Stabilus SE (STM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Stabilus S.A. conference call regarding the financial results in the third quarter of the fiscal year 2020. [Operator Instructions] Let me now turn the floor over to your host, Mark Wilhelms. Please go ahead.

Yes. Good morning from my side here from the Stabilus team. We've got Michael Büchsner, CEO; Andreas Schröder, Investor Relations; and myself, Mark Wilhelms, on the line. Thank you for joining us for the call around our Q3 numbers, after which probably it has been the most difficult quarter, automotive and industry, in general, has been through. I'll now hand over to Michael Büchsner, who will lead you through the initial pages of the presentation.

Thank you very much, Mark. Hello, everybody, also from my side. Our presentation today is split into 3 sections. First of all, I'll give an introduction, then we'll talk about the financials for sure. And sure, at the end of the presentation, talk about the outlook. Yes, the last quarter, as Mark already said, was a very difficult quarter for the industry. We -- and I would like to give an update about the current situation at Stabilus. On Page #4, you'd see that we have in terms of status quo a couple of corona cases here and there, occasional cases. No big spread, but need to be still very cautious in some of our plants like Romania, Mexico, U.S. and also here in Germany, we had one or other case. Luckily, we could isolate all these cases and had no big spread of the coronavirus. Our top priority for sure is to ensure the safety of our employees here and to keep also our operations running, which so far we did achieve because of our stringent measures, right? We have our distancing measures, hygienic measures. And especially now in the days and weeks of people returning from vacations, these rules are up and running, and they are vital and important to stabilize -- continue to stabilize our company and to make sure that we stay on par with our demands from the customers, keep our operations running, and strive for further improvement. Yes, the global light vehicle production in general, for sure, in the third quarter around the globe was really down, down by 45% as a result of the OEM shutdowns. What you don't see here on this page is that actually on the industrial side, also for Stabilus, it was kind of better, only negative 22%. So the split we have, the healthy split we have between automotive and industry, stabilizes the situation and helps a lot also in our terms to not only have a positive impact on our profit and cash situation, but also helps us to manage our operation because we can shift capacities between automotive and industrial, which then flexes-- or allows us to flex our cost better than others. Yes. In terms of our production capacity, we are still on short-term work, furlough, our plant shutdowns several days, and all other measures to flex our capacities and adjust the cost structure. We continue the -- continuing this task for the next weeks and months according to the call of our customers to make sure that we flex our capacities and optimize our profitability. In terms of the balance sheet, net leverage ratio, 1.4x EBITDA, about EUR 114 million cash as of June 2020. One thing Mark will also talk about is that we could secure another credit line. You know that we have a large not utilized EUR 70 million revolving credit facility and we could secure another EUR 50 million, which is kind of maximum leverage ratio up to 4.25 EBITDA until March '22, which further helps us to stabilize the situation and stay a very healthy company. On Page #6, you see the financial results, as we speak. So, of course, at Stabilus, our revenue in the quarter -- in the past quarter was EUR 147 million versus EUR 241 million quarter 3 2019. For sure, impacted -- a big impact by the coronavirus, minus 34% year-over-year. Auto accounts for minus 45%. And industrial made up a bit, which, as I said, was very healthy for us and did help us to flex capacities. But moreover, to also show a decent profitability. The industrial business did only shrink by 22%. In terms of acquisition effects, positive 0.5%; currency inflation effect, minus 3%; and the organic growth itself was 36.7%. This leads me to the EBIT margin, EUR 5.7 million is the number versus EUR 37 million of same period in last year. Actually, we have a positive margin to a big scale driven also by the healthy industrial share of 3.9 million -- positive -- 3.9% as positive EBIT margin. For sure, below last year's target of 15.4%. Profitability itself, negative EUR 16.4 million in the third quarter whereas we had EUR 19.3 million in quarter 3, 2019. However, there is a big impairment in there, in particular, customer relationship. On the aerospace side, we had to adjust EUR 25.7 million in terms of this intangible asset. But also here, Mark will tell you more about the details behind that deal. Nevertheless, as I said, we had a positive EBIT margin of 3.9%, which is compared to others in the same industry on a decent level, driven by our healthy share of the industrial business. Yes, adjusted cash flow. The free cash flow. There were no payments in quarter 3, 2020, unlike last year; last year, we still had EUR 39.3 million in the third quarter driven by this acquisition of Aerospace last year. In total, the free cash flow is at negative EUR 6 million versus EUR 31 million quarter 3 in the financial year '19, same period. And at the end of the day, we are still in a healthy situation. Still only slightly negative free cash flow, so we could maintain a good position and could further stabilize. And as I said, also with this additional credit line, we see a positive sign and should be in a positive position for the months to come. Net leverage ratio 1.4, used to be 1.2, end of Q3 last year. And at the end of '19, we have been at 1.0. So also in the same range. The net financial debts are at EUR 214.2 million versus EUR 225.5 million end of Q3 2019. This brings me to the outlook. Only 2 numbers to talk about the outlook, and the framework of the outlook later on. We see a revenue for the complete year 2020 for Stabilus of in the range of EUR 800 million. And adjusted margin of in the range of 11% on EBIT level. So as I said, yes, for sure, in the third quarter, we were impacted by the corona crisis. However, our healthy share is between industrial and automotive, did allow us to still operate on a positive EBIT margin level. So we've been one of the few companies also who did an impairment here in a big magnitude of one of the businesses we have in the aerospace business, which however, prepares us for the future. And the bottom line is, outlook for the year, EUR 800 million, around about and 11% EBIT margin. So with that, I would hand over for some details to Mark.

Yes. Thank you, Michael. Let's now turn to Slide #7, which shows some of the information that you've just heard on a graphical basis. Top left-hand side revenue, we already touched the Q3 numbers. Top right-hand side, EBIT, EBIT margin development. We touched as well. In terms of profit, a couple of additional information. As mentioned, we booked a write-down on our aerospace business, namely the acquisition General Aerospace of EUR 25.7 million, less deferred taxes, which results in EUR 18 million hit here in that quarter, and that is for 100% ownership. We, in fact, about a year ago, bought 80% of that company. And in a second step, bought another 10% of that company. So depending on how you do your analysis, you may want to adjust this and also the earnings per share for the effect of some numbers being 100% and others like profit and sales only being reflective for our true revenue share. On the right-hand side, at the bottom, you see the adjusted free cash flow. Michael already mentioned last year, we had a positive EUR 31 million after adjusting out the acquisitions. This year, we are at EUR 6 million negative. Surprisingly, in the third quarter, we, in fact, had higher CapEx than last year, which is impacted by more R&D, but also by additional investments into our new facility in China, where we are continuing to set up the building, and due to certain timing constraints do not yet get all the government grants hitting our bank account. As we speak of government grants, government support. From Germany, we still lack the cash in from the short-time work. We do pay the people the short-term subsidy of the government for the government and later on, get that back through the government agency. And it's a notch over EUR 3 million cash we lack in this quarter. Kind of adjusting for both of those effects of all 3, the investments into the Pinghu plant, the higher investment into R&D as well as missing of the cash-in of the short-term work subsidy, we would, in fact, be at a 0-ish cash flow. Turning the page to #8. We look at first 9 month figures. First 9 months, we are at revenue of almost EUR 600 million, which is 15% under prior year. In terms of EBIT, EBIT margin, first 9 months at 11.1% that is shown on the right-hand chart here versus last year's 14.7%. In terms of net profit, bottom right-hand side, eventually also impacted by the one-off write-down I had mentioned, currently at EUR 18.1 million, which is 3% of sales last year. We had 8% of sales in that area. Free cash flow over the 9 months, clearly impacted by corona with inventory buildups with suppliers screaming for money as well as customers trying to stretch a bit. We are at a cash flow of EUR 14.8 million, which is 2.5% of sales. Last year, we had 7% of sales. Towards the back end of this year, I expect some improvement of the cash flow as the situation, namely the inventory situation will improve going forward. Turning the slides forward, via Page 9 to Page 10, we come to the European numbers. Light vehicle production in Europe, Middle East and Africa in Q3, at 2.4 million units, that is 61% down, compared to that our revenue came down by 37-ish, 38-ish organic in total. And when we then look at the industrial business within that one, it has an interesting share. Historically, you know, we've always been trying to get a higher share of industry business. This quarter, it was 61%. However, not generated by selling more in industry but by this dramatic loss in the automotive business. So don't be misled thinking we will now forever do 61% industry business. Organically, the industry business decreased from EUR 62.5 million to EUR 48 million. In Europe, that is 23.2% down or 24.8% organically, i.e., adjusting for the acquisitions. Automotive Gas Spring decline is 56%, compare that to the 61% automotive industry down. And Powerise down by 43%. Again, to be compared to the 61% automotive industry down. Powerise clearly supported by additional exports, we are doing out of our Romanian plant for various customers to China. EBIT margin, 2.3% versus last year's 14.9%. One sees the pressure the dramatic revenue reduction has put on the organization, but we still maintained a small level of profitability. Turning over to Slide #11. We see the details on the Americas numbers. In Americas, light vehicle production was at 1.5 million units, i.e., 71.3% down versus last year that compares to the 61% we've seen in Europe. So in the U.S., the impact was even more drastic. Our own revenue came down by EUR 50.2 million or 54.3%. Adjust that one for FX effect, it's 47% down. So compared to the auto industry, it kind of did reasonably well. Within that, the industrial revenue is down by EUR 5.3 million. In terms of share, industry is now at 56%, the EUR 23.7 million industry out of the 42.3%. As Michael said earlier on, the industrial business helps us to stabilize the revenue side, helps us to stabilize the loading of the plants. And this revenue numbers show this nicely that a good balance of industrial business and automotive business helps the company -- helps our company. Revenue decline in Automotive Gas Spring, 61%, about 10-ish points better than the overall automotive industry. And Powerise at 59.6%, call it, also 60%. So somewhat doing better than the overall light vehicle production. In terms of Powerise, a few additional information. We are shipping to a couple of extra customers, gained new orders. Our products seem to be liked by the customers, and we are getting over the dip we've seen in the last year, 18 months ago, for our Powerise, loading Powerise production. Americas, in spite of all actions taken with furloughs, people taking vacation, taking unpaid vacation, we still incurred a small EBIT loss of EUR 400,000 there versus last year's EUR 15.9 million profit. On Page 12, we come to the third region, Asia/Pacific. Light vehicle production in Asia/Pacific is at 8.4 million units. That is down 22.8% versus prior year. Our revenue even increased a little bit by EUR 2.9 million. That is 8.5% up or organically, FX-adjusted, its 10-ish percent up. In terms of business areas, worthwhile to note, Automotive Gas Spring kind of even, automotive Powerise 60% year-on-year growth due to new model launches in Q2 with various U.S. products that have been launched that helps us. Revenue in the industrial area, it's just a rounding of EUR 100,000, I think not worthwhile to mention. Revenue overall in Asia/Pacific in the industrial segment is very small. Our lion's share of the U.S. -- of the APAC business, in fact, is Gas Springs, with EUR 16 million revenue we had in the last quarter. That is quite a nice share of our overall Automotive Gas Spring business. Profit-wise helped by the better revenue, we are now at 16.1% margin that makes our APAC region, the margin strongest region in the company in that quarter. For Page 13, I hand over to Michael, again.

Thank you very much, Mark. Yes, let's talk about the different business units and the revenues we did in the different business units. Overall, as I said before, we had in the third quarter, EUR 147 million sales, which compared to prior years in the range of 40% less than the prior year. But as you see on this chart, in color yellow, our share of the industrial business did increase a lot. Last year, same period, we had 40% industrial and 60% automotive. And nowadays, it's around about the same share, 50-50, driven by, for sure, the market circumstances of automotive. However, this share did help us in terms of our plant utilization and the profitability of the company because of some backing here. And the share of the industrial business is higher or did increase because -- a couple of aspects, if, for example, take maintenance of cars, people who do not buy new cars, they maintain their existing cars. So we are one of the big suppliers for official Gas Springs and other components, Powerise in the industrial market in terms of replacement market of products or maintenance markets, for cars, which counts in industrial on our side. Then many people did work from home. They have web shop usage in some areas. We have 3x the planned web shop sales. That means in terms of e-commerce and web shop activities, we saw disproportional increase in terms of the sales channels, which did help a lot on our side also to boost the sales here. And then for sure, some areas of the business like medical, solar and also our solar stream business, by the way, were disproportionately healthy growing in the past months just because people are basically more at home. They use their own [ soda ], preparing stuff for [ soda ]. Generator [ soda] [stream equipment where we are present with our products. In terms of solar, for sure, the trend of towards protecting the environment is on. And we could sell a lot of these products in the solar market. And then for sure, needless to say, the medical market, this boom in the last month which also materializes in our numbers. So overall, as I said, there is a very healthy share between industrial and automotive of equal share, which did help a lot despite of the global light vehicle production reduction of 44.5% in the third quarter. For us, that at the end of the day, also meant that in the range of 45%. We did suffer in the Powerise and the Gas Spring business equally because for sure, we were on the automotive side impacted. But however, as I said, it was kind of made up by the industrial side and also in the long-term run, our strategy is still on that we foster and further strengthen our industrial segments because this crisis has once more shown us that it's vital to have a healthy split between automotive and industrial for good profitability and a stable company. Yes, I turn over to Mark again to talk a bit about our credit line and the new facility agreements we did. Mark?

Yes, thank you. Page 14 gives you a few information, a bit information around our senior facility agreement and the changes we did. Important is on the right-hand side where you see the amendment, during the last working days of the month of July, we agreed with the banks, signed an adjustment amendment to the SFA with the key following items. The covenant headroom currently at 3.25x is increased to 4.25x EBITDA for a couple of quarters. And then gradually in 2022 coming back to today's level. So during the time of the current corona issue, a potential second wave, which may hit us, we have a far more relaxed covenant. You've heard at the very beginning of the presentation from Michael, we are currently at 1.4x. So there's a sizable headroom available for us, especially with that adjustment that should ensure that from a point of view, credit agreement, no trouble on the horizon. Additionally, we secured another EUR 50 million credit line. We are, at this point, not proposing to draw on that or not needing to draw on that. So we just pay the commitment fees that is available as long as a normal credit agreement is till June '23. So that gives us additional liquidity in case we would like to, a, need it for operational issues during a second wave or for interesting M&A opportunities. So that gives us room to react. In the bars below, you see expressed in euro million, our liquidity cushion as of end September, end September last year to be precise and end of June. So it's EUR 209 million versus EUR 212 million. Some may say, hey, that's only EUR 3 million more. On the other hand, in the meantime, we had repaid EUR 20 million on the old senior loan. Somewhat with hindsight, not too good because we agreed the repayment before the corona crisis started, and we've also paid EUR 27 million dividend. So in fact, the step from EUR 209 million to EUR 212 million, one needs to add another EUR 47 million key cash out, which helped us to, well, pay dividend and stabilize the overall relationships with the banks, and gives us a good base for the future to come. As we talk about future outlook, I'll hand over to Michael Büchsner again, who will give you some more insight to how we see the next couple of months standing out for us at Stabilus.

Thank you very much. Yes, the outlook. The 2 most important numbers for sure. Revenue, EUR 800 million about -- round about. And on the EBIT side, adjusted EBIT number in the range of 11%. These are the 2 numbers. And they are based on, for sure, light vehicle production according to IHS and a certain GDP development, which is in line with the different market institutes you know. And in terms of the light vehicle production, last year, we had, as a basis, 90 million. And this year around 72 million vehicles built. So that means an impact of 20% below prior year's level in terms of cars produced out there. And our assumption is also that this will not return before the year 2024, back to the 90 million. This is according to the IHS numbers. And GDP, based on the different businesses we have, we see a somewhat faster relief of the GDP, like everybody else sees like until 2022. However, also here, some impact -- and our planning still contains for the rest of the year slightly better share of the industrial side compared to the automotive side when it comes to recovery. For sure, in the long run, we continue and pursue our long-term strategy STAR 2025. Our team spirit is -- despite, for sure, the difficult environment everybody suffers, still on. So One Stabilus is forefront in all discussions. And we are keeping up with the market development also when it comes to fighting the corona pandemic. And when it comes to working in site, the impact on our business, as I said, at the beginning, with our good actions not only to contain the virus and the virus spread, we've achieved not to have thick corona clusters, but only 6 single cases of corona in our company, which was a tremendous effort by the team. And in the same way, we could, thereby, right away, jump into the countermeasures and the execution of countermeasures to fight the financial impact on our company, and that's why we are probably better off than many others in the industry with our profit results for the quarter and then for the complete year. And this is what we continue to do with One Stabilus as our spirit in the team. So we fight in these difficult times, even more. Have our weekly profitability recovery meetings with weekly our meetings to fight the pandemic of the coronavirus, and this makes us confident for the rest of the year and also in the outlook that we will be successful out in the market. Our 6% guidance for the years '19 to 2025, we are right now in review because we are in our budgeting and long-term -- mid- and long-term planning also in a -- to a later point in time, we will give some more clarity about this number. Also here, our strategy STAR 2025 is still on. And we focus on a sustainable and profitable growth in the long run. However, for the time being and for the rest of the year and for the complete year, our number is 800 -- in terms of EUR 800 million sales. And revenue side and adjusted EBIT in the range of 11%. So that's about it in terms of the presentation.

Now we open the floor to questions. And the moderator will take your answers -- your questions, and we will give the answer. [Operator Instructions]

[Operator Instructions] The first question comes from Marc Tonn from Warburg Research.

A couple of questions from my side. First, would be, we've seen quite a nice outperformance of Powerise, but also Gas Spring sales when compared to the automobile production in the respective regions. I think globally, it's pretty much on par. But when we look at Americas, when we look at EMEA, on a standalone basis, you did better organically when compared to the market overall. So my question would be, is it something we could also expect in the quarters ahead so that you see let's say, increasing or, let's say, better performance than the market overall. Also, if it starts to recover due to design wins, particularly at Powerise or to which extent did prefect perhaps some kind of, let's say, stocking effects as the manufacturers play a role in the last quarter. That would be the first question. Second question, looking at your margin guidance for Q4, I think you basically, as you're aware at around 11% after 9 months. Basically, it's implicitly you are targeting 11% also for the last quarter, and revenue is down some 18% year-over-year so for that quarter, so pretty impressive by itself, but also, perhaps could you give us some indication on what you may need with all the structural -- and both structural and also short-term measures you did on the cost side to return to a level of 15% in terms of quarterly revenues, would it be something like EUR 225 million, EUR 230 million. Can you put a number behind that or is it, let's say, too much dependent on the split of the business in that regard? Third question would be at industrial, I think you did much better than in auto, as you rightly mentioned, so -- and you also stressed which segments developed even very positively in the last quarter. Just a question, is there anything which we should be aware of, let's say, some kind of late cyclical industry of, let's say, a certain importance for your business, which may develop, let's say, less favorably coming from here? Or should we also see that, let's say, rather decent improvement in the -- auto may be still down year-over-year in Q4, but also an improvement there going forward from here.

Yes. Thank you very much for your question. I will start and then hand over to Mark for some more details as well. So in terms of the outperformance Gas Spring and the Powerise. That's absolutely stated correctly, yes, we see a good shift in share also on the Powerise, difficult times. This is driven -- and this will be a twofold answer, right? The first one is short term and then in the long run. In the short term, it's pretty much depending on the fitment rate of the customer. So we experience in different regions, the behavior also that the customers in difficult times either are kind of giving you packages, certain packages for a discount where they then put certain premium features in like the Powerise which then drives a certain share of additional volumes out there in the market. And fortunately, also for us here at Stabilus, this is something we've seen many times, right? If you go to dealership, they have special discounts, offer you premium packages. And if you combine the packages, you get better deals. And this is certainly something we see now in this rebouncing effect after the main impact of the crisis, just as an action from the dealerships to foster sales of the vehicles. And yes, we think, for the next couple of weeks, at least, that this trend could continue. That's one thing in terms of the Powerise sales. And then on the long run -- mid- and long run, it's -- and we monitor the awards we get, very stringent. Not only that we have in the pipeline for the Powerise -- particularly for the Powerise, good program sales. That means we got good new programs. We're currently working on awarded problems, which will have the SOPs next year. But also on the long run, in terms of the business shares we could secure, we kind of confirm the market share and exceed the market share we currently have in the industry on the Powerise, which indicates that we further grow with this business segment. So that's on the first question. In terms of sales behavior and the profitability, in terms of also forecasting on the midterm, as I said, the guidance for the year is in the range of EUR 800 million sales revenue, and 11% EBIT margin on a long run. Midterm and long term, for sure, we are, as I said, in the MTP to foster and define our guidance for mid- and long term and to recheck these numbers. However, with the actions we are taking, we are preparing and paving the road for a good outlook. And for example, we are -- kind of achieved with our stringent measures to fight the pandemic that we, right away, could concentrate on countermeasures to increase the profitability. So we see, for example, with our strong force on the purchasing side, good purchasing savings, which are in line or slightly exceed our targets. We've been able to flex our capacities in the different operations we have, which help a lot to create a sustainable future because this is not only that we concentrate on short-term work, furlough, and other activities. We, in a sustainable way, could stabilize our overhead structure, which we are now embedding in our numbers. And this, at the end of the day, leads to a sustainable outlook also here. So it's not like we will be then on the long run on this 11%, we are striving for sustainable actions to further increase this margin with our different actions we have on hand. Also, in terms of the industrial and automotive side. The industrial automotive split of 50-50 is for sure, as we speak, driven by the general, more heavy downturn on the automotive industry on global scale. Everybody is impacted by that. On the industrial side, however, we see strong growth potential for us. So why is that the case? On the industrial side, we see strong growth in the Asia Pacific region, also the latest numbers show, if you see in the different regions that we have stronger rebounds in the Asia region, also on the industrial side. That's what we continue to foster. Some effects will be seen here by our [ Topaz ] initiative where we put all the brands as stated in one of the prior calls, all the brands under one umbrella, which makes us more powerful in the different regions. We are, despite of the corona pandemics, in the middle of rollout of our [ Topaz ] action. And then, as I said, also in terms of web shops and e-commerce. In a very early stage, also starting last year, we've been figuring out a strategy to foster the e-commerce sales and web shop sales, which now materializes. And all these actions help us, not only in terms of healthy share to lean towards the industrial sector, but also it helps us to sustainably grow our margin, in the close future, mid- and long term, for sure, as well. Also, I would hand over to Mark for some additional words on this situation.

Yes. Let me touch on your question #2 with the 11% margin, EBIT margin. The first 9 months came in at 11.1%. For the full year, we see 11%. So logically, the last quarter is 11% margin as well. Compared to last year, we want to achieve that in spite of a kind of almost 20% revenue slump. Cost structure adjustments can be quite clearly done to maintain margin when revenue drops 5% to 10% over that. We see there's some margin compression happening. And that is what we are reflecting in the outlook. And we are, as pointed out, continuing to do our actions in terms of short-term work, pushing suppliers to pave the road for the future to have good purchasing prices for the time to come and also gradually adjusting our workforce. We are not doing big programs like a couple of other companies, but we do that in a smaller scale, very much consensus-driven with the workers' council, and also in a very solid cash-efficient approach. We hope that measures specifically in the German plants like short-term work and overall reduction of working hours with a corresponding pay reduction will help us to secure not only the medium-term profitability of the organization, but also ensure that the skilled labor stays around that we then need if in a year or 2, the industry overall automotive as well as industry itself, our business segment industry comes back to a more normal revenue pattern.

Hopes that answers your questions.

It does, but just a quick follow-up. When you -- let's say, look at the FX side in Q4, have you baked in any kind of negative development? I think it was a burden in Q3 already in this -- in the around EUR 800 million, baked in some additional negative effect from FX for this quarter?

Yes. We are not seeing the dollar at par with the euro. That's for sure, it's not 1.10, but it's softer than 1.10. It's like 1.17, 1.18 we have in there.

The next question comes from Sabrina Reeh from UBS.

I have a couple. So could you maybe give us some more color on the dynamic of the cash flow you expect in Q4? Like -- will Q4 still be impacted by CapEx tied to the new China plant, for instance? The second one is, I mean, you don't have like a big program and you haven't given us like an indication of how much you expect in cost savings. But could you give some guidance on any positive cost saving impact you expect for Q4? And third question is what was the reason for the -- I just noticed that sales expenses increased quite heavily in Q3. What -- the reason was for that? Is there anything special behind that or a reason we should expect that to be the case in Q4 as well? And finally, the last question would be just could you give us an update on the developments in Powerise, what you are seeing between the 2-sided and single-sided systems, is that share currently still at 50% to 50%? Or are you seeing a changing dynamic there?

Okay. Thanks for your questions. I'll take care of the cash flow question. And the third question with sales and marketing, and Michael takes care of cost saves and Powerise. In terms of cash flow, quite clearly, the current pace of the business with certain unsureness around revenue development, it's much harder to forecast the cash flow as well as we did in the past. But I do expect, we will see customers paying at normal terms, we do expect that our current high inventory will gradually come down because we are right now stocking more finished parts than needed as a result of frequent changes of customer call-offs, and we are stocking more parts in terms of supplier component on our premises. We will maintain those supplier parts on our premises to ensure we are able to keep on producing even if a supplier has a 1 or 2 week lockdown for the well discussed reasons. When it comes to us paying our suppliers, we continue to ensure taking full advantage of the European early settlement programs to pay those business partners early. Bigger CapEx. Unsure to say what will happen with the government grants in China. It's all contractually based, revolving around certain certifications on progress of the facility in Pinghu. The building will be ready towards the calendar year-end. And the interim cash in for the government grant is very dynamic. Therefore, it's tricky to give a statement in that regard. However, we expect to get most of the German short time work subsidy in during the fourth quarter. When it comes to your -- or with regards to your third question, sales and marketing expense, very high expense. We've booked in sales and marketing the write-down offset General Aerospace acquisition. I mentioned earlier on that the numbers show 100% ownership because we fully consolidated. As such, here in sales and marketing, you see the write-down of the acquisition. Out of that, it's EUR 25.7 million is the overall write-down, EUR 1.36 million sits in COGS and the rest sits in G&A. It's -- sorry, sales and marketing. It's a noncash event. So for any analysis just eliminated. That is what we are doing with adjusted EBIT margins. Now I hand over to Michael Büchsner, who takes care of your question 2 and 4.

Yes, in terms of your cost-saving question for quarter 4. What we, in the past weeks, achieved was that we maintained our purchasing savings, which we've been baking into the numbers in the budget for this year already, which is in the range of 2% to 2.5% purchasing savings, which we have been forecasting for the year. And despite of the big impact on the supply base, for sure, also out there in the general industry, we did -- could maintain our purchasing savings in that range, which help a lot this 2.5% when it comes to the purchasing savings, our cost structure in the company. This is what we maintained also in the fourth quarter. And then we achieved to get up to 85% to 90% flexing of our direct labor and overhead structure with the actions taken around the globe. And this is also the number we have been baking into the number for the quarter 4. In conjunction with these 2 main actions, we also have started programs to increase the output of our several plants then we started programs to combine the work stream on different lines so that we're producing more efficient, in different lots. So we've been putting the lots together in a way that they make more sense in terms of being produced in a very efficient way on the different lines with less change over and less exhaust there. And these are the main actions, which then lead to a general assumption that we end up in the 11%-ish range when it comes to adjusted EBIT for quarter 4. Covering your question 4, Powerise 2-sided versus single-sided general trend. There is no change from the last quarter. We see this pretty much pending on the car body and car model of the OEM. The last award we got are leaning a little more towards single-sided system. But this is only driven by the different models, which were awarded in the past couple of months. Because generally speaking, wherever the car model is less stiffer in terms of the body frame and the tailgate is bigger, then you need a 2-sided system just to handle the forces of the car and the stiffness of the car. Wherever you have smaller trunks and trunk lids and covers on SUVs, you can handle a single-sided system. So it's predominantly a decision of the OEM driven by the engineering departments rather by purchasing -- rather than by purchasing. And that means there is still no change in terms of shift to the one or other direction. It kind of will, from our perspective, stabilize in the range where we are currently compared between single- and dual-sided systems. I hope that answers your question.

Yes.

The next question comes from Ms. Yasmin Steilen from Commerzbank.

Yes. So basically, I am looking at your EBITDA leverage, which is quite low. And you have just mentioned the extension of your covenants for the threshold. Looks very cautious in light of your current EBITDA leverage. So how should we see the increased headroom? Is it kind of headroom for potential M&A or do you see risk arising from a significant deterioration of the business? And in case of a potential M&A, could you shed more light on the end markets you're looking at? So my understanding is that you still try to strengthen your industrial business. And maybe you could also share some color on the development of the [indiscernible]. So to what extent they have curated most recently because I assume pricing would be an important parameter for the market to value a potential acquisition in light of your recent impairment.

Yes. Thank you. I take care of the first part of your question, Yasmin. The leverage here, today we are at 1.4x. We now have headroom up to 4.25x, it may sound big. But at the end of the day, we were all surprised how strongly this virus did hit us. The standard models of judging headroom were proven to not be really effective. That is why I said it's important to get additional room to operate to ensure nothing can happen in terms of financing agreements, even with 3 quarters, 4 quarters of corona hitting the organization. There we are probably better prepared and eventually we are better prepared than half a year ago. So that is why we were driving for that. The other reason is, as you correctly state, M&A, as we are currently at 1.4x, when we buy a company, any acquisition will have a negative impact on our leverage because we cannot buy a company at 1.4x EBITDA, in my opinion. But typical acquisition prices are like 6x, 7x, 8x, 9x, somewhere in that area. So technically, any acquisition will have a negative effect on the leverage. And that is also why it makes sense to now secure headroom that versus today's business may sound excessive. On the other hand, by mathematically rolling in 1 or 2 acquisitions with purchase price multiples I have mentioned, shows you that it makes sense to be prepared for that. Michael will talk on our M&A initiatives.

Yes. On the M&A side -- thank you very much, Mark. Generally speaking, you're absolutely right. In terms of the industrial business, this is predominantly our target area because -- and I think also the past months, they show us that we are absolutely on the right track with fostering our industrial sales. And that's why our first priority is also to target companies with a high share of industrial sales. And also, what we further need to strengthen is our AP footprint. Because in Asia Pacific, we have only 10% of the current share of our sales related to sales in Asia Pacific. So this is also a good spot for us to be. We foster both, right? Industrial sales and sales in Asia/Pacific with our M&A activities. We have an M&A team here in the company. And actually, we have now weekly -- almost weekly calls and meetings with potential partners. And it's kind of a twofold thing. On one hand side, many companies, as you know, they kind of struggle. So they would be easier targets than before. On the other side, some of these companies, they are so tied up with managing the downturn that they don't have too much time to talk about strategic topics and M&A activities. However, we are progressing. As I said, we have weekly -- our discussions with potential targets out there, and we are confident that we further will strengthen our industrial business and our Asia/Pacific share with the actions we have on hand. Also a topic will be in terms of sales price. And you mentioned the sales price of potential targets, how we see the prices of the companies out there. We want to be the leader in everything round about motion and also comfort, right? Our big slogan is, Your Motion, Our Solution. And this is kind of what we strive for in daily business. So this is why targets on this high level of expertise and technical details will not be cheap anyways, out there. So the targets we are talking about are targets who are on a high level in terms of expertise when it comes to motion, motion control. And that's why all these targets out there, there will be not easy targets anyways, despite of the currently very difficult economical situation for many companies out there, the targets we have in the scope, they are on the highest level of technical capabilities, and they will be not easy targets. Thank you very much for the question. I hope we answered them.

And the last question from Philippe Lorrain from Berenberg.

My question is more of a follow-up on your full year guidance. So if I take that, you're basically implying in your numbers, that the dollar is probably going to be at 1.17, 1.18 by year-end, something like that. That would lead to probably like something like perhaps like up to 5 percentage points weakness just coming from the dollar average on the regional weight of the Americas or something like that, I do get that probably you're still implying something like an organic sales decline of about 15 percentage points, perhaps 15, 16 in Q4 as a whole. If I'm not completely wrong, it seems like the global car production rate should be down about 12% or something like that for Q4 as a whole. It seems to me like your guidance has been perhaps on purpose a little bit conservative right now just because the visibility is not great. So could you confirm that? Or are there like any more effects besides that you're feeling that perhaps as well, besides the fact that Powerise has benefited from higher take-up rates from customers because they are proposing that as a, let's say, as a gratis option when they are selling the cars, but there might be as well like a little bit of restocking, destocking at the customers that you do not completely -- yes, kind of, let's say, appreciate right now that you want to be just cautious when guiding the market.

Well, one can very -- with a lot of detail calculate this. I mean, EUR 800 million is a round number, right? In there, we have certain assumptions for the development in the various markets. When you look at our detailed revenue by region, you see Powerise plays a strong role in the U.S., a lesser degree in Europe and smallest in Asia still. But in terms of year-over-year growth, Asia is very important. And you need to spend a bit of effort into the detailed mix assumptions over the regions with the Powerise that sells for like EUR 40 versus the normal automotive gas spring that sells for 3-ish euro. The relevance of the individual regions versus the total global average of automotive industry you've picked does not fully mirror our own revenue pickup of the areas. We have, in Europe, in U.S., like 90% share with the gas spring business. Powerise is important with a good share in Europe and U.S., also in terms of market penetration. So there are certain mix assumptions of what vehicles will be sold in the -- or will be produced by the car manufacturers in the next 7, 8 weeks, and we have been very optimistic with a couple of our revenue estimates in the past. And we've learned that quick changes at the customer production can cause an issue. And overall assumption that many of the forecast institutes use kind of assume that hardly any customer plant will be closed down for corona or any related issues, which I tend to disagree with that assessment. I personally think there's a much higher risk due to workers coming back from vacation due to people that were bringing a certain level of sickness into the plant. And we've seen it before that customers order parts and then due to their own shutdown planning, don't pick them up. And our year ends in September, which is unusual for many automotive companies and therefore, very tricky to forecast. Hope that helps.

So I do get that. Yes, it seems so overall, but basically, you're saying whatever IHS also like is saying in terms of production rates by region, you're just like taking a slightly different view just for the purpose of, let's say, not being burned later on if -- yes, these forecasts do not materialize the way you think.

You kind of imply that we want to underscore the outlook. But we assume based on the call offs from the customers and our assessment of how this will go forward, not a 100% hit rate of every plan everybody has. This is a balanced view. Otherwise, it would not be a good forecast.

Okay. I get that. And perhaps like a final question because you are speaking about your midterm targets. And I appreciate that the midterm target was articulated in a way last year, but everybody got to understand what were like exactly the underlying forecast or underlying assumptions for that forecast that are set in terms of global GDP, in terms of global car production rates. So now the question is, why wouldn't you, instead of saying that under normal conditions you should be able to grow 6% per year the top line, but you would actually start guiding more like on the basis of an outperformance rate versus these underlying assumptions regarding car production or global GDP. I think that could make the guidance a little easier for everybody to understand because I think everybody kind of appreciates as well that these underlying assumptions just move all the time.

Yes. Our top target is for sure to give a good and sustainable outlook you also can work with at the end of the day. That's why we've been choosing the methodology of showing our forecast. Actually, we are, as I said, in the middle of the planning process. And for sure, the corona crisis and also the attached effects on the industry did change the overall perception in the market. So we're in the middle of the planning process, also in terms of how we formulate the guidance and this is what we will communicate later this year, just to make sure that we don't miss anything here. We want to conclude on the mid- and long-term planning before we give another guideline and guidance out there for the midterm. But for sure, our highest target is to also make you guys' life as easy as possible with clear boundaries for this guidance.

Okay. This was the last question. So let me hand back over to your hosts.

Thank you very much.

Okay. Then if there are no further questions, thank you very much for participating in our call. I wish you all the best. [Foreign Language]. Thank you, everybody.