Ferronordic AB (publ) (FNM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Ferronordic Q1 Report 2020. Today, I'm pleased to present CFO, Erik Danemar; and CEO, Lars Corneliusson. [Operator Instructions] Speakers, please begin.

All right. Good morning, everybody, and welcome to this presentation of our first quarter results in 2020. This is Lars Corneliusson speaking. And if we move to Slide 2. The quarter was characterized by growth in Russia/CIS and the start of our operations in Germany. And we saw during the quarter both revenue and operating profit growth in Russia/CIS. We had negative earnings impact from Germany, in line with what our previous expectations were. We had strong cash flows from operating activities. And we had disruption, unfortunately, from COVID-19, which we started noticing in March, and we expect that to increase going forward. We are taking measures, and we have taken measures to reduce our costs and strengthen liquidity. But if we move to Slide 3, financial highlights. As we said, we had a revenue of SEK 1.118 billion, which was up 55% compared to last year. That was 17% organic growth in Russia/CIS and then 38% from the consolidation of operations in Germany. And we saw growth in Russia and CIS from all the sectors of our business. And sales were up -- equipment sales were up 14%; aftermarket sales, 6%; and contracting services, 69%. Revenue in Germany was SEK 275 million. And out of that, 69% from truck sales, 25% from aftermarket and 6% others. We saw an operating profit for the group decrease 9% to SEK 51 million. That was a combination of an operating profit growth in Russia/CIS of 8%, but a decline -- a group decline from negative contributions from Germany, again, in line with our expectations. So all in all, the group operating margin declined to 4.6%. And we had good cash flows, as we said. So we had lower working capital and net debt in the quarter. If we go to next slide #4. So for Russia/CIS, it was a strong quarter despite the increasing uncertainty related to COVID-19. As we said, growth in equipment sale in units were up 17% to 229 units, and that was in a flat market. Obviously, then we gained market shares in several product groups. We have good -- continued good sales of contracting services, up 69%, and the ramp-up that we did in the first part of last year continues to deliver good results for us in contracting services. When it comes to Germany, we had a successful launch of the operations. It was on time. It was working fairly well, I should say, the whole launch. However, truck registrations in the market were down 26%. That is -- it's mainly a part of an overall downturn, a worsened market already before COVID in Germany. And so -- and also the base in Q1 2019 was very, very high. But on top of that, we then started to see an aftermarket demand decline from mid-March, which then also disturbed our demand in our workshops for parts and service. And obviously, with the COVID-19 situation, we see risks of supply. We see risks of demand, and we see service disruptions potentially and existing. So this is another type of crisis when we used to handle crises where demand is diminishing very rapidly in Russia, for instance. But now we also have a factor of supply risk from manufacturers. We expect that to be seen towards the end of Q2. And we also have, due to lockdowns, due to quarantine regulations, we have disruptions in our ability to actually meet demand -- potential demand from certain customers, where we -- our mechanics simply cannot go without being quarantined for a while. So it's a very uncertain situation in our markets. And obviously, our focus is on customer and employee health and safety and costs and cash flows. The Board of Directors yesterday took the decision to recommend to cancel the dividend with argument that the uncertainty and potential disruptions on markets, and we are strengthening our resilience and financial position. So in this context, the Board proposes that no dividend shall be paid out. We go to Slide #5. It's how we have responded and are responding to COVID-19 when it comes to employee health and safety, customer service and costs and cash. Obviously, when it comes to employee health and service safety and our customers' health and safety, we have strict health and safety protocols, obviously, protective equipment for customer-facing employees. Work-from-home initiatives when possible and also when required. We have, as much as we can, split team shifts for mechanics to reduce staff overlap and manage risks in our workshops and the countries. When it comes to keeping our customer service at a good level in these circumstances, we're working a lot. We have all our workshops are operational in all countries. We have 24/7 coverage in most part of our countries. We do remote and virtual support. For instance, in contracting services, we usually apply a month shifts. So the -- as you know -- might know, contracting services are usually in very remote places, in far-reaching locations in Russia, and operators are working usually 1 month and then home 1 month. We have now -- due to quarantine regulations, they will need to be quarantined for 2 weeks before they can start operating, et cetera. We have prolonged those shifts or rotations to 3 months now, and obviously, making sure that we have good on-site facilities for them. And more important than ever, obviously, focus on customer uptime. When it comes to costs and cash, we have reduced headcount. We are reducing headcount, and we're also shortening working hours where we can. We have taken temporary and voluntary salary cuts, and that goes also for the executive management. We are minimizing CapEx, and we are doing what we can to improve our liquidity position. Despite all what's going on, we see good traction in our business development efforts. And we talked about Germany. We are now in the midst of integrating German operations into our business systems and processes ongoing. Obviously, that is -- slowed down the implementation of these changes due to COVID-19. But we are still working on them actively. Our component rebuild center in Ekaterinburg have produced the first components, rebuild components. They are produced, and they are sold. And we see the center for component rebuild and also machine rebuilds to become an integral part of our business system going forward. We are continuing to develop contracting services. And it's now a year ago since we started operations in Kazakhstan. We have expanded during this year. We have put our footprint throughout the country. We have a good organization. But obviously, the COVID-19 has restricted us in that expansion, but it will continue going forward. We talk about economic developments in our markets, obviously, no surprise COVID-19. But the economies will be slow, both on COVID-19, but also particularly for Russia and Kazakhstan, to a certain extent, the low oil price that we see in the market now. In Russia, we had a Q1 growth of GDP at 1.8%, but expectations are for the year 2020 of 5.5%, roughly, decline. However, most forecasts are talking about a growth again in next year. March inflation was low at 2.5%. Forecast is 4.3% for the full year, so slightly down compared to last year. Central Bank has cut the rates twice now, one in -- one time in February and 50 basis points again in April. That is now 5.5%, which is on a historically low level in Russia. And the ruble has weakened against the SEK 18% towards the end of the quarter. In Kazakhstan, we had GDP growth of 2.7%, less decline expected for 2020 at 2.5% and a slightly higher growth rate expected in 2021. Germany, slow rate, 0.9% first quarter, and a 7% decline expected for the full year 2020, and, again, coming back to growth in 2021. If we go to Slide 8, this is -- we'll talk about Russia and the upside potential looking -- going forward. The black line here is market in units, and we indexed it back to 2011, and as you can see, the market having dropped drastically between 2013 and 2014 with the sanctions. Again, sanctions combined with oil price actually have come back slightly, but still it's only at 64% of the level in 2011 and 57% out of the 12-year revenue -- market, sorry. Whereas our revenue is 60% higher than 2011, and operating profit 285% higher than 2011. And again, as you can see, our business model in downturns is resilient. Despite the fact that the market was down 83% '14, '15, our revenues was down also, of course, by 40%, but the bottom line really didn't move much at all. So we kept the operating profit where it was, and then we got a very strong leverage when the market came back slightly again, as you can see. However, as we talked about before, there is obviously a risk of supply and demand disruption in the rest of 2020, not only from manufacturers' temporary production stop, but also from our customers, in certain cases, temporary production stops due to lockdowns and, on top of that, a lower all price. So -- and a very uncertain future ahead and much we can't predict. So April, for us, so far, has been -- has shown the same trends as we saw in Q1 more or less. But going forward, it's very, very difficult for us to predict the near-term future here. So Erik, I'll hand over to you for the income statement.

Thank you very much, Lars. I hope everybody can hear me well. So turning to Slide #9. I'd like to start with saying that as of this quarter and following our expansion to Germany, we will be reporting 2 operating segments. So that's Russia/CIS, which currently then includes Russia and Kazakhstan, and then Germany separately. And in terms of the report, for those of you who follow the company, you will find on Page 3 and 4 some more detailed information on the respective segments. And also in the back end of the report, Page 18, 19, you would also have some more information about the separate performances of the businesses and also the assets and liabilities of the different segments. We will also disaggregate contracting services revenue. So previously, we have reported equipment sales, aftermarket and other revenue. And contracting services was then reported within other revenue. Now we will disaggregate that and show that separately. Remaining then in other revenue will be rental income and the small car business that we have in Germany. Turning to the results. It's been mentioned that the total revenue stood at slightly above SEK 1.1 billion. Looking at those operating segments, 75% of that revenue came from Russia/CIS and 25%, about 1/4, from the operations in Germany in the first quarter. Looking rather at activities, then we see that 63% comes from sales of equipments and trucks; 26% from aftermarket, so service and parts; and then 9% from the contracting services; and the residual then being rental and other revenue. Gross margin declined 3.9 percentage points to 16.3%. That was a result of lower margins on equipment sales in Russia/CIS. Also, in Russia/CIS, the lower share of aftermarket compared to the same period last year went from 29% to 26% of the share of revenue in, again, Russia/CIS. And then also, of course, an effect of the consolidation of the operations in Germany, where the gross profit margin, as you can see in the table here, was SEK 9.7 billion. So dilutive on the overall group level. Looking at our selling, general and administrative expenses as a share of revenue, they were lower in the first quarter 2020 at 11.5% versus the same period last year. Again, Russia/CIS stood at 11.1%, as you will see in the report, and Germany at 12.8%. So lower in Russia on a stand-alone basis versus the same period last year, a big decline there. Operating margin similarly declined to 4.6%, and operating profit then as a result of that declined 9% to SEK 51 million, much driven by the negative contribution of SEK 10 million in operating results from Germany. Below operating profit, the result was negatively impacted by net finance costs, the difference year-on-year there being SEK 6 million and also from foreign exchange effect, which was a positive SEK 8 million same period last year and a negative SEK 5 million. So a SEK 13 million difference there year-on-year as a result, again, of currency movements. Turning to the next slide, #10, and looking at the long-term trends. The top graph here showing the last 12-month trailing revenue. We did see a slight decline in the fourth quarter of last year after a streak of 14 quarters of straight increases on that last 12-month basis. In this quarter, again, Russia/CIS organic before Germany was actually up, so reaching the highest level ever, and then inorganic additional SEK 275 million from the German operations also then attributed in this quarter. Gross margin, again, down to 16.3%. And as you can see from the graph on the right here, lower right, Russia was down on a stand alone also. But then in addition to that, you had a diluted effect from Germany, and similar effect on the operating margin, again, mainly due to the negative contribution of minus 3.5% that we had in Germany in this first quarter of operations. Turning to Slide #11 for long-term trend on first, selling, general and administrative. Here, again, we look on a 12-month rolling basis, so 12 months of SG&A over 12 months of revenue. Then we were higher than the same period last year on that basis. Although, again, looking at the quarter itself, we were actually lower. And return on capital employed, an important performance metric, stood at 23% in this quarter. Decline, again, relating to operating loss generated in Germany, which is consolidated into the overall results. As you can see from the black line in the graph, Russia was higher in the quarter on a stand-alone basis than the previous period, meaning the previous quarter. Other factors impacting still working capital when we compare year-on-year for Russia stand-alone and IFRS 16 also having some impact there still. Turning to cash flows. We, again, saw positive cash flows in the quarter. And looking at the reportable segments there, the trends were reversed, in line with what we had anticipated. So in Russia, we saw operating profit growth and, at the same time, a decline in working capital positively affecting working capital and cash flows, while in Germany we had a negative operating result and higher working capital from starting the business there and acquiring the working capital to run the operations. Below operations or, say, operating cash flows, we had higher tax payments and also higher interest payments from a higher gross debt outstanding when compared to the same period of last year. If we look at CapEx, that decreased as a result partly of the more cautious stance we've taken in this quarter given the environment we find ourselves in. And then if we look at financing activities, you can see between the segment there, again, that Russia reflects a picture where we actually paid back money to the banks, while, in Germany, we had net draws on our facilities. Turning to the balance sheet. To say a few words on that, we can see that property, plant and equipment actually did decline in the quarter. That's much an effect of the depreciation of ruble in the reporting period. It depreciated by 18% in the -- from the opening to the closing. So the balance sheet effect. The average rate was actually 4% stronger than last year. But again, looking at the balance sheet, there was a meaningful weakening of the ruble. So that was a meaningful effect. Of course, there was depreciation as well, and that was more than offsetting, again, the increases that we had. Those increases were mainly due to adding right-of-use assets, so IFRS 16 effects in Germany in the amount of SEK 25 million. Net debt in Russia/CIS, so looking at this on a segment basis, decreased from SEK 397 million at the end of the year to SEK 193 million at the end of this quarter. So that's again, quarter-on-quarter, the result of stronger operating cash flows and lower working capital. The working capital declined to SEK 525 million. That was an effect on foreign exchange and higher payables. Notably, in terms of those payables, it is partly an effect of the terms that was agreed when we took over importation of equipments and parts to Russia that we now saw the effect of in this quarter. There was also, as I mentioned here, a foreign exchange effect, of course, on the balance sheet items. Now let's, in Germany, move the other way. Again, along with our expectations, so from SEK 196 million to SEK 340 million there mainly on higher working capital. There, the working capital increased from SEK 27 million to SEK 135 million, and that was mainly due to inventories and receivables. Again, we did not acquire any trucks in the transactions in the first quarter. We did acquire parts in the fourth quarter of last year, but trucks inventory was acquired in this quarter, in the first quarter of 2020. Similarly, we did not take over any receivables, but, of course, built up in the course of the business receivables in this first quarter of 2020. Looking then at working capital on a consolidated basis. In relation to last 12-month revenue, it came down to 13%. Again, that's using an annualized basis for Germany, given that we don't have a 12-month history there, and simply taking the revenue this quarter x4 as an approximation there. As a result of the cash flows And these movements, net debt-to-EBITDA declined from 1.2x at the end of 2019 to 1.0x at the end of this quarter. Financial objectives and dividend policy. Revenue, we currently stand at 2.3x our 2016 revenue. Our objective for Russia/CIS remains unchanged in these turbulent times. Looking at operating margin, again, this shows trailing operating margin last 12 months, then we stand at 8.5%. So it was 4.6% in this quarter, but 8.5% trailing. And that then remains above our objective that we reset when we went into Germany from 6% to 8%. And net debt-to-EBITDA currently right in the middle of our target range, which is set over an economic cycle. Dividend policy remains unchanged. Lars has commented on the decision of the Board, given the efforts we are taking and the environment we currently find ourselves in. So with that, I hand over the word back to you, Lars, for something about that outlook.

0 Yes. Thank you. So obviously, the outbreak and the measures to contain the spread of COVID-19 have caused extraordinary uncertainty across our markets. And as we have talked about for the rest of the year, we are most likely, we will face various degrees in disruption not only in demand but also in supply and our abilities to interface with our customers. We can't, at this point in time, forecast what measures might be implemented or how that effect might be in our markets. Russia has introduced many, many measures for a while, and we have seen disturbances in our customer interfacing. We -- as you know, Volvo has temporarily closed down there their assembly facilities. And the situation in supply will most likely have an effect on us going forward. So to forecast the near-term development of our markets in such a business environment we don't believe is meaningful. What we do and what we can do and what we should do is to respond to COVID in taking measures to maintain absolutely the highest level of service that we can to our customers, to protect our employees and to strengthen liquidity and cut our costs. And we are confident that our business model, which is built around a great team and a robust aftermarket, resilient aftermarket business, will once again prove itself to be strong. And in the longer perspective, obviously, we remain positive because the underlying fundamentals and the business opportunities in our markets are strong. So that is the outlook from us this quarter. And that was -- if we then summarize, again, the quarter, we saw a strong quarter. In Russia and CIS, we had growth of 17%. Market was flat, and we saw revenue and operating profit growth in Russia and CIS. Obviously, negative earnings impact as we have expected from Germany. We also, as Erik talked about, we have strong cash flows from our operating activities in Russia and CIS. And the disruption from COVID that we saw starting in March is expected to increase going forward and thereby, we are taking measures to reduce costs and strengthen liquidity. So by that, I think we can hand over for questions and answer, please.

[Operator Instructions] And our first question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. So first of all, you mentioned in the report that the gross margin was pressured in Russia due to lower -- or sorry, yes, there's gross margin pressure in Russia. So my question is more or less what was behind the pressured gross margin? You talked about lower margin on new machine sales here. Is it price pressure? Or is it the mix? Or...

It is a mix of different things. It's partly a product mix in the quarter. We also had effects from currency in the quarter when the -- actually the machines that we bought and that was sold in Q1 were bought at a time when the ruble was strong towards most currencies. So that had a negative effect on the margins. And we also had a price increase from our main supplier, main partner. So those 3 together affected margins negatively.

Then it sounds like we should probably expect similar development in Q2 as well. Or...

Well, as I said, I mean if we take every -- all these 3, one thing has changed of these 3, and that is the exchange rates. So the ruble has weakened compared to a quarter ago.

Okay. Perfect. You also guided for demand in April almost similar as in Q1, and I mean you continued to show fairly decent growth in your Russian operations. So could you give any indication of how May is looking compared with April? If you have seen the decline there? Or is it -- or do you more expect the decline in demand to be late Q2 due to the late -- to the restrictions being implemented later on compared to Europe and Russia?

Well, as we said, and, yes, Carl, the April has continued more or less the same trends as we saw in Q1. And going forward, what we are saying is that we -- it's difficult for us to forecast the near term. Things are changing by the day, and there are many rules or many different rules in different regions of Russia, for instance. On the other hand, we see Germany opening up slightly. And so we can't really give you any guidance on that, except for that we believe that these supply constraints could potentially come into effect in the end of quarter 2.

Okay. Perfect. And you also mentioned in Germany, for instance, that you implemented reduced work times. I guess you used the government-backed furloughs and the Russia salary cuts. Is it possible to quantify the cost reductions that you made?

No, we don't quantify them at this point. But you're right. In Germany, we have partly -- I mean also for protective purposes, we have reduced time. We have not allowed shifts to be in the workshops at the same time to contain a potential spread of the virus among the employees and potentially leading them to a shutdown of our workshops, a complete shutdown. So -- and in Germany, we have -- for that period of time when the mechanics have been not working, we have been able to get governmental support from that. But apart -- and we are doing restructuring in Russia of our organization. But we don't give numbers on -- to that at this point.

Okay. Perfect. And the final of me, and maybe slightly more difficult, but regarding the May decree and the investment in the infrastructure, do you think that Russia will be able to implement these investments in -- starting in 2021 given the oil price situation, given that COVID-19 on the top of that? Or do you expect it to be postponed a couple of years?

Well, I mean this is a very good question, obviously, Carl. I mean the -- there are different -- there are forces in the government that wants to implement them now and not wait until the autumn or something like that. There are other forces that sees that, yes, we have an issue with the oil price and so on and so forth. But I mean the -- I think, frankly speaking, the will to introduce them and the need to introduce them is so strong and so all over the place. I mean everybody understands that that is the driving force for a positive growth in GDP going forward. So I would assume that they will do their utmost to implement these projects, for sure.

Our next question comes from Kenneth Toll from Carnegie.

So let me start by some really stupid questions. But in Russia and in Kazakhstan, you said that there are different regulations in different parts and so on. But are your -- like, can you move machines and spare parts around as you want in Russia and Kazakhstan?

We can with a lot of disturbances and much longer lead times and a lot more efforts than what is simply the case. But we can. Yes, we can.

Okay. And then -- yes. And when it comes to mechanics, is that harder? Or...

Yes. I mean, yes, it is because some mechanics, they are then -- in construction equipment business, we go to the customer sites most of the time to service the machine. In 80% to 90% of the cases, we go to the customer. Whereas in truck business, the customer comes to the workshop. But when it comes to mechanics in Russia, there are limitations. We see limitations. And we experience that both -- in some cases, not in all cases, but in many cases, when customer goes to a site and the site is under quarantine, obviously, to protect them against the COVID and -- they're not allowed to go in. They're not allowed to sell parts. So we see restrictions in that. Yes, we do.

Okay. But -- and one thing I was thinking about also that, I mean trucks in Germany, for example, is it the same situation there that your -- you can move around your spare parts and mechanics and so on? I'm thinking that -- I mean transports could also be a sort of a critical activity in society.

No. I mean there are no restrictions as such for trucks to come to our workshops in Germany. There is -- what there is in Germany is that there is not that much transport anymore. We'll see what happens now. I mean you all know that the whole automotive industry basically stopped for 6 weeks or whatever it was all around Europe. And of course, for instance, auto components in the industry is a big transport goods for our customers. So there has simply been less trucks coming to our workshops. But, sure, the workshops have been operational. It's regarded as a socially critical activity as well as truck transport, obviously. So it's more a demand -- less demand than a restriction we see.

And then also -- sorry, you talked about the shortages, supply shortages could come at the end of Q2. Is that also for spare parts, you believe? Or is it more for machines and trucks?

So far, we have seen very limited disruptions in the supply of spare parts. So we don't expect that really to go forward. But who can tell? Who can tell, Kenneth? I mean we don't know what this COVID-19 will have. But as we see now, we have not had any major disruptions in spare part, except for time and lead times and problems in getting them through customs and getting them over borders, et cetera. But the disruption we're talking about in the report is mainly related to machines.

Okay. And then the ruble weakening a lot in Russia, I mean before you have been disciplined in changing prices in Russian ruble to sort of adjust for machines and so on, but how has that developed now on machines and spare parts in Russia? Have you had time to adjust your prices and have competition followed? Or -- yes, talk a little bit around that.

Well, I mean we usually try to price as good as we can, and we haven't changed that policy now. That's what I can say. And obviously, the currency rate is a very important factor in what pricing we can get out in the market because our competitors are selling denominated in our currency, and we are selling in rubles. So usually, when the ruble weakens, we have a period of where we usually can take out more in the market as opposed to what was in Q1 when we had a strong ruble in the end of last year and then that hurts the margins on machines.

And finally, maybe 2 short questions for Erik. One is the working capital as share of sales in Germany was around 13%. Do you believe that that is a fair value, a fair level that we could sort of look at when things normalize in Germany again?

I mean, again, as you know, Kenneth, yes, we don't give guidance on such matters. So I'll be cautious there. I think we -- this quarter was a startup quarter when we got things going. So it is likely to move around a bit. And I would probably also be cautious, especially in the first year and especially given the outlook we have now, which is very hard to really to set expectations. Over the long term, I mean I think it, yes, probably could move maybe a little bit lower from that level. But again, I think, especially with this outlook we have now, I wouldn't give you guidance on that because it is very hard to say, quite frankly, how things will develop.

Great. And then on the cash flow side, you say now that you get some benefit from longer payment terms for the spare parts inventory that -- or when you buy new spare parts to fill up the inventory you have. So that's affected positively in Q1. But that positive effect, it's not over now. It should benefit you for a couple of quarters more. Is that correct?

So it's less spare parts, more new equipment since we took over importation from Volvo. Regarding extended terms, there was a transition period when we didn't see the effect of this. And in the first quarter, we did see the effect of it. And it should only be a benefit for us over the next few quarters. It should be permanently, so to say, in the business setup and the relationship we have there with our main supplier. So again, there was a transition period, and we have now moved over. So going forward, there will always kind of be sort of volatility between quarters. There's still we can do about that with sort of the lead times we have and demand swings between quarters that we see. But again, this effect now, the transition from taking over importation, that that is something that we now have worked through more or less. So this is sort of more a normal relationship that we should see going forward.

Our next question comes from Karl Bokvist from ABG.

My first question concerns the trading update for April. As you said, you said it continued in sort of a similar fashion as Q1. Just to get a bit more flavor on that one, are we talking about Q1 as a whole? Or that you noted a notable demand weakness in March and you're saying that that sort of demand environment continued?

I think you can take that as for the quarter as a whole. I mean the first quarter was obviously strong in Russia and CIS and where we saw a weakened demand in Germany. So I think that's where -- what you can read into the April trends as well.

. All right. And a follow-up on that one. I think you mentioned it in the presentation partly, but why do you think that the Russian market continued seeing quite a strong fashion throughout the entirety of Q1? Is it mainly just because the COVID-19 effects hit Russia at a later point in time? Or is there something else, I don't know, happening as well?

Well, I mean partly, yes. The COVID restrictions came later in Russia. And the actual sort of big restrictions to travel and move and so on and so forth didn't really come until the end -- towards the end of March. But fundamentally, the -- as we've said before, I mean the market in Russia is undersupplied. There is still a pent-up demand in the market from the previous years where the market has been really low. I mean we're still at 57% of what the market was in 2012. And obviously, the -- there is still demand out there. Certain areas are feeling better than others, but there is still a demand. And it's more just a replacement effect, they need to continue to replace. So nothing fundamentally in terms of the market, in terms of the activities has changed. But obviously, there are restrictions, and there are uncertainties that will affect going forward. But I think from a market perspective, in Q1, it was more or less in line with our expectations for Russia, where we expected it to be.

Understood. And I think you've mentioned previously in, terms of access to customers that, one, you haven't seen that many of your customers shutting down operations as of then. And also, two, that your own service technicians or mechanics, they had received some form of special allowances or papers to actually travel around the countries. Is it still so that they are allowed to do so in comparison to perhaps the general citizen in Russia/CIS countries?

Yes, that is a fact. It doesn't mean that they are -- that it's possible to travel everywhere and to all customers. Some customers are themselves in lockdowns, and some customers don't allow us for that reason to visit them and service the machines. So there are -- we have -- as an activity as such, it's allowed, but there are constraints and there are restrictions that hinders a full-fledged service to some customers. And that changes. I mean some are closed and then they open up, and then some others closed, et cetera. So it all depends on the situation per customer and per region really. That's what it is.

Understood. And maybe it's just something that I missed here, but I -- and I think you mentioned it, Erik, but I thought you were going to book the about SEK 90 million payment for the German business in Q1. Just out of curiosity, what is happening here? Or in case I missed it.

Yes, I'm not sure what payment you referred to there. I mean in the deal in Q4, we acquired from the original structure the half transaction, so the subsidiary company that we have there, and also spare parts, and we had a prepayment for properties. Then as we moved into this quarter, again, the transactions relating to Germany was really that we took on the operating capital that we needed. So we took on trucks in inventory, and then, also, of course, built up our own receivables. And with the trucks and the inventory also came payables. In terms of beyond that, it was also the IFRS 16 effect on rental properties in Germany that came into effect. So yes, I think...

I thought about the sort of acquisition payment component to auto has given that you more or less assume the working capital from the Volvo dealers, but auto, has -- was more of an actual transaction.

- That was more of an actual transaction. We did pay the transaction amount, as you can see in the fourth quarter from the report there. What there was and still remains was something called a contingent consideration. And that is still outstanding. Actually, it's EUR 500,000. So there is -- depending on where the final annual close, which is done by the auditors on the half, is done, and that was not done in the first quarter, it was not supposed to be. It's going to happen in the second quarter. And there could be a residual payment following from that. There could also not be. And that is, again, disclosed in our full year report, in the annual report and in the fourth quarter. So that one is still outstanding.

Okay. And just 3 more questions from here. So the road to profitability in Germany, looking a few years ahead now, of course, COVID-19 will, as you say, have an impact here. But given that you have now assumed control of the business, what sort of measures will you first try to incorporate or have taken into effect and which sort of measures do you think will have the biggest impact on profitability in case you are to reach the -- I think you have just said 3% to 5% margins in the German operations?

Well, again, I mean the -- we see good potential in turning the German business around and mainly with, again, focus on the aftermarket to increase the share of our aftermarket towards the customer. We see other opportunities by implementing our processes, our sales processes, our digitalization processes that will support that. And we also see an opportunity to improve the network and drive brand image and which should increase sales of trucks. And it's -- as we have said before, it's not a short process. It's a long process. We've started it. And the first thing we do when we can do even in the COVID-19 situation is to try to implement as many of the processes that we have in the group and that we can apply also to the day-to-day activities in Germany. So again, it's focus on the aftermarket, it's focus on efficiency in the workshops and to get that a bit higher than it is now.

Okay. And just finally, 2 quick ones from now. First of all, contracting services here, do you expect this to level out on sort of rolling 12-month levels here, given that perhaps you are focusing more on existing businesses, and that it will be difficult to win new ones in the current environment? And second, just the sales from Kazakhstan now, could you give an indication of how much revenue we are talking about here and how this has developed year-over-year?

Well, if we start with contracting services, we are not stopping looking for new projects. We want to continue that development, and it's an ongoing process. We will not give any guidance to that now. But as you see, I mean we are now continuing to get the benefits of the escalation or whatever we should call it that we did a year ago in contracting services. And hopefully, we can continue and find new projects, and we're always looking for new projects. So that's more what I can say on contracting services. Sorry, what was the second question?

Sorry. It was about Kazakhstan, approximately how much of sales -- yes.

We don't give that number. We were consolidating into segment. What I can say about Kazakhstan is that we had a -- last year was better than we had expected. We had a good startup. We had a good -- we had a good expansion. We really got out in the market to -- and we have traction on sales, but mainly, again, traction in the aftermarket and making sure that we are there for the customers. We don't give the numbers, but, so far, so good. The Kazakhstan, if we talk about COVID, had -- were quicker than Russia actually in making restrictions and state of emergency. They -- already in the middle of March in Kazakhstan, as you might know, that state of emergency has now been lifted. But there is still demand for our services and products also in Kazakhstan.

There are no further questions. I return the conference to you for any closing remarks.

Yes. All right. And thank you, everybody, and speak to you next time in August. Hopefully, we will have more clarity on where the COVID-19 takes our markets and takes us. But I think that's about it. Thank you very much.

Okay.