Good afternoon. This is the call conference operator. Welcome, and thank you for joining the Sogefi first half 2020 results conference call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, please signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Mauro Fenzi, CEO of Sogefi. Please go ahead, sir.
Welcome. We are here today to talk about Sogefi's first half results. According to the agenda, we are going to give you an update on the COVID situation, and a last couple of slides on the perspective 2020. Going directly to page three of the presentation, we go through the highlights of this semester, starting with the revenues. The volumes overall in Sogefi have been reduced 33.2% on reported basis, which is equivalent to -31.2% at constant exchange rate. You will see later during the presentation that we outperforming in most regions, the market, and I will go through it later on. In the second quarter, which has been a very challenging quarter, Sogefi has been 55.7% down versus 65.5% of the market. Again, a good trend in volumes also in the second quarter, even if the reduced amount is quite important.
Going to the EBITDA level, the EBITDA has been EUR 47 million, equivalent to 9.1% on sales versus 11.1% of the previous year. A 2% reduction. The reduction has been achieved thanks to a very effective action on the gross fixed cost, which amounted to EUR 38.8 million versus the same semester of 2019. In Q2, we have to highlight that the cost actions are really becoming very effective, because in the second quarter, we did the EUR 32 million reduction versus the EUR 6.8 million in quarter one. In the same period, we had EUR 7.3 million restructuring cost, higher than last year. Last year has been EUR 4.4 million. We included EUR 4 million of the exchange impacts, mainly North and South America. At EBIT level, we reached EUR -18.8 million.
We have to remember that in this first semester, we had a write-down amount equivalent to EUR 6.5 million versus EUR 1.9 million of the previous year. The net income has been EUR -28.8 million. On the free cash flow, we have to say that the free cash flow was EUR 70.8 negative million versus EUR -3.3 million in the same period of last year. The net debt reaches EUR 327 million versus EUR 256.2 million end of 2019. All the numbers, we are going to go through them in the coming slides. If you want to highlight report in slide number four, we started immediately in March an emergency plan in order to minimize cash and reduce cost. 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 impact of manufacturer inefficiencies in a very unstable context. The gross fixed cost has been reduced on the semester, 27% versus 2019. We need to highlight that from the second quarter, 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 the very important ramp up of the new Romanian plant, which is supporting Romanian production. Going to the slide number five, 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, Sogefi has been able to be more positive than the market in all the regions. We have to keep in mind now that the geographical mix on which Sogefi is acting is a little bit less favorable in the overall amount, because you remember that I told you that at the first 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 businesses' performances. I would like to analyze that, all in all, 31.2% constant exchange rate we said. The three business units were Air & Cooling at 29.1, reduction, Filtration 25.7, and Suspensions 38.2. I have to make a couple of comments on these numbers.
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 the worst, Suspensions suffered a little bit more for two reasons. One is because they are acting more on countries where the reduction has been unfortunately more important. The second is because the stopping period during the lockdown initial days has been unfortunately longer for Suspensions than for engine components. Going to slide number seven, we see the clients slide. Again, on this slide, I would like to highlight attention on Daimler and BMW, because in the premium German customer arena, Sogefi improved the sales pretty well on both sides. This is very key for us because we have many new jobs coming, including the newer new product plans, which are coming from these two customers.
Go to the next slide, which is slide number eight. We see the EBIT breakdown performance. We lost on the sales volumes, EUR 81.1 million. Half of it, more or less, EUR 38.8, has been recovered working on fixed cost reduction. We had 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 protect the profitability. We had a slightly higher restructuring cost, because we started working on personal cost where possible. We have also a contribution coming from Morocco, mainly. The new plant, which is under production now for Filtration, because volumes were slightly above the expectation. Going now to the business units one by one.
I would like to start on slide number nine, which is Suspensions. We already talked about the sales volumes on Suspensions, which are down 40.9%. 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 +20.6% in Q2 because of the new projects launched in the same period of time from this country. At the profitability level, on the right of the slide, 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 are talking mainly about steel in this case.
We included, of course, the cost of the new Romania 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 15.6 million fixed cost reduction amount, which has been key to minimize the decrease. Last but not least, we have an EBIT margin around the 4.7% negative, reflecting higher incidence of depreciation. Going to Filtration, which is the slide number 10. On the revenues are down 28.1%, at current exchange rate. Aftermarket has been key, like the Morocco new plant revenues, which has been, as I said, better than forecasted. Didn't been balanced, unfortunately, by the decline in the two 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. We reduced also here fixed cost of a key amount, which is EUR 13.2 million. These numbers are also including a negative effect of exchange rate in Brazil, equivalent to EUR 2.6 million. Last but not least, we go to Air & Cooling.
Air & Cooling performed better, because even if the decrease was in the range on the sales of 29.3%, with a decline in Europe and North America, we had a higher EBITDA in Europe and China, balancing the decrease on volumes partially. The fixed cost reduction has been of roughly EUR 7 million. China, like what you have seen before in Suspensions, has been able to grow pretty well, even if in a difficult period like this first semester. We had many key start of production with new customers. I would like to ask Yann Albrand to go to the next slide, which is slide number 12.
Thank you, Mauro. You have on the left-hand side of the chart Q1 and Q2 in 2020. We can see that Q2 in terms of sales is not even half of Q1. The key point, maybe the most important message, is that we have been able to flexibilize 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 an amount of variable costs, which is not easy to adapt to your level of activity, which takes some time to stabilize. 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 had roughly in H1 2019 with the full volume.
That goes not so easy, and it was key in delivering the EBITDA results that may be less bad than they could have been. The second significant item, which Mauro refers to, is gross fixed cost reduction. In Q1, we had time to reduce fixed costs by EUR 6.8 million versus prior year. In Q2, EUR 32 million. 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, Argentina. When we close plants, we still have to pay the costs. In Italy, we used CIG. In France, we took advantage of these schemes to sharply reduce the gross fixed costs, which allowed us to mitigate part of the adverse volume impact. Below EBITDA, a significant item, which are the write-downs.
We did a full exercise end of June. Usually, we do the full monthly at the end of the year. We redid our impairment test, with the assumption of reduced volumes, which as you will see later on, we assume will be lower than previous years for quite a while. The impact of this cleanup is in H1, a cost of EUR 6.4 million, of which EUR 5.5 million in Q2, but we estimate that only EUR 1.8 million is directly linked to COVID-19. Below EBIT, financial results end of H1 is in line with prior year. For once, I probably won't have question on the tax rate. We have a positive tax rate. That's to say, we were cautious in assessing what we might recover in future years, and we booked a EUR 1 million deferred tax asset instead of tax charges as in previous years.
The last but not least line, it refers to discontinued operations. It's a difference with prior year. As you know, we mentioned it in prior calls. It refers links to disposal of a plant in 2019. If I now move to slide 13, free cash flow. Mauro mentioned we had a significant negative free cash flow, EUR 70.8 million 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 EUR 64 million. What happened? We reduced inventory, but actually, we received less money from our clients than we had to pay to our suppliers. This makes the bulk of the cash drain in the second quarter of 2020.
This is entirely linked to the amount of factoring, which you can see at the end of Q2 is at EUR 57.6 million. Usually, we are between EUR 95 million and EUR 100 million 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 drain, 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 EUR 20 million of tangible investment versus what we had assumed in our budget. We plan to keep that reduction on a full-year basis. All in all, it is a significant cash drain, EUR 70.8 million of negative free cash flow. The net 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 position. End of June 2020, the group has financing in excess of its needs, in excess of EUR 194 million. When we do our full year 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. 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 covenants were positively met as of June 2020. Nonetheless, considering the uncertainty of markets, we have decided to engage with our standard business partners. The banks of our group are working with us at present.
We are looking for state-backed financing, both in France and Italy. Italy, France, people familiar, it's a structure loan. In France, we have a similar scheme, which is supported by the French state, with the guarantee of Bpifrance. We are well advanced in these discussions, and we plan to sign around EUR 100 million of medium-term financing. When we say medium-term, it's six years loan.
Thank you, Yann. Hello. Thank you, Yann. We go now to slide 16, which is the slide covering the COVID-19 period update, 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. The 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 implemented already, the safety means 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 plants 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 the first quarter, I told you that the Sogefi management was very keen and ready to implement all the actions to manage cash out and cost. I think we did really the best in this area, because we used all the local rules, like Yann said before, to minimize personal costs. 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. 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.
Sogefi has been quite efficient in countries where we had no government incentives to make special agreements with the union in order to protect costs in the lockdown and in reduced volumes periods. About the volumes, we have China really running at 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-19 situation in India, unfortunately, is not solved and is quite heavy. In Europe, we restarted plants everywhere with a good trend. The volumes are recovering. There is a gradual recovery in the different countries. Going to North America, the recovery of volumes is pretty fast. In all the plants, you know that we have plants in Canada, U.S., and Mexico, serving the local customers.
In South America, unfortunately, the situation is less positive because both in Brazil and in Argentina, we have plants running, but with limited volumes. Maybe in Brazil, the COVID situation is again not solved and quite critical, too. Now, we jump to the future. The visibility, of course, on the future is not, at the moment, exciting. I decide to start from what IHS is saying in slide number 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 heavy reduction. The area-by-area numbers, 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 -32.3%, while in Asia, we have a -16.1%, of which China is today the best forecast because it is showing a -12.8%. This has been the input for us in order, and we go maybe to the last slide, which is slide number 20, to prepare the company to the difficult period, which is now going to start second year half. For the second year half, you have seen that IHS on the second year half is forecasting a -10%. If you look at the forecast from other market analysts, they have a range which is more between 15% negative and 30%.
We have decided on this side, on the second half of the year, to consider a very conservative scenario, which is a -20%, because we want to prepare the company for the coming years in the best shape possible in order to return to the positive EBIT as fast as possible. 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 a slightly positive cash flow in the second year half. 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 has a time span from today until end of H1 2021, we'll take all the actions feasible to reduce the break-even of the company 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. We do not foresee an increase in debt by year-end. In this situation, in this market, considering also that we have to keep in mind the natural expiration of existing loans, we started, a couple of months ago, negotiating with our current financial partners to renew loans and to enter into new medium-term loans for a total value of around EUR 100 million to protect better the company. This to give you a very high-level outlook of 2020. This last slide of our presentation. I think we would like to give you the time to go through some questions. We are ready to start. Thank you.
Excuse me. This is the call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. 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 a -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. 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. The second question is on the cost reduction. You did a good job on this side. Can you quantify the expected cost reduction for the second half? 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. Just a flavor, an indication, and if you can quantify the cash impact of the restructuring cost. Thank you very much.
Mauro Fenzi speaking. I'm going to reply to the first question, and then I leave Yann the task to go to the second. The first question is on the trend on the second year half. We expect, Monica, to perform slightly better also in the second half.
To be honest. We did, in the second quarter, as you have seen, I think a good trend that we would like to continue also in the second year half.
Okay.
I leave you, Yann, 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 you look at Sogefi revenues from the first half, to see that roughly speaking, revenues from Sogefi are totally in line globally with what market did. What we presented to you, we said we vastly outperformed the market in the first half. It is a mixed impact, Monica. As you can see, we roughly are 10 points ahead in most regions. Answering your question globally, but slightly less, because it's linked to the relative weight of Europe, which is very important for Sogefi, as you know, it's roughly 60% of our revenue.
To the relative weight of China, which is very small for Sogefi, and which is minimizing the negative trend of world market in the first half. What happened in the first half, probably will be the same in the second half. China had a strong recovery.
The market is still booming. We are outperforming the market, but it has a small impact on our revenue because China accounts for roughly 5% of our revenue.
Yeah.
It's just to say, these are numbers which you need to look at very cautiously.
Yeah. By the way, Yann, sorry, just a second, because I want to reply to Monica. Monica, you asked before, part of the first question, how is the market, in the coming days, no?
Yeah.
You asked about June and July. It's very different region by region. If I consider June, of course, according to what Yann said, in China, we were outperforming the market pretty well because we were at the same level of budget, in China. Unfortunately, volumes we do are not, on the global amount, very important. It's very positive we grow. The second, in the other regions, the June result has been between, I would say -20%, -30%, according to the different regions.
Overall, in June, we did -25% versus prior year. To be compared with the global assumption we have taken for the second half, which is at -20%.
Okay. Thank you very much for the clarification.
In terms of cost reduction. Cost reduction should be lower in the second half because we expect a recovery of volumes, and we prove to have multiple levers. 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. Also because we start seeing the first impact of our structural cost reduction. All in all, we plan to have a further cost reduction in the second half that might produce something in the region of a further EUR 20 million reduction of our fixed costs.
Okay.
In terms of restructuring, Monica, you saw that we already booked EUR 7 million 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 EUR 24 million for the year.
EUR 24 million?
EUR 24 million, of which seven 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.
Yeah.
When we saw the adverse impact, we hedged the contract, therefore, we believe we should have far lower exposure to adverse Forex in the second half.
Okay. Got it. Thank you very much. Thank you.
You're welcome.
The next question is from Martino De Ambroggi with EQUITA. Please go ahead, sir.
Thank you. Good afternoon, everybody. One more question on the cost side. You mentioned fixed cost down 30 million in Q2, I understand it's not entirely structural. How much of this EUR 30 + million will remain going forward? Something is linked to the temporary layoff programs and so on, they will come back as soon as the volumes will go up. This is the first question.
Martino, thank you for the question. As you said, most of the actions taken during the last month have 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, are lasting according to the union agreement we took, plus, where it's applicable, to the country's rules that are changing, by the way, every week according to the COVID, let me say, development. Let me say, most of the amount you have seen is a temporal 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.
Most of these costs are really relevant to the February situation. Yann, do you want to add something?
Yes. If I may, Martino. In the first half, the fixed cost reduction versus 2019 was EUR 38.8 million, of which EUR 32 million in Q2. Of that total amount of quasi EUR 39 million, EUR 28 million are personnel related, which means there is another roughly EUR 11 million, which is non-personnel related. To rebound on what Mauro said, in Q2, most of the savings, let's say, are temporary. That's to say, we reacted fast in order to reduce costs. A limited amount is structural. 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 a cycle down the road, 2024, we still see it with volumes in Europe down roughly 15% versus the pre-COVID situation. In NAFTA, which is our second region, we see that we might go back to pre-COVID volumes only in end 2022, 2023. That's why what we are preparing right now is to lower the breakeven point of the company, because we don't think that work volumes will reappear instantly. Therefore, in the coming months, our cost reduction efforts will be more structure driven.
Last but not least, I want to add one point, Martino. I was mainly referring to Europe, where we had the social tools and government tools. To be honest, when we talk about South and North America, the situation, as you know, is quite different. We took already some actions to lower structurally the cost, because, for example, in Brazil, we took the opportunity to reduce the personal fixed cost in, let me say, quite a key amount in the last quarter. 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 lower cost structurally.
Yeah. Thank you. Could you quantify what is the final target in terms of cost cutting measures and what is the timeframe? Just very roughly.
The timeframe, as I said during the presentation, we have a plan which is ending with the more important phase, the core phase, at the end of the first 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. The last question is on the free cash flow. I see a mismatch between what you mention in the press release, talking about a recovery of networking capital in the second half, which was the main responsible for the cash absorption in the first half. You're guiding for just slightly positive free cash flow in the second half. Just to understand, what is offsetting the networking capital recovery, maybe if the cash out for the EUR 24 million restructuring cost you indicated before. Also, as a B part of the question, if the factoring assumption in your slightly positive free cash flow.
Okay, Martino. As explained in the slide, which I commented earlier, the impact of working capital on H1 is a negative impact of EUR 54 million. 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 a position to go back to levels of factoring, which are more in line with what we usually have. At the end of H1, this service with EUR 67.6 million, we plan to be around EUR 100 million factoring at year-end. You mentioned the point on restructuring. We mentioned what we plan to take in the second half. Not all of it will have a cash impact in 2020.
As Mauro mentioned earlier, we plan to have finished restructuring by the end of the first half of 2021, which means that a significant amount of the EUR 17 million we took in the second half will be paid out in 2021.
Okay. I would assume you should have a more solid free cash flow than just slightly positive because, unless I am missing something.
It is possible.
Okay. Thank you.
That's certainly our approach.
The next question is from Francois Robillard with Intermonte. 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 second quarter? What can we expect going forward in 2020? The other one is, 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 2021? Thank you.
On income tax, as you have seen, we booked EUR 1 million income tax effect in the first half of the year. Unfortunately, there will still be a net loss in the second half, although far reduced versus the first half, which means that in all likeliness, we book some further tax effects, but for a limited amount in 2020. For the footprint reorganization, I'll let Mauro handle the difficult question.
I mean, for the footprint reorganization, I can, I think, tell you where we are going to take some actions that will be anyhow not this year, not relevant to 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. I mean, Brazil and Argentina, where some actions will be taken for different reasons, including the much lower volumes affected in the coming period of time.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star followed by one. Gentlemen, there are no more questions registered at this time. I'm sorry, there is a follow-up from Martino De Ambroggi 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?
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.
Okay. On sales?
Yeah.
Okay. For the EUR 100 + million of new loans, you are close to the end of the negotiation, 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 in Italy, they need to be closed by year-end. We hope to close them just after the summer vacations.
Okay, thank you.
Once again, if you wish to ask a question, please press star and one on your telephone. For any further questions, please press star and one. Gentlemen, there are no more questions registered at this time.
I thank you for your time. Thank you very much, and enjoy your holiday. Yeah. Bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.