Nilfisk Holding A/S

CSE:NLFSK

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Nilfisk A/S Interim Statement Second Quarter 2020 Call. [Operator Instructions] Dear speakers, please go ahead.

[Jens Bak-Holder]

Good morning, everyone, and welcome to Nilfisk's earnings conference call for Q2 2020. My name is Jens Bak-Holder, and I'm Head of Investor Relations at Nilfisk. To present Nilfisk results for the second quarter of 2020, we have CEO, Hans Henrik Lund; and CFO, Prisca Havranek.Turning to Slide 3. Before we begin, I want to remind you that this presentation, including remarks from management, may contain forward-looking statements that, for a number of reasons, should not be relied upon as predictions of actual results. And therefore, I encourage you to read the content of this slide in connection with the presentation.Now looking at Slide 4. The agenda of presentation is as follows: Hans Henrik will start by going through the key takeaways of the quarter, which includes an update on how COVID-19 outbreak has impacted our business and how we've responded to this; this will be followed by Prisca briefly going through the financial performance of Nilfisk and a brief status on our outlook for the financial year. As always, you are invited to ask questions during the Q&A session at the end of the presentation. And with that, Hans Henrik, please go ahead.

[Hans Henrik Lund, CEO & Member of Executive Management Board]

Thank you, Jens. Good morning, everyone, and thank you for taking time and taking part in our call. I hope you're all well and safe during these extraordinary times where, of course, the global pandemic continues to impact people, societies and companies around the world.Let's kick off with Slide 5 for the key takeaways for Nilfisk during Q2. In Q2, we focused on the safety of our employees, of course, our customers and our partners, and in keeping all of our sites fully operational. And I'm happy that we have been able to serve our customers throughout the quarter with no operational interruptions during a difficult time, obviously. During the quarter, we saw a negative impact on COVID-19 on the demand. Very big variations from market to market, of course, and from segment to segment. That said, we are pleased to see a significant improvement during the quarter with the month-over-month pick up in the demand across the globe. We started off in April with organic growth of minus 32%. We saw a slight improvement in May as some countries have been not with a minus 28%, and then a more significant improvement in June at minus 15% as more countries are opened up again. July was in line with June. However, the uncertainty for the rest of 2020 is still high, especially when it goes to how the pandemic will evolve and how it will impact the macroeconomical conditions that, in turn, will obviously impact our demand. So visibility is low.In Q2, we responded swiftly to the decline in revenue. And during the quarter, we, first of all, adjusted our production capacity to the changes in demand very quickly. We managed our cost and CapEx very strictly. And we took the opportunity to send a significant number of employees on furlough given that the customers were not open. As a result of all of that, I'm pleased to say that we managed to reduce the overhead cost with close to EUR 20 million in Q2 versus Q2 '19. In addition to that, we took the opportunity to execute a larger part of our restructuring plan which will have a positive impact on the structural cost going forward, and I'll get back to that in a second. With these measures and the continued high engagement across the organization, which I'm, of course, very thankful for, I actually believe we're well positioned for what lies ahead.We do, however, as we've communicated this morning, remain cautious on the rest of the year. The development of the pandemic, combined with the highly volatile macroeconomical conditions, means that we're not able to fully assess the revenue and profitability for the rest of the year. Our financial guidance for 2020 will, therefore, remain suspended.Now turning to Slide 6 for a summary of the demand development in Q2. And if we look at the regions, there were quite significant variations across the various markets during the quarter. Not surprisingly, we've seen a demand peak up in markets where societies began to reopen. And we've seen a less favorable development in markets where lockdowns are continued.To give you a flavor for all of this, we can look at U.S. versus Canada. In U.S., we've seen a positive trend through the quarter, and demand has picked up quite significantly month-over-month. Canada, on the other hand, has remained in a fairly strict lockdown. And obviously, that's impacting our demand, and we're not seeing the same traction in orders from Canada. So it is down to the local way of dealing with the pandemic.Turning to EMEA. We have seen quite some differences here. In EMEA South, which for us is Spain, Italy and France, we had the highest impact early on independent mix, as you can imagine. In all of these markets, we saw very low demand levels beginning. But actually, they've all picked up fairly quickly to bounce back. Not fully to a normalized level, clearly, but the trend is indeed positive.U.K. is another example where they have been hit really hard by the crisis. And their recovery is slower, given that there are still quite significant restrictions on what you can do in U.K. and what you cannot.APAC, still a high degree of uncertainty in China, severely impacted by the crisis, but also the financial conditions in China. So it's progressing slower out there due to a cautious purchasing behavior. That said, add it all up, we're pleased to see the overall Q2 development across segments and markets pick up significantly month-over-month.If we turn to customer segments, as we're illustrating on Slide 7, we've talked about this before, but just to recap. There are quite significant variations between the different segments. There are customers who have stayed fully operational through the crisis: food, supermarkets, hospitals, and they are fairly close to normal demand levels. If I go through the complete other end of the scale, demand is, of course, very low in segments like hotels, hospitality, restaurants, airports. They are not in the market for new equipment at the moment. For the remaining segments in the middle, the picture is a bit more mixed. Overall, industrial customers are, however, cautious on their spending. That's a very general comment. If you go into segments like food, warehousing, it's a bit different. But in general, that's the picture. Touching briefly also on the development in service. Generally speaking, we've seen less impact on the aftermarket business compared to overall equipment business, reflecting that we've had ServiceMax available to our customers throughout the quarter with the right safe measures. And we've seen a continued demand for service from our customers.Turning now to Slide 8 for a few more details on the restructuring that I spoke about and we announced in May. We were looking to reduce approximately 250 full-time positions across countries and functions to reduce our structural costs moving forward. The execution is going according to plan and it's going well. And during the quarter, we have eliminated a very significant portion of the 250 positions. We still have some work to do in the southern part of Europe. There are negotiations, country-wise, that we need to go through. And we, of course, respect. But all in all, a very significant part of what we were planning to do has been done. And the restructure built on the foundation we've created during '18 and '19, where we have established a global and well system-supported model that now allows us to take these benefits. And I can go through a couple of examples with you. We now have a fully global marketing setup. We develop global campaigns, not local. We execute these mostly digital, not so much physical anymore. And this means that we've been able to take resources out, mostly locally. Sales, as you know, we've been implementing Salesforce globally. We now know how to use it as well, which means that we can improve efficiency, and we've taken that benefit. IT, we've moved competencies to Hungary, a low-cost country in that sense. We've established a new IT hub there and taking cost out of more high-cost countries. So -- and we've reduced use of consultants as well. So pretty much building on what we have built over the last couple of years.Other functions, R&D is an example, we have simplified and streamlined our operating model and that's giving us some benefits as well. So good to see that we've been able to do that. All in all, I'm happy with our ability to address the situation of COVID through Q2. Obviously, a troubled quarter from a top line perspective, however, in line with what our competitors saw as well, which is, of course, important. We've been operational, safe, been able to serve the customers. We've taken out costs short term. We've significantly progressed on our restructuring, and we will, of course, benefit from that going forward. Quite a few accomplishments in a hectic quarter, I would say.With that, I would like to hand over to you, Prisca. And Prisca will walk you through some of the financials.

[Prisca Havranek-Kosicek]

Thank you, Hans Henrik.Let me start off with the profit and loss statement on Slide 10. In Q2, our total revenue was EUR 191.1 million, and we have a reported growth of minus 26.1%. In nominal terms, our revenue was reduced by EUR 67.5 million. Out of this, close to EUR 3 million or 1.1% comes from the exit of the consumer business in the Pacific region. The FX impact was slightly negative due to the impact of several currencies, which gives us an underlying organic growth of minus 24.9% in Q2. During the quarter, our revenue was significantly reduced by the pandemic. This impacted our gross profit, which was down a little over EUR 37 million.Our gross margin declined by 4 percentage points. This is a rather steep decline. However, let me remind you that in Q2 2019, our gross margin was positively impacted by one-offs. We report a gross margin of 43.9% in that quarter, which is a very high number for us. If we look at the drop of 4 percentage points, about half of this comes from underutilization. Also, because of our strong quarter in consumer, we see a mix effect bringing down the margin.Looking at the overhead costs, here I'm pleased to say that we have reduced our overhead cost to close to EUR 20 million in the quarter. We did this by implementing strict cost controls, minimizing all necessary spending -- or unnecessary spending, apologies, such as travel, marketing and the use of consultants, and also by sending home employees on leave or on furlough. To that end, approximately EUR 5 million of the EUR 20 million savings come from government support programs. Out of this EUR 5 million, approximately EUR 3 million have been recognized as other operating income in our P&L, whereas the remaining EUR 2 million are netted in salary costs.Our good efforts on the cost side enabled us to mitigate roughly half of the decline in gross profit. But overall, EBITDA before special items dropped with around EUR 18 million, bringing it to $21 million for the quarter. This gives us an EBITDA margin before special items of 11%. If you adjust for the government support programs, the EBITDA before special items is 8.4%. This is, of course, lower than last year, but at an acceptable level given the severe impact of the COVID-19 on our revenue. Our special items amount to EUR 8.7 million. The larger part of these come from the restructure, as Hans Henrik has already talked about. While the restructure is still not fully finalized, it will contribute to reduce our cost run rates going forward. The rest of special items in Q2 relates to strategic projects, such as our newly opened distribution center in Europe, in Belgium. In sum, despite the positive impact from our lower overhead costs, our reported EBIT came to a loss of roughly EUR 4 million, giving us an EBIT margin of minus 2.1%.Now turning to Slide 11 for an overview of the reporting segments, and we'll start with EMEA. Where we've seen an overall pickup in demand during Q2 despite regional differences. So for example, in EMEA North, Denmark, Sweden, Norway and Finland, were, generally speaking, less impacted by the crisis. And we've also seen demand pick up nicely in these markets. In the U.K., however, recovery is progressing more slowly due to the timing and the scope of the national lockdown. EMEA Central has been least impacted by the crisis. This also goes for our largest market in that region, which is Germany. Here, we also see demand picking up again, but the development has been less deep compared to the other regions. But that is simply because they are coming from a more positive starting point. This is quite different in EMEA South, where we have Spain, France and Italy as the main markets. Here, our revenue was down by more than 50% in the beginning of the quarter. But since the lockdowns began to ease, we have seen these markets bounce back quite nicely, not to the level before COVID-19, but the development is positive. So all in all, we have a revenue of close to EUR 84 million in EMEA in Q2 and an organic growth of minus 29.1%. Our gross margin came to 45.1% and the decline of 410 basis points is largely due to low capacity utilization, as I've mentioned before. We managed to reduce our operating expenses by EUR 2.9 million, which is only partially compensating for our lower revenue, bringing our EBITDA margin before special items to 21.7%.Now moving to Americas on Slide 12. Starting with the U.S., our largest market is in this segment. Generally speaking, the demand in the U.S. is less impacted by COVID compared to other markets in this -- in the Americas. Also, we have seen demand picking up from April to May to June. But of course, we remain cautious about this development. The recovery trajectory is looking a bit different for markets such as Canada, as Hans Henrik has already mentioned. They have been subject to very strict lockdowns, meaning we didn't see demand return in that quarter. Finally, in LatAm, our larger markets, such as Mexico and Brazil are showing a recovery pattern, which I would say is a bit of a mix between the U.S. and Canada. In sum, our revenue for Americas was EUR 58.3 million, and our organic growth was minus EUR 28.1 million. Our gross margin declined by roughly 4 percentage points to EUR 38.9 million, again due to underutilization. We did manage to reduce operating expenses quite significantly, EUR 4.4 million during the quarter, but we still see a drop in EBITDA before special items and report an EBITDA margin before special items of 17%.Turning to Slide 13, where we have the numbers for APAC. Starting off with China, here, demand is not picking up again, and we continue to see very hesitant purchasing behavior from our customers due to the economic climate. In the Pacific region, however, we are quite happy with the revenue generation during the quarter. And we see more or less the same recovery pattern in the other APAC markets, which brings our total revenue to EUR 13.7 million and the organic growth to around minus 36%. We see a drop of 3.5 percentage points in our gross margin, partly due to revaluations of inventories in Australia and Singapore in Q2, and partly due to mix effect. We reduced our operating expenses by EUR 1.2 million and report an EBITDA margin before special items of 5.8%.Now for our Consumer and Private Label business on Slide 14. Starting with Consumer. We're very happy to report a very strong quarter for this business. Our revenue is close to EUR 25 million, and we deliver organic positive growth of 21.1%, which is above expectations and is a strong increase compared to Q2 2019. This is largely the result of strong sales during the lockdowns, where most consumers were spending more time on home improvements. But at the same time, we remained fully operational in our supply chain, which is important to note. Our sales team sees new opportunities in the market. And we've had a positive contribution from new product release. Of course, you should bear in mind that we've had a weak business performance in Q2 2019, so the comps are obviously in our favor. Despite inventory cleanup in the Pacific region, we managed to keep our gross margin stable at 33.5%. For Private label, total revenue is EUR 10.8 million, and our organic growth is minus 18.5%. This is more or less in line with our expectations. Our gross margin is slightly down with 1.9 percentage points due to customer and also product mix.Now turning to the balance sheet and the cash flow on Slide 15. For Q2, I'm pleased to report a significant reduction in our working capital. We have actively worked with our inventory levels in its response to the crisis and were able to reduce these with around EUR 31 million compared to [indiscernible] last year. This is particularly due to raw material and components, but you should also bear in mind that about EUR 5 million comes from the exit of our consumer business in the Pacific region. Due to the lower revenue, our trade receivables were also reduced by EUR 56 million compared to last year. We're in very close contact with our customers, especially, of course, under the given circumstances, and we are happy to report that overall, our collection efforts have not been impacted by the crisis. Trade receivables were also reduced during Q2, combined with movements in the remaining items in our reported working capital, we saw a reduction of EUR 53 million. Overall, we remain very highly focused on our working capital to protect cash flows and on the balance sheet. Turning to CapEx. We are pleased to see a ratio of 2.8% compared to 4.8% in Q2 '19. We have postponed a number of R&D projects and reduced our IT CapEx as well, which has given us a CapEx reduction of EUR 8.6 million in the quarter and EUR 1.8 million comes from low investment in property plant and equipment. As a result of favorable working capital and CapEx, we are able to report a solid improvement in our free cash flow despite the crisis. In Q2, we generated free cash flow of EUR 30 million, up EUR 14 million from Q2 last year.Our return on capital employed is down by 9.5 percentage points due to the lower EBIT before special items. And due to the positive development in cash flow, we have managed to reduce our net interest-bearing debt with EUR 47.1 million compared to the same time last year. Out of this EUR 47 million, close to EUR 19 million have been reduced since March 31, which we are very happy with.As we've communicated to you previously, we obtained a backup credit facility of EUR 100 million at the end of May. This brings our total committed facility to EUR 550 million. And excluding lease liabilities, our financial headroom was at EUR 210 million as of June 30. Our financial gearing was at 4.3x compared to 3.4x at the end of 2019.Now before we continue with the Q&A session, please turn to Slide 17 for an update on the 2020 outlook. Now as we have explained during this presentation, the rapid development of the pandemic has had a very significant demand -- impact on demand in Q2. We've seen significant variations in demand patterns across different markets and customer segments. As Hans Henrik mentioned, we've seen sequential improvements in revenue during the quarter, with June coming in at minus 15% organic growth and trading in July in line with that. The development over the coming months, however, is highly dependent on how the pandemic will develop and impact our markets and customer segments. Also, our industry is very dependent on the macroeconomic conditions which are currently facing unprecedented volatility. In Q2, our strict cost control and the support from government grants resulted in a significant reduction of overhead costs compared to 2019. While we do not expect the government grants to continue beyond Q2, the low cost base of Q2 reflected a significant reduction of our activity level. So as we adjust our business activities to the future customer demand, our cost run rates will be above the levels that we've seen in Q2, whereas the restructuring program will have to reduce the cost run rates going forward. For these reasons, we are currently not able to give a meaningful assessment of revenues and profitability for the rest of the year, and our financial guidance for 2020 remains suspended. This concludes our presentation, and we are now ready to open up for the Q&A. Operator, please continue.

[Operator]

[Operator Instructions] Our first question comes from Kristian Johansen, Danske Bank.

[Kristian Tornøe Johansen, Senior Analyst]

Yes. So first question is on your credit facility, which you managed to extend. Can you elaborate on the wording that you have adjusted covenants on your credit facility?

[Prisca Havranek-Kosicek]

You have seen we have increased our facilities to EUR 550 million. As you know, we do not disclose the covenants, but I can assure you that we are well within our covenants and there is no breach of any covenant whatsoever at the end of Q2.

[Kristian Tornøe Johansen, Senior Analyst]

But historically, you have disclosed that the covenant was on the net debt-to-EBITDA metrics. Is that still the same metric or is there an adjustment to the metric as well?

[Prisca Havranek-Kosicek]

We have adjusted the metrics, and we have also adjusted, obviously, the total financing package. So our covenants are several aspects, and we have adjusted both of those.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. Then second question is on your autonomous focus. So you write in the report that you are spinning out the technology build in to the Liberty machine together with Carnegie Robotics. Can you elaborate a bit on the reasoning for spinning it out in a separate company? And what's the ownership split in this company? And what should we think about in terms of capital requirement for this company going forward?

[Hans Henrik Lund, CEO & Member of Executive Management Board]

So thank you, Kristian. It's actually very simple. We've worked with these guys. We have developed technology together with them that we believe can be applied outside our industry, and we're just simply wanting to have an upside of that if it happens. And it's not really a huge financial transaction. It's much more saying here's a partnership that we would like to build on and have a potential upside.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. I understand. And then the ownership split, is that 50-50 between you and Carnegie Robotics or...

[Hans Henrik Lund, CEO & Member of Executive Management Board]

Yes, sir.

[Kristian Tornøe Johansen, Senior Analyst]

That's good. All right. Third and last question, special item costs for the second half of 2020. Can you give any indication of what to expect here?

[Prisca Havranek-Kosicek]

Yes. Let me take that one. Thanks for the question. So you've seen the reported special items of EUR 9.5 million for the first half. When we talked about our initial guidance in February this year, we were talking about EUR 10 million to EUR 15 million of special items for the full year. Now that was before we decided to restructure the program that has been mentioned before in May. So going forward, I would say, with the visibility we have, I would expect the second half to be in line with the first half on a special items point of view.

[Operator]

Our next question comes from ABG.

[Casper Blom, Lead Analyst]

Yes. Is it me?

[Operator]

Yes, sir. Please go ahead.

[Casper Blom, Lead Analyst]

Okay. Sorry. I didn't catch it. This is Casper Blom from ABG Sundal Collier. First question regarding the Americas and particularly, the U.S. I'm aware that sometimes it's really difficult to separate warm and cold water, but could you give any kind of sort of more comments to the underlying turnaround of the U.S. business that the -- how that is developing? And though I recognize it's difficult to sort of split out what is market-driven, what is Nilfisk-driven at the moment? That's the first one.

[Hans Henrik Lund, CEO & Member of Executive Management Board]

Thanks, Casper. So let's go back to Q2. We've been losing market share in the U.S. for God knows how long, and quite significant. This was great to see that it didn't happen in Q2. So we -- as you know, we're working very diligently across all parts of the organization in U.S. to get back to a growth track. And I'll be very cautious here in what I say about the future. I'd rather just say that I'm pleased with what I see, the work that's been done by the team in terms of improving how they address the channels, how major account wins come in and how they operate. So structurally in a better spot than we have been before. And then I'll leave it with that, Casper and just come back every quarter and tell you how it has progressed.

[Casper Blom, Lead Analyst]

To EMEA. And sort of these comments about how, at least in southern part, that the macroeconomics are holding your customers back. This is now actually the fifth quarter in a row where you were posting a negative growth in EMEA. And we've also previously heard you talk about how a machine can last for 3 to 7 years. I mean wouldn't we soon be getting to the point where you would expect that sort of renewal rate to kick in and start pushing through some sales despite the sort of market uncertainty that you see right now?

[Hans Henrik Lund, CEO & Member of Executive Management Board]

Under normal circumstances, I would agree with you. However, Q2 has definitely not been a normal circumstance. So I think people are very restrictive in their CapEx spend or their OpEx spend, just like we are. And that's the big uncertainty, Casper. Can they make it work a bit longer? And there's likelihood that they can. However, now you are talking specifically about the southern part. What I really experienced was a major drop early on because Italy, Spain, France, just was a complete lockdown, as you know, hit hardest in EMEA by COVID. And the recovery has been excellent. So it seems promising. It will come back. But I just don't know how much due to 2 things: how is COVID going to develop? Secondly, as you know, we are GDP-dependent, and you know the volatility in that area, right? But in the daily operations, the daily sales, I'm pleased with what I see.

[Casper Blom, Lead Analyst]

Okay. I suppose, guessing here a little bit, that you work with some sort of pipeline in your sales organization, that your sales guys constantly sort of have leads and they speak to their sort of account manager counterparts, and they see sort of where they should get the next deal. Have you got any kind of like view on -- if that is sort of a pent-up demand that is building right now, that you have these corporate buyers that are just being restricted by their CFOs, but as soon as that restriction lift, you sort of would expect them to sort of jump back and start ordering?

[Hans Henrik Lund, CEO & Member of Executive Management Board]

We're still -- pipeline-wise, we are -- the pipeline is reflecting the trends you have seen. And as we said, July was pretty much in line with June. So it's hard to comment on the pipeline as such. The situation is still, Casper, that if a purchaser needed 1 approval before to buy a machine, he now needs 2 or 3 for obvious reasons. Again, similar to what we've done. So the process is a bit longer to get these approvals through. But again, if you look at what's happening from April to June, July, the trend is right.

[Casper Blom, Lead Analyst]

Okay. And you don't worry about the fact that you see sort of a flat trend from June to July?

[Hans Henrik Lund, CEO & Member of Executive Management Board]

No, I don't. Because you and I have talked about this before. You cannot measure this business under normal circumstances month by month. There are variations. And it's not like you can do a straight line between 2, 3 dots. One month can be a little bit is and a little bit that. So don't read anything into that, Casper. That would not be factual.

[Operator]

Our next question comes from Mikael Petersen, SEB.

[Mikael Petersen, Analyst]

I have a question regarding APAC. You said that the demand is still low in China, but it seems though that the economy is improving over there. I'm not sure if is this company-specific or if you think your customers were holding back, very hesitant on investing into new equipment? Or if you have any flavor on the China situation, that would be very helpful.

[Hans Henrik Lund, CEO & Member of Executive Management Board]

Thanks, Mikael. Let's talk about APAC first. Because we're being -- we're underperforming in APAC in Q2. The reason is -- first reason is, we have a situation where we are split of our revenue. We're quite good in countries like Thailand and Malaysia. And those countries, they were hit the hardest through Q2. All of the tourism and all of that stuff went down. There were even political unrest in Malaysia. So that's why we are, overall, not where we want to be in APAC, number one.China, I have a little bit some of the same questions because we haven't seen -- we've seen a pickup since February, where we started. But it's been a bit flattish lately. And I don't know all of the reasons, Michael, on that front. What I'm seeing is that there is a cautious behavior in terms of buying. From our people living in China, we shouldn't expect that China is normal by now. People are still hesitant going out to restaurants, and the life out there is still not what it used to be. So that's impacting it as well. And then they have a few flare ups of areas where corona is back. So I do believe that it is corona-related, but we are monitoring very closely whether there might be some internal reasons as well. We haven't found them yet, but we are monitoring very closely.

[Mikael Petersen, Analyst]

Okay. And then my second question. Now since you provide EBITDA before special items, can you maybe try to quantify the impact of the COVID-19? So you have EBITDA before special items and COVID-19?

[Prisca Havranek-Kosicek]

Thank you for your question. What I can tell you is on the cost side, what we have done, and I think we've also talked about the gross profit in my remarks. And then, I mean Hans Henrik has talked about the impact on the demand side, so if you put that all together, you have the EBITDA impact. On the cost side, we have roughly saved EUR 20 million as you've seen year-over-year. Now EUR 5 million these are support programs from various governments in various countries. So those will not come back. Of the remainder, I would say about half of it will be in personnel costs, so holding back of FTEs but also variable components like bonus accruals. And the delta to that would be activity-related costs, which you have to expect will come back depending on how the demand pattern will be there. So you'll have to -- you see a significant COVID impact in Q2 on the costs. But of course, that will bounce back once the revenue line bounces back.

[Mikael Petersen, Analyst]

Okay. And then maybe my last question. Since you're doing all these restructuring changes and changing the sales, operational, changing the marketing and R&D, et cetera. Do you see any further cost reduction possible without impacting the ability to meet the demand? I'm just trying to figure out if, let's say, that the demand keeps being negative double digits, could we see further cost reductions that you currently have planned for?

[Prisca Havranek-Kosicek]

Yes. Let me take that question. Obviously, that is part of our job to continuously improve our cost position, take on efficiencies. So do I see further potentials? Absolutely. Will I be able to give you a flavor of how and when and how much? No, I can't. But what I can say is, and you've seen, we've taken a very big step in May. We've reported, and we are fully on track on executing that. You'll see that this cost program will also contribute in the second half of the year. I would say if you need a modeling assumption, then I would say, roughly in line with the special item impact we are seeing. So that's a tangible cost reduction that is already in the execution. And obviously, as we go forward, we will, on the one hand, look for further efficiencies. But on the other hand, of course, then also adjust activities, such as marketing and travel from our sales force to the demand levels, and also the COVID situation.

[Operator]

[Operator Instructions] We have a follow-up question from Kristian Johansen, Danske Bank.

[Kristian Tornøe Johansen, Senior Analyst]

Just a follow-up here. Looking at the development of your full-time employees, it's down 531 in Q2. You said you realized the reduction of almost 250. So that leaves still roughly another 300 million FTEs that you have reduced outside that program. Is that just temporary reductions? And should they come back, as said, if activity picks up? How should we think about that?

[Prisca Havranek-Kosicek]

Yes. Thanks for your question. Absolutely. You're spot-on. So we have reduced around 500 FTEs, but we have to be very careful for 2 reasons. Because, as you know, our business, we have a large number of workforce in blue collar in our manufacturing operations. And those have been, of course, reduced as we were hit by the crisis. So that's a major effect of that delta. On top of that, you also have to keep in mind that at the end of Q2, there were still people in furlough programs and on leave across the workforce. So that has also contributed. So I would be careful in interpreting that number relates to our total -- you can't relate to our OpEx salary cost because a lot of it will be seen in gross profit.

[Operator]

[Operator Instructions] We have no further questions. Dear speakers, back you for the conclusion.

[Hans Henrik Lund, CEO & Member of Executive Management Board]

Thank you for the questions. Thank you for joining us. Happy to walk you through Q2 and how we see it. So with that, we conclude the call. Thank you very much for joining, and have a good day. Goodbye.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for attending. You may now disconnect.