Saf-Holland Se

XETRA:SFQ

Earnings Call Transcript 2024-Q3

[Operator]

Dear ladies and gentlemen, welcome to the SAF-Holland SE Q3 2024 Results Call. Today's presenters are CEO, Alexander Geis; and CFO, Frank Lorenz-Dietz.

The presentation slides are available on the SAF-Holland corporate website. The presentation will be followed by a Q&A session.

Please note, this conference call will be recorded and published on the corporate website of SAF-Holland SE. Everything spoken through the unmuted microphone will be processed during the online meeting and published on the website of SAF-Holland SE. If a participant does not wish to be recorded, they should refrain from participating in the Q&A session and keep the microphone muted.

The Q&A session is exclusively for institutional investors and analysts. All other participants of the conference call are kindly asked to contact the Investor Relations team directly if they have any questions. Mr. Geis, the floor is yours.

[Alexander Geis, executive]

Hello to everyone, and welcome to our conference call on our Q3 2024 results. Let me start with some recent strategic highlights on Page 3, please.

In August, we celebrated the opening of our new tech center in India, which will play a central role as a globally integrated location for research and development. The new tech center is an important addition to our global R&D network and part of our corporate strategy to expand our global backbone also in the area of research and development. With this, we will master the increasing complexity at system level and among other things, will also deepen our expertise in the software area.

Another strategic step was made with the issuance of EUR 100 million promissory note that was successfully placed in Q3. The proceeds were used to early repay EUR 68 million on term loans that were taken up in 2022 to fund the Haldex acquisition. Hence, we further improved our maturity profile and also broadened the investor base.

Let me move on to Q3 '24 financial highlights on Page 4. During the past quarter, we were able to demonstrate that our resilient business model is proving itself worth in a challenging market environment. While the demand from original equipment customers fell strongly in some cases, we were able to partially offset this decline, thanks to continued robust aftermarket business as well as the full consolidation of our latest acquisitions like Assali Stefen in the end of July.

Group sales were 20.4% below the prior year level and organically, sales decreased by 21.5% year-over-year. Nevertheless, despite a significantly weaker OE market environment, we were able to maintain our profitability on a solid level with an adjusted EBIT margin of 9.8%, mainly due to our strict cost discipline and a favorable mix effect with a high proportion of the aftermarket business.

Moreover, we were able to achieve a solid operating free cash flow of EUR 42.4 million in Q3 despite a significantly lower top line development and slight net working capital-related cash inflows. Hence, our leverage remains almost stable at 1.9x and thus within our range of less than 2x.

To summarize, SAF-Holland was able to demonstrate the resilience of its business model in the third quarter as well as in the first 9 months of the year. We performed well in a market environment that was more difficult than expected at the beginning of the year. Therefore, and considering the current demand level, we are specifying our sales forecast for the '24 financial year at around EUR 1.95 billion and maintain the margin forecast of around 10%.

On Page 5, you can see what these developments mean for Q3 '24 numbers. So our consolidated sales reached EUR 439.9 million with a solid adjusted EBIT margin of 9.8%. For the 9-month period, this sums up to group sales of [EUR 1,452.5] million and a double-digit margin of 10.1%. The adjusted EPS amounted to EUR 0.42 for Q3 '24 and EUR 1.80 for the 9 months period. Our net working capital ratio increased to 16.4%, mainly due to the acquisitions, but also based on the higher inventory needs for the aftermarket business.

Excluding acquisitions, the net working capital ratio would have amounted to 15.2%. And moreover, operating free cash flow reached a level of EUR 42.4 million and EUR 86.7 million in the first 9 months.

Next page, please, for the group sales. Sales in the first 9 months of '24 were affected by the weakness in the commercial vehicle market, especially in the trailer segment in EMEA and Americas. Accordingly, OE sales were 17.7% below the same period of the previous year, which ultimately resulted in an organic decline in sales of 13.7% year-over-year. Hence, the third quarter declined by 20.4%. In organic terms, the group was down by 21.5% compared to Q3 '23, but was partially offset by additional sales of EUR 9.7 million from the acquisitions of IMS Group, Tecma and Assali Stefen.

On the next page, you can see the sales split by region and customer. So due to this year's acquisition, the sales share of the EMEA region increased to 46%. The Americas region in turn, was affected by the weaker trailer and truck market and contributed 40.8% to group sales. The APAC region slightly weakened in the third quarter, primarily due to the withheld investments in the wake of the elections in India as well as the heavy monsoon season recently. So the APAC share decreased slightly to 13.2% of group sales.

Looking at the split by customer group, sales from the OE business decreased by 27.4% year-over-year to EUR 265.1 million, which was due to the weaker commercial vehicle market worldwide. Accordingly, the trailer OE segment accounted for 47.1% of sales in the third quarter, while the truck segment stayed almost on the same level as in the past year of 13.2%. In contrast, the aftermarket business decreased only by 6.9% to EUR 174.8 million, mainly due to a seasonally weaker demand over the summer period as well as a slight destocking of customers. However, it continues to be a resilient pillar of the SAF-Holland business model. And as a result, the aftermarket business contributed 39.7% of group sales.

On the next page, speaking about the group adjusted EBIT development. Our total adjusted EBIT in the first 9-month period decreased only moderately by 4.4% compared to the same period of the previous year, resulting in an adjusted EBIT margin of 10.1%. The third quarter of '23 benefited from a onetime catch-up effect in the aftermarket business, while this year's third quarter reached an adjusted EBIT of EUR 43.3 million and continued to be strong with a margin of 9.8%. While the favorable mix effect with a higher aftermarket proportion strongly supported the group margin, also the continued synergies from the Haldex integration and a generally strict cost discipline had a positive effect on our profitability.

Let's go to the regions now, starting with EMEA on Page 9. You can see that top line development in the EMEA region was strongly influenced by the softer development of the trailer market that is expected to have declined between 25% to 30% year-over-year. Hence, our sales fell organically by 17.1% in Q3. For the first 9 months, the decrease amounted to 10.8%. Although the region was able to outperform the important trailer market, sales declined due to the weaker demand in the overall OE segment. Despite that, the aftermarket business continued to develop robustly. And moreover, the recent 3 acquisitions contributed a total of EUR 9.7 million to sales in the third quarter.

Despite the overall lower top line development, we were able to even slightly increase our profitability in the third quarter based on the higher share of the aftermarket, but also due, as I said before, the very strict cost discipline in the combination with personnel cost measures like short-time work. Hence, adjusted EBIT amounted to EUR 16.4 million, resulting in an adjusted EBIT margin of now 8.1%.

On the next page, we can see the development of the Americas region. So in the Americas region, the weaker momentum in the trailer market continued also in Q3. Additionally, as expected, we saw lower customer demand from the truck sector as well as a reluctance to invest upfront U.S. elections. Sales decreased organically by 24.5% compared to a strong prior year quarter that benefited from a favorable onetime catch-up effect in the aftermarket business after the cyberattack. Accordingly, sales declined organically by 18.5% in the first 9 months of the year.

Nevertheless, adjusted EBIT remained strongly in the double-digit percentage range and benefited from a higher share of the aftermarket business, a strict cost management as well as efficiency improvements in our production facilities. So as a result, the adjusted EBIT amounted to EUR 20 million or a margin of 11.1%.

So last but not least, speaking about the APAC region. So India is the biggest market and due to the not yet resumed government investments in infrastructure projects post the elections in India as well as due to the heavy monsoon season that was unfortunately impacting the mining sector, the region was unable to maintain last year's top line development. In addition, the weaker momentum of the U.S. trailer industry was negatively impacting our trailer business, specifically in Southeast Asia.

APAC sales declined organically by 24.9% in Q3. Accordingly, sales in the first 9 months of '24 amounted to EUR 186.6 million and were 6.7% below the previous year, which is an organic decline of 7.9%. Looking at the bottom line, we were able to hold a very strong profitability level with an adjusted EBIT of EUR 6.9 million and an adjusted EBIT margin of 12%. The improvement in earnings in China as well as the higher share of the aftermarket business supported our profitability also.

And with this, I hand over to Frank for the key financials of Q3.

[Frank Lorenz-Dietz, executive]

Yes. Thank you, Alex, and hello to everybody on the line. As usual, let me start with a short overview on the EBIT to adjusted EBIT reconciliation for the group on Page 13.

Despite the top line decline of 8.6%, our reported EBIT during the first 9 months of 2024 amounted to EUR 126.7 million and grew even slightly by 1.4% based on less restructuring and transaction costs that were adjusted this year. Hence, we improved our quality of earnings. For the third quarter, adjustments only amounted to EUR 0.7 million for the acquisition and integration-related costs for IMS, Tecma and Assali Stefen.

The depreciation, amortization from purchase price allocation slightly increased to EUR 17.4 million during the 9-month period and does not yet contain the finalized PPA for Assali Stefen. For the full year, we currently expect the level of PPA adjustments to be at around EUR 25 million. As a result, also adjusted EBIT was down by 26% and the adjusted EBITDA declined by 18% in Q3 2024. In the first 9 months for the year, adjusted EBIT declined only by 4.4% and the adjusted EBITDA was almost stable compared to the prior year.

Moving on to Page 14, where you see the bridge from EBIT to basic earnings per share. As said before, reported EBIT amounted to EUR 126.7 million for the first 9 months, respectively, EUR 36.9 million for Q3 stand-alone. Unfortunately, the finance result in the third quarter as well as during the first 9 months was influenced by unrealized exchange rate effects, which I will explain to you in a minute on the next page.

In addition, income taxes declined in accordance with our top line development, but were impacted by catch-up effects from former periods. Those effects relate to several different circumstances like the inclusion of latest tax assessments that we did along the legal entity consolidation during the PMI process of Haldex. The consideration of the results from recent tax declarations as well as the first application of the new regulations for the global minimum taxation.

The overall tax rate amounted to 51.1% for Q3 and 33.9% during the first 9 months of 2024. Majority of the effects in Q3 are nonrecurring. We expect to end the year with a tax rate at the level of the first 9 months or slightly better. Overall, basic earnings per share was impacted by the unfavorable development of the finance result as well as the tax issues during Q3. However, despite the significant top line slowdown, our reported earnings per share only developed moderately below the first 9 months of the prior year.

As it is not the first time that we reported effects from unrealized FX valuations, I'd like to explain them in more detail for this reporting period on Page 15. The finance result amounted to minus EUR 17.5 million during Q3 as well as minus EUR 35.7 million within the 9-month period. Also, the financial result was impacted by interest expenses from interest-bearing loans of approximately EUR 9 million per quarter, which is in line with our forecast of around EUR 36 million for the full year. We saw strong unrealized currency effects mainly on intercompany loans at closing rate in previous quarters.

At the lower half of the page, you can see the biggest drivers of it. On the one hand, the U.S. dollar and on the other hand, the Brazilian real. The U.S. dollar alone caused a negative unrealized FX effect of minus EUR 7.3 million. If you were to look at these effects as they stand today, there would be a positive EUR 9 million effect, eliminating almost every impact on the finance result.

On a year-to-date perspective, as said, we are in line with our expectation for the interest expenses of approximately EUR 36 million for the full year 2024. Unrealized FX effects are pure valuation effects, not possible to forecast, but do not have any impact on our cash flow.

Moving to Page 16, where you see the development of the equity ratio. Compared to year-end 2023, equity improved by EUR 8.4 million to EUR 484.4 million, mainly supported by the solid result for the period, but was partly offset by the dividend payment of EUR 38.6 million in June. Since the balance sheet grew a bit less, the equity ratio reached a slightly better level of 28.9%, which is even 1.4% higher than the level at the end of September 2023.

Turning to Page 17, I would like to speak about the net working capital development. Net working capital increased by 11% to EUR 330.7 million compared to the end of 2023. Despite the latest acquisitions as well as generally higher stock level for the aftermarket business, inventories decreased by 1.3% compared to December 2023.

In addition, the amount of factoring was reduced from EUR 40.4 million 1 year ago, respectively, EUR 37.7 million at the end of December 2023 to now EUR 28.7 million at the end of September 2024. As a result, net working capital ratio of SAF-Holland amounted to 16.4% of sales. Excluding the acquisitions of IMS, Tecma and Assali Stefen, the net working capital ratio would have amounted to 15.2% and was within our target corridor of 15% to 16%. However, net working capital is a top priority for us, and we will continue to work on further improving it in the coming months, both in the existing companies and in our recent acquisitions.

And now let me address the cash flow development on Page 18. The net cash flow from operating activities in the third quarter amounted to EUR 50.7 million and was positively driven by the solid operating result as well as a slight cash inflow from net working capital in the amount of EUR 2.8 million. In addition, while paid income taxes grew slightly due to higher earnings in previous periods, the cash flow was driven by lower warranty provisions.

As a result, the net cash flow from operating activities in the 9-month period amounted to EUR 113.4 million. Moreover, investments in property, plant and equipment and intangible assets amounted to EUR 31.1 million in the first 9 months, which corresponds to 2.1% of sales. Overall, CapEx focused on the further automation, modernization of production processes in EMEA and Americas as well as on the preparations for the new plant in Rowlett, Texas. Hence, we achieved a solid operating free cash flow of EUR 42.4 million that is expected to further support the deleveraging as well as future dividend payments.

Let's turn to Page 19 for the ROCE development. ROCE at the end of Q3 2024 amounted to 19.4%. The lower level compared to December was mainly driven by the disproportionately high increase of net debt due to the financing of the recent acquisitions compared to lower earnings in the light of the current market weakness. However, with 19.4%, we can once again demonstrate that the efficient use of capital employed.

Let's also take a quick look at the current maturity chart on Page 20. As said at the beginning, we issued a promissory note of EUR 100 million with tranches of competitive variable interest rates and terms of 3 and 5 years. The proceeds were used to early repay EUR 68 million on term loans that were taken up in '22 to fund the acquisition of Haldex. Thus we further improved our maturity profile.

Looking at '25, our solid liquidity profile in combination with the implementation of a cash pool by the end of this year should cover a material amount of the outstanding maturities next year.

Moving on to an overview of the leverage development on Page 21. At the end of September, the net debt-to-EBITDA ratio slightly changed compared to the end of December 31 '23 and amounted to 1.9x. The net financial debt increased by 10.8% despite our strong position of cash and cash equivalents and was mainly due to the EUR 72.1 million increase in interest-bearing loans and borrowings. However, we achieved once again the target of reducing the leverage ratio to a maximum of 2x by the end of 2024.

Having said that, back to you, Alex, for the outlook and closing remarks.

[Alexander Geis, executive]

Thank you, Frank. I'm on Page 23, showing the full year '24 forecast for trailer and truck markets. So in recent months, several commercial vehicle markets have continued to weaken. After strong growth in recent years, high interest rates led to an investment hesitation by fleets, especially in the trailer market in EMEA and Americas. Based on latest developments, SAF-Holland now assumes that European trailer market will decline by around 20% to 25% this year compared to '23, means up to 5% lower than expected in August.

For the European truck market, a decline of now 23% is expected. In North America, both trailer and truck markets are predicted to further soften after the strong previous years and are forecasted to decrease by around 31% and up to 10%, respectively.

In China, both trailer and truck markets are expected to continue to grow. After the recent decline in the market, a plus of up to 5% is still expected for the trailer and the truck market. And speaking of India, following the conclusions of the elections, the government infrastructure projects are expected to continue. Nevertheless, it is not expected that the trailer market will reach the level of the previous year and is expected to shrink by around 6%. In the market for heavy trucks, which is less important for SAF-Holland in India, production figures are expected to decline by around 8%.

Going on the next page, looking at our guidance for the full year '24. In view of the weaker-than-expected market environment, as just explained, we have specified our sales forecast for the group. After assuming consolidated sales of around EUR 2 billion at the beginning of the year, we now expect around EUR 1.950 billion and hence, a reduction of 2.5%. Despite this development, we continue to expect an adjusted EBIT margin of around 10% for this year. Based on a continued strict cost management, a favorable customer group mix with a higher share of the aftermarket business as well as from a continued realization of synergies from the Haldex acquisition. And moreover, the CapEx guidance remains unchanged with an amount of up to 3% of sales.

So as usually, please let me conclude the presentation with some key takeaways on the next slide. SAF-Holland performed strongly in a challenging market environment over the past 9 months. Although the market situation is not expected to change in the short term, SAF-Holland is good positioned to compensate for weaker OE demand due to its robust aftermarket business and the regional setup.

We do a strict cost management and the use of various personnel measures, but also through the continuous realization of the synergies in the course of the Haldex integration. SAF-Holland continues to achieve a solid operating performance with a strong margin in both the third quarter and the full 9 months period. We are also confident that we will achieve a margin of around 10% for the full year 2024 despite the expected slightly weaker sales adjustments. Solid earnings and cash generation will support deleveraging in the coming quarters and ensure a solid financial profile going forward.

So ladies and gentlemen, this concludes the presentation. Thank you, and we now can start with your questions, please.

[Operator]

[Operator Instructions] And the first question goes to Yasmin Steilen of Berenberg.

[Yasmin Steilen, analyst]

I have 2, if I may. So the first one is on your sales guidance. The new guidance implies around 4% sales decline in Q4 and leaving M&A effects aside some 8% sales decline. Could you provide some more insights on the underlying assumption as this implies a significant sequential improvement from your almost 22% organic sales decline in Q3. So any color to provide us what gives you the optimism for the recovery would be very helpful.

And the second question is on the working capital, just a housekeeping question. You mentioned in your interim report a significant reduction of factoring level year-over-year. Could you please specify the amount to get a better understanding of your working capital development in the third quarter?

[Alexander Geis, executive]

Yasmin, this is Alex Geis speaking. I will take up the first question with the Q4 sales. Well, I have to say that a lot of our trailer customers, specifically in the U.S. and in Europe, they pushed some orders from Q3 into Q4, which will be produced. So there was a shift in orders. Aftermarket should also be stronger in Q4 than it was in Q3. A lot of our big aftermarket distributors, they were watching their net working capital and specifically the inventories and the cash flow. So they destocked a little bit being now at a level where we can see that new orders are coming in.

And also the M&A is now in full effect for Q4. So speaking of Tecma and also Assali Stefen, which is the biggest one of the 3 we took on board this year. Basically, the [Italian] customer shut down for 4 to 6 weeks. So Q3 was very, very weak, specifically the first month of August, there were nearly no sales happening and also beginning of September, but this is now going to happen in Q4. So shift of orders from Q3 into Q4, aftermarket up and the full M&A consolidation makes us positive that Q4 will be better than Q3.

[Yasmin Steilen, analyst]

Perfect. Very clear.

[Alexander Geis, executive]

And also to add to this, the order intake in October was surprisingly much better than it was 3 or 4 months before. So July, August, September was quite weak. The orders we got specifically in the trailer market, from trailer customers here in Europe was promising, not on a '23 level, but better than the months before. And also the order intake now in India is getting much better.

[Frank Lorenz-Dietz, executive]

Okay. Then I take your second question. Yasmin, the factoring amount in Q3 2024 was EUR 28.7 million. The number for December 2023, so year-end closing last year was EUR 37.7 million, so EUR 9 million higher. And if we go 12 months back to September 2023, it was EUR 40.4 million, so EUR 12 million more. So we reduced by EUR 12 million in a 12-month view and EUR 9 million for this year.

[Operator]

The next question goes to Holger Schmidt of DZ Bank AG.

[Holger Schmidt, analyst]

The first one is on Haldex. Several times during the presentation, you mentioned the synergies from the Haldex integration. How high are the total synergies in the third quarter or year-to-date 2024? And could you also give an indication about the further development of synergies from Haldex? That's the first question.

And the second question is on the aftermarket business. As far as I can see, the aftermarket business was down year-over-year by around 7%. We saw a sequential decline. We have a rather weak OE business at the moment, which means the population is not increasing. How should we think about the future trajectory of the aftermarket revenues? And then the third question is more on the financial side. It's on the free cash flow. Could you give an indication for the operating free cash flow for the full year?

[Frank Lorenz-Dietz, executive]

Okay. Thanks for the question. I take the first question related to the Haldex synergies. We do not disclose a quarterly or an annual improvement number. But if you take the achievement, the number we have achieved last year, EUR 10 million to EUR 12 million in 8 months in 2023 and our target that we are following of EUR 50 million cost synergies for 2027. This is what we communicated last year on the Capital Markets Day.

You cannot interpolate it directly because some of the synergies, especially the deeper process integration synergies are linked to our SAP implementation project that will be concluded in '26. But you can at least make a kind of estimation what could be the impact of 2024. We do not disclose a precise number for that.

[Alexander Geis, executive]

In terms of aftermarket, I would take that. Well, in Q3, specifically, we saw a decline in the aftermarket come in. I already reported that before that a lot of our distributors, they were really cautious on the stock levels because interest rates are still high, both in Europe, but even higher in the Americas, which are the 2 very strong aftermarket regions for us.

And basically, the customers are reducing and destocking at the moment just to have the cash available in uncertain times. And specifically prior the U.S. elections, we got feedback from all our aftermarket dealers in the U.S. specifically and also in Canada that they are not buying aggressively like they did before. But stock levels are down now. They have to buy, population is still there within the last 5 to 7 years. We increased population massively in Europe and in the U.S. for both for truck components, but also for trailer components. And so we are looking forward to the future that we also are going to increase the aftermarket share further, not to share the aftermarket sales further.

[Frank Lorenz-Dietz, executive]

And to your last question related to the cash flow development, we don't guide a cash flow number for the full year. But if you take our sales development, we don't expect any special impact in the EBITDA for the rest of the year. So no seasonality in this perspective, also not special impact in tax, as I mentioned before. What we need to consider is that our current CapEx ratio is 2.1% of sales. Guidance goes at a maximum of 3%. So as usual, in the fourth quarter, we have a kind of catch-up effect in CapEx that if you consider this altogether, then you will come to a kind of solid estimate.

[Operator]

And the next question is from Jorge González of Hauck Aufhäuser.

[Jorge González Sadornil, analyst]

So my first question will be around the situation in U.S. with the new government. You have invested recently in Mexico and -- but you are still well represented in U.S. itself. So I'm wondering how you plan to follow on this subject of the potential import tariffs. And it is something that is not of a material impact in case of the tariffs to be applied for you as you can move production from Mexico to U.S. That will be interesting to -- how you see -- how you are following this subject first.

And then second, on the expectations for next year, Europe is kind of a black box. It's not very clear where is demand or which are the levels. So it will be really appreciated how you see Europe and which levels do you see for the trailer demand to increase next year. But in U.S., there is, I think, a consensus that the tariffs are improving, the freight fees are improving and that the truckers are going to enjoy a better situation next year. Do you see trailer enjoying this expected improvement next year in the first part of the year? Or how do you see these trends going on?

[Alexander Geis, executive]

I take -- I will try to take both questions, and Frank will help me. Election in the U.S., well, I'm not judging whether it's good or not, okay? From a personal perspective, I also only can tell you that we have the regional setup. U.S. is -- or Americas or North America is very important for us. We have manufacturing facilities in Canada, some in the U.S., some in Mexico. And basically, if Trump is going to increase the tariffs against China, which I think can happen, this is good for us because there's even more in-sourcing coming into the NAFTA. They still have the -- or they have the free trade agreement between the 3 countries, Canada, U.S. and Mexico. And basically, this is a positive signal for us.

We don't ship a lot of stuff from Europe or from Germany, over to the U.S. or to Canada. This is very minor sales. The big sales comes from locally manufactured products. So in that case, I see that positively, I have to say. And speaking about the truck business in 2025, I think it will be increasing because of the new emissions coming in 2027.

So we already have a prebuys typically 18 months, mainly upfront those emission changes because then a truck is much more expensive from January 2027. So from a truck perspective, I think that it's going to increase in '25, but then massively in '26 and trailer typically follows because there is demand coming. Everybody was hesitant prior to the U.S. elections, now Trump won with a lot of lead. Basically, there was a good victory for him. So people can go now back to work, invest. They are confident that the country will develop also in 2025.

And in Europe, what will I say? Biggest backbone of Europe is, was Germany. Germany is not really outperforming. I'm not even would like to take that word. It's really in bad shape. That's a political issue we have now, but happy for us now, there will be reelections soon. Today, they announced it will be, I think, February 23. So then hopefully, the right parties come to the table and they change quickly. We need some positive signals. And if Germany comes back, then everybody is in a good mood, the people are investing again.

And as I said before, we already see some positive signals now with the order intake already in October. Hopefully, that continues in November, and it's slightly getting better. So from my perspective, new elections is a positive signal for Germany, and this is also good for the rest of Europe. And also for U.S., I see positive signals for truck and -- truck will also pull the trailer market.

[Frank Lorenz-Dietz, executive]

I may add on your question, over to the footprint of Americas. We are not investing only in Mexico. We are quite balanced. We will open a new plant in Texas as well. So in any case, I think it's difficult to put tariffs on Mexican imports to the U.S. because all our customers are producing in Mexico. I think 50% to 60% of the truck production is already in Mexico. This will be anyhow difficult. But if such a case would really come in, we have the flexibility in our footprint as we have also a new location also in Rowlett mid of next year for fifth wheel production, and we will manage this.

[Jorge González Sadornil, analyst]

Very useful. And maybe a last question, if I may. I think you have -- you are planning to present at Capital Market Day next year. So I'm wondering if you can give us a highlight in this regard of what you are planning to talk in general in the Capital Market Day. I see that the cash flow generation is still very strong despite the weak OE. So I'm wondering if you are still focused on growing with acquisitions or if you might increase the payout in the following years?

[Alexander Geis, executive]

Jorge, you are totally right. We will update you during the Capital Markets Day what the highlights will be. But of course, we are going to grow both inorganically and organically and if it makes sense also inorganically. We are always watching good targets where it makes sense, where we can get synergies, but it's too early to speak about that, and we will get the full update latest during the Capital Markets Day.

[Operator]

And the next question goes to Fabio Holscher of Warburg Research.

[Fabio Holscher, analyst]

Just one question left. On your gross margin, which has improved quite substantially this year to 22.2% year-to-date, was usually below 20%. Is that only the higher aftermarket mix? Or are there other factors at play? And in connection, how do you think on pricing and input costs going forward, please?

[Alexander Geis, executive]

Well, mainly the profitability comes from the aftermarket. You guys know that we don't share the profitability between OE and aftermarket. We did that 7, 8 years ago or basically last time 2015, so it's already 10 years ago when we reported in business units. But absolutely clear, the profitability or the majority of the profitability comes from the aftermarket. This is also the case why we have dedicated teams in all 3 regions.

So not OE guys taking care of aftermarket together with OE, we have dedicated focused guys, people working for us in the aftermarket, making sure that we are further growing and also keeping or even increasing the margins coming from the aftermarket.

But speaking of OE, of course, we had to react quickly now with the downturn of, as you can see, 20%, 25% in the major markets. So we took a lot of personnel out of the production facilities, specifically in the Americas or in the U.S. to adapt the cost structure. So that's one reason. Then we added Haldex. We were able to increase the margins from the Haldex side, specifically the very low margins on the European side. We also were able to increase, but still working on the synergies in that respect, which will also drive the gross profit and also the EBIT. And these are the main areas where we are focusing at the moment.

[Operator]

Okay. So at the moment, there seems to be no further questions. [Operator Instructions]

[Alexander Geis, executive]

Maybe let's use the time. I got a note from my Investor Relations to speak about that, but I was really, really surprised what happened today with our share price. And I can clearly tell you that I personally are going to rebuy a lot of shares today. So as a positive sign, as I said, I was negatively surprised and I got a news that very low level now to also increase my already massive stock I have in the company. This is how I believe in the whole group.

[Operator]

Okay. We still have another question. It comes from Patrice Piade of Amundi.

[Patrice Piade, analyst]

A question about you said that you were able to offset the OE shortfall of sales, thanks to headcount and synergies. But to what extent if there is further deterioration...

[Alexander Geis, executive]

Sorry, just wait a second. We only can hear you like every 2 seconds. Maybe just go a little bit away from the microphone and try it again. I'm sorry.

[Patrice Piade, analyst]

Excuse me. Do you hear me well now? Is it better?

[Alexander Geis, executive]

Now it's better.

[Patrice Piade, analyst]

Okay. So you mentioned that you were able to offset by cutting headcount and synergies to offset the shortfall of sales from the original equipment side. But to what extent if the situation is worsening, you can't offset this shortfall of sales? Do you have more room to cut cost and more synergy to extract? And if you can give perhaps a little figures about what sort of sales you can offset by this action in order to maintain the margin, please?

[Alexander Geis, executive]

Okay. So as far as I understood you, you are referring to our ability to flex costs in the OE production side?

[Patrice Piade, analyst]

Exactly.

[Alexander Geis, executive]

And to what extent further can decrease. Okay. Understood. Well, we have seen a decline of 20%, 25%, a little bit more in the U.S. or North American market in the trailer market. So we already flexed everything possible we could do. We could further flex a little bit, but we don't want to do that because, first of all, we invested a lot of money and time in our personnel. So we try to keep personnel as long as on board as possible for future cycles, of course. And we also would like to invest in the future.

It doesn't make any sense to cut costs now, let's say, in a way that then we will get a burden for future times, and we will hurt ourselves. We flexed a lot, as I said, 20%, 25% OE down. We did our utmost to flex that. You can see the margins also OE helped a little bit and also the synergies, of course, if the market would drop by 50% like we had it in 2009, then, of course, there are other issues. But with a level of 20%, 25% OE down, we are at an area where I can say I still feel comfortable. We feel comfortable at the moment, we don't see the necessity to further flex down. As I said, we would like to keep people on board because we invested a lot of time and money in our personnel working force or the absolute numbers we flex down.

[Patrice Piade, analyst]

Okay. And a question about the aftermarket. So you work a lot in order to increase the aftermarket and in order to be more present. And do you have some room to grow more the aftermarket or you did what you -- in terms of market share gain and capture some extra sales to the base or you have done everything?

[Alexander Geis, executive]

No, everything -- its never everything done. There's always only one way that's to grow and to get better in every aspect we are doing for the company, of course, and I can speak of the aftermarket, of course, because I was running the aftermarket in the company for more than 15 years myself. This is why I said before, we have dedicated teams working on that. They get their own CapEx investments. They are focusing not only on the OE brands like SAF and Holland and Haldex, but also on the second brands like SAUER, Gold Line, [indiscernible] for Haldex. For the second life of a truck and a trailer we are increasing that and working on increasing that. And of course, there is never an end of aftermarket.

We would like to grow the aftermarket absolutely, not in share of sales because now with a share of sales of 39%, my personal opinion is 2/3 OE, 1/3 aftermarket. That's the perfect balance. And if OE would be better by, let's say, 10%, then we would come back to that share of 65%, 75%. That is the perfect balance for the company. But in absolute numbers, of course, we are going to have to grow the aftermarket. And it will be growing because of the population we put in the markets between the last 5 to 7 years in all the major markets.

[Patrice Piade, analyst]

Okay. And my last question about the debt. So the debt -- if we take the net debt is stable since the end of 2023. So I understand that you have to -- you pay a dividend for that and some acquisitions offset the free cash flow. But for the future, so you had just below 2x net debt to EBITDA. Is it for you at the right level or due to uncertainty on the -- due to economic situation, you want perhaps to grow -- will below the 2x?

[Frank Lorenz-Dietz, executive]

Yes. If you look into our leverage numbers from the past, it's -- so deleveraging is focus in our capital allocation and SAF-Holland has been at 0.7 before the Haldex transaction. So we will -- we have a strong EBIT-generating business profile, and we will deleverage further. And also, as Alex mentioned, if we see an interesting M&A target, also do some M&As like we did this year already with some of our -- with the 3 acquisitions we did. But focus is further deleveraging. It's below 2 is not a problem. Below 1 is even better, but it depends always on what is the best decision and what is on the market for M&A. And this is no change in our capital allocation strategy.

[Patrice Piade, analyst]

Okay. And so the financial cost will be for the full year around EUR 30 million, if we exclude the...

[Frank Lorenz-Dietz, executive]

EUR 36 million.

[Patrice Piade, analyst]

EUR 36 million, yes. So there's a way for you after you made a promising note to reduce the interest rate of your debt and we could see this next year?

[Frank Lorenz-Dietz, executive]

We are working on improvements of our finance results, especially on the interest cost. You have seen that we have reduced factoring already, but is also finance result. Also with the further reducing of the gross debt, we will stepwise come down. Cash pool will help us to use the available cash better and reduce also gross debt. So we are working on further reducing this number. We have always to look into the global interest rate development, but will also help us a little bit in the next month again. So this will have also a good tendency.

[Operator]

[Operator Instructions]

[Frank Lorenz-Dietz, executive]

Okay. There seems not to be the case. Thank you, everyone, for your questions. The Investor Relations team is available in case you have any follow-up questions. We will be on the road again and attending conferences in the coming weeks and look forward to seeing you there. Moreover, I would like to draw your attention to our Capital Markets Day that we will hold in Aschaffenburg on March 27 next year. We look forward to your participation. Have a great day.

[Alexander Geis, executive]

Bye.

[Frank Lorenz-Dietz, executive]

Thank you.