Q2 2020 Garrett Motion Inc Earnings Call
[music].
My name is Jamie and I'll be your operator today.
I would like to welcome everyone to the Garrett Moshe quarterly earnings Conference call.
This call is being recorded and a replay will be available later today.
After the company's presentation, there will be acuity session.
I would now like to hurt the hand, the call over to possibly lot VP Investor Relations. Please go ahead.
Thank you Jamie Good day, everyone and thanks for listening to carried motion <unk> second quarter 2020 conference call before we begin I'd like you mentioned that today's presentation in press release, where available on the Garrett motion website.
You know BW Dot Garrett motion Dot com well, you'll also find linked to our actually see filings along with other important information about yet.
Turning to slide two we note that this presentation contains forward looking statements regarding our business prospects goals strategies anticipated financial performance payments to Honeywell and the anticipated impact of the Corona buyers on our business. We encourage you to read the risk factors contained in our financial.
Hi wage become aware of the risks and uncertainties in this business and I understand that forward looking statements are only estimates of future performance and should be taken as such forward looking statements represent managements expectations only as of 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 an operator business and we reconcile we could those measures to the most directly comparable GAAP measure and you were encouraged to examine those reconciliations are found in the appendix both the press release in the slide presentation also in today's presentation.
And comment we may refer to light vehicle diesel in light vehicle gasoline products by using the terms diesel and gasoline on like with US today, It's Olivier Robby.
It's president and CEO, Sean do you spend our Chief Financial Officer Computer brought our Chief transformation Officer, I'll now hand, it over to Olivier.
[laughter] sensible and welcome everyone to get Reds second quarter 2020 calls, it's called first I would like to we're talking about when you see a fortune he's done on today's call.
I'm joined already in June I still still being to see if what swepco a successful I'm not sure. They don't technology company, that's what's required LDR disappear.
He brings to our company more than 20 years of financial leadership with extensive experience in the auto industry.
We're excited to act as a member about like typically scheme as he continues to work closely with Peter to ensure a smooth transition.
You don't restaurants, you sent to the newly created role of Chief approximation of T shirt, Peter I would like to personally thank him for his new members contributions over the past nine months as interim CFO and look forward to many more as the orchestrate gallerists continuous evolution in preparation for the future.
[laughter] don't into the second poster on fills out for 2020 yards continued to build the phone it's been spending truck recalled enough rational makes sense.
These out of it being challenging times on global scale, requiring direct rapidly I'd just its operations around the world and reduce cost performed the Cogs 19 pandemic.
Of course, the else on safety yellow colleagues nurse and community, which we operate remains our top priority and I will all goes to everyone at the key babies ongoing price.
I'm very proud of the dedication and resolve our employees have shown during <unk> didn't start per yard working tirelessly to keep I won't be that's running in a safe and I'd be shut manner. The speed at which we responded the from the supply chain disruptions diminishing from trying not to the rest of the well during the fourth quarter and then disrupt.
Sounds around the rest of the well alongside restart in China in the second quarter was exceptional.
The resiliency of our operating structure is directly related to our became a big spring until you've got being quite good suppliers worldwide and maintaining a low whatever lucky Queen integration and they bring direct to quickly adapt to such extraordinary circumstances.
Well just time several of our sites worldwide I've gone above and beyond you could go to not blows and those of personal protective equipment for both selling on different time and you. All did in yeah. We made donation to provide for hospital beds <unk> kids as well that nutritional meals for people do you need.
By the end of the second quarter, we see the resumed operations.
All of our production facilities with a rebound in China, we treat junkie precrisis levels in May.
The gradual reopening across the rest of our global footprint is consistent with the restart of the auto industry as an old beginning in the middle of Q2 and continues to progress slowly.
As we focus on ramping up production outside of China. We continued to successfully manage our global supply base with minimal interruption, but remain very can sell never put onshore wind down to a lot of production level, then shut down and challenging demand environment extending into 2021.
I am pleased to was bought in Q2 direct generated 63 million adjusted EBITDA for margin of 17.2%. Despite the substantial drop guesstimate what do you know.
This important accomplishment is testimony to the teams that needed to maximize the flexibility of all modell led by a world class Laborde manufacturing footprint and integrated supply chain combined with the original well thought and expense you manage all your experience in that it getting downturns.
We believe it will likely take cures for we've got a cellphone unprecedented humanitarian an economic crises and the situation remains quite fluid. We continued to when you told that it does development, but dismissed the notion of a quick V shaped recovery.
We also up they need new film coming on treating the cluster and Philadelphia splitting payment to our former parent Honeywell, resulting in a total liquidity upon Buddy media at the start of the saltwater.
Although the she's a positive development for the management of the trunk crisis, the email the payments related to the subordinated obligation to only well creates a significant cash build on for 2023 unbeknown.
Yes, Josh Golden living so our ability to expand on our strategy now and in the future any negative impact. We further intensified event of additional headwinds shouldn't we indeed provide more details later in the present they shouldn't we expect the revised expected cash flows to Honeywell.
So 40, no disgraced highlights the strength fundamentals of Garrett.
One yeah needed to outperform the industry, thanks to our growing shelf demand and strong underlying macro and second youre breaking extensions combined with a valuable costs modelled that helps presale gosh and and that's why keep knocking profile even in an unprecedented Craig just like the one where our aim but at the same time.
It also exposure is she would you touched a structure that the company narrative from its former parent as you know.
Turning to slide fall, we provide an update on deep pockets of the cookies nineteena for now well business.
Starting on the left.
We offer a Nobel view of the global production landscape.
As I, just mentioned, China, I surpassed our expectations since reopening much boosting see 7% organic growth in Q2, thank back to the probably your for yet.
The strong performance in this country continue to be driven by new product launches and shell human gains.
In addition, we have benefited from an improving commercial vehicle market, which has been under pressure although the passenger.
He said that we do anticipate more moderate growth in the second half of 2020 as local stimulus programs in China are expected to run their course.
I won't businesses in South Korea, and Japan continued to produce at the level of output and our plant in India reopen in May after closing for approximately five weeks in Q2 and slowly ramping production.
In Europe, and North America, the major always gradually restarted production between the end of that premium in may.
Excluding the effect in late March as a result, GAAP sales, which is already close for most of the second quarter.
So then drop off not get activity combined with local government mandates articulate in Mexico for direct that's all the close of finishing up your reduce production at many of its manufacturing facility in those regions.
All of our plants worldwide on operating mostly on fixed people schedules across all product line and we have seen an uptick in demand beginning in June.
Why do we don't see Patriot you'd be modest improvement in volume during the second half of the year. We believe global auto production will still be done almost all your by approximately 23, 60% in 2020, assuming no falls off shops of disruptions.
So now we continue to allow us a gradual and comprehensive ritz onto a program that follows w. ritual guideline and your device of local governments and public health officials.
This includes Ehealth and 15.
Prior to site reopening followed by access restrictions strict standardization igene protocols global top brightroll checks and hybrid CBD key safety, marking and posters to guide I went to leave without being put those social dispensing and also precautions.
Two fills up from what confidence in responding to the workplace. We are installed Vinnie employee rotations in some kind of our locations, while maintaining a walk from them.
I know key priorities for Garrett is to ensure we meet customer commitments by working closely with our partners and making sure production levels matched the changes in customer activities.
Although we have not experienced anything if he can do day to date for our new product launches, we modified our children defect is still well run, but stemming from lower expected volume given the current environment.
We will also continue to flex our I'll give you additional cost structure, the shutdown walking schemes, including fellow reduce well schedules and they tend to leave I've been highly impactful and we'll still play a role but on the list of scale compared to Q.
And as we stated before we intend to reduce Oh boy, our capital expenditures, we don't typically low and musky related to what he gross bye.
He persons in 2020, excluding commitments from prior years.
Since the beginning of this year. We have also launched several comment on cost reduction programs to make a long in addition, Morris missions.
Although discussed.
Initiatives, our cost of the we run the company they have been taken to another level. This year to ensure we adapt our cost structure to our revenue profile that may not returned to pre could be level for several years.
And you can go ahead.
The overall demand on our operating on borrowing and remain I'd and sustain the full impact of the cookie 19 pandemic on that won't global business continues to depend on many unpredictable mutual developments, including the potential for second wave of current I've ever us or longer than anticipated cost wave.
Based on the current dynamics, we expect to see sequential improvement in the current saltwater but bear in mind that this is coming over a little base and our results I speak to be don't Europe gardener, so until conditions become more stable. We believe it's prudent to refrain from resuming a food outlook at this time.
On slide five we reiterate our long term technology growth strategy.
As we've stated in the past the positive long term drivers of our business remain intact. Despite the near term descriptions across your three industry and global economy.
The rollout of stringent global fuel economy, and then on that combined with the growth in electrification of bullet train continue to provide shop, Tom and long term macro tailwinds.
Yes, its position as a market leader antibodies Oems to deliver a painter and say 12 Angel has enabled our company consistently outperform global auto production and we expect this trend to continue.
Well one thing you engine unforeseen problems.
Anything new regulatory mandate and to date, we haven't seen a desire among Chinese authorities, our European condition to weed such requirements in light of the current prices.
Even implementation of self installed out these top or delayed we will not be to be materially impacted given full run dolphin established years in advance.
As a result, it's unlikely automakers will take the liberty to delay the balance sheet in the shutdown, but instead matches the platform mix among the schedule deliveries.
So as to juggle industry recovers after faster pace than global auto production, we believe our future performance will be froze all supported by Garrett I show of while the business.
Since going public we have achieved a strong when rates you know couple of business. As you know we establish an update of our win rate every year in Q3, but at this stage I can already say that the we remain on track for Amazon, you're all strong win rate formats reinforcing our wind.
Street leadership.
I will approach to building callable at sea of long term relationship with globally. We've provided a distinct competitive advantages that that's the right at the forefront of value added innovation and services.
Last month, we received the 2020 bps equality Trust.
Well Enrico engine of the automakers highest performing suppliers.
Peter Straits Williams said is we have boots on the last few years in working relentlessly to improve customer experience.
In June Methodist Energy also announced plans to launch a new I Bridgeport train featuring Garrett 48 volt each jabil.
These type of the degree to an engine coming from a kilometer is rare in our industry and once again underscores our longstanding relationship with the major manufacturer and reinforcing our role as a premier technology innovator.
As mentioned in the past, we expect to be first to market will be jabil, which is working in from me not one technology transfer able to the massive beginning next year.
Each of darice considerable expertise in automotive engineering building complex electric motor since then and associated power electronics running at unmatched speed and temperature and we stay the way for more growth opportunity Nick pretty good.
On the software side, we recently entered into a new partnership with Congo to expand our small diagnosis and productive technologies for use among commercial vacancy.
And who is the leading international telematics provider and by sitting our software solution for inclusion into applications, we intend to broaden the reach of Doris IDH and tools and enabling end users to maximize village at a time and increased reliability.
Enterprises like this one our focus is on preparing the company to exit stronger and the reason why we continue to press and developing new technology not only for comfortable business, but also in editorial addition, and software.
With that I will answer to overcome shunned provide additional color regarding our financial results.
Thanks, Bolivia, and welcome everyone I'm thrilled to join answers a talented and experienced leadership team and look forward to working with management to healthcare and achieve its strategic long term objectives I will begin my remarks on slide six.
In the second quarter Garrett reported net sales of $477 million down 39% at constant currency as Olivier mentioned earlier, our performance for the quarter was adversely affected by the covered 19 related plant shutdowns in Mexico in India as well as production slowdowns across Europe, partially offset by China.
Adjusted EBITDA for the quarter was down 59% to 63 million and for a margin of 13.2%, which is attributable to lower volumes stemming from the current a virus outbreak.
Our year over year decremental margin was 20%, which includes mix headwinds, resulting from significantly higher demand for gasoline products getting in the second half a 29 team and into 2020 for the second sequential decremental margin from the first to second quarter was approximately 16% driven by the impact at various initially.
Thats the flex our global operating structure and reduce costs that we put in place at the end of the first quarter.
Adjusted free cash flow was minus 174 million, which reflects the deterioration in market conditions and the associated impact on working capital and lastly, adjusted diluted deep, yes, which exclude Honeywell and definitely obligation expenses and related litigation fees was seven cents per share in the quarter.
Turning to slide seven.
We illustrate our net sales by region product line.
The strong rebound in China, which grew 57% organically in Q2 compared to the same period in the prior year during a time when the rest of the world with dealing with production Curtailments Cobot 19 led to an outsize proportion of net sales in Asia.
As a result, the percentage of net sales in either climbed 20 percentage points in the second quarter largely at the expense of Europe, which was down eight percentage points. These regional changes in the quarter are an outlier and are not an accurate representation of in normal course of our business.
On the product side, we show the percentage of net sales from gasoline was 36% in the second quarter up five percentage points from your earlier period.
Although gasoline remains our strongest product care category the mix shift from diesel to gasoline has also been.
Endemic we continued to benefit from new gasoline product launches and penetration gains as diesel remains a decline. This rate of decline. However was much lower at the start of the here for the onset of the current affairs, which has significantly impacted diesel sales in Europe.
Lastly on this slide you see an increase in the percentage of sales from both commercial vehicles and aftermarket products. However, these higher margin businesses continued to face global headwinds consistent with the overall auto industry.
Turning to slide eight we provide our net sales bridge for the second quarter.
While all of our product lines were impacted globally by the current 19 pandemic as expected China was the only country to post year over year growth, which was more than offset by the demand drop and the rest of the world.
We break down the sales declined but product line gasoline products were down $72 million, representing a decrease of 29% to constant currency over the same period last year. Despite the growth in gasoline volumes in China, we discussed earlier.
Overall, the performance of our light vehicle sales when combining both gasoline and diesel products at a constant currency was in line with the decline in global light vehicle auto production of approximately 47% in Q2.
Commercial vehicle declined by 60 million or 37% to constant currency, which was partially offset by CV growth in China.
And aftermarket sales decreased 27 million or 20% constant currency.
Turning to slide nine.
You see our adjusted EBITDA walk for Q2, 2020 as compared to Q2 2019.
For the quarter Garrets, adjusted EBITDA of $63 million was down 59% compared to the same period last year.
Despite a 104 billion and lower volumes stemming from Koby 19 as discussed earlier, we achieved adjusted EBITDA margin in that were 13.2%.
This performance highlights the effectiveness of our flexible operations and reflects the signal.
The favorable challenges in price as well as productivity gains net of lower volumes lever to leverage the notable accomplishment in light of considerable market disruption we faced.
Also benefited from nets tailwind in the quarter, mainly mainly due to the relative quarterly performance and aftermarket in North America and commercial vehicles in China.
SDMA expenses decreased 7 million in Q2 due to the implementation of our ongoing cost controls to mitigate the impact of the covered 19 pandemic on our results.
R&D expenses were down 4 million in the quarter, mainly as a result.
Our flexible working schedules.
In all our numerous cost control and cash management actions generating savings in the quarter totaling approximately $30 million.
Our cost savings benefit combined with the inherent flexibility of our global operating platform as well as mix and pricing tailwinds enabled geared to improve the sequential decremental margins from the first to second quarter two approximately 60%.
For Q3, we expect our sequential decremental margin to be higher due to the lower expected savings for short term working schemes as mentioned earlier on the call. Another governmental supported programs as well as illustrate product mix versus Q2.
Turning to slide 10, we provide our net debt walk for the second quarter.
In Q2, our net debt increased by $203 million to 1.43 billion.
Largely driven by use of cash of 172 million from working capital and accrued liabilities.
Historically, Eric Hi, working capital turnover provides a source of cash on an annual basis. However, in the current environment, but unusually low volumes our customer collections were down in Q2 as expected and were only partially offset by lower disbursements to cut to suppliers.
The benefit from these lower disbursements will most likely take effect in Q3, given the payment terms for our suppliers are longer and typically it stands at approximately 60 days over collections. So the timing of payments between our customers and suppliers had a significant impact on our working capital in Q2.
Cash interest of 30 million increased 11 million in been entities and 10 million in bi annual interest payments on our unsecured bond.
Additionally, our cash taxes of 3 million in Q2 are lower than usual, mainly due to decrease in our pretax income.
Other cash items in the quarter included higher outlays for professional services as well as cash compensation and do start following our previously disclosed continuity awards.
For the second quarter, our adjusted free cash flow was minus 174 million.
Routing indemnity related litigation fees incurred by Garrett totaling 2 million, our Q2 free cash flow was minus 76 million compared to minus 29 million in the same period last year.
Turning to slide 11.
During the second quarter, we announced an agreement with our senior lenders under Garrett credit agreement that provides for covenant relief for up to a two year period through June Thirtyth Twentytwenty to these modifications, which include an adjusted maximum leverage ratio and a waiver of interest coverage ratio requirements enhance our ability to come Pat.
Ongoing impact for the covered 19 crisis, we appreciate the support of our lending group.
And we maintain our focus on ensuring the near term liquidity of our company.
We ended the second quarter with available liquidity of $482 million, including cash and cash equivalent of 139 million and funds available under our revolving credit facility of approximately 347 million partially offset by.
By 4 million in uncommitted ducts.
Total gross debt, excluding cash increased to 1.57 billion as of June Thirtyth.
Mainly driven by net drawdown on our revolver of 66 million to finance the use of cash in the second quarter.
Pursuant to our amended credit agreement secured net debt to consolidated EBITDA ratio was 3.07 times as of June Thirtyth, and we have no material debt maturities before September 2023.
The final note on the slide the substantial doubt language raised in our previous 10-Q regarding our ability to continue is it going concern has been removed. This quarter. Following the Q2 completion of our amended credit agreement, but as Olivier mentioned earlier, our capital structure remains a significant challenge and that will further describe our situation on the next slide.
Moving to slide 12.
We outlined the potential expected payments to Honeywell based on the amendment to the subordinated indemnity agreement completed in the second quarter and also note select balance sheet items associated with disagreement.
As of June Thirtyth, Honeywell liabilities totaled three 4 billion.
As you can see from the graph the delaying payments to Honeywell helps us with our short term liquidity issues over the next two years. However, they also put us significant burden on our capital structure from 20 to 23 onboard as deferred indemnity amounts are not subject to the annual 175 million dollar payment cap.
Based on the catch up provisions under the intended the agreement the deferred payments are expected to be repaid getting juju twentytwenty three assuming we are in compliance with our credit group financial maintenance covenants.
Total indemnity payments are 2023 are currently expected to total approximately 375 million when combining the potential 200 million in deferred amounts with the regularly scheduled payments to be conservative the forecasted payments assume all regularly scheduled payments beginning in the second half of 2022 will be made at the 100.
75 million annualized cap as defined in the intensity agreement.
The annual mandatory transition tax payments to Honeywell will continue on an annual basis as planned with the exception of the 2020 payment of 19 million, which has been postponed until the end of this year.
As a reminder, our MTT payment schedule Amortizes over eight your period at 8% of a total of each of the first five years before accretion to 15% in 2023, 20% in 2024 and 25% in 2025.
In summary.
While the deferral of the subordinated indemnity payments, it's helpful to support our near term liquidity. It is clear post 2022, we will face significant cash flow drain for the year thereafter, the situation accurately depict the impact our four of our former parent decision to oppose it appropriate capital structure on guarantee it was not student to cope with any.
In April challenges at the macro level much less those we face amid a global pandemic.
As a result, we will continue to pursue our rights this others Honeywell to ensure the sustainability of our operations over the long term.
Actively defending our company against any attempt nuclear operations as an independent company with that I will now turn the call back over to over there.
Thanks Ryan.
On slide 15, we summarize our Q2 performance and just to date actions all of our plans that fits the resumed operations led by China.
Which has already returned to pre crisis levels and we expect our remaining plans to gradually increased production of time as customer demand improves.
Indeed, our results for the second quarter reflect significantly lower volume stemming from the impact of because 19 pandemic, but despite the unprecedented shut downs across the global automotive industry direct posted 63 million in adjusted EBITDA margin of 16.2% in the quarter.
Hi, liking our operational expense by leveraging our highly valuable cost structure and exhibiting strict cost control measures to respond rapidly to the abrupt devaluation in business environments.
Going forward well, we strive to take full advantage of our rates again business model to mitigate the impact from the current crisis.
But as global infection for the current Novartis I've, yet to stabilize and in fact.
Increasing in many countries. We consider that there is much uncertainty that lies ahead in our industry and the global economy.
I am also encouraged by our strong ongoing when performance in our culture will business and the continued acceleration across our innovative existing until 12 solutions.
I am pleased that we successfully amended our credit agreement and Philadelphia has been payments, while former parent, but the set of information we shelf today about the consequences you already have postponing obligations related to how many wells bought anything indemnity payment highlight our concerns about our capital structure and remains.
The point of focus for us.
Confusion I want to shale my appreciation for our teams are on the well well don't extraordinary work under such conditions.
This concludes our formal remarks today, and we know and back to both for the Q any.
Thank you Olivier operator, we're now ready to open the call for questions.
Yes.
Okay.
Thank you Olivier.
Operator, we're now ready to open the line for questions.
Yes.
Operator.
Yes.
Operator. This is Paul we're now ready to open the lines for questions.
Ladies and gentlemen at this time will begin any question and answer session.
The ask a question. Please press star and then one.
To withdraw your questions you May press star too.
You are using a speaker phone we do ask you. Please pick up your hands that before pricing the keys to ensure the best sound quality.
Once again that is star and then one ask a question.
Our first question today comes from Ilene Smith Bank of America. Please go ahead with your question.
Good morning, guys.
First question, obviously your free cash flow was very much hindered by the working capital unwind in the quarter. How much of this would you estimate gets reversed in the second half of the year and is dependent on certain volume levels at all.
Yeah. This is Sean high.
Good morning, it's.
It definitely is something it's dependent on volumes as we move into the third and fourth quarters.
The trend, we see coming out in June will naturally unwind a bit.
It's very tough to predict as we mentioned earlier what will happen in the fourth quarter, it's very volume dependent console dependent in that regard, but we will see an unwind as I mentioned earlier in the in the third quarter.
Okay.
Some suppliers has outlined are estimated free cash flow breakeven levels versus production production declines on a full year basis is this something that you contemplate at all or any guideposts that you can you give us if we think about 2020 in total.
Yeah.
I would say that you will see cash flow improved in Q3, and confusion for depending on where volumes and up but again, we're not providing guidance, but I you know I would hope that 50 improvement continues we would not see the use of cash.
We would not active year, where the use of cash a one year oneseventy, we would be better than that.
But again, it's very very dependent on where we see the biggest risk in that volumes in the second half, but primarily September October and November.
Okay.
Second question, you've commented that all your plan servers and operations do you have an estimate for Ross top level that you're running across your various regions based on the volume trends and based on your variable cost structure, you have any estimates for top level implants or regions that.
Choir for profitability.
I'm sorry, I missed part of your your question could you please repeat.
Yes, so first certainly sir.
More profitability think about.
Yeah.
For profitability, we've historically benchmark kind of 70 to 80 per site, but I'm wondering based on your variable cost structure, whether that could be lower.
So sorry. This is what did you need to go to tell you anything here.
That well.
We got that we are benchmark that I got I. Thank you for that but.
I didn't get the the metrics you wanted to point out.
I I think we can take this offline.
But broadly do you have an estimate right now that you're running.
Capacity utilization levels across your plans.
Oh capacity utilization.
Yeah, hi capacity utilization.
Quite frankly, when you look at.
When you look.
We should compared to two the industry that we are not.
I would say end of 2019.
So we don't see the volumes coming back to deliver off 2019 huh.
Before.
2022.
So in term of capacity utilization that give you a little bit of an idea.
Oh.
We would be.
Okay, great. Thanks for taking the questions.
[noise] once again, if you would like to ask a question. Please press star one.
And our next question comes from Joseph Spak from RBC Capital markets. Please go ahead with your question.
Okay.
Two quick question.
First I believe I heard beginning in the call you mentioned.
20 production down about.
20, 30%.
That seems a bit more conservative.
The party assumptions.
Customer specific or can you talk through some of your regional.
Okay, that's maturity customer specific I think we'd.
We'd rather have the conservative side, though.
Because the way we have seen volumes of other apps to loans and the when we consider the economy over the next few months has been quite a prototype.
In fact.
Non of you should get back to what you read web publishing done the return to work in May and June.
No no then ive match, what the said what the goods in the forecast and we are very wise.
To plan I want to digest, not only our factories.
To lower level and that's.
Adjusting to what at year end as being what they too.
So we are we are very Jeff what about the second half, we obviously seeing a situation.
That's correct, you're improving or even very strong gains in China.
July as.
Shannon was saying he is routine.
That's really relatively strong.
But it's just too early to say that the second half of the year would not be impacted not only by infection rate that we can add from decreased 19, but lets keep in mind that a lot of the permanent cost reduction measures that the companies around the will not only in the automotive industry out driving.
I'll still to be C and to be implemented and the consequences of those measures on because the consumer sentiments and the ability for people to buy your job.
Maybe becky.
In the second out so we'd rather cautious on that because I think it's a little bit too early.
To say that everything back to normal and everything is fine.
Okay.
And then I guess.
R&D cost reduction measures.
There was obviously.
Decremental performance quarter.
Well, how should we think about those temporary cost measures and the ability.
So I will tell them just want to answer would compete but.
Question on key obviously, we'd be.
Everything we crude and when you are being the flexible scheme. That's we obviously easier because we are the I never left temporary workforce.
Well with men venue now operations as you know.
Thus far we've been able to combine that with a different schemes that we had some different countries and we have minivan.
Working very closely with some developments, while we are quite relevant in some of size make sure that we would benefit all the good elements would put in place such measures.
And obviously there is a temporary effect of that that at some points need to be compensated by more coming up measures in the most dominant managers I would tell you have two categories.
The first one that's related to.
Direct costs and quite frankly, you dig dig on sort of team I'm not expecting anyway, let's get on the plane and he soon.
Thanks soon so.
Obviously, there is a long lasting exports have lots of the constriction seems that we've done and then there are more dominant matures that down into the structure of the business.
Namely, making sure that we adjust our resources to the amount of activity that well see moving forward.
I would say on this one that first.
As we said that in the presentation. This is an exact size that we've been doing always in this company every year. We are the repositioning plan every year.
And that's it for ensure it'll be like going to the gym and you don't do that at some point to get fat and then you get to get to a surgery.
What we are frame to avoid so this you're obviously the plan that we have launched a much bigger than what we usually do a year on year basis.
But I will let Sean comment on that.
As we is as we stated it relates 30 million impact in the second quarter.
20 that was more of the short terms dig funded leads we are and so 10 carries over.
But.
Having said that we are actively looking at what government programs are going to be renewed and put in place and as Olivier mentioned, we are looking at.
Additional actions, so I would say 10 as a baseline carry over into the next quarter with upside potential.
Okay.
Yeah.
And our next question comes from Teresa Quest from LNG. Please go ahead with your question.
Hi.
Two questions from me.
Hi.
As we shift.
And how much of it.
I think you when we talked about the increased freight costs.
And then secondly can you talk through supply chain and is that has been any challenges there.
So let shouldn't comment on the decremental margins.
Because I think we are clearing the presentation to say that shown here, we have 28% decremental, but if you do.
The quarter over quarter, which excludes a significant piece of the mix effect. We are the on your then we get to 16, which is quite Joel.
But I would comment on display engine disruption first on engine would come back to that so in some of supply chain disruptions quite frankly supply chain disruptions due to cause either we have numbers on them.
You can imagine that we were shut down for six weeks in Atlanta, we have some suppliers in the one region that are useful global operations.
We are the number of suppliers.
In in a in China feeding the rest of the well for Q1 was really a stretch.
For us from scratch and standpoint, amazed by the flexibility that the teams that we can play.
No there to keep on supplying the rest of the World and then immediately after that we started with the shutdown of the rest of the World and then.
Starting extremely fast and then we are not at a 100% local content. Although we are very I in China, where I'm at 100%.
And.
That creates.
So most of challenges as well.
So from a supply chain disruptions standpoint, obviously.
Now we are returning to normal.
I don't see there is an image all one that that remains.
And we are very happy with the we went through all of that minimizing at the same time as much as we could.
Impact impact on our cost.
From a supplier risk management standpoint, while many during that as we said before very very carefully.
I see the fact that we'd have a lot of all suppliers in Asia, which is the region that does restarted faster and that there's been less efficacy that.
Overall, when you look back from a cash standpoint.
Made us probably so far I would say so far.
Little bit more immune to that point.
But that remains a band that while watching it extremely carefully.
And just add on to that we're going to decremental margins.
As we look into Q3 in Q4.
As we stated it we won't see such a strong sequential decremental margin and Q3 in particular will have and people have a bit more pressure, because we didnt quite well on pricing and the second quarter and we see that did a pressure coming back on pricing in the third and fourth again, assuming the sort of tepid recovery continues.
And additionally by some of the savings and again, we dependent upon if there are additional eight funded leave schemes that are in place and effective us implementing the program that we discussed earlier to further.
Generate permanent cost savings on an ongoing basis.
Alright, just a normalized margins in the near term should we choose to think of it is roughly 16%.
Well I think we talked we talked about on that the nonetheless, or we said that.
Considering.
The mix impact of gasoline and.
We would we will keep on.
Seeing margin.
In the normal environment without coated.
That would be indirect of what we show at the end of last year.
With the progress he is a gradual uptick linked to the implementation of new technological together an inside.
Thing with the ramp ups. So Pete 2022, so 2020 to 2020 squeeze a valuable geometries gathering.
Now obviously you can you mentioned that the coronary disease Brady dropping a big stone into the Val.
We are looking at that we are working actively on recycling that these net with onto the well volume, but at this stage or when the Gill ranch.
All right that's very helpful. Thank you for the color.
Once again, if you would like to ask a question. Please press star one our next question comes from the long.
Go ahead with your question.
Hi, guys. Thanks for taking my questions.
Hey, guys aren't giving guidance, but yeah, we say, whether you expect capex to be up or down for the year and what your outlook is for the second half its running higher in the first as I was wondering what it looks like and second.
Maybe just reinforces the question.
And that's probably a follow on to where we are going with that we daugherty Crum RBC.
Oh, just from a capacity standpoint, a lot of what we invest in divested related to capacity.
The reason why we've been able to adjust our capex very quickly.
To sum seeing down 40%, that's just what we're expecting.
So.
Quite frankly, we are just that we will be adjusting our ramp ups in term of generic capacity.
Turning to our own out where the industry going there.
Good thing for US is that when you back due to the fact that the penetration rate of so who is increasing.
And you to the fact that I were.
Revenue was expected to increase on top of that due to shop demand gains and pull them launches.
We are just can you expect.
A drop of volume on.
I would say I'm to rebound to pre coded 19 crises, probably faster of our business than the rest of your automotive industry. So we should not.
Suffer I was going.
Sonoco.
I'm confident that even by the same macros.
And in the meantime larger stunning.
The distributors are bigger picture of the company to get people needs of the company. According to the.
And the beauty is that we have lower capex as person on digital revenue and on top of that a lot of that's driven by capacity needs. So this is the reason why we can flex.
Let me start answering your question.
Okay. That's helpful and just shifting gears can you talk a little bit directionally about how your market shares held up in the quarter, specifically in North America in Europe, I'm, just trying to square comments about strong language that.
The sales being down in those geos.
Well that more than deliveries by the big Oems. So it's just I know, there's a big lag between deliveries and production schedule in this environment. So I was just trying to understand what the trouble chart Cherry market didn't Latin America, and Europe, and how your share trying to.
Well, we've explained that we are gaining shares.
We are we are making engineering challenges that side, but we are.
Moving much faster on the gathering side, which is where we are getting most of the share.
And in China with example, I mean, when we say that the audience in China.
Access a 50% of book, where they where are your before you can understand the threat of that is not driven just by the recovery of the China market itself, but more importantly by the launches that's off the shelf gains that we've been talking about and same on global platforms that are both with American and European customers.
Without driving I'd above market you above market performance, we are so little because she jones for mean across all like this one just to say that well growing and industry industry has been summer disrupted that it's just that while growing much faster than industry, but an outgrowth into a into a bit dropped I just want to return.
It does have a statement that would be.
Just a bit too bold imagine.
Okay. That's last question.
The market gotten really excited about fuel cells recently, and Eric talked about that as being a potential the potential growth market for you guys.
Are there any update you guys can offer in fuel cell front in terms of customer wins or product launches.
All himself is very often.
That is very well.
We are very happy with the technology we are.
We are engaged in discussions with.
And.
Can be customers on that.
The technology. We are this is really differentiating and I'm provided the detail for these guys to improve the efficiency of the who says it's 10 minutes of use this commentary and Pos beating add to the hydro Jan.
Movements.
And.
Quite frankly, you asking a lot of traction with conventional age outs you asked him also.
Some parameters that I've been looking very active you've got that and now planning sauce for idling products.
So everything we've set so fast has been reinforced by all the movement that's happening to its two investments.
On the best malls.
Got it that's right at the same time.
You bet that keep in mind that we are not expecting to sell to take over the automotive industry by 2025. So that's that's a long term investment that's a good bet follow itself.
Because we think that before training industry moving falwell much more diverse than twice.
A few years back if we play with multi falls off I bridge you sell batteries.
And we want to be.
Acquisition mobile technology.
Of these options.
Okay and.
And gentlemen, with that will conclude today's question and answer session.
The conference has now also concluded we thank you for attending today's presentation. You may now disconnect your lines.
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