Earnings Call: H1 2020

Jul 27, 2020

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Sotheby First Half twenty twenty Retail Conference Call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Malo Fenty, CEO of Surgency. Please go ahead, sir. Welcome. We are here today to talk about Sodetti's first year out results. And then according to the agenda, we're going to give you an update on the COVID situation and then last couple of slides on the perspective 2020. So going directly to Page number 3 of the presentation, we go through the highlights of this semester, starting with the revenues of the volumes. The volumes, overall, is adjusted in reduced 33% 0.2% on reported basis, which is equivalent to minus 31.2 percent at constant exchange rate. You will see later during the presentation that we outperformed in most regions of the market, and I will go through it later on. In the second quarter, which has been a very challenging quarter, Sogeti has been 55.7% down versus 65.5% of the market. Again, a good trend in volume also in the Q2 even if the reduced amount is quite important. Going to the EBITDA level. The EBITDA has been $47,000,000 equivalent to 9.1% on sales versus $11,100,000 of the previous year, so a 2% reduction. The reduction has been achieved, thanks to very effective action on the gross fixed cost, which amounted to €38,800,000 versus the same semester of 2019. Now in Q2, we have to highlight that the actual the cost actions are really becoming very effective because in the second quarter, we did a $32,000,000 reduction versus the $6,800,000 in quarter 1. In the same period, we had $7,300,000 restructuring costs higher than last year. Last year has been $4,400,000 percent, and we included the $4,000,000 of vest change impacts mainly in North and South America. At EBIT level, we reached minus €18,800,000 We have to remember that in this first semester, we had the write down amount equivalent to €6,500,000 versus €1,900,000 of the previous year. The net income has been minus 28.8. And on the free cash flow, we have to say that the free cash flow was €7,800,000 versus minus €3,300,000 in the same period of last year. The net debt reached €327,000,000 versus 256 $200,000 end of 2019. That's all the numbers we are going to go through them in the coming slides. Lines. So this is going to highlight the results in slide number 4. We started in Italy March an emergency plan in order to minimize cash and reduced cost. And the results are according to the action plan we did. On the variable cost, the reduction is in line with the new volumes, and this has been very useful to minimize the impacts of manufacture and efficiencies in a very unstable context. The gross fixed cost has been reduced on the semester 27% versus 2018, But we need to highlight that from the Q2, the reduction with respect to the previous year is 45%, so quite important. Also, the investments have been reduced according to the period by 24% compared to 2019. In this reduction, we protected with a lot of attention, the investments on new products and a very important ramp up of the Romanian plants, which is supporting Romanian production. Going to the Slide number 5, we see the revenues by geographical area with the performances in most of the regions. As I said, if you see the performance versus market column, suggests we have been able to be more positive than the market in all the regions. We have to keep in mind that now that the mix, the geographical mix on which suggests the exact figure is a little bit less favorable in the overall amount because you remember, as I told you, that at the full year sorry, the 1st semester, we were around 33%. Because the China contribution, which is very positive today, is not in volumes strong enough to give also the mix level the right contribution. Going to the next slide, which is showing the business's performances. I would like to highlight that on the revenue, 30 1.2% cost and exchange rate we said. The 3 business units were air cooling at 29.1 percent reduction, Filtration, 25.7 percent and suspension, 38.2 percent. I have to make a couple of comments on these numbers. The filtration has been better than the others because in the aftermarket business, we have been able to do more volumes. On the other side, if I can comment the best and worst, the suspension suffered a little bit more for two reasons. 1 is because they are acting more on countries where the reduction has been unfortunately more important. And then the second is because the stopping period during the lockdown initial days has been unfortunately longer for suspension than for engine components. Going to Slide 7, we see the client's slide. Again, on this slide, I would like to highlight the attention on Daimler and BMW because in the premium German customer arena, Sobecky improved the sales pretty well on both sides. And this is very key for us because we have many new jobs coming, including the new Arabia plants, which are coming from these two customers. Go to the next slide, which is Slide 8. We see the EBIT breakdown performance. We lost on the sales volumes €81,100,000 AlphaBeat, more or less, €38,800,000,000 has been recovered working on fixed cost reduction. We have a slight improvement on the efficiency on variable cost, which is a good sign because even if we were working in a very challenging period with stop and go and with very low production rates, we have been able to the protective profitability. And then we have a slightly higher restructuring cost because we started working on cost on personnel cost where possible. And then we have also a contribution coming from Maropo mainly. So the new plant, which is under production now for filtration, because volumes were slightly above the expectation. So going now to the business unit 1 by 1, I would like to start on Slide 9, which is suspension. We already talked about the sales volumes on suspension, which are down 40.9%. And as I said, it's been affected by the higher presence in areas where the reduction has been more important, like Europe and the most difficult markets like South America and India. On the other side, I have to highlight that even if the volumes are not important, very high, we had a very good performance in China with plus 20.6% in Q2 because of the new projects launched in the same period of time on this country. At the profitability level, on the right of the right, we unfortunately, we have been affected by lower volumes. On the other side, we had a benefit from the material cost, which have been lower. We have documented our steel in this case. We included, of course, the cost of the uranium plant, which has been protected, as I said, in order to keep timing and to complete the commissioning phase in time of this new development. We had a EUR 15,600,000 fixed cost reduction amount, which has been key to minimize the decrease. And last but not least, we have an EBIT margin around 4.7% negative, reflecting higher independence in incidence of depreciation. Going to inflation, which is the starting one percent. Our revenues are down 28.1% at current exchange rates. Aftermarket has been key, like the Morocco new plant revenues, which has been, as I said, better than forecasted. It has been balanced, unfortunately, by the decline in the 2 most difficult countries like South America and India. On the profitability level, which is on the right, We had, of course, as I said, a negative impact again for the most critical countries like South America and India. And then we reduced also year fixed cost of a key amount, which is €13,200,000 These numbers are also including the negative effect of the exchange rate interest is equivalent to €2,600,000 Last but not least, we go to Air and Cooling. Air and Cooling performed better because even if the decrease was in the range on the sales of 29.3%, with the decline in Europe and North America. We had a higher EBITDA in Europe, in China, balancing the decrease on volumes partially. And then the fixed cost production has been of roughly €7,000,000 Again, China, like what you have seen before in suspension business, has been able to grow pretty well even if in a difficult period like this 1st semester because we had many key start of production with new customers. Now I would like to ask Jan Alvaro to go to the next slide, which is line number 12. Thank you, Marlo. We have on the left hand side of the chart Q1 and Q2 in 2020. And you can see that Q2 in terms of sales is not even half of Q1. As a key point, maybe the most important message is that we have been able to flexibile the variable costs, which is not an easy feat. As you know, the nightmare in industry is when you have to restart the plant, you need to open with unannounced the variable costs, which is not easy to adapt to your level of activity, which takes some time to stabilize. And as you can see in Q1 and Q2, we roughly remain at 70% of cost of sales and variable costs, which is the level we have roughly in H1 twenty nineteen with the full volume. So that goes not so easily and it was key in delivering the horrible results that may be less than they could have been. The second significant item, which Mario refers to, is gross fixed cost reduction. In Q1, we had time to reduce fixed costs by €6,800,000 versus prior year. In Q2, €32,000,000 What happened? We at once used all the schemes, which were in place in the countries in which we operate. There are not always such schemes in countries such as India, Brazil, Latin America, Argentina. When we close plants, we still have to pay the cost. In Italy, we used chicken. In France, so much parcel. So we took advantage of these schemes to sharply reduce the gross fixed costs, which allowed us to mitigate part of the adverse volume impacts. Below EBITDA, a significant item, which are the write downs. We did a full exercise end of June. Usually, we did the full monthly at the end of the year. So we did our impairment test with the assumption of reduced volumes, which as you will see later on, we assume will be lower than triple yield from quite a while. The impact of this cleanup is, in H1, a cost of €6,400,000 of which €5,500,000 in Q2, but we estimate that only €1,800,000 is directly linked to COVID-nineteen. Below EBIT, financial results end of H1 is in line with prior year. For 1, I probably won't have a question on the tax rate. We have a policy of tax rate, as per se. We were cautious in assessing what we might recover in future years. And this is a €1,000,000 deferred tax effect instead of tax charges as in previous years. The last baseline, it refers to discontinued operations. So it's a difference this prior year. As you know, we mentioned it in prior calls. It represents the disposal of our plant in 2019. If I now move to Slide 13, free cash flow. Mauro mentioned we had a significant negative free cash flow, €70,800,000 in H1, most of which in Q2. Of course, it's linked to less activity, but a big impact is linked to working cap. Working cap, as you can see, we had a negative impact of €54,000,000 What happened? We reduced inventories, but actually, we receive less money from our clients than we have to pay to our suppliers. And this makes the bulk of the cash drain in the Q2 of 2020. This is in terms of the amount of factoring, which you can see at the end of Q2 is at €57,600,000 Usually, we are between €95,000,000 €100,000,000 plus. We had less sales, so we could sell less to the factor. And therefore, we had a negative impact in Q2. To mitigate this cash trend, we reduced our investment. You don't see it here because we usually do not communicate on budget. But in the first half of the year, we shaved €20,000,000 of tangible investments versus what we have assumed in our vessels. And we plan to keep that reduction on a full year basis. So all in all, it is a significant cash drain, €70,800,000 of negative free cash flow. The net the cash drain has been contained mainly through good actions on working cap. We have cashed a lot of late payments from our clients and from CapEx containment. If I now move to cash generation. End of June 2020, Secur has financing in excess of its in excess of €194,000,000 When we do our further projections, we believe the excess at year end should be similar to the amount I just mentioned. In second half of the year, we have no debt repayments. So in terms of liquidity, no big issue till year end. A key point is that despite fears when the crisis started when no one knew how it would evolve, all bank of loans were quite easily met as of June 2020. Nonetheless, considering the uncertainty of markets, we have decided to engage with our standard business partners. So the banks of our pool are working with us at present. We are looking for state tax financing, both in France and Italy. In Italy, France, the people familiar with such a loan. In France, we have a similar scheme, which is supported by the French state with the guarantee of depay d'France. And we are well advancing these discussions. And we plan to sign around €100,000,000 of medium term financing. And we say medium term is 6 years long. Thank you, Jan. Hello. Thank you, Jan. We go now to Slide 16, which is the slide following the next 3rd period of with the status area by area. Let's start, as usual, from the most important point, which is the safety of our workforce and employees. We are continuing protecting the people with safety processes all over the world. We have a lot of travel limitations with quarantine imposed by the people coming from risky zones. Risky zones, as you know, are changing according to the time, but the processes are staying in place to protect the people. In most of the countries, we have the smart working approach running at a very good level, and we are implementing we implemented already the safety needs in the offices, in the plant according to the local authorities and our processes. In the lockdown phase, we did a major effort to reshape the production processes plant by plant, location by location in order to implement the safety rules and to keep the people safe. We started also a couple of months ago to manufacture internally safety masks in order to have them available now in the plant without risking not to have these very key devices. The good news we have is that today, all the plants in the world are opened with different levels of volumes. In the coming slides, we are going to talk a little bit more about the volumes. China, as I said before, is really running at speed at the moment in all the business units. About the main actions implemented, some of you remember during the last call we did at the end of Q1, I told you that the strategic management was very keen and ready to implement all the actions to manage cash out and cost. I think we did bring the best in this area because we used all the local routes, like Jan said before, to minimize the personnel costs. And we have been able to control and to minimize pretty well investments all over the world without affecting new products and the redevelopment of plants. So we protected the future of the company. About the volumes, we have region by region. There is a qualitative slide in Page 17, where you see that all the plants, as I said, are open. You see where we are using government incentives, as usual, and where we are using union agreements. So just as we're quite efficient in countries where we had no government incentives to make special agreements with the unions in order to protect costs in the lockdown and in reduced volumes period. About the volumes, we have China really running speed, as you see from the slide. Since we are talking about Asia, unfortunately, India is running but with limited volumes at the moment. The COVID situation in India, unfortunately, is not sold and is quite heavy. In Europe, we restarted trends everywhere with a good trend. The volumes are recovering. There is a gradual recovery in the different countries. And then going to North America, the recovering volumes is pretty faster. In all the plants, you know that we have plants in Canada, U. S. And Mexico serving the local customers. In South America, fortunately, the situation is less positive because both in Brazil and in Argentina, we have planned running but with limited bonus, maybe in Brazil where the COVID situation is again not solved and quite critical to. So now we jump to the future. The visibility, of course, in the future is not, at the moment, exciting. So I would like to start from what IHS is saying in Slide 19. You see the different quarters in the slide with the full year forecast on the right side of the slide. As you see, IHS is today saying that there will be a reduction full year in the range of 22%, which is a net reduction. And the area by area numbers are we have 25%, less in Europe, slightly better in North America. South America, unfortunately, as we said before, is the most affected one with the minus 32.3%, while in Asia, we have a minus 16.1%, of which China is today the best forecast because it is showing a minus 12.8%. This has been the input for us in order and we go maybe to the last slide, Slide number 20, 2, we're preparing the company to the difficult period, which is now going to start 2nd year half. So for the 2nd year half, you have seen that IHS on the 2nd year half is forecasting a minus 10%. But if you look at the forecast from other market analysts, They have a range which is more between 16% negative and 30%. We have decided on this side, on the second half of the year, to consider a very conservative scenario, which is minus 20%, because we have to prepare want to prepare the company for the coming years in the best shape possible in order to return to the positive EBITDA as fast as possible. And we are expecting to achieve a slightly positive EBIT, excluding the structuring cost and a significant reduction in the net loss versus H1 2020 and the slight deposit cash flow in the second year also. In this very low visible market for the coming years, we have also launched a very strong plan for the reduction of the fixed cost. The plan as a time span spans from today until end of H1 2021. And we'll take all the actions feasible to reduce the breakeven of the compound in order to be prepared for the coming difficult period. The last couple of points are relevant to financial resources. We have to highlight that end of June 2020, we have enough financial resources in excess to our current needs. And we do not see we do not foresee an increase in debt by year end. In this situation, in this market, we are and considering also that we have to keep in mind the natural aspiration of existing loans. We started a couple of months ago negotiating with our current financial partners to renew loans and to enter into a new medium term loan for a total value of around $100,000,000 to protect debt of the company. So this to give you a very level outlook of 2020. This outlines our presentation. Now I think we would like to give you the time to go to some questions. We are ready to start. Thank you. Excuse me, this is the close call conference operator. We will now begin the question and answer session. First question is from Monica Bosio with Intesa Sanpaolo. Please go ahead, madam. Thank you. Good afternoon, everyone. I have three questions. The first one is on the trend for the second half. You decided to be conservative. You are accounting at minus 20% in the reference market for the second half. I was wondering, do you expect to perform in line with the market or maybe to perform a little better or a little worse? Just a flavor on this. And if you can give us some update, if it's possible on the trend of the revenues in June and maybe in July, if you have, just to check the exit speed from the first half? And the second question is on the cost reduction. You did a very good job on this side. Can you quantify the expected cost reduction for the second half? And can you give us an idea of the restructuring costs for the full year? I imagine that on top of the restructuring costs, we have also to add some ForEx losses. So just a flavor and indication and if you can quantify the cash impact of the restructuring cost. Thank you very much. So, Mario Pesci speaking. I'm going to reply to the first question, and then I'll leave Jan the task to go to the second. So the first question is on the trend on the 2nd year alpha. We expect Monica to perform slightly better also in the second half, to be honest, because we did in the third quarter in the Q2, as you have seen, I think, a good time that we would like to continue also in the second year announcement. Then I will give Jan the task to go to the cost reduction second half and the restructuring cost. If I may, and I hope I'm not going to create confusion on the question on the trend of revenue versus market. I wanted to go back to what Mauro explained before. It is strange when we look at strategic revenues from the first half to see that roughly speaking, revenues from strategic are totally in line globally with what market did. And then what we presented to you, we said we vastly outperformed the market in the first half. Okay, it is a mix impact, Menka. As you can see, we roughly are 10.5 in most regions. So answering your question globally, but it's taking an invest because it's linked to the relative rate of Europe, which is very important for Sogutu, as you know. It's roughly 60% of our revenue. And to selective rate of China, which is very small for our strategy and which is new might be a negative trend of world market in the first half. And what happened in the first half probably will be the same in the second half. China has a strong recovery. The market is still booming. We are outperforming the market, but it has a small impact on our revenues because China adjusted roughly 5% of our revenues. So it's just to say it's Visa lending, which is to look at the recastions. Again, by the way, I'm sorry, just a in the coming days. You asked about June July. But it's very different region by region. But if I consider June, of course, according to what Jan said, in China, we were out of same level of budget in China. But unfortunately, the volumes we do are not on the global amount very important, but it's very positive. We grow. The second, in the other regions, the June result has been between, I would say, minus 20%, minus 30% according to the different regions. And overall, in June, we did minus 25% versus prior year to be compared with the global assumption we have taken for the second half, which is at minus 20. Okay. Thank you very much for the clarification. So in terms of cost reduction, cost reduction should be lower in the second half because we'll expect a recovery of volumes and we have multiple endorsement. Nonetheless, we expect to keep on reducing fixed costs via optimization of the existing schemes which we have used so far and which keep on being usable in most European countries. And also because we start seeing the first impact of our structural cost reduction. So all in all, we plan to have a further cost reduction in the second half that might produce something in the region of the 1st year 20,000,000 reduction across fixed costs. In terms of restructuring, Monica, you saw that we already booked €7,000,000 in the first half. We are planning to book a far larger amount in the second half. On a full year basis, we plan, for the moment, to have an exceptional charge of €24,000,000 for the year. €24,000,000? €24,000,000 of which, €7,000,000 in the first half. Okay. Your last question, if I'm not mistaken, was on ForEx. ForEx, we believe, was tackled in the first half. A lot of our foreign exposure was linked to Latin America. And when we saw the adverse impact, we hedged the contract. And therefore, we believe we should have further lower exposure to adverse products in the second half. Okay. Got it. Thank you very much. Thank you. You're welcome. The next question is from Martino De Ambrozi with Equita. Please go ahead, sir. Thank you. Good afternoon, everybody. One more question on the cost side. You mentioned fixed cost down €30,000,000 in Q2. But I understand it's not entirely structural. So how much of this €30 plus 1,000,000 will remain going forward? Because something is linked to the temporary layoff programs and so on. So they will come back as soon as the volumes will go up. This is the first question. So Marcin, thank you for the question. As you said, most of the actions taken during the last month has been driven by on the personal cost, I mean, by the implementation of the local agreed rules or with the government or with the local unions. These are rules that are temporary because, as you know, our last thing I call to the union agreement, we took last in the what is applicable to the country's rules that are changing, by the way, every week according to the COVID, let me say, development. So we are let me say, most of the amount you have seen is temporal, let me say, amount that we had using the cost reduction tools we had in place for COVID. Plus, of course, we also reduced, as we said, other cost areas. Of course, we cut immediately the external agent employees and workers. But most of these costs are really relevant to the temporary situation. Jan, do you want to add something? Yes, it's Jaime, Martino. In the first half, the cost reduction, the cost reduction versus 2019 was €38,800,000 of which is 32 in Q2. Of the total amount of quasi €39, €28,000,000 are personnel related, which means there is another roughly €11,000,000 which is non personnel related. To rebound on what Lauro said, in Q2, most of the savings, let's say, temporary. Let's just say, we reacted fast in order to reduce costs. So a limited amount is structural. And as we go in the second half of the year, a lot more of our actions will be more structural. That's to say, we do expect to have short- to medium term reduced volumes. As you have seen, our assumption for H2 is a reduction of 20% of volumes. We don't expect that volumes will pick up in 2021. When we look to the future, we see, if I go down the road, 2024, we still see it with volumes in Europe, down roughly 15% versus the pre COVID situation. And in MAPPA, which is our 2nd region, we see that we might go back to pre COVID volumes only in end 2022, 2023. So that's why what we are preparing right now is to know what the precedent point of the company because we don't think that volumes will reappear instantly. And therefore, in the coming months, our cost reduction efforts will be more structure driven. And then last but not least, I want to add one point, Martino. I was mainly referring to Europe where we added social tools and government tools. But to be honest, when we talk about South and North America, the situation, as you know, is quite different. And we took already some actions to lower structurally the cost because, for example, Brazil, we took the opportunity to reduce the personal fixed cost in, let me say, quite a key amount in the last quarter. So it's a mix between country and country where we didn't have the social government tools, so we acted already a little bit in advance to cost structurally. Yes. And could you quantify what is the final target in terms of cost cutting measures and what is the time frame, just very roughly? The time frame, as I said during the presentation, we have a plan which is ending with a more important phase, the core phase, at the end of the 1st semester of 2021. About the amount, as we discussed, we are trying to target a reduction compatible with the market reduction of 15%, 20%. Okay. And the last question is on the free cash flow. I see a mismatch between what you mentioned in the press release, talking about a recovery of net working capital in the second half, which was the main responsible for the cash absorption in the first half. And you guide you're guiding for just slightly positive free cash flow in the second half. So just to understand what is offsetting the net working capital recovering. Maybe if the cash out for the $24,000,000 restructuring cost you indicated before. And also, as a big part of the question, is the factoring assumption in your slightly positive free as explained in the slide which I commented earlier, the impact of working capital on H1 is a negative impact of €54,000,000 We plan to recover more than 40% of this negative impact in the second half. Part of it will be through more factoring because as revenues pick up, we should be in position to go back to levels of factoring, which are more in line with what we usually have. At the end of H1, we closed out with €67,600,000 euros We plan to be around €100,000,000 factoring at year end. In terms you mentioned the point on restructuring. We mentioned what we plan to put in the second half. Not all of it will be will have a cash impact in 2020. As Manuel mentioned earlier, we plan to have finished restructuring by then by the first half of twenty twenty one, which means that the significant amount of the €17,000,000 we'll put in the second half will be paid out in 2021. Okay. So I would assume you should have a more solid free cash flow than just slightly positive because unless I am missing something. Thank you. That's still in our culture. The next question is from Francois Robillard with Intermode. Please go ahead. Hi there. Good afternoon everybody. Thank you for taking my question. Just a couple on my side. First one is on tax. Can you just come back on the negative tax item you booked in the Q2? And what can we expect going forward in 2020? And the other one is on the more precisely what actions are you going to implement? Maybe you already covered it, but on the footprint reorganization, which you talked about, can you give us a bit more color on what's going on by first half twenty twenty one? So on income tax, as you have seen, we booked £1,000,000 in the first half of the year. Unfortunately, there will still be a net loss in the second half, although higher yields versus the first half, which means that in more likeliness, we'll book some further tax effects, but for a limited amount in 2020. For the footprint reorganization, I'll let Mauro handle the specific question there. I mean, on the footprint reorganization, I can, I think, tell you where we are going to take some actions that will be anyhow not this year, so not present until 2020? At least, I can tell you the regions where we are going to put more attention on the organization. For sure, the most critical region for us will be LatAm. So I mean, Brazil and Argentina, where some actions will be taken for different reasons, including the much lower volumes expected in the coming period of time. And sorry, there is a follow-up from Marti Berrien Brody with Equita. Please go ahead. Thank you. If I may, on the raw material, you mentioned a tailwind. If you could quantify what was in the first half and what you expect for the second half? So to reply to the question on raw material, we had the timing again business by business because as you know, we have different raw materials, according to different business, a range between 1% and 2% positive effect. On sales? Yes. Okay. And for the €100,000,000 plus of new loans, you are close to the end of the negotiation. So I can imagine this will come before year end. It has to come before year end because as you probably know, such schemes in France and Italy, they need to be closed by year end. But we hope to close them just after the summer vacation. Okay. Thank you. Gentlemen, there are no more questions registered at this time. So I thank you for your time. Thank you very much and enjoy your holiday. Yes. Bye bye. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone. Thank you.