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Covid-19 Pandemic Significantly Impacts Grammer's Revenue and Earnings
Effects of the Covid-19 pandemic negatively impact revenue and earnings in the first quarter
Collapse in demand of customers and production restrictions lead to temporary plant closures around the globe
Revenue down to 454.9 million euros in the period from January to March
Operating EBIT at 0.4 million euros; EBIT at –2.1 million euros
New organization for the Grammer Group successfully started in April
As a result of the global Covid-19 pandemic, Grammer AG has started 2020 with significant drops in revenue and earnings. Due to the collapse in demand and product orders in both segments, as well as the customers’ production restrictions, group revenue fell by 14.8 percent in the first three months to 454.9 million euros (01–03 2019: 534.1 million euros). The lower demand caused by the effects of the Covid-19 pandemic impacted sales markets that had already been weaker since the second half of 2019.
The temporary plant closures started at the end of January 2020 as a result of government orders in China, where production was however able to gradually restart beginning in March. This was followed by plant closures at European and American locations in mid-March due to customers halting production within those regions. Due to our own plant closures and extraordinary effects from exchange rates, EBIT in the first quarter fell to –2.1 million euros (01–03 2019: 24.0 million euros). The cost-saving measures already introduced were not able to compensate for the gap in revenue. Operating EBIT, adjusted for currency effects in the amount of 2.5 million euros, fell to 0.4 million euros (01–03 2019: 23.0 million euros). Operating EBIT margin was therefore 0.1 percent (01–03 2019: 4.3 percent).
“The Covid-19 pandemic has a massive impact on the global automotive industry and hence also its supply base. As an international partner to the major premium OEMs, Grammer is closely integrated in global supply chains and is directly affected by the drop in demand,” says Thorsten Seehars, Chief Executive Officer of Grammer AG, explaining the situation. “Despite the measures taken immediately and the continuous implementation of our performance program together with the introduction of short time working arrangements at all locations, it was not possible to avert the effects of the sharp drop in revenue on the Group’s earnings. However, as the new Executive Board we see the current crisis as confirming our decision to position Grammer more firmly on a regional basis and to implement other organizational measures that will make our company swifter and more flexible. Although we cannot prevent such market situations, our new organizational set-up does make it easier and faster for us to adapt to them. We are also seeing the first positive results of our new long-term strategy in the world’s largest automotive and commercial vehicle market in China, where our regional sales organization is currently in negotiations with various customers to increase our market shares.”
Impact of Covid-19 Pandemic Felt in All Regions
Group revenue in the first quarter of 2020 amounted to 454.9 million euros, thus coming in 79.2 million euros below the figure from the same period in the previous year. Initially, at the beginning of the year, restrictive measures to counter the continuing spread of the coronavirus only had to be taken in China. These measures included halting all production operations in addition to sweeping lockdown orders, which also led to a stark collapse in demand. As a result, sales in the APAC region fell by 25.6 percent to 53.6 million euros. Beginning in March, however, production was gradually restarted in China, reaching the levels from before the Covid-19 pandemic by April.
Since mid-March, the increasing infection numbers in Europe and the United States have led to the partial or complete shutdown of production facilities. Accordingly, at 263.5 million euros, revenue in Europe was significantly below the previous year’s level (01–03 2019: 307.0 million euros). In the Americas region, revenue decreased to 137.8 million euros (01–03 2019: 154.9 million euros).
Revenue Losses in Both Segments
Both of Grammer’s business segments have felt the impact of the drop in demand from the first quarter. In the Automotive segment, revenue decreased on account of both the plant closures in China, which lasted nearly two months, as well as the vehicle markets, which had been in decline since the second half of 2019 and were down 14.3 percent to 324.2 million euros. Despite the cost-saving measures that were introduced, operating EBIT in the segment still decreased to -7.8 million euros (01–03 2019: 10.6 million euros).
In the Commercial Vehicles segment, revenue dropped by 15.5 percent to 142.4 million euros. In addition to the plant closures in China and the restrictions in Europe and the Americas region, the exceptionally high revenue in the previous year´s quarter – because the first half of 2019 was characterized by an overall high demand in the Commercial Vehicles segment – also affects the comparative calculation. Operating EBIT amounted to 10.4 million euros (01–03 2019: 16.8 million euros).
Comprehensive Measures as Response to the Covid-19 Pandemic
Grammer introduced comprehensive measures from an early stage in response to the global crisis caused by Covid-19. In doing so, the automotive supplier was able to benefit also from the experiences of its locations in China, which had already been impacted by the restrictions. These measures include precautionary and safety measures for employees at all Grammer locations, the increased use of mobile working solutions, the use of all available working-time models, making use of available vacation time and the rapid implementation of hours reductions which was adopted promptly together with the employee representatives. To secure its financial situation, Grammer relies on maintaining detailed control of the worldwide cash flow as well as equity instruments such as a hybrid loan.
Equity Ratio Increases to 26 Percent
In February 2020, the Grammer Group concluded a new syndicated loan agreement in the amount of 150 million euros and 80 million US dollars, with a term of five years and two extension options of one year each. As a result, non-current financial liabilities increased to 288.8 million euros (December 31, 2019: 220.0 million euros) but simultaneously current financial liabilities decreased to 153.4 million euros (December 31, 2019: 207.7 million euros).
As of March 30, 2020, a hybrid loan in the amount of 19.1 million euros was granted by Ningbo Jifeng Auto Parts Co., Ltd., a company within the Ningbo Jifeng Group (the majority shareholder of Grammer AG). The hybrid loan was concluded with an indefinite term and has a quasi-equity characteristic.
As of the end of the quarter, the equity ratio amounted to 26 percent (December 31, 2019: 23 percent).
New Organizational Structure at the Grammer Group
Over the last few months, Grammer has enhanced its organizational structure in order to be able to react even more swiftly and flexibly to changing customer needs and to make operational decisions directly at a regional level. Responsibility for operating business has therefore been delegated in the three main regions Americas, EMEA and China. The various product segments in the passenger car business are being combined in one Automotive Division, which together with the Commercial Vehicles Division will perform an overarching function for managing the global customer and product strategy and ensuring best coordination of global projects. Group functions will support the regions and divisions in the execution of their strategies and are responsible for corporate governance and for ensuring effective business processes worldwide. This new organizational structure has been rolled out step by step across the entire Group since April 1, 2020.
Forecasting Development for 2020 as a Whole Not Possible
After China, the Covid-19 pandemic is currently making itself felt in Europe and North America. While industrial production in China has largely returned to normal levels, the other two regions are currently still feeling the strain of significant restrictions. For this reason, we should expect the global economy to continue to be massively impacted during the second quarter of 2020.
In the Automotive segment, production has resumed at all Grammer plants in China and is approximately at pre-crisis levels by now. Following the shutdowns in the plants in China, the start-up of the truck seat production progressed more quickly than in the Automotive segment and may hence imply stronger demands in the months to come. In Europe, leading automobile manufacturers announced that they intend to gradually restart production beginning in May. Resumption of operations depends on the ability to ensure the health and safety of employees and the status of the supply chains, as well as the expected customer demands.
The forecast published in the 2019 annual report for the 2020 fiscal year was suspended with the press release on March 30, 2020. The estimations and expectations contained in that forecast are based on market assumptions and internal evaluations from the beginning of 2020. In light of the extremely dynamic nature of developments and the associated uncertainty as part of the Covid-19 pandemic and the accompanying economic effects, forecasting the remainder of the 2020 fiscal year is not currently possible. Grammer will issue a forecast as soon as this is sufficiently possible.
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