Earnings Call: H1 2019

Jul 22, 2019

Afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Sajefi First Half twenty nineteen Results 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. Laurent Hebenstreit, CEO of Sajefi. Please go ahead, sir. Thank you very much. Hello, everybody. It's Roy Dannstreit, CEO from SERGEFE. I'm here with Jan Albras, our Chief Financial Officer and Stefano Kennon, Investor Relations. I am happy to report our first half twenty nineteen results and especially the new news on the Q2. Starting on the documents on Page 2, revenues were down 4.3% at current exchange rate and 3% at constant exchange rate, whereas the production market was down 6.7%. So we outperformed the market, especially in Europe. The EBITDA came out at 11.1%, which of course is down from 2018, but and that's a very important message. In the Q2, EBITDA came out at 11.6% versus 10.6%, each one with comparable sales, which means that we are delivering what we promised, which is the 2nd quarter, in improvement versus the 2nd quarter. EBIT follows the same trend, 3.1% with the 2nd quarter at 3.4% versus 2.9% in the 1st quarter. Net result at EUR 6,900,000. Free cash flow came out at €8,800,000 in the middle of the year, including €5,400,000 due to the application of IFRS 16. The good news is free cash flow in Q2 was positive. The net debt stands at $332,000,000 including 400,000 related to the application of IFRS 16. Excluding this amount, net debt compared to EUR 167 point 3,000,000 compared with EUR 260,500,000. We also believe you on the fact that we have less factoring, which needs to be taken into account. If we move to Page 3, we see that while Sureshine delivered better numbers in the Q2, the market actually was worse in the 2nd quarter. You see that after a drop of the world production market of 5.4% in the 4th quarter, The markets have dropped 5.9% in the 1st quarter and 7.5% in the 2nd quarter. We will worsen in Europe. Europe is very important that this is a large majority of Surgessi sales. North America did a little bit better than the Q1. South America as well. And it is, of course, in Asia, where we had both a drop in China as well as in India, coming out for Asia in total at minus 15.6% on the second quarter. Now if you look at Societe revenue in comparison with what we just said, I will now concentrate on the Q2. As you can see at constant exchange rate, we came out at minus 3.1%, which is representative of our activities because it's the same number as Europe. You see that the market in Europe was down 7.4% in Europe, whereas we reported minus 3.1%. The case of China is, of course, very significant because while the market was down 16.3%, so Jason said that concerns were down 35.4%. This is mainly linked with our customer mix. We have 3 customers which were impacted more than the reduction of the market, which are mainly Ford, PSA and GMC, which during the second quarter had a significant drop while it has been holding before. So this is a main factor. We have in the second half of the year many launches, both in air and cooling, filtration and suspension. And therefore, we expect a stronger quarter a stronger second half share in China due to the launch of many new products in the 3 businesses. Moving to Page 5 on the revenues by business unit, again focusing on the Q2 on what has changed. You see the different behavior between those 3 business units. Suspensions was hit the worst at minus point 8.1%. Air and cooling came out at minus 4.8 percent and filtration came out at 0 versus the prior year with a better resistance in particularly aftermarket activity. Moving to the Page 6 in terms of sales by clients. You see a significant growth of sales at PSA, which is a continuation of our success in capitalizing on the PSA hotel synergies. You see a drop with Ford. With Ford, we have a drop in China, which I've mentioned before. We have a drop in Europe, which is consistent with the decline of Ford in Europe and the drop in South America, especially in suspensions where we get the end of life of 2 important contracts with Ford. The decrease at Schad Chrysler is linked to the end of life of one important product and the rest is in line with evolution of the market. Just a quick comment on the Daimler. You need to take into account the fact that Sergey C supplies intake manifold for the engine, which is common to Werner and Renault. And this is 100% reported in Renault because it's a Renault supplier code. And therefore, our growth with Renault Nissan is a bit overstated and our defense with Daniela is also overstated. So you need to correct this element in order to have a vision of what's going on with Daimler. And we confirm the growth trend with BMW, which together with Daimler are our growth target. Having said that, I would like to hand over to Pierre Albrand, our CFO, to comment on the evolution of the margin. Thank you, Laurent. So moving on to Page 7. The reduction in EBITDA versus prior year is mainly volume driven. And this explains why EBITDA decreases from 11 0.7% in 2018 to 11.1%. 2019 includes EUR 4,300,000 of restructuring costs versus EUR 2,700,000 in the previous year. So no plant closing at this stage, it's ongoing restructuring. Moving on to Page 8, by business unit, Suspension EBITDA went down from 9.7% in 2018 to 8.6%. And the reduction in the profitability is mainly due by South America and by China, where there was a significant drop in volume. In filtration, the EBITDA went down from 12.2% in 2018 to 9.6 percent. And this reduction is mainly linked to the sales drop in Europe. In Europe, we are talking about OE business mainly and start up costs in Morocco. The good news is Air and Cooling. Air and Cooling profitability went up from 14.5% to 15.4%. And despite lower sales in China, there was a general margin improvement, especially in Europe. Moving on to Page 9. EBIT as EBITDA is mainly volume driven and this largely explains why EBIT went down from 4.7 to 3.1. And as Laurent mentioned earlier, the good news is that despite an adverse market in Q2, EBIT on sales went up from 2.9% in Q1 2019 to 3.4% in Q2 2019. Financial results improving, negative from EUR13,900,000 in H1 of last year to only €11,000,000 this year. Cash interest were down by €2,100,000 versus the previous year. Net income went down from €14,800,000 in 2018 to €6,900,000 percent after 8,300,000 of tax expense. So we still have a high tax rate. And this tax rate is still high because we have taken a prudent stance on emerging countries. So Morocco is still considered as a start first set up operation. And in countries where we have still little visibility, I'm referring mainly to Latin America, where we have taken decision not to activate deferred tax effects, which I believe is a prudent assumption. It is important to see that the first half results include €4,000,000 net result, which is the positive impact of the disposal of the Fries plant in the first half. These results are reported on a separate line, which is assets held for sale. And I'll comment the disposal a little while later. Moving to Slide 10. The good news is that faced with a difficult market situation, which reflects in our top line. We had anticipated and we started to cut on fixed costs. And fixed costs have gone down by roughly €2,000,000 year on year, first half twenty nineteen versus first half 2018. And as you can see in the comment on the right hand side of this slide, we put an acceleration in the second quarter of 2019, in which this quarter alone, we had a €3,300,000 phasing versus the previous year, which is minus 4.4%, which is roughly same trend as the top line. If we move to Slide 11, Slide 11 is important as Laurent mentioned, it's a comparison of Q1 and Q2 performance. Level of sales is roughly comparable. When we look at material, we are no longer impacted by adverse raw material impacts, exceeding picking up. The markets are more favorable and there were actions in order to regain part of what had been lost in the previous years. And this already shows in the material percentage quarter over quarter. Direct labor is not a huge improvement, but 9.7% to 9.5%. The trend is there and we have a lot of actions ongoing in order to improve the operational performance of the plants in the coming months. Fixed costs, I already mentioned, so already a CHF3,300,000 fading quarter over quarter and we are going to pursue this effort in the coming months. Others, it's basically it's one offs, it's slightly more restructuring, slightly more non operating costs. And so as we commented before, an EBITDA, which increases from 10.6% in Q1 2019 to 11 point 6% in Q2 with, as I said before, quasi the same level of sales and an EBIT from 2.9% to 3.4%. Cash flow. Cash flow, so first half twenty nineteen versus first half twenty sixteen. We commented a lot on the decreased profitability. This shows in the funds provided by operations. First half twenty nineteen benefited from the disposal of the Freys plant, which landed us a net cash net favorable cash of RMB7,200,000 Working cap, as you can see, is unfavorable versus the previous year, but this was offset by less CapEx in 2019. So EUR 8,000,000 less CapEx in 2019 versus the previous year. The following line is the impact of the new leases according to IFRS 16 and intangible and IFRS 15, that's to say mainly the tooling, it's roughly in line with the previous period. So all in all, in the first half, negative cash flow of €8,800,000 versus a positive €3,900,000 last year. But as Laurent mentioned in his opening statement, the key point was that in Q2, we had a positive cash flow. All in all, net debt booked out IFRS 16, which I remind you is the booking of our new lease commitments, remained end of H1 at EUR267,000,000 versus EUR260,000,000 last year. And this includes the factoring, which was €103,000,000 at the end of H1 versus €108,600,000 a year ago. So roughly 5,500,000 less factoring than a year ago. We might have pushed Coming to the disposal of Fries. So Fries, it's an air and cooling plant located in the East of France. In 2018, we decided to let go of that plant, which manufactures products. This was we started our business review and Phase was early on completed as non core business. And so we decided to find, if possible, an acquirer for this plant. And we have finalized the sale in the month of April. All payments were paid during April June, and we are happy with the sale, which will avoid us to close the plant and which will also benefit the new owner who needed a plant for new activities in the East of France to service German clients mainly. So on the right hand side, we have the main numbers in 2018 of this plant. Please bear in mind that although we only have landed the net EUR 7,200,000 in cash, the very good thing of that disposal is to avoid the disruption, which is that of restructuring the plant and all our workers have found continuity through this operation. So all in all, we can consider this a good month. Page 14, this disposal has not drastically changed what Sogefi is. You all know by now, so we are mainly with European footprint. Let's say, Sogeti, 63%, whilst well production is only 25%. So both are represented in Europe versus well production. The news underrepresented in Asia helps in the current market. Significant presence also in South America, which sometimes can be good news, sometimes more difficult. And a good presence in North America, which is probably the most profitable market right now. Maybe I hand over to Laurent to comment on the new recent business awards. Laurent? Thank you, Jan. As indicated by Ian, the main reactions which explained the progress between Q1 and Q2 was of course very hard negotiations with our customers in terms of material costs recovery. And in this context, we thought it was important to share with you the fact that in the 3 business units, we've got new awards during this period. In filtration, we've been awarded to supply oil filter modules on various vehicles for start of production in 2022. In the Air and Cooling, we've been awarded by German premium OEM to supply air intake manifold with some production in 2020. And in suspension, we've been awarded from stabilizer bars for battery electric vehicle with a software option in 2022 in our new plant in Romania. So despite strong negotiations with the customers, we keep having new awards as the effort we've been making on R and D and our competitive team of our activities are starting to show and will show more as this business ramp up in the future. I'd like now to come to Page 16 on the outlook. You know that the main source about the automotive market is seeing for the second half year a small decrease of 0.4%. Knowing that the Q4 of last year was weak, we shared this information in our presentation. Based on this, as well as on the number of starts, which I mentioned in China, so this is expected in the second half year to be substantially in line with the same period of last year. And we are now communicating that the EBIT margin in the second half is expected to improve slightly compared to the first half of the year, which means we are continuing the trend of our improvements, which we saw in the Q2 versus the Q1. Thank you very much for your attention, and we'll be happy now to take questions. Excuse me. This is the Chorus Call conference operator. The first question is from Monica Modigl with Bancaina Infinco Sanpaolo. Please go ahead. Yes. Good afternoon, everyone. I would have 3 questions. The first one is on the expected evolution of the market of the reference market in the second half of the year. So you're expecting basically slight decrease of the market, minus 0.4%, is correct? And I was just wondering what kind of assumption do you have behind this minus 0.4%. What is the expected growth, the U. S. For China, Europe and U. S? And the second question is on the savings on the fixed cost. You did a very good job in cutting the fixed cost in the Q2. Do you have an indication for the full year? What kind of savings can we project by year end? And the third question is on the ramp up cost on Maracopoente. Can you quantify the ramp up cost in the quarter and maybe any rough indication for year end? Thank you very much. So, Jan, you want to share the numbers on the H2? So Dominique, on the market, Laurent mentioned that production market went down in H1 6.7 percent versus previous year. Conferences and when we say consensus, it's IHS, which is a reference data collector, now says minus 0.4% in the second half versus the previous year. If you ask by main market, main market, today they say plus 1.1% on Europe 28%. Sorry, last 1? 1.1%. So increase in the second half when it was a 6.1% decrease in the first half. Naphtha, U. S, Mexico and Canada, it's a 1% reduction versus 2.7 in the first half. And China, which is very significant, it's roughly even, it's minus 0.3% versus minus 13.4% in the first half. Something which is said also is that India, which is a key emerging market, had a tough start because the market went down by 7.2% in the first half, and it's projected to go down by only 1.8% in the second half. So these are market assumptions. Of course, translation into the impact from SOGIFI are different because it depends where we are and what nominations we've been awarded. So what we have done is a sanity check with the data which we collect from the carmakers. And roughly, the data is quite reliable for the next 3 months and it supports our assumptions for the second half of the year. Okay. Thank you. So on the fixed cost, Jan will give you the number. Remember that during the first half, we had an adverse effect on the cost. So if you want to see the impact of what we are doing, basically what you need to do is you need to take the full year impact minus the negative of the Q1. So, Monica, roughly speaking, for the time being, we are going for a full year reduction of €6,000,000 of gross fixed costs, including the increase in the Q1, because of course, this is not the speed of reduction in the Q2. Yes, okay. And do you expect to keep internally these savings? Or do you expect a better part of them might be transferred to the final clients? It's fully internal. Okay. These are internal decisions. So that will remain within for this year. Okay. And the last one, the ramp up cost from Morocco. So Morocco, we had a tough first half. And roughly speaking, Morocco cost us some an EBIT in the region of a negative €4,000,000 Okay. Thank you very much. The next question is from Francois Riard with Intermodal. Please go ahead. Hi, everyone. Good afternoon. Thank you for taking my question. My main question is concerning EBITDA on the number you reported for last year in 1H. So last year, you reported CHF 104,000,000 of EBITDA and this year in today's report, you had €95,000,000 for the same period. Can you give us a breakdown of how the adjustment was made? So was it a part for there was obviously a part for Freys, but was there another part for IFRS 16? And hence my second question, which EBITDA will be comparable to the one that you used for first half of twenty eighteen? Will it be the one pre or post IFRS 16? So Francois, to give you comparables, EBITDA without FRAZ and with IFRS 16 was EUR 100,000,000 last year, going down to EUR 86.4 billion in 2019. Okay. So, basically, the 95.3 you used was before IFRS 16? Of course, because we are not authorized to adjust opening figures. So that's why I gave you the numbers as we have with state them with IFRS 16. So as a comparable basis, it's €100,000,000 down to €86,400,000,000 And the €100,000,000, they do not take into account FRAZ, which has been set apart. Okay. So it makes if you take so pre IFRS 16 for both, it makes a drop of 16% of EBITDA in the first half of this year compared to last year. Am I correct? It's 13.8% reduction of EBITDA, which is mainly volume driven. Okay, great. Thank you. And just to follow-up, so Monica asked about the Moroccan plant before and in your presentation you talked about new products coming from your Romanian plant. Can we have an update on the rollout of the plant and some kind of visibility on when it will start to produce the profitability impact so far this year? Hello, Laurent, Edelpreet speaking. So concerning Romania, we are right now building the plant. And the first production will be done in the first half of next year. We, of course, have tried to run before that. We started installing the machines practically September, October. The sales we will start in the first half year. And as usual, when we start in new plant, especially in suspension, the ramp up is rather low. So it will be more of a negative impact than a positive impact in the beginning in terms of results. Okay. Thank you very much. And Francois, just rebounding on your previous question, EBITDA went down year on year. But as I mentioned before, EBITDA on a comparable basis went up between Q1 and Q2. Yes, I was talking about 1H. So it's a one point improvement Q1, Q2 in tough market conditions. Understood. Thank you very much. Basically, we had a very bad Q1. Everything added negatively. And as we didn't have as we didn't have made progress with the car manufacturers and the negotiation, we had to consider that the negotiation is not successful. And of course, in the second quarter, as we start to have results, we can look at in the Q1 deposit in use, more to come going forward as we continue negotiating. Okay. Thank you. The next question is from Martino De Ambroggi with Equita. Please go ahead. Good afternoon, everybody. I have a follow-up on the raw materials because 1 percentage point of improvement can be summarized as an impact of material costs, which are down. You mentioned negotiations are going on. But what is the total impact you expect for the full year? And is it mainly coming from Spill or Plastic? Because these were the 2 responsible for the negative impact of last year and you supposed to be also for the current year? Yes. So typically, what's happening in in the industry, as you will know, is that there are, if you could, productivity or price down agreements with the customer, which range between 1% 2%. This year, due to the increase, the past increase and the current increase in raw materials of plastic and steel, We opened the negotiations with the car manufacturers. And if we resolve our mass, we have given very little productivity and we have recovered some of the materials. Here's what you see. In terms of price of the materials themselves, this is another matter. The increases of the matter during the period, during the first half have been less than we anticipated, but we still had during the first half on average an increase in the cost of format and future. The gain is really the effect of the negotiations with the customers. Without a negotiation with customers, we would have a deterioration. It is true that some steel products are starting to show signs of decrease. If this is confirmed, the pressure of the customer will increase to again reduce the prices. But on steel, as we have a backlog of €75,000,000 of steel price we have not recovered, I think we are well prepared to weather these negotiations. To answer your question on the percentage of material, we expect a further improvement in the second half of the material content that we've had in Q2 versus Q1. Okay. Okay. So CapEx, in your last call, you mentioned that they should have been up for the full year, while they were down 8,000,000 in the first half. So should we change our assumption for the full year and why? It's a good question. We still are factoring the EUR 10,000,000 increase of CapEx year on year. It mainly stems from the Romania investments. And depending on the evolution of the top line in the second half, we'll see whether to defer or cancel part of the investments. But for the time being, we see no reason why not to keep this guidance. Okay. And the tax rate was indicated at roughly 50%, but looking at the comments you put in your press release seems to be higher for the full year and restructuring costs are still at around €10,000,000 So, tax rate, in every call, I say, tomorrow is going to be better. And I do say that every quarter, it's just the same. It's what happens when you have in your pretax income, the mix of earning operation and losing operation. So Morocco is an obvious one. We've been prudent and still the operation is up and running and generating profits. We are not going to book deferred tax effects, But we also have other regions, let's say, Mercosur, where we are not making money and in which we have decided for the time being not to book different tax assets, which means that the tax rate on a full year basis probably will be slightly higher than 60% this year. So I know it's disappointing, but we need to kill the losses in order to improve it. Sorry, Jan, it's more than 60, 60? Unfortunately, more than 60, 60. Okay. In terms of restructuring, for the time being, there is no plant closing. So we are talking about restructuring in the region of €10,000,000 on a full year basis. Okay. Very last on the guidance, because you mentioned flattish sales, which means, if I'm not wrong, is last year adjusted for divestiture, the total was €760,000,000 And when we talk about small improvement in retomol sales, should we expect 3.5% or closer to 4%? We are looking for something in the region of 3.5 percent in the second half. The next question is from Alexandre Verdi with Kepler Cheuvreux. Please go ahead. Good afternoon and thank you taking my question. I just had a follow-up question on the market outlook. So you basically guide for probably flat sales for H2. What does it mean in terms of market outperformance? I mean, you performed you outperformed the market by around 4% in H1. Should we expect the same degree of outperformance for H2? And in terms of regions, or should we also expect the same regions to drive the outperformance? That's the first question. Okay. Thanks for your question. We are always very careful in terms of guidance on the top of the guidance in general and guidance on the top line. And each time so far, we've outperformed our own guidance. What will be different in the second half will be the start of pricing of many new products in China. Therefore, the outperformance we expect is more oriented towards China, but versus strategic position, because remember that in the first half, our decline was much more than the market. So we are therefore coming more aligned with the evolution. Jan, do you want to comment some more? So you're right, we are beating the market by roughly 4 points in the first half. We are quite careful with the second half. Second half, we expect to perform roughly in line with the market, that's to say roughly even, and this is something we've checked recently. Roughly, we believe we shall be in line with the market in Europe, slightly better in NAFTA, probably in India and China as well. But in China, we need to be very careful because the market is moving up and down. And we are very cautious on Mercosur, which is a difficult market. Okay. Thank you. Maybe a follow-up, you still use IHS, so I think if I remember correctly, they are not minus 3.7% for the full year. Some of the suppliers adopted a much more cautious scenario between minus 4% and minus 6%. I mean, why do you still use IHS because we all know that they cut every single month they had their figures? And if the market is down, let's say, 5% this year, how comfortable are you with your guidance? So, let me be more precise. We are communicating in reference to IHS because we believe that IHS, even if it's been cutting every quarter or every month is still common accepted reference. Now, we will need our forecast and we start with the programs we have from the manufacturers, not from IHS. So our forecast is presented in reference to IHS, In reality, it's based on the Social Security internal information and the information we are getting from customers for start of production, end of production. So yes, relatively reliable. In that case, for the Q3, it coincides, but it does not always coincide. So to answer your question, we are not building our forecast on HS. But we are presenting our forecast in comparison with HS as it is, I would say, commonly accepted. But it's important to precise that we are working on customer specific scenarios, ground by ground. Our forecast are bottom up, so it's not top down extrapolated by region. And as Laurent mentioned, we ran sanity checks with all the information, which is updated on a constant basis by account makers themselves. So the data we use is not global market data. It's purchase orders by part number by clients. And on Q3, for the time being, it helps. Well, we have seen to give you a bit more insight, but we have seen some customers reducing October prudently. This is taken into account in our scenarios. Depending, as usual, on the phase of July, which nobody knows still, they might adjust, but it's unlikely that they will adjust September, which is more likely that they will adjust October November, which is always better than adjusting December, because the worst thing which happened is what happened last year. That's why this forecast is from IHS as well as also some systems because remember Q4 of last year was very poor. If you look on and this happened really in December, if you look on the 6.8% in Europe and we had minus 7.3% in Q3. So we are not seeing this right now in Q3, the minus 7.3%, talking about Europe now. And of course, Q4 will depend as always out the phases of July and August. Okay. That's very clear. Thank you very much. Laurent, we don't see a lot of overstock right now. There could be some others here or there, but it's not a general overstock situation, because what is the worst case is when the customers keep on calling apart, building more cars, building with inventory and then they cut off for a second. They do that when inventory is piling up. So we will help with the end customer manufacturer inventory piling up. So we believe Q3 could be around these numbers. We have new information of a significant drop in Q3 coming up from none of our customers. Okay. Thank you. Gentlemen, there are no more questions registered at this time. So we'd like to thank you very much. Excuse me, Martino De Ambroggi has just registered for questions. Please go ahead, through. Sorry, just a follow-up on the financial costs because in Q2, they were €5,000,000 probably I missed if there was something more recurring or should we multiply by the next 2 quarters, roughly EUR 5,000,000 for each quarter? Martino, we are going for roughly a EUR2.5 million phasing year on year on a full year basis. This is a prudent stance. We think we are safe in that assumption. Okay. Thank you. Gentlemen, there are no questions registered at this time. Thank you. So thank you very much for attending the SoGESI First Half Year results conference call. Thank you very much for your questions. We look forward to talk again with you for the results of the Q3, and we wish you all a very good summer. Thank you very much. Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephone.