Q1 2020 Earnings Call
Hello everyone. My name is Jamie and I will be your operator this morning. I would like to welcome everyone to the Garret motion earnings conference call.
This call is being recorded and a replay will be available later today after the company's presentation. There will be a Q&A session at this time. I'd like to hand the call over to Paul Blaylock deceive investor relations, please go ahead.
Thank you, Jamie. Good day everyone and thanks for listening to lotions first quarter 2020 conference call before we begin. I'd like to mention that today's presentation and press release Thursday available on the motion website at where you will also find links to our SEC filings along with other important information about Garrett turning to slime to we note that this presentation contains forward-looking statements regarding our business prospects goals strategies anticipated financial performance payments to Honey Wagon and the anticipated impact of the coronavirus on our business. We encourage you to read the risk factors contained in our financial filings become aware of the risks and uncertainties in this business off and understand that forward-looking statements are only estimates of future performance and should be taken as such the forward-looking statements represent Management's expectations only as
Is up today and the company disclaims any obligation to update them. Today's presentation also uses numerous non-gaap measures to describe the way in which we manage and operate our business office dial each of those measures to the most directly comparable gaap measure and you're encouraged to examine those reconciliations which are found in the appendix to both the press release and slide presentation. Also in today's presentation and comments. We will be referring to light vehicle Diesel and light vehicle gasoline products by using the terms of diesel and gasoline only I will now turn to the the purpose of today's call and with us today is Olivier ravier our president and CEO in Peter Brock our interim CFO. I'll now hand it over to Olivier.
Science bowl and welcome everyone to direct software.
2020 conference call let me start by pressing two points in line of unprecedented crisis that the world and most specifically aware industry are getting through First Choice health and safety or employees is a priority. We are taken very early proactive measures that sometimes are going beyond the recommendations of the page where we operate but we also make sure to support the communities where we operate by providing protective equipment and even producing close to home. She's pretty sure I'm going to is in China second. The nature of the price is a stretch the flexibility of our supply chain to a level. We are never imagined before think about I want fastest growing plant one Western down for six weeks into one the supply chain with the number of suppliers. We are in China was stopped dead.
Then we saw the opposite China restarting at full speed as a time when critical Supply from your up was interested in these circumstances and facts of the assault and the results achieved by gerrity's describe. This is realizing our responsive and our flexible our operations. All this gets us to the result. We see on slide three for the first quarter and that demonstrate direct flexible operating platform and Global capabilities and is the onset of the global image the cry. This is obviously not over and the future remains quite unpredictable, but we continue to take proactive measures to confirm the coronavirus outbreak we discussed in more detail later on on the call with the priority on several in details and well-being of our employees and supporting our customers and local communities dead.
The only thing I will need sales to hold 745 million don't only 8.5% the constant currency do to lower volume down from the impact of the covid-19. Although we continue to outperform the whole industry AS Global like the vehicle production was done approximately 25% in q1. Just this last year these represent about 16 percentage points of over four months despite the shutdown of our fastest growing plant for six weeks in a fastest growing region. We also generated 108 million in adjusted ebitda and fifty-seven million, it adjusted free cash flow which excludes the in the material payments representing the conversion rate of 84% of adjusted net income our ability to quickly ramp up production in China and to restore our yep.
Will supply chain from China contributed to the store Global growth in our life vehicle Gathering segments, which clan 14% has constant currency into one month. This is by the current crisis. We achieve positive organic growth industry in sales in all regions as a result of our new product launches and she'll demand games. I'm encouraged by the regional market conditions in China. We have seen the spread of covid-19 around the world and are now facing significant Auto industry challenges in Europe the American life and also India, we are indeed implemented numerous actions to adjust our operations reduce our cost optimize our cash position and Stratton vrs Financial flexibility during the first quarter and in April, we fully Drew Down on our store hundred seventy million revolving credit facility our total equality wage.
approximately 650
5 million at the start of the second quarter positioning us to better withstand the substantial disruption across the global automotive industry and economy is worldwide wage you to preserve get resolved by implementing strict cost controls and cash manager and actions including significantly reducing discretionary expenses or temporarily reducing based on a senior leadership team on the Catholic side as most of our local expenditure is related to volume growth. We are also reducing or postponing commitments wage 2020 by 40% while preserving our new product launches, although the near and long-term.
Don't think was like four, we provide an update on the impact of the covid-19 starting on the left hand side of the slide. We also another view of the global project on Cave I mentioned to go I'll conditions in China have rebounded faster than we anticipated in addition to resuming normal operations at our facility. I was supply chain and customers in China are basically resume normal production level as well our businesses in South Korea and Japan continue to operate although wage level than plan and our class in Pune India remains temporary closed in Europe and North America market conditions deteriorated towards the end of the month beginning in March most North American temporary closed their plans in response to the rapidly escalating. Coronavirus crisis, the major. Oh is in both Europe.
No America, I would rather you restarted production at the factories of the last two weeks of announced plans to restart production later this month. Although at relatively low levels based on these developments get us temporary closed all reduced production as many of its manufacturing facilities in Europe and North America during to an end in to change our plans in this region are currently operating at low capacity in response to customer demand and local government mandate the supply chain disruption in both of these regions as being mostly limited to date is on the drop in demand. We continue to manage our Advanced Supply base to ensure our production levels match oil changes in customer activities.
No turning to our own blink priorities in this crisis. We are implemented best practices protect the health and safety of our Workforce including a decision and cleaning protocols. Well play distancing site access restrictions and worldwide travel back. We are also implemented work from home policy with galles team members greatest strength, and we remain committed to ensuring those in the essential for maintaining business continuity work on site back in the safe and compliant manner. We are currently in the process of phasing in more comprehensive recent to a program that others to w h o m c c guidelines local office and if we know the condition as well as our own precautionary measures the recovery operations at the website will be gradual beginning with the stereo the radio off.
I think he was something employees continuing to welcome all as appropriate. This proactive approach will enable us to fine-tune our measures wherever necessary job ensuring with follow-up commitment to keeping a log cabin.
Let's face and healthy. I will stop as in Marina Place be focused on working closely with our partners and leveraging direct Global footprint and standardized processes to meet customer commitments engage in constant communication with all of our customers worldwide and we modify our protection plan accordingly long as we managed the balance of 2020. We also flexing of organizational structure in implementing short-term working teams, including solos reduce costs to use and state funding leave.
By taking advantage of assistance programs while Louis Walker 463 returned to their jobs as a future update. We're able to maintain our responsiveness as market conditions gradually improved.
I just want to confirm include reducing and contract Service workers which make up above One Source Auto Chrome Rock Falls delaying Merit increases for employees suspending discretionary spending that is not critical to our daily operations and fifteen external hiring. We also intend to optimize our working capital requirements by controlling inventory in the discipline manner, which is a strength of our business office in receivables and collaborating with our suppliers as we have consistently done throughout our long-standing story. And as I mentioned earlier, we also offer you reducing pay for senior leadership as well as board members by 20% and postponing non-essential Capital expenditures by actively managing a lower cost structure.
And preserving Capital we expect to generate significant cash settings for the gear and we I've actually thinks of step to burst Ur our liquidity as because in nineteen Place continues to write the evolved. It has become increasingly difficult to quantify the impact on our business while our disability is limited. We expect the current quarter to be supposed to be more challenging than it was in q1 due to the idea and certain operating environments. We recently withdrew our full year 2020 guidance and intend to Thursday June providing an Outlook as a future of the case with that. I will like to over to Peter to provide additional color regarding our financial results. Sorry.
On Syfy first computer technology strategy, despite the disruption due to heavy industry and global economy is important to bear in mind the positive long-term problem and solves a lot of business that are remaining intact direct ourselves as an industry leader of 65 years delivering critical cutting-edge Technologies to Major automakers worldwide.
once this one president
In situation in behind us automakers will likely and control even tougher regulations and Technical challenges and GR8 will be there fully engaged with them with the wide range of differentiated products and solution. Our management team has $90 in the past and we are determined to emerge from this.
Seven crisis has the strongest company. We continue to benefit from globalization rates particularly in gasoline. And I bring that form and Banks. Yeah the option of the technology to drive higher content of the vehicle and stress on our long-term growth prospects for 2020. We are addressed either of them knew probably reflect a slower ramp-up do to lower affecting volumes in light of the current environment. But so far we have not been informed of anything else. He can't launch we are also named saying and unwavering focus on bringing around you Electrify technology market and remain on track to finalize the industry additional hour. Each of financial mass-market launch next year.
Justin Winston to start production later the service of a second-generation fuel-cell compressor and increase the number of projects to develop our agents you sell vehicles we would think that any team is drive and consumers and chemicals to reconsider how much they will stand on wage Advanced new technology. But if there is a domain where we are convinced that pressure will not reduced. It is not current missions and this is the state wage. We contribute the most with our technology Solutions. And now let's talk to Peter for the long-awaited actual colors regarding our financial results page and welcome everyone. I will begin my remarks on flight 6 in the first quarter Garrett reported net sales of 745 million down 8.5% as concierge.
Has only been mentioned earlier our performance for the quarter was adversely impacted by our plan shut down in China, both of which are currently operating at full capacity. Additionally. Our q1 net sales were impacted by lower production levels in the final weeks of March at several of our manufacturing facilities in Europe South America covid-19.
Notwithstanding these impacts our if you want a sales reflect higher gasoline volumes stemming from increased supercharger penetration and gasoline engines and new product launches all set off by lower diesel volumes and lower product sales in our commercial vehicles and aftermarket business.
adjusted
Even that for the Border was down 32% to 108 million for a margin of 14.5% which is a 3D attributable to our lower volumes stemming from Chicago Fire outbreak an unfavorable product mix and premium freight costs incurred mostly in relation in relation to the interrupted supply chain from China.
We're a year over year incremental margin was impacted by the mix headwinds stemming from the significant increase in gasoline growth during the second half of 2019.
The sequential incremental margin versus Q4 2019 was approximately 34% despite the premium freight costs incurred in q1 as I mentioned a moment ago and was very much in line with our average contribution margin.
I was just a free cash flow which asks clothes and then they really the same install Honeywell increased slightly year-over-year 257 million representing an 84% off adjusted free cash flow conversion rate.
Lastly our adjusted diluted EPS which excludes Honeywell Indemnity obligation expenses and related litigation fees was $0.89 per month compared to $1.22 per share in q1 2019.
July seventh you see that our gross profit was down $54 million from lower sales mix and back and premium freight cost partially offset by productivity. All directions was down three million reflecting lower legal fees and relation to the indemnification agreement and not operating income was at eight million primarily related to Foreign Exchange impacts of heavy lastly tax expense was down twenty-three million and this includes the benefits of reduce withholding taxes.
On the overall basis net income was down ninety million versus last year despite a lower tax extent of twenty-three million.
Turning 3/8 wheel is straight our net sales by region product line. If you want our Asia sales as a percentage of total net sales decreased by three percentage points over the same period last year due to the impact of covid-19 as previously discussed on the product. I'd be grew our percentage of net sales from gasoline products to 36% in the fourth quarter of seven percentage points from q1 2019. This segment remains our largest and fastest-growing category.
This Thread is consistent with the commentary be provided in our key for call has to be expected transformational shift from diesel to gasoline to continue in 2020. Although I am a slower Pace compared to 2019 to be more specific the decline and our diesel sales for the first two months of the year was much lower than the decline in 2019, but no strength was reversed and marched uses arrested throughout the sales related to the coronavirus especially in Europe also on the slide both both of our higher-margin businesses and commercial vehicles and have some markets declined as a percentage of net sales in the first quarter reflecting The Continuous headwinds for each of these end markets. Which accelerated in March
Starting to slide line with provide our net sales for the quarter gasoline products through 34 million representing an increase of 14% at constant currency over the same. You're while diesel products declined by fifty five million or 18%. Constant currency mainly do the due to the overall market decline and run off of certain application a commercial vehicles declined by 29 million or 70% that constant currency and after market sales decreased sixty million or 16% that constant currency long as the downward Trend and both of these segments accelerated in the quarter due to cross covid-19.
The one in ninety million in the quarter in summary, although we continue to grow arrogant. And if you want all of our product lines were impacted by covid-19 tanic adversely affecting our net sales performance for the quarter.
Starting to dislike then you see our adjusted ebitda walk for a few 12020 as compared to q1 2019 for the order Garrison. Just the detail one hundred eight hundred eight million down 32% compared to the same period last year higher premium Freight expenses and lower volumes were largely due to covid-19 as we already discussed.
The unfavorable next in the quarter was partially offset by productivity gains. We believe our q1 productivity gains represent a notable accomplishment considering the significance off like in disruptions. That's the experience in the quarter.
And do you mean it was essentially flat if you want last year and argue any expenses decreased four million while preserving our core RFD to build for the future. The attacks benefits on page 21 21st is Brian here was 5 million.
Lastly our sequential Vikram Vikram mental margin was approximately 34% in q1 versus Q4 2019 largely in line with our variable contribution for the quarter despite the inkers premium freight costs in the first quarter and and efficiencies resulting from the plant shutdowns in China.
Turning to slide 11:00. We provide our Network for the first quarter. If you want to be reduced by $26 million to 1230000000 including a 50015000 benefit from working capital capital expenditures for the four door on a cash basis total $39 million, which mainly represents Q4 2019 a capsule expenditure commitments based in q1 2020 as mentioned earlier. We have started to postpone all non-essential calculate expenditures, which should generate cash benefits for the remainder of the year in addition our cash taxes of three million in q1 were lower-than-average mainly used some reimbursement to receive in q1 as a reminder call shortly cash taxes are normally linear and conflicted with significantly on a quarterly basis.
For the 1st.
Corduroys just a free cash flow to $57 million including Indemnity related payments of $39 million. Our free cash flow was eighty million compared to fifty million in the same period last year going forward. We will maintain our focus on preserving on preserving castles and improving our cash balance during these challenging times a month starting July 12th to the end of the first quarter with available liquidity of 658 million, including cash and cash equivalents and cents is available under the revolving credit situation.
Total gross-out excluding cash and cash equivalents increased forty 1 million during if you want to 1484000000 as of March thirtieth birthday driven by and drove down on the revolver of 66 million in the first quarter.
On April 6th, we fully through the remaining funds available under our revolving credit facility supplementing our cash position of $254 million at March thirty first served as a result. We started the current second quarter with $658 billion in cash and cash equivalents.
Our next issue was 301 as of March 31st, and if we have no significant debt maturities before September 2023.
Based on our current projections the expect we will not be able to comply with one of the financial covenants in our credit agreement as early as of June 30th 2026 that's outstanding debts to our trailing Consolidated attack and those Finance Financial metrics are being impacted as the market response to the coronavirus cried.
We are currently in discussions with our lenders on potential modifications to our continent as well as Waiters.
This process will pursue its course during the coming few weeks and we have made significant progress to date.
It's like thirteen be related to Honeywell is the first quarter of 2023 reduced our annual liabilities by 47 million to 1305000000 primarily use the payments of thirty five million two hundred miles in January 2020 as a reminder the indemnification liability, which is recorded at a billion thoughts approximately as of March 31st reflects the cap 275 million in cash payment per year and it's paid $200 in euros at a fixed exchange rate.
Our estimated payments for 2020 remains approximately 108 million or $67 million below and all couple of hundred and seventy-five million for the second month or any payment will reflect the deduction of approximately $34 million stemming from over payments made in 2019 has to be disclosed on our previous call The Cue to make a payment has been deferred at this point to May 31st, and we are evaluating our obligations with respect to learning as to when any payment must be made.
Additionally we had also need for the annual mandatory transition tax payment to any value of $18 for the first two months to May 31st.
With that I will now turn the call back to all of you on site 14. We summarize our q1 performance and you'll to date actions during the subscriber. We do it on 60 bull operations and Global capabilities. I mean the coronavirus outbreak while you one result was significantly impacted by the covid-19. We clear of operations in China and restored the selection contributing to a strong growth in like they target women sell. I am proud of the dedication and resolve the line fluid option during this difficult. And I am confident that we will email from this Global pandemic in a position of strength.
Although market conditions in China continue to show signs of stabilization the near-term Outlook remains challenging especially in Europe and North America should continue to take advantage of our flexible and resilient business models by actively drawing upon our ID valuable structure and advanced Supply base management and able to adapt quickly to short-term Market disruptions. We also implemented aggressive cost control measures and cash management actions to increase our liquidity and we are activity evaluating sort of steps to strengthen our financial flexibility and maximize our free cash flow in response to this crisis.
We also maintain our focus on developing new technologies around electrification and software by collaborating with our Global customers as we have done for the game default. We remain with position to accelerate the wall clicking Edge technology to the market and drive long-term success, even in unprecedented challenging circumstances, like the ones the global economy and the automotive industry facing the performance achieved in q1 both on the revenue line on the prophet and the gas line. I like the strength of Gareth, but technology leader voice for Google market grows in the shop mid and long-term as well as an efficient operator that can flag operations to maximize its performance.
This concludes our former enough today and I will know I need back to ball. Thank you Olivier before we begin the Q&A portion of the call. I need to mention that we will not be taking questions related to the existing lawsuit with Honeywell operator. We are now ready to open the call for questions.
Our first question ladies and gentlemen, we have now reached the question and answer portion of the call. You would like to ask a question, please press star and then one to withdraw your questions, you may press star in two months. If you are using a speakerphone, we do ask you please pick up the handset before pressing the numbers to ensure the best sound quality. Our first question comes from Brian Johnson from Barclays, please go ahead with your question.
Yes, good morning.
I know you don't want to talk about the Honeywell lawsuit, but you did put a page in there about the indemnification payments to Honeywell and my reading of your filings would seem to say that if you do trigger an event of default the Honeywell payments get subordinated. I'm not sure if it's defer. I'm not sure if it's interesting. So you could you walk us through that mechanism and maybe comment on where that could be going.
Yeah, you're right. The credit agreement stays that s you would reach as a company with the leverage Covenant which we expect to happen as we said at the end of the month and forth or the deferral mechanism or any payments to Honeywell with respect to the indemnity Indemnity obligation and kicks in till we are back in touch with uh with the Covenant. So we expect that to happen as soon as q1 and they'll they'll be our back. Um, so to say um, um off we'll take it from there and just a follow-up many other Auto Parts companies gain some Covenant relief coming into their calls the banks generally seem to not want to foreclose on what could just be a temporary downturn. It's there's something different about your lending relationships that prevents that
Well, let me comment on on where we are into into this but I would recommend for that as you remember. Well spread out from a walk-in only six bottles ago, which is very specific. I will follow up around imposed on us reject capital structure. That was unable, unless Garrett executed perfectly. I have a macroeconomic and Industry environment meaning that was really unsustainable that way unless everything was perfect. We inside this is Kathy. Sure was instituted to cope with any need full operating challenges.
Much less those we face in the trunk environment. So now that's probably the specifics of the pit of command on the web page trying to see with the banks. Well a few options. There are a few options open as you can understand. We cannot go into the specifics about how we are going to potentially could get into waivers or Amendments of our credit agreements, but I can say though is that we have started the process we expect it to close relatively before the before the end of the month and there are still a few a few elements of the of the agreement with this person our agent, um in discussion. I think we should get a light on on a few months outstanding potential changes in the amended agreement in the coming few days, honestly, and then we are going to get into a process of reaching out to our lenders probably as soon as as soon as later this week Thursday.
When you say agreements, do you mean with your former parent or do you mean with the banking group?
Okay. Okay. Thank you. I'll I'll go back and do you have some questions on the torch?
Thank you. Our next question comes from Joe spoke from RBC Capital markets, please. Go ahead with your question. Thank you very much. Maybe just a little bit on sort of the detrimental margins. I know it's sort of Highly unusual times. Um, um, and if you even sort of talked about maybe sort of sequential sort of better to look at here, but like but the the bridges you provided were on a year-over-year basis and if we look at um, you know, the mix factor which was just large obviously continuing with the continued shift from from diesel to God. But so even if we back that out like the volume price Factor on on what you indicated where you're getting the client seems like 45% sacramentals and I know plants were closed at 6, but I guess it was just wondering if you could provide a little bit more color and maybe something you wouldn't normally want to get into but just a sense of the detrimental in China or
We're sort of the rest of the world and just so we can get a little bit of a better sense for how the detrimental margins or the margins in general hold up as we move to the second quarter when the regional wage clearly changes we said before I the margins in China are not that different from here to the the global average margins of the of the company. So the fact that q1 was proportionately significantly impacted by China or If I decline in sales and shine not necessarily has an out of proportion hit on the back deck rental margins and we also expect the rebound in China that we currently expect in the second quarter not necessarily to have significant effects. In fact on the on the same. The current month of March is that we will see in the ink you to um, I think the way that's how we basically said that the way to look at it is obviously versus q1 last year birth.
with the banking group
The impact is significant. But if you go back to 2019 and our quarterly financials, there was a significant difference between our adjusted ebitda margins first half north of 19% off and second half 17% 16 and a half percent. This has to do with the fact that our gasoline business runs up. So significantly in the second half of the Year specifically in clubs, or you remember when we had organic growth all written by high volume gasoline program. So we we have two different worlds basically in 2019. Therefore it's more meaningful to look at the We Believe Saddam is Lee and and they're the map gets you to 34% which is close to the variable margin of the business. What is it going to mean moving forward for you to We believe that we can improve this is decremented margin threats because of all the actions that we have deployed obviously and that already explained including obviously reducing our temporary resources.
contract Service workers implement
Adding reduced work schedules across all of our plants basically across all of our sites. I should say including and sg&a and Arnie. So obvious Thursday are going to be benefits coming through from this which should overall reflect in some capability in the decremental margins in the second quarter when it gets to the second half of the Year wage. Um, it's it's the year your store is going to be different because of the dynamic that I explained the same is from all the incremental costs actions is going to depend too significant extent to what extent a significant extent to to how each state from the lease programs in the different countries in the world are still going to be applicable and honestly also to what extent we will see them at that time and date, of course to have to the business Dynamics at that point. There's all these times still forecasted in in a pretty wide range as you can imagine, but I guess it's getting you some wage.
How we how we think about it? Yeah. Thanks. Thank you, I guess so I can lie. I know you're pretty variable as you've sort of indicated and so much shown em, but you know, I think you're you're sort of historic ebitda margin range 18 to 20% um, assume some higher volumes and if we're entering this. Over the next couple of years where you know violence might be a little bit lower for for longer than thought is there more you can do on costs outages or some more restructuring you can do and and how should we think about your ability got to pay for that just given, you know, maybe some of the financial constraints
This one we have some colors to that. The first point is that in in this company. We are never been doing construction by ways. We all believe that constantly and we are always optimizing along the way so it's it's not very often. I think it's a difficult to see any press reports of stuff except off Factory closures. We need a password repositioning stuff. It's fastest thing that we have every year which is adjusting our cost and writing the necessary actions if we need to and we always add them space to do that. So it's not didn't usually it's a continuous process which moves on the needs of these people dying off the second part. He does for us. The question is how fast the industry is recovering past 2020. So $2,020 a year off.
No, it's it's almost all that is that so the question for us is reading where is 2022 21 2022 and there is one thing that I thought that I would like to share with you is that it's not only about the automotive industry. We have one significant programs. We are having seen doing a better job than the industry. Uh, this will remain in 2021 and 22. So that will come back the real question which is the one you are which is which are we getting ourselves back on the trajectory that we are seeing a pre-crisis keeping in mind. The the machine packed I would say it's just too early to say Thursday. We have better visibility on the industry before giving answer answering that but uh quite frankly we are not playing well the business after the credits that is less performing from the dead.
some point the system during the
crisis
Thank you. I'll pass it on.
And our next question comes from our sink of dishes from Morgan Stanley, please go ahead with your question. Great. Thank you for taking the question. Just wanted to get some visibility instead by Chain. I know it's been uniquely constructed by you and you know, how we should think about that, uh, you know have the help of the the tear to supply chain that you've effectively constructed.
Well, as you know, we are spending a lot of resources on as developing our suppliers and this is something we've been doing for a long time. So I guess that's the little need of the secret Source behind our supply chain model at the same time. It means that we are very close with our suppliers. And even in times of Crisis. I'm trying to else that you'd like to be as efficient as possible. If you want an example today what we see from the janitor that it's taking a lot of time for them to adjust their faith. We must be the forecast after receiving from the janitors. It's like ignoring that there is a crisis. So what we do with our supplier is not on a monitoring very closely the financial stress and this is something within learning in 2008/2009 and keep on doing so, uh, we are also making sure we're dead.
Reshuffle the program so that it's not putting them in the difficult position from a cash need some point. And that's something with that we take pride of doing and in our in the way when I manage them, so we enclosed to uh, the shuttle Supply base. What are they are on the well, we use is that we have a lot of them in China and China is recovering as the country faster. And the second name is were you making sure we adjust our supply chain need even if we need to second-guess, uh because of lack of information what we get from our customers,
And then how do you think about you know the operations in Mexico and how those resume?
Well, Mexico has been in quite at the center of our Focus for the last few weeks as you know, in Mexico. So, uh, we have the right to sell essential businesses and we've been able to do that for some time. We are still to close the factory for about a couple of weeks and then we are restarting the factory to supply and those essential, uh, the vehicles that we are solving so think about the oil industry the agriculture which represents a significant piece of activity in Mexico for the passenger vehicle sign on the commercial that your side we obviously waiting. Uh, you'll see what the authorities will decide it's in the middle of the discussions with them. So we cannot tell you it's a matter of days the system at all month, obviously.
right, and then my last one here, you know with the you mentioned that
The capital structure they'll suited to cope with with any significant challenges. But you know, if you make it out of this crisis as it appears, you're you're you're progressing, um, you know in in some way that that justifies the capital structure that you know was was was created at the onset. What are some other things that you know, the current capital structure prevents you from doing
I know generally I would think is that just imagine you have you send Bolt running and you put on the back of Usain Bolt seemed like the tenth own container.
It could potentially run but you will run much lower the way to think about our capital structure of today.
Okay. Thank you for taking the questions. Our next question comes from David Kelly from Jefferies, please. Go ahead with your question.
Good morning, my line cut out earlier. So apologies if either of my questions were addressed, but I guess how should we think about the productivity impact of social distancing, you know stagger chefs the various changes to plant work as RAM back up and and you know particularly impact on on detrimental as potentially going forward would be great.
So we all just need the retail for the social thing and all the measures that we have into the factory quite frankly. The worry we are is much more about people getting people onto the lines and giving people off the lines. So since about for the places in a factory where people can interact with each other and that's when a lot of focus because quite frankly on the lines, we have the right, uh things in place to protect the employees, uh, it's all about, uh, limiting that social distancing. I need directions or factories and this is where we spent a lot of time with all the rest relationships, but it's more a matter of implementing the the discipline than the fact that will come with that. We really believe that the the additional cost and the impact on the rental margins will be will be completely immaterial. Obviously. There are going to be some more supplies that you have to birth.
Need to make sure that we do what we have to do, but I think in the big picture, it should have any significant material Financial impact.
Okay, great. Thank you. And and then a couple of segments related questions appear as discussed stronger-than-expected diesel sales and the quarter just curious as to how diesel tracked cognitive to your expectations here.
Well, there is a pre covid-19 or kind of course covid-19 view on this. The PIN code is 19 is that this was doing better than expected and that's from years as well. And and we do confirm that the question mark and and there are all kinds of reasons for that. I mean people seem amazing tentacles optimizing the Giants early in the year was just looking for the end of the year. So we saw the beginning of the year is done. I'm just I'm just but better than the question is with the big disruption that's happening to the market today. We don't know what will be the mix pass code in nineteen. We don't know yet the extent of the government incentive. Uh, we don't know yet. Do we come eaters with recompute the average emissions? Yep.
Solutions for what which was to Europe?
In light of the full compliance that they need to achieve and we don't know what the crime is. We'll do on the mix of vehicles that car makers will sell them to know that we need to ask amateur starting to sell vehicles and so far in Europe as you know, I mean, it's difficult to Value account. You cannot even get to a shop so long, uh that do the post covid-19 mix will tell us if what we saw pre-crisis is still happening post-crisis, but we are question off.
Okay, great. Thanks. I appreciate the color there. And then just one quick segment follow-up. Just curious. If you could talk about the after market Outlook in this environment. I would assume it would be somewhat more defensive. But clearly as you mentioned. This is not a normal Market downturn type scenario either. So any color on the aftermarket would would be great.
Well, this thing I can tell you is that if I put the side of the highway segment that we have which sells can set off that the centers and all the rest and if we look ugh mainly on the on the vehicle side, which are passenger vehicles and commercial vehicles all these major off of lockdown in the countries, especially in your life and do something next time in the US drastically reduce the traffic on the road.
So as a result of that people are using less than less subject to failure and therefore that's probably a point that he is not the same as what we saw in the presence of Susan a 2009 and it's dropped in activity is just just to drop off my eyes Drilling and therefore could not get to the market. So do you see less than what we would see in connection for new jobs, but still and you just need to go to a shop in Europe that uh home is already struggling to get people come and Retail that counts. Although this is an activity that is all right saying to us is not authorized many countries, but triggering cost is and if it's not difficult to get an appointment and speaking by experience.
Friday I appreciate the color all pass alone. Thank you.
Once again, if you would like to ask a question, please press star and one our next question comes from Alien Smith from Bank of America, please go ahead with your question. Good morning everyone for taking the questions. Can you remind us what your current expectations are for production restarts across major regions particularly Europe specifically what percentage of your plants have restarted with customers off and what does the ramp in China inform you about production ramps potentially in other regions?
so
In China me out back to pre-crisis levels.
So we are very much aligned. It's like if there was no covid-19 in the middle.
Is there any precedent by the way, although we are worried that China may be getting into the relationship recovery. And that's why we are very careful about the way we are managing our customer. So in Europe, all of our Factory have restarted all of them the point though is that some of them have not restarted yet? So that's why we are in very low volume of pollution in Europe. And we expect that frontal not to be very fast developing ways.
Okay, and in terms of the cost reduction actions you've been able to execute on is it fair to characterize more Visa staunch the bleeding efforts with the volume drop off and cost that you would actually add back volumes or has some of this been more structural. I'm just trying to think about the possibility for incremental is on the other side of this.
It in in the in the short, there are actively working to its left structural. If if you think about what what we have just explain what the actions are as short scheduled work weeks for menu almost all of our employees worldwide basically, um, reducing discretionary spending basically reducing contract Service workers and temporary employees. All of that is is an extent less structural. I think when it comes to structural costs discussions and dedication. We probably need to be a little bit more thoughtful about what could be the potential recovery in the second half of the year of and twenty Twenty-One. What is the potential damage back on some of these actions? Because as it was mentioned before these actions typically come with some some cash outflows as well. So we want to make sure that we make the right decisions from a from a base wage.
Feedback point of USB managers through through the crisis here in the comment field workers. But but that doesn't mean that we are not considering structural costs takeouts to protect the second half of the year and to be prepared for for twenty twenty one. That's that's something that is part of our DNA as we always do it as well. As you said before, um, probably the need is higher now, but at the same time do you want to make sure that it's sketch very well spent and let's keep in mind something that I mentioned today, which is the fact that we are still on temporary Workforce and contracts. They work for us that makes up something like one force of the total Workforce. So it giving us flexibility obviously on the weather and but it's giving us flexibility just went on the way up.
Great. That's helpful. And one last question on the capital structure. Do you believe that recent revolver draws are sufficient?
Sent to a stand the current market crisis or would you look to proactively augment your liquidity potentially with additional capital and are there any constraints in the Honeywell indemnification that would prohibit you from doing so long?
Well, we we can't give you the final answer on this that's ultimately going to depends on how how badly and how long lasting the crime it's going to be be truly believe that even today middle of may we still have a very substantial liquidity position starting from the 658 that wage worker with we are very very closely watching. Um our cash forecast on a weekly basis for the coming few months actually to make sure that we have that we have a very close handle on this for the time being we believe that um, we we are okay with the liquidity that we have but who knows how long the crisis is going to develop from here? I think in our case scenario, there is no need to what you just refer to if there would be potentially an a scenario of another. Yep.
Economic lockdown across the world and a second wave of of of coronavirus reading and then that could be a different scenario. That's the end that we need to look into it to adds to ethnic ability to the company so long it is there is no firm answer to this. I think the only thing we can say is that for now, we believe that should be okay, but this this can definitely change depending upon how the how the crisis develops.
Great. That's very helpful. Thanks for taking the question.
And ladies and gentlemen at this time and showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.
Thank you Jamie that concludes our call for today. We appreciate your time.
Ladies and gentlemen that does conclude today's presentation we do. Thank you for joining. You may all disconnect your lines.