph Laskawi, Deutsche. The first one would be on your working capital reduction. Looking at the full year basis, over EUR 70 million, I think, is from receivables. Could you give us some broad indication on how much of that cash came from factoring? How much was done aside from that? And also on the inventories, where, I think, around EUR 45 million cash came in. Was that largely related to tooling that you've managed to get off your books and to the customer earlier than previously? Or was it really an underlying improvement of your own inventory management when it comes to goods that you have stored? And the second question would be on the margin that we've seen in Q4. The underlying margin actually was down versus Q3. I think going into the next year, and you highlighted that cost-saving measures in Q4 already helped quite a bit. Would the 3.9%, if we strip out the gain, be the run rate excluding any negatives from the coronavirus that we should think of going into the year? And all negatives would bring that down? Or don't you want to share anything at this point in time?

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Stefan Wolf, ElringKlinger AG - Chairman of the Management Board & CEO [6]

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On the working capital side, the receivable sales, EUR 60 million, 6-0 million. And when we look at inventory, there is a portion of that coming out of tooling, but there is also a portion, mainly, I have to say, coming out of raw material plus work in process. Second question, when I look at earnings quality, broadly speaking for Q4, the mix of Q4 is not (technical difficulty) look at the quality of (technical difficulty) not very good mix. And if I look at the results, I still would maintain my opinion that Q4, to some extent, is an extension of the positive development, in particular, in NAFTA. Yes? This is what I can tell you in regard to earnings, quality, Q4 without going into the specifics. I would defer to the 30th for that. But so far, I would qualify Q4 from my side.

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Christoph Laskawi, Deutsche Bank AG, Research Division - Research Analyst [7]

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And just a follow-up on the factoring side. How much room do you think you have for 2020 to go further with that? Could it be the same magnitude? Or are the easy gains essentially done by now?

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Stefan Wolf, ElringKlinger AG - Chairman of the Management Board & CEO [8]

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No, I think the -- there is some more room that we have here. But the easy ones are part of the 60. Now it's getting more difficult.

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Operator [9]

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The next question is from Christian Ludwig, Bankhaus Lampe.

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Christian Ludwig, Bankhaus Lampe KG, Research Division - Head of Research & Analyst [10]

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Yes. Another one on the working capital. Basically down the same routes as Christoph tried to ask. How sustainable do you think this 24.5% are going to be going forward? I mean, just keeping it at that level, I think, would be a great achievement. Is that something that you think will definitely be something you would try to make for 2020? Or is that already a very big challenge? And the second question would be, very quickly, an update on the current coronavirus status? What do you see currently in your Chinese operations? What is your view on the situation there?

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Thomas Jessulat, ElringKlinger AG - CFO & Member of Management Board [11]

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Yes. First one, I think roughly 25%, when I look at what we have achieved in terms of our processes to control working capital. From today's perspective, I think 25% is a good target number for us going forward. And I think this is (technical difficulty) I don't see any items (technical difficulty) and I, on other side, would not be too aggressive because always, there is start-up situations, there is change of sources, change of suppliers. And the 25%, I think, is a good target, and it's -- I think it's a good group achievement here if we can maintain that on that level.

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Stefan Wolf, ElringKlinger AG - Chairman of the Management Board & CEO [12]

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Well, let me elaborate on the coronavirus. First of all, we have 4 locations in China. One is in the North, Changchun, almost no impact on that. Then we have 3 locations in the South, which is Suzhou, Chongqing and (technical difficulty) no impact. The biggest impact is (technical difficulty) it was closed another week after Chinese New Year. So we are lacking here 1 week of production. The same with Chongqing. Then people returned to Suzhou. And they had to stay home for 2 weeks so that when production started again last week on Monday, we were lacking a lot -- of course, a lot of people. So production started around about 30%. We are now back to about 50% to 60%, but we're still not 100% what we have to produce. Which is not a real big thing because almost (technical difficulty) customers are not producing. So we (technical difficulty) a problem. Also with regard to who's going to pay for that, it's absolutely sure that we are not going to pay for that because it's false measure. So everybody has to take their own damages by themselves. But we will see, from my point of view, a big impact internationally in about 2 to 3 weeks because of the situation in China. A lot of suppliers were closed and a lot of parts and also materials did not go on the ships. We have some ships on the oceans that are going to the U.S. and to Europe delivering parts. But I would say, in 2 weeks, we are facing a problem because (technical difficulty) that we need. So this is not (technical difficulty) this is a global problem. It shows that those -- the global network can be really hit very, very easily. And that, from my point of view, should lead to the car manufacturers overthink their purchasing strategy. Maybe it makes sense to pay a couple of cents more for a part coming from Europe or from Germany, because the damages that they will have out of this coronavirus issue, from my point of view, it's much more than what they have saved over the last 5 years by buying parts from China and saving some money. (technical difficulty) magnitude of the impact, we cannot tell, we (technical difficulty) it's really unpredictable.

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Operator [13]

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Next question is from Frank Biller, LBBW.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [14]

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Yes. It's about cash and cash equivalents, EUR 135 million on your balance sheet at the end of the year. What is the minimum amount you're thinking of a cash position here on your balance?

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Thomas Jessulat, ElringKlinger AG - CFO & Member of Management Board [15]

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I think minimum amount that I want to carry is somewhere maybe EUR 75 million, EUR 100 million.

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Frank Biller, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [16]

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Okay. And so the rest is being used for reducing the financial debt position then?

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Thomas Jessulat, ElringKlinger AG - CFO & Member of Management Board [17]

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Yes.

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Operator [18]

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We have a follow-up question from Akshat Kacker.

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Akshat Kacker, JP Morgan Chase & Co, Research Division - Analyst [19]

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I just wanted to follow-up on tangible CapEx. The levels that we are seeing now are obviously below depreciation. How sustainable is that? And should we expect a normalization back to the levels of EUR 110 million, EUR 120 million going forward? Is that a fair estimate?

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Thomas Jessulat, ElringKlinger AG - CFO & Member of Management Board [20]

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We'll keep CapEx level in a range around this amount for 2020 and also for 2021. Yes? There is, going (technical difficulty) upside (technical difficulty) is the expectation that I would have that -- there is going to be times where we have to invest more in machines and infrastructure. But right now, in order to execute the plan, we don't need more. And also it's, for us right now, I think, a reasonable level. And it's -- like I mentioned before, it's not a level where we starve ourselves to death. So we do the necessary and we also add, in some areas, capacities where needed. And we will keep a close look on the distribution between classic business and the new business. But 2020, '21 (technical difficulty) maybe not on this level, maybe a little bit higher, but (technical difficulty) (inaudible).

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Operator [21]

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As there are no further questions, I would like to hand back to Dr. Wolf again.

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Stefan Wolf, ElringKlinger AG - Chairman of the Management Board & CEO [22]

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Yes. Thank you very much. Thank you for your questions and for attending our conference call today. We heard that, apparently, there were some issues with the quality of the line. If that was the case, and you could not really hear us all the time, we apologize for that. Sorry about that. We're going to work on that, of course. And whenever you have additional questions with regards to the (technical difficulty) today, Mrs. Graf (technical difficulty) are more than happy to take your individual calls. Just call them, ask them, they are all well prepared, and they will answer your questions. So thank you very much, and hope to see you all when we present our final audited figures on March 30, 2020. Thank you very much. Bye-bye.

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Operator [23]

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