Jost Werke SE

SWB:JST

Earnings Call Transcript

[Operator]

Welcome to JOST Werke Q3 2020 Results Conference call. Today's conference is being recorded, and at this time, I'd like to turn the conference over to Joachim Dürr. Please go ahead. Your line is open.

[Joachim Dürr]

Yes. Good morning. Very good morning from Neu-Isenburg to all of you. I hope all of you are well and happy. It's a Gray November morning here, but we're trying to bring some light to you by showing us our Q3 numbers.We had a quite strong Q3 2020, despite the ongoing pandemic impact, mainly supported by our acquisition of Ålö and by a strong Chinese market. Our group sales were able to grow by 11% to EUR 197 million, and our adjusted EBIT increased 7% to EUR 20 million year-over-year. The Ålö postmerger integration is on track. Ålö is developing in line with expectations. It raised our group sales by EUR 44 million in Q3 and reached adjusted EBIT margin of EUR 4 million. After a strong ramp down in Q2 and already in Q1 in China, now was the time to prove our high operational flexibility. We were able to swiftly adjust our production volume and to follow the rapid changes in customer demand that we've seen in all regions in Q3. And I'm very happy to report that within that, we were even able to improve our gross margins to 28.4%.Also happy to report that we were able to show a very strong cash generation out of this operational performance. Our free cash flow improved to EUR 31.6 million. The net working capital as a percent of last 12 month sales, of course, were hit by lower last 12 months of sales and rose to 21.1%, which is an improvement over Q2, and Christian will give you a bit more information on that. The positive net income came in with EUR 5 million, despite the ongoing pandemic disruptions that we've had, supported by our strong operational business performance and the adjusted net income amounted to EUR 12 million.Looking at the market development. I've already mentioned that the markets were still impacted by the corona pandemic. It was quite a recovery compared to Q2, where we've seen even much stronger hit, but it's still far below previous year, as you can see on the numbers, especially for the truck and the trailer markets worldwide, except China. In Europe, truck and trailer markets went down 27% and 22%, respectively. Our organic performance in that was minus 16%, and that's mainly a result of our aftermarket business, which is stabilizing because it doesn't go as much down as the new build that we see on truck and trailers. Same is true for North America. The market, minus 40% and minus 47%. Our performance, 28%, also supported by a strong aftermarket business, which, as you know, also has a positive margin impact.APA, I already mentioned. China, extremely strong, especially on the truck side, very, very strong recovery, making up the losses that we've seen mainly in Q1. And therefore, 47% plus in APA for trucks, a minus of 14 for trailers. Our performance within that was 26%, reflecting the rate of China and the recovery in China. And not so much in India, but also South Africa and the Pacific region came back rather nicely in the third quarter. Looking at the tractor business, we've also -- we've always said that we see this as the stabilizing component of our overall business. And you can see here, tractors -- agricultural tractors with minus 5% in Europe and plus 2% in North America is a quite stable business environment, despite the pandemic impact that we still have.With these market numbers, Christian Terlinde, our CFO, will give you more details to the key financials.

[Christian Terlinde, CFO & Member of the Executive Board]

Yes. Thank you very much, Joachim, and good morning also to the audience from my side, from Neu-Isenburg. Yes, let's quickly start with the different regions within JOST primary segment, and that is -- we'll start with Europe. Obviously, the Ålö acquisition had a very positive impact on our financial numbers and the improving end market support of that development. If we look at Q3 standalone, you will see that our sales in Europe grew by 14% to EUR 117 million. So that is higher than Q3 last year. Obviously, Ålö contributed approximately EUR 32 million of those sales to Europe, but organically, revenue excluding Ålö and foreign exchange rate effects, the traditional JOST business contracted by only 16%. And if you recall that what Joachim just showed you, it proves again that we were somewhat outpacing the market.The growth was supported by the steady recovery of the European truck market, and on the other hand, sales in the agricultural business, as we had already mentioned during our Q2 call, were affected by the typical Q3 seasonality. That means Q3 is traditionally the weakest quarter on the agricultural side. So year-to-date, we are slightly better than prior year, again, mainly due to the Ålö inclusion, and organically, yields would have been at minus 25%. But this is already -- there, you can already see that we are seeing a turning market minus 25% year-to-date, minus 16 % in Q3 is already an improvement.The adjusted EBIT for the entire group grew by 3% in Q3 to EUR 9.3 million. So that is an improvement, again, partially driven by the Ålö inclusion. JOST standalone would have been slightly down. However, we can also see here that we are getting better and -- compared to Q2 2020, where we recorded a 2.8% margin. So this is 5.2 percentage points better than Q2. And you can really see that the cost reduction measures that we carried out in H1 and also the strong performance of Ålö in Q2 were really supporting this profitability improvement. On a year-to-date basis, we are seeing really a gradual increase from the very weak Q2 in our traditional JOST business. And please, when you look at those numbers, always bear in mind that we are not reallocating any of the headquarter costs to other regions. So Europe is bearing the entire headquarter burden, and therefore, the margins are traditionally slightly lower than in other regions.With that, I would like to go to North America, where we are seeing a very pandemic-struck continent, and that was especially visible in the first 2 months of Q3, July and August. We saw a major negative impact on sales, and Joachim showed you the market numbers, minus 47% and minus 40% down for trucks and trailers. And only the agricultural business holding up shows you how immensely affected the North American market was by the pandemic, and that was coupled by an overall expected market downturn in 2020. So sales in North America contracted by 4.2%. Had it been without Ålö, we would see a minus 28%. It's certainly a big decline compared to last year. On the other hand, it's much better than you would have thought if you had developed in line with the market. The demand for trucks and trailers is still weak. However, the -- we are seeing, and this is really a major benefit that we're enjoying this year. We're seeing tremendous increases in aftermarket sales, which come at a higher profitability. That was already one of the reasons why we were quite -- developing quite better than the market in Q1, and this development continued all the way through Q3.Speaking about the North American market, we are hoping that the positive trend that we saw in September will continue through Q4. And it's probably too early to say that we've reached the bottom of the downturn, but the hopes are there that we will continue to see upward trends also going into 2021 in North America. When we talk about EBIT, you see, obviously, a declining EBIT margin, minus 41% -- or EBIT development and the declining margin of minus 41%. Rest assured, we've really done everything to flex our costs and -- especially on the SG&A side. And the higher aftermarket portion certainly helped. But overall, there is a decline in EBIT, but that is predominantly driven by 2 effects, certainly lower sales, but also the ongoing Ålö relocation of its U.S. plant from Tennessee to South Carolina. That is still ongoing, and the raging pandemic didn't really help to support that effort also from the headquarters side. So again, we have several effects in Q3. One is -- certainly, the positive is that we're enjoying higher aftermarket sales, but on the other hand, we have a traditionally weak agricultural business in North America. And overall, the pandemic is taking its toll on the development of the market in North America.Now let's go to Asia Pacific Africa. The region that was first struck by the pandemic, and I think you all will recall that when we spoke about the Q1 results, when no one really knew what was going to happen in this year, we were already faced with a 7-week shutdown of the plant in Wuhan. And this effect continued into Q2 when our plants in India and South Africa were closed, and we also had to deal with partial shutdowns of our entities in Australia and New Zealand. So overall, we've had 6- to 7-week shutdowns in China, India, South Africa, and despite that, we would also have to continue to pay our employees even though they weren't working.So now let's look at Q3 specifically. You see that our sales in the Asia Pacific Africa region grew by 21%. So we've reached a EUR 39 million level in Q3 2020. And here, the effect of Ålö is rather neglectable because Ålö has hardly any sales in this area of the world. So if you look at it organically, you see a 26% increase and the difference between the 21% reported and 26% organically is entirely caused by negative exchange rate effect. So there is not really much of an impact of Ålö. So it was driven certainly by China, where we really saw a heavy prebuy effect due to change in regulation that was expected for September. However, this effect continued all the way through September. Also in Australia or in Oceania, we had very positive sales results coming from a country that went out of lockdown and is now going into the summer months with a lot of construction going on. And overall, this was really stabilizing the overall situation in Asia Pacific Africa because unfortunately, the situation in India has not developed positively. India is still a very depressed market, and again, it's a COVID-struck country. And so far, we're seeing very little positive development. It's getting a little better, but not much.Speaking about the profitability. Adjusted EBIT in APA grew by 63% to EUR 7.6 million with an EBIT margin now reaching 19.7%. That is the first time in JOST history, and it's -- again, it's driven by a very favorable product mix. The prebuy effect in China means that we're selling much more heavy-duty products than we are expecting to sell going forward. So that's very positive. We also introduced severe expense reduction measures in all countries in that world. So this is now paying off, and we were able to scale down our production in India quite quickly so that we limit the losses that we incur in India to a very, very small amount. So again, the Ålö impact on that result is rather limited.So what does it mean for the group? The group in the first -- for the first time in 2020, our sales grew compared to prior year's quarter. So now we're up 11% and to that Ålö contributed EUR 44 million. Without the EUR 44 million of Ålö, we would be down by 11%, and that is also bearing in mind, there are some negative exchange rate effects. So despite the ongoing pandemic, the end markets stabilized in Q3, and we saw a very strong recovery of the Chinese market. We had higher aftermarket sales in all regions and very positively, all plants were open and in operation without lockdowns in the entire Quarter 3 2020.So on the results side, the adjusted EBIT grew to 7% -- grew by 7% to EUR 20.3 million. The margin and that's very positive for us, it's back in double-digit range. So we have reached now 10.3% in Q3, and that is an improvement of 4 percentage points over Q2 2020, and it's still lower than in Q3 2019. But bear in mind that Ålö in this quarter had a rather weak profitability with 8.8%, but that was expected, as we said, Q3 with 2 summer months is extremely weak in the agricultural business. So despite an organic sales decline of 11%, JOST was once again able to prove its high flexibility in a way that you can see here that meant a 10.3% EBIT margin.So that is it for the profitability and sales side. Let me quickly give you an overview on our exceptionals. And here, you can see on the left side of the screen, you see in the 9-month development and the Q3 development separately on the right side, we are basically having standard effects and then acquisition-related effects. So on the 9-month numbers, you see that we had basically 4 -- yes, we had basically EUR 14.4 million acquisition-related effects that is -- that are coming from Ålö. And out of those, about EUR 5.8 million were cash effects while the rest are PPA-related effects. And out of those, we are assuming that most of those will go away. Basically, when you look at the bars, you can assume that only the blue bar will remain in the years to come and potentially, the top gray bar that is -- those are other optimization and unusual effects that we're adjusting. But anything in red and orange and dark gray will potentially go away in the years to come.So let's look at the development of our earnings after taxes and earnings per share. We were able to close the quarter with a positive net income that is very nice, despite some negative exchange rate effect, so positive in Q3. The taxes are once again very low. We certainly have some cash taxes that we have to pay. On the other hand, we had some positive effect of deferred taxes. So we're only showing EUR 0.4 million in tax effects. The finance result is mainly unrealized, almost EUR 2 million of the EUR 3.4 million are unrealized foreign exchange rate effects. The remainder goes for higher interest on -- due to the acquisition-related loans that we increased.So that brings us to an unadjusted EBIT of EUR 8.3 million, then we add the depreciation and amortization of purchase price allocation and the other exceptionals, and that brings us to the already discussed adjusted EBIT of EUR 20.3 million. If we normalize this down to the adjusted net income, you see the finance result, again, EUR 3.4 million and a pro forma tax rate of 30%, meaning EUR 5.1 million in taxes, brings us down to an adjusted net income of EUR 11.8 million, and that is very comparable to last year's EUR 12.8 million. And bear in mind that still corona is having a major impact on our operations, on our sales, and therefore, we're quite happy. Yes, I know that Ålö boosted this number, but overall, it's a positive development, if you ask me.Now, a look at some of the balance sheet ratios and other numbers. So royalty, obviously, went down from 18.4% to 9.6%. This is predominantly driven by the inclusion of the net debt of the -- the debt of Ålö, the financial liabilities, and on the other hand, also a weaker earnings, especially in H1 of this year. So ROCE declined. The equity ratio decline compared to the last year-end number to 27.1%. This is pretty much the same number that we were displaying also in H1 of this year. And the reason why we haven't seen an increase even though we had a positive net income is mainly because -- and this is something if you study our quarterly report in detail you see, a minus EUR 20 million effect of unrealized foreign exchange rate losses that are coming from the consolidation of our foreign operations that is just shown not in the P&L, but in equity directly.So if I look at the net debt, you see that we have been able to lower the net debt from the number in June from 2.84x to 2.65x. This is basically driven by our very strong cash flow generation also in Q3. So we have been able to use EUR 50 million in cash for the acquisition beginning of the year, and then we had partially repaid some of the revolving credit facility all the way through Q3, and that was already EUR 22.5 million in cash. And overall -- and this is something that you will see in the balance sheet as we were pretty much on the same level of cash that we were at the end of last year, despite all those out payments that you see here.So let's look at the free cash flow. Cash conversion rate remained strong at 83%. Free cash flow is again at EUR 31.6 million, so slightly better than last year, despite all the negative impacts of the pandemic on the industry. CapEx with EUR 4.6 million is at 2.3% of sales. So we are still within the expected range of 2.5% for the full year. And you see an increase in absolute working capital numbers for trade receivables, trade payables and inventories, and this is certainly, if you compare it to Q3 2019, driven by the inclusion of Ålö. Also for this quarter, we are seeing the typical effect of the ramp-ups when we have to prefinance inventories and receivables, and there is not enough offset on the payable side. But overall, we're quite happy to have achieved the fairly low leverage ratio, and we're hopeful that we will bring the net working capital also in percent of sales down towards the end of the year.So with this, I would like to hand it back over to Joachim for an outlook of the rest of the year and a summary of the last quarter.

[Joachim Dürr]

Okay. Thank you, Christian. Yes, let's comes to the market outlook that we get from the prognosis institute, LMC, Clear Consulting, FTR and what we see in the call-offs that we get from our OEMs. So the picture that you're seeing here is somewhat improved versus the picture that you've seen in Q2, mainly on the truck side and on the tractor side. On trailers, it's quite constant. It still looks quite challenging with trucks in Europe at minus 25% and minus 30%; in North America, between minus 40% and minus 45%; and only in Asia Pacific, an increase. So that all improved versus what we've shown and what they have concluded 3 months ago. Trailers is at the same level, minus 20% to 25% in Europe; minus 40% to 45% in North America; and also minus 10% to 15% in Asia Pacific. On tractors, you see an improvement versus the last numbers. More or less stable market year-to-date, which again, supports the logic that we've always had that the agricultural business should be a dampening factor in our overall volatile business.So that's the prognosis for the market. What is our expected performance in that, and I'm happy to report that we can confirm the outlook that we've given to you in September. Sales, we expect to be a small single-digit percent below last year and also depending on how the corona pandemic now shapes out for the rest of the year, as you may have heard, we've seen some suppliers having to shut down. So it continues to be a somewhat volatile environment that we currently have. Our adjusted EBITDA margin, we continue to expect higher than 10%, even in this challenging year, and our EBIT margin also above 7%. We plan for CapEx in around 2.5% of sales, more or less as usual.So what are the key takeaways? The executive summary on the next slide. We have a very solid Q3 performance, we believe, despite the ongoing pandemic impact that we're seeing on our worldwide market. The recovery of the transport markets, especially in China, and the agricultural business have contributed to the very positive results. Ålö is going according to plan. It has a good performance in Q3, despite the typical seasonality that we see in agricultural business, and the integration of Ålö into the JOST world is coming along very nicely, despite the fact that the integration teams have obvious travel restrictions. We can really put a lot of ticks in the boxes in our integration process. The aftermarket recovery recovered again in Q3, and that supported our business overall, and also the challenging environment that we have is also proving the flexibility in our economic business model. The aftermarket, of course, adding not only a stable element in terms of sales, but also adding a positive mix effect due to the better gross margin that we have on the aftermarket business.JOST has used and will continue to use all the instruments that we have available to ensure our flexibility, and we will certainly maintain our cost and cash focus as we've done in the past quarters. The positive results that we are seeing out of that are reflected in the Q3 numbers. But it's not all cost savings, we do continue with all our R&D projects and with our major projects. So we are the market leader in couplings, vehicle interfaces and agricultural loaders, and we are continuing to invest in our R&D projects.And I can confirm to you that most of our projects are going as planned. We only have very little delays, mainly due to delays with partners that we work with in our R&D projects and also in our integration projects and optimization projects that we partially shown like the transfer from Tennessee to South Carolina. So despite the cost savings and despite the travel restrictions, I can conclude that the most important projects are running according to plan, and we only have very, very little delays, and that's mainly driven by partners that we work with. So truck and trailer markets worldwide, we expect them to improve further, but we will still see the Q4 seasonality, and we will certainly continue to see a volatile market environment also for 2021, however, at a higher level than we have in 2020.So with that, that concludes our presentation, and we're very happy to take your comments and your questions.

[Operator]

[Operator Instructions] We will take our first question from Nicolai Kempf from Deutsche Bank.

[Nicolai Kempf, Research Analyst]

Nicolai Kempf here from Deutsche Bank. So given the strong number you mentioned from China, I wonder how sustainable this is? Because you also mentioned the prebuy effect. So what do you expect for the last quarter? And also what do you expect for next year? And my second question would be on the U.S. truck market. You mentioned that it's still rather weak, but you also see a very strong rise in Class 8 order. When do you expect to benefit from this order?

[Joachim Dürr]

Yes. Thank you for the question. Concerning China, you're absolutely right. We were and continue to be very positively surprised that the demand on trucks is as much and as high as it is. And also, we've explained last time that there is a change in legislation from the 3.5 inch kingpin size to a 2-inch kingpin size, which led to a prebuy effect. That did not stop in September as we expected. So Q3 has been strong, and -- even in September, and also in October, we are seeing relatively strong numbers out of China. However, we do expect that market to weaken. We see some of that is stock deliveries, and certainly, the transfer to the 2-inch will come. It doesn't come as a prop as it was initially planned by the government, but it will come over time. So we expect for the next year, a weaker Chinese market than what we've seen in the last months.Concerning North America, we already do see the positive impact. And as you've already seen in our numbers, the Class 8 volume is coming back. However, I would say that North America continues to be a very volatile market and very unpredictable with the very high cases, the COVID cases. And there is a lot of noise in the market from plants that are close to being shut down because of lack of employees that can go to the plant due to the high infection rates that they have. So yes, it is coming back, and it's also a market where you typically have fairly high stock levels that need to be refilled. So we're seeing some of that, but it's very volatile and really hard to predict at this point in time how that will shape out for the coming months. So we will have to use our flexible business model and our flexible teams, the way we've done it in the past to be prepared for the volatile market environment.

[Operator]

We will now take our next question from Frederik Bitter from H&A.

[Frederik Bitter, Analyst]

Congratulations on the very, very solid results, I think, especially in the COVID context. A few questions from my side, please. The first one, and we already talked about it a bit now with the typical seasonality you have in Q4. And just if you could confirm that this will also be the case in Q4 because, obviously, we know that there is no change to your guidance. Obviously, it looks like, say, a tad more conservative now post the first 9 months. I'm just trying to understand a bit more the seasonality and also Q4. Obviously, we have COVID as a big factor there, but we also have a cyclical recovery in the end market, I guess, particularly in North America where you commented on a bit as well. So what kind of sales level would you think is realistic based on the basic production plans you had from the OEMS, the call of plans?

[Christian Terlinde, CFO & Member of the Executive Board]

Okay. Frederik, thanks for your comments. So the Q4 seasonality is something that is quite obviously a -- well, it's -- what you can see traditionally is that Q4 has been your weakest quarter. You -- and with you here in this case, I speak basically about the truck and trailer industry. And on Page 19 of the slides, that should be visible on your screen right now, you can really see that traditionally, Q2 is the strongest quarter, and then we see a decline in sales all the way to the weakest quarter in Q4.This is somewhat mitigated by the agricultural business, where the weakest quarter is Q3, but obviously, the agricultural business is roughly 1/3 or little -- or even -- or only 1/4 of our business. So don't expect that Q4 will be extremely much better than it had been in the past. And also, what Joachim just mentioned, we -- I understand why you're saying it seems to be quite conservative our guidance. But on the other hand, there were news just today that some bigger supplier plants had to be closed down totally because there aren't enough workers because there are coronavirus outbreaks, and this is something that we also fear. So right now, I would say, yes, it could be that our guidance is currently conservative, but give us a few more weeks, and then we will know better, if this is -- if we have to -- if we keep our guidance or if it's too conservative right now.

[Frederik Bitter, Analyst]

Yes. Absolutely. Understood. And obviously, we saw the news and it's a mixed effect since we want to play it safe. Of course, now just hoping maybe get a bit closer to sort of a sensible level of Q4 sales, but we need to wait for a bit longer, I guess. The second one, the midterm margin potential of Ålö, where would you see that, say, if we posted a margin of almost 11% in the first 9 months of this year, and you -- in the first year or just in the year of integration, obviously, we know that Q2 was very strong for them, but still very respectable performance also in Q3. So the 11% now, is that a run rate you would see as an annual result in 2021? And then -- and what could be the potential based on your observations now working with this asset for a couple of months?

[Christian Terlinde, CFO & Member of the Executive Board]

Well, when you -- if you recall, the announcement that we made pretty much a year ago when we announced the acquisition, we said we would like or we assume Ålö to be margin accretive to our current business model. And so far, it is. We also said that even if it is not margin accretive in the first couple of years, we still believe, in the midterm, it should be higher than the traditional JOST business. So up to today, we're quite happy with the development, but in the end, we also need to work longer with the teams. We need to better understand the market dynamics and the overall business model, but I would assume that the 11% that you were talking about just a second ago is something that we would also expect going forward, and this is our ambition.Can it be higher? Well, it's too early to say that. And I don't feel comfortable as of today because they are still undergoing this optimization program, and as you know, this is not a running steady state business. So there are a lot of changes ongoing. There are a lot of changes -- as I said, we're still working in North America with the plant relocation, and we need to see how this will all pan out. But overall, we're happy with the development of Ålö. We're happy with the integration. And I think we're well prepared to have a new member of the family in our JOST family, and this will add to our profitability going forward.

[Frederik Bitter, Analyst]

Okay. Yes, certainly understood. That's sounds very encouraging. I'm looking forward to drop common news flow there. And then I had one. The gross margin you were showing in Q3, I think it was around 29% or so. It's a very good result. Is that not driven by temporary cost savings, like temporary workers, lack of -- or loss of, say, lower travel expenses. What's happening in the COGS otherwise there?

[Christian Terlinde, CFO & Member of the Executive Board]

No. What I would say is that what you see here is really the flexibility of our business model. This is something we've always prided ourselves in, and I think when we were first talking to all of the investors and analysts in 2017, we could only say, well, back in 2009, we were able to flex our company and our business quite significantly so that we were still delivering double-digit EBIT margins -- EBITDA margins. And I think, this quarter alone is a great proof that this is possible. We can scale down. We can also ramp up, if needed. And this is the general statement I would like to make.So specifically to your questions regarding temporary savings, yes, we have, of course, used the pandemic also to renegotiate with some of our vendors, suppliers to get temporary relief. In the end, it is certainly a pain sharing, but I would also say that we're confronted with the same pain sharing request on our customer side. So it's not only one side. So there are both -- this kind of effects on both ends. So it's an effect on sales but also on suppliers.And then, obviously, we're -- depending on the different activity levels in each plant, we are utilizing available instruments, be it short time work in Germany, be it furlough schemes in North America and the U.K. or whatever is available. So we're trying everything we can to flex our cost. And I would say that it had an impact on the gross margin, but I would not say that this is extreme. So don't expect that gross margin will go down dramatically. There is one other aspect I would like to mention, and we have enjoyed positive material price developments in this year, where the core material being steel for us has gone down in pricing.

[Frederik Bitter, Analyst]

That's quite helpful. So I would -- basically, to sum it up, what you said, I would expect that sort of, obviously, gross profit margin of 30% or so, it was in Q3. I just looked it up. It's rather not sustainable, but it should still be better than what you -- the 26% or so you've shown in like 7 -- like 2018, '19 because of the sort of the structural adjustments you have made. It is that a fair summary?

[Christian Terlinde, CFO & Member of the Executive Board]

It's difficult because when you -- when we speak about structural adjustments, I would say, most of the structural adjustments that we've made were more on the SG&A side. The operations -- the plant operations, I think have already been extremely lean, extremely flexible, and this is why the margins are developing in line with volumes, and that is something you already saw in H1. In Q1, so it's difficult also to say that the margins will continually grow again above 30%. So it's too early. Also with the integration of Ålö, we see a disruption in the margin development because it's no longer the traditional JOST business. So again, we're happy with the 29%, and the 26% year-to-date is certainly not that positive, but it's still okay given the pandemic. So next year should be in line with that, I would expect.

[Frederik Bitter, Analyst]

Yes. Absolutely. No, that makes sense. And then the last one and then I stop asking questions. Obviously, they're way too many anyway. Just quickly, guidance, where do you see working capital at the end of the year?

[Christian Terlinde, CFO & Member of the Executive Board]

Well, that's a tough question. In any normal situation, I would have said, we're going to be below 20%, but this is not a normal year because now we're also seeing -- well, first half of the year, we saw the negative impact of COVID, where sales went down dramatically. On the other hand, we were also scaling down our working capital dramatically. So I wasn't -- I'm happy about the development there, but now we're going into a ramp-up phase. And already Q3, you saw it in China, very, very high sales, and that always means higher inventories, higher receivables. The positive news is, again, we're continuously improving our -- the aging of our receivables, but I would not go so far to guarantee you we're going to be below the 20%. It is certainly our target. We will do everything we can to bring it down below 20%, but it could also be slightly above 20%.

[Frederik Bitter, Analyst]

Yes. Sure. I understand. So you were EUR 160 million now, EUR 134 million last year. So I guess, ballpark somewhere in this range, absolute number.

[Christian Terlinde, CFO & Member of the Executive Board]

Yes.

[Frederik Bitter, Analyst]

Yes. Okay. Excellent.

[Christian Terlinde, CFO & Member of the Executive Board]

Okay.

[Operator]

We will now take our next question from Sarth Patel from JPMorgan.

[Sarth J. Patel, Analyst]

This is Sarth Patel from JPMorgan. I just have 2 questions. The first one would be, in terms of the aftermarket, you've mentioned that it's been doing pretty strong. I know in the different region. Could you just give us an idea about how this is trending versus the overall business? Is this growing by a low single digit? Or is it that versus the market being down to get a sense of that? And maybe you could also tell us how the share of aftermarket in each region is developing. And then secondly, my second question was on the APA margins. It's close to 20% in this quarter. Obviously, there is some structure temporary arrangement here. How sustainable are the margins here with these different cost actions you've taken in India and with the prebuy? So how do you see that trend going forward? How much of the cost you see coming back?

[Joachim Dürr]

Okay. So let me start with the question to aftermarket. The aftermarket more or less correlates with the kilometers or miles driven on roads. That's where the partner consumes, that's where the damages happen, and that's where the replacements are done. And that's why it's a stabilizing factor and has been in this year. Our aftermarket year-over-year comparison would be somewhere single-digit below previous year, which correlates with the miles that you see. If you look at the German toll system or other report on mileage, you would see that we are about 5% less traffic than we had in another year due to the pandemic. There was a lot more during spring when the pandemic was really -- related to shutdowns also in the industry. But 5% is more or less a good number or anywhere between 0% and 10% is a good part of what we see in our aftermarket.And as I said, the question before was, is there any one-time effects? Of course, that's not a onetime effect, but the mix effect that's generated out of that because of the lower OEM sales is an effect that, obviously, helped us to build the performance that we were able to show in the financial performance. And as we said earlier, also to the question from before, there is -- we're using any measures to bring -- to use cost flexibility to bring the cost down. Some of them maybe opportunities that are only here this year. Some of them are maybe opportunities that will last for longer. So it is a mixed bag. On the aftermarket, to come back to your question, you can -- for North America and for Europe, it's about the same. The aftermarket content in Asia is not as high as it is in the developed markets, Europe and North America. You can count on anywhere between 0% and 10% decline versus last year. But as compared to total sales, obviously, a higher share of aftermarket which gives us a positive mix effect.

[Christian Terlinde, CFO & Member of the Executive Board]

And to your question about the margin in Asia Pacific Africa, the 29% is driven tremendously by China, and we are producing so many fifth-wheel couplings in China currently or we were in Q3 that we've never done before. So it's -- those are record volumes that we are seeing in the Chinese plant in Wuhan that was closed that -- we have to expect that we will not be able to sustain this extremely high level of margin. I mean, as we've said, 19% is something we've never achieved before, and it's unrealistic to assume this will be a lasting effect.So you know what our margins are traditionally in Asia Pacific. They are already higher than in the rest of the world, but to expect a 19% or 19.7% margin going forward in Asia Pacific is not realistic. Those are driven tremendously by the extremely high sales volumes, and it will simply not happen going forward.

[Sarth J. Patel, Analyst]

Sure. So just a follow-up. Do you expect in the medium term to be trending back to those 14% to 15% levels? Maybe slightly higher than that, but something around 14% for Asia Pacific?

[Christian Terlinde, CFO & Member of the Executive Board]

Again, to what Joachim just said, given the fact that we've also done a lot of expenditure reducing measures also in Asia Pacific and in the South Africa region, we do expect that there is -- for some of those effects, that will be a lasting effect, but overall, yes, we believe we will go back to a margin level of 14%, 15%. I think that's realistic, and that's already ambitious given the constant price pressure we're seeing from our customers. Don't underestimate that.

[Joachim Dürr]

Yes, the price pressure plus the market expecting to be lower, which -- we had a fixed cost effect. And we now are enjoying still a very positive mix effect because we're selling more of the heavy-duty equipment than we had actually planned.

[Operator]

[Operator Instructions] We will now take our next question from Philippe Lorrain from Berenberg.

[Philippe Lorrain, Analyst]

Philippe Lorrain from Berenberg here. Perhaps, just like a follow-up on this APA margin topic and also like on the gross margin question from Frederik before. So is it fair to assume that the gross margin in Q3 was positively influenced by the positive mix effects that you mentioned in APA. And since you guide for the APA margin to normalize in the coming years, that when these mix effects actually then fade and the volume also effect fade somewhat, the gross margin for the group will be also somewhat negatively influenced, if I put aside whatever happens to the input costs?

[Christian Terlinde, CFO & Member of the Executive Board]

Okay. Yes. Well, first of all, welcome, Philippe. Good to have you on that call as well here now. Gross margin Q3 absolutely was impacted by mix. So we have several mix effects here. The first one was the one we just recently discussed with more heavy-duty parts being sold, especially in China. That heavy-duty always means more profit for us. That's -- those parts are more complicated and come with a higher margin. The other part, of course, is you have the fixed cost aggression effect, if you really have such high volumes, especially in China. So this is having an impact. And last but not least, the higher aftermarket proportion in all of the regions that we've been enjoying, and Joachim just spoke about. So I would say there will be a chance of margins to decline, and I think I stated that already during Frederik's question that this is an extraordinary quarter. We're very happy to report those numbers, but it's not likely that we will continue at such a high level in the future.On the other hand, what we also need to consider is that the overall volumes are still depressed in the truck and trailer market. So if they return to normal levels, then again, we will enjoy the same just before-mentioned fixed cost aggression result effects. And so there is still a lot of opportunities out there for the years to come for margin improvement, but we have to be realistic that there are also in the current results some very positive onetime effects included.

[Philippe Lorrain, Analyst]

Okay. That's perfectly fair point. And the second question and last one was just more like on the North American market. I think in your preparatory remarks, you were mentioning something with regard to the trough, but I did not get that properly. So could you repeat again, like, the comment that you made on your expectations regarding the North American market, especially with regard to the trough. Because I understand that we've got some volumes coming back now, but.

[Christian Terlinde, CFO & Member of the Executive Board]

Right. Right. It's -- of course, like any guidance you're getting is -- there is a lot of uncertainty around it. But what we have done is, we've looked at the development of the North American truck and trailer market over the last 30 years, and you do see it's a very volatile market. It usually goes up for about 2.5 to 3 years, and then it goes down for 2 years.And then we were comparing that with the development during the pandemic, and I think -- and this is just our personal observation and our personal feeling that the pandemic certainly increased some of this negative effect that we were already expecting. I mean, going into 2020, we were all expecting a market decline on the truck side of 30% to 35%. Now it's 40% something, 45% to 40%, so it's bigger. But that would also mean -- and this is our expectation that probably, the downturn is a little bit shorter than you would traditionally see. So it may be not the full 2 years or even longer, but maybe a little bit shorter. And that would mean that sooner or later, we will have reached bottom, if not yet, very soon. And then we will be, again, getting on into an upward development, and this also at least, to some extent, supported by the heavy order intake on Class 8 trucks that we're seeing in North America.

[Philippe Lorrain, Analyst]

Okay. I understand better now in that context. You tell me, like, the Q2 was probably absolutely, like, the trough, but the question is more, like, what's happened or what's happening, like, in the next few quarters and how quickly the recovery generally takes place?

[Christian Terlinde, CFO & Member of the Executive Board]

I would like to say that if you just look quarter-by-quarter, it may be Q2, but frankly, July and also at least until the middle of August, the development was very depressed in North America. It just turned around quite quickly end of August and then all the way through September.

[Operator]

That will conclude the Q&A session for today. I will turn the call back to your host for any closing remarks.

[Joachim Dürr]

Okay. This is Joachim Dürr. Then -- well, thanks a lot for your questions and your interest. We are not unsatisfied with the numbers. We've always said, we have a fairly flexible business model. And this was, in many ways, a difficult quarter, but in that way, it was a quarter where we could prove that flexibility. And we just discussed that we, obviously, had some negative points, which are the volume effects overall, but some of the positive impacts that we see that are inherent in our business model like the aftermarket, margin, mix effects and others, all those shaped out quite nicely.So I think we can conclude within a very difficult market environment, a quite solid performance of the JOST group. And we thank you again for your interest. Any other questions that you may have, you have our contact, you can reach out to Investor Relations, to Christian or to myself. Thank you very much. Have a good day, and stay healthy.

[Christian Terlinde, CFO & Member of the Executive Board]

Thank you.

[Operator]

Ladies and gentlemen, that will conclude today's conference, and you may now all disconnect.