SKÅNES FAGERHULT, Sweden, July 23, 2020 /PRNewswire/ --
FIRST SIX MONTHS
President and CEO, David Woolley, comments on the Q2 2020 Interim Report.
Market and sales development
The quarterly published market indices suggest production rates, blended for the Group's end-markets and regions, declined by -58% with both the Americas and Europe & RoW reporting negative growth for the fourth successive quarter. The Group's reported sales continued to be affected by the overall market slowdown and the effects of the global pandemic COVID-19, with sales down -38% year-on-year for the second quarter and -29% for the first six months of the year. The same market indices indicate every geographic region and every end market application was weaker year-on-year during the second quarter. No sector in this industry was immune from the global pandemic with most end market applications down by between 70-85%.
Constant currency sales in Europe and Rest of World were down -42% whilst the Americas were -28% year-on-year for the second quarter and the disparity between the two geographical regions is explained by two factors. Firstly, the timing of when COVID-19 impacted the regions, Europe early in the second quarter then latterly the US. Secondly, key US customers were deemed essential suppliers by the US government and were encouraged to continue to manufacture construction & agricultural machinery, softening the sales impact to our US hydraulic product group.
Sales to all end-market applications were lower in the second quarter year-on-year with the truck & off-highway sectors, agricultural machinery & construction equipment particularly affected in our core regions of North America and Europe.
Global pandemic - COVID-19
The effects of the pandemic, COVID-19, started to materially impact our business in late March with many of our European & Asian OEM customers forced to cease production as national governments imposed restrictions to limit the spread of the virus. Concentric reacted quickly to the changes in customer demand reducing our cost of capacity by introducing short-time working arrangements in many of our facilities, furloughing employees or extending plant shutdowns. Concentric also accessed government employee support programs in Sweden, Germany and the UK with grant income from these schemes amounting to MSEK 8 during the quarter. The new US pay-check protection program was also utilised with loans of MSEK 10 received during the quarter. Concentric will seek loan forgiveness from the US government during the second half of this year, converting the loan to grant income.
Concentric Business Excellence - managing operating margins and cash
Concentric Business Excellence has been key in our ability to adapt operations to lower demand and thereby defend our margins. All parts of the business participate in this programme, driving continuous improvement in customer service levels, employee motivation and operational excellence. This program and our employee's resilience and ability to adapt to an ever changing environment has ensured the operating margin was maintained at good levels despite a -38% reduction in sales. The year-on-year profit drop-out rate was limited to 35% and the operating margin before items affecting comparability for the second quarter was 14.2% (21.9).
Managing the liquidity of the business has been a critical activity this quarter ensuring only essential capital projects are approved, controlling inventory levels and ensuring customers continue to pay to terms. Operating cash flow for the period was MSEK 87 with an operating income to operating cash conversion ratio of 181%, the quarter benefitting from a working capital unwind. Cash and cash equivalents increased during the quarter by MSEK 49 to MSEK 631, and with no external bank debt we are confident Concentric has sufficient cash to meet our operational needs.
We are proud of our performance during this most difficult of trading quarters and all has been achieved through the support and understanding of our employees.
Developing products for our tomorrow
Clearly in the short term we are managing the business during an economic slowdown, compounded by the global pandemic. However, the Concentric team has a clear focus on the long term strategic opportunities which CO2 neutral transportation and energy generation presents. During the second quarter we made four important press releases which continue to demonstrate we are winning new business with both e-pumps and conventional technology which enables our customers to reduce fuel consumption and CO2 emissions:
These new contracts further demonstrate that Concentric is able to win new business in the strategically important e-pump sector and is actively participating in developing new technology to substantially increase fuel efficiency of class 8 trucks as part of the US Super Truck program. The new patented DCC is proven to have significant benefits in long haul truck applications, reducing fuel consumption and more importantly reducing CO2 emissions.
Right sizing the business
The global economy and demand from our customers has been affected by the pandemic. It remains too early to know what profile an economic recovery may take, but it looks certain customer demand will be lower post the pandemic for some time. To reduce our cost of capacity to meet the medium term demand from our customers we have implemented a headcount restructuring program which will be completed during the third quarter. The cost of this program has been calculated to be MSEK 20 and expensed in Q2.
The overall published market indices blended to Concentric's mix of end market applications and locations suggest the overall market will recover during the third quarter of 2020, but the recovery is not uniform across geographies or end market applications. We expect demand for medium- and heavy-duty trucks in Europe to recover ahead of North America but demand from the off-highway sectors, agricultural machinery and construction equipment, will remain suppressed.
Therefore the global pandemic will affect our business for an indefinite period of time. Demand for our engine products has improved slightly through the second quarter and we expect this uncertainty to last for the rest of the year. As an example; the demand for hydraulic products has weakened particularly in the North American market, and level of orders received in the second quarter indicate that sales in the third quarter 2020 will be similar to sales in the second quarter. However, whilst visibility has improved somewhat, uncertainty in the market place is high and is expected to influence sales indefinitely in the nearby future.
Restructuring the cost of capacity during the coming quarter to right size the business to address medium term customer demand will be a key activity, whilst ensuring we maintain core skills within the business to support future growth and the ability to develop new technologies.
The financial position of Concentric remains strong, both capital structure and liquidity and Concentric remains committed to meeting our customers' requirements.
For further information, please contact:
David Woolley (President and CEO) or Marcus Whitehouse (CFO) at
Tel: +44-121-445-6545 or E-mail: [email protected]
The information in this report is of the type that Concentric AB is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the agency of the contact persons set out above, at 08.00 CET on 23 July, 2020.
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SOURCE Concentric AB