Morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Sogefi first quarter 2019 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, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Laurent Hebenstreit, CEO of Sogefi. Be glad, sir.
Thank you very much. Laurent Hebenstreit, executive officer of Sogefi. Welcome to this conference call concerning the first quarter 2019 results. I am here with Yann Albrand, Sogefi Chief Financial Officer, and Stefano Canu, Sogefi Investor Relations. I guess you all have the documents. We will start on page two of the document with the highlights for the first quarter 2019. The first point of the highlight is that Sogefi revenues ended up at EUR 389.9 million. That is EUR 390 million. At constant exchange, that means we are down 2.9% versus the market, which was down in terms of production of cars worldwide by 6.7%. We did better than the guidance we initially gave as we outperformed the market. The EBITDA came out at EUR 41.3 million, that is 10.6% on sales versus 12% in 2018. EBIT at EUR 11.3 million, at 2.9% on sales versus 5.6%. Net results at EUR 1.6 million versus EUR 11.2 in 2018.
Free cash flow at EUR -9.1 million versus a positive EUR 9.3 million in 2018. The 2019 numbers include EUR 7.5 million impact of IFRS 16 and EUR 1.6 million of operating cash consumption, of which EUR 3.1 million due to the start-up of the new production plant in Morocco. Finally, in terms of debt, we ended at EUR 328.9 million. The application of the IFRS 16 determined the recognition of EUR 66.8 million of financial debts right of use. Excluding this amount, net debt would have ended up at EUR 262.1 million versus EUR 260.5 million at the end of 2018. At the end of the presentation, Yann Albrand would be happy to answer all your question on the various status. Continuing now on page three with revenues by geographical area. We see that Europe, which is the main reference market for Sogefi, with 60% of our sales, was down 5%.
We reported 3.5% change or 3.6 constant exchange rate, better than the market. In North America, we were substantially at constant exchange rate in line with the market. South America, we ended up in EUR 16% lower. Here, South America is 9.6% of our sales, with the heavy impact of the exchange rate, especially in Argentina. Finally, in Asia, the reference market was a minus 11.8, and we reported minus 8.6, of which we had a very severe drop in China. We reported minus 22.5% of sales in China. China sales at EUR 17.2 million are, of course, important but are of limited impact versus total sales of EUR 389.9 million in the quarter. Turning now on page four to the revenues by business unit.
We see that at constant exchange rate, Suspensions had the higher decline at 3.9%, due to the end of life of some programs, and a reported change at -6.9%. Suspensions were also the more impacted in terms of exchange rate, and we'll see that had a significant effect on the results. Filtration had a limited impact of the exchange rate despite the exposure to South America. Finally, on Air and Cooling, we had a counter effect because due to Canadian dollar, US dollar parity versus the euro, at constant exchange rate, we were down -2.1%, but we reported flat sales. Coming to the decline per piece. During the first quarter of 2019, where we had underperformance was at Ford and Fiat Chrysler, mainly. Ford and Fiat Chrysler, as you know, had a difficult first quarter.
In the case of Sogefi, due to the fact that we serve Ford in China, the impact was even bigger as far as the decline of our sales. Whereas on reverse, Renault Nissan and PSA were quite strong during the first quarter. These were the points I wanted to underline. BMW still positively oriented in terms of growth. Moving now to page six, as far as what is ahead of us, which is more interesting than the past, is the future. The forecast of IHS is a reduction in terms of total production of 3.4%, so it remains a difficult environment, of course. As we expected in our guidance, the drop in China, instead of being 13.5% in the first quarter, is forecasted at -3.4%. South America could be negative. What is more negative in the second quarter is the -7.7% in Europe.
Having said that, I would like to hand over to Yann Albrand, Sogefi's Chief Financial Officer, to comment on the financial results.
Thank you, Laurent. We are moving to slide seven on EBITDA. As Laurent said, EBITDA margin went down from 12% in Q1 of last year to 10.6% in Q1 2019. Without any surprise, this reflects the drop in sales, which has a direct impact on EBITDA. It also reflects lower contribution in both Filtration and Suspensions, and we'll come back to that. Also, an item which is explaining the deterioration of EBITDA is that in Q1, we had EUR 1.9 million of restructuring costs versus EUR 1.1 million a year before. If we move to the following page, EBITDA margin by business unit. In Suspensions, it goes down from 9.9% to 7.9%. This reflects a drop in sales, of course, but also reduction in profitability in South America. It's mainly Argentina which is suffering, and China, where we have a tough market.
Filtration declined from 12.2% of EBITDA to 9.6%. The margin reduction is mainly due to the drop in volumes in Europe. Also difficult here in Brazil, which is hitting us by roughly EUR 1 million. The cost of our new startup in Morocco, which is still in ramp-up mode. In Air and Cooling, EBITDA went up from 14.5% to 15.4%. As you saw, sales remain even, whilst gross margin increased in percentage. The BU is now focusing on products with higher margin, and this shows already in the results. If we move to page nine. EBIT, as you can see, goes down from 5.6% to 2.9%. The main impact, of course, is the EBITDA reduction. There's also a secondary impact, which was evidenced in the press release. As Laurent said, on January 1st, we moved to IFRS 16 on leasing.
This has an impact both on our P&L and on our NFP. In P&L, the EBITDA was increased by EUR 3 million versus the previous year, whilst the impact in terms of EBIT is roughly nil, it's EUR 0.3 million. EBIT, it's less EBITDA, less impact of IFRS 16, which is nil at EBIT level. Financial results is improving, with cash interest down EUR 1.3 million versus the previous year. Net income going down from EUR 2.8 million to EUR 0.4 million, still the same impact. Despite less tax expenses in Q1 2019, the fact remains that we still have heavy tax expense due to the fact that we still have some areas like Brazil where we are losing money, and we do not book deferred tax on areas where there may be an uncertainty. This includes all the ramp-up zones such as Morocco.
We'll wait till we have a solid profitability in such areas before we start booking deferred tax assets. Moving on to page 10, cash flow. As Laurent pointed out, negative cash flow, cash consumption of EUR 19.1 million in Q1 2019 versus positive EUR 9.3 million last year. A very significant impact is the implementation of IFRS 16. In this EUR 19.1 million, the net impact, both the booking of the new lease commitments plus minor P&L impact is a cash consumption of EUR 7.5 million. It's a booking cash entry. That's to say, it mainly reflects the recording of new lease commitments, which we now book as assets and as liabilities. Without this impact, which we wouldn't have had a year ago, the cash consumption of Q1 is only EUR 1.5 million, of which slightly more than EUR 3 million from Morocco alone.
A significant impact as well in terms of net financial position. Without a new IFRS, the cash position would have increased from EUR 260 million end of last year to EUR 262 million, a minor impact. On top of this, we added EUR 66.8 million, which is just a recording of all the prior lease commitments, plus the new ones which we signed in Q1 2019. We mentioned our estimation of the impact had we had IFRS 16 in 2019. In 2018, it would have been already EUR 60 million. Which explains why the net financial position goes from EUR 262 million to EUR 329 million. Laurent?
Thank you very much, Yann, for these detailed explanations of the various elements. I would like now to turn to the outlook on page 11. Clearly, we are not satisfied with the results of the first quarter or with the expected difficult start of the year. Let's now look at the second quarter. The global car market is expected to decline 3.4% in terms of car production compared to the previous year. We highlight the fact that within there is still a negative impact in Europe, which is 7.7%. In this environment, in the second quarter, we will see forecast lower sales reduction than the market forecast. In clear terms, we continue to outperform the market.
More important than the sales, in terms of profitability, EBIT in percentage for the second quarter is expected to improve compared to the first quarter due to the various actions we have ongoing. We are working with the car manufacturers to make sure we continue passing on the impact of the raw materials. You noted that for the first quarter, in six quarters, we have not highlighted the fact that we had negative impact because during the first quarter, we had a neutral effect in steel versus the first quarter of last year in terms of net impact in our P&L.
We expect in the second quarter and the third quarter and the fourth quarter to continue our work to recuperate some of the negative impact of the increase of steel of last year, as well as having a more positive trend in terms of the materials as some materials in steel are starting to go down, which would have a positive effect on the profitability of Sogefi Suspensions activity. This profitability, EBIT for the second quarter, is expected to improve compared with the first quarter. This is what we wanted to share with you, and we'll be happy to now answer your questions. Thank you for your attention.
Excuse me, this is the Chorus 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 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. The first question is from Monica Bosio of Bank of America. Please go ahead.
Good morning, everyone, and thanks for taking my questions. The first one is on raw materials. Just to clarify, just to check, have you just told us that in the first quarter you didn't have any raw materials impact and you recover in terms of pricing? My question is if you can elaborate more on the full year indication on the raw material impact and if it is better or worse than before. I presume better. The second question is on the expectation on the second quarter. I had a look at the market provider forecast. Just a flavor from you. Don't you think that the expectation for China in the second quarter might reveal too bullish? The third question is on restructuring. In the first quarter, you had higher restructuring year-on-year.
Can you just confirm us the guidance or the indication for the full year? Thank you very much.
Thank you, Monica. Laurent speaking. On raw materials, thank you for pointing to this important point. I confirm that in the first quarter concerning steel, contrary to the previous three quarters where we reported a net negative impact between purchasing prices and selling prices, including the recuperation of materials. Remember that this has been last year EUR 12 million to Suspensions, roughly EUR 3 million per quarter. In this quarter, between the fact that some grades of steel have started to reduce and the fact that we've been doing a better job at negotiating both at the end of the year and beginning of the year, we have, for Suspensions, a neutral impact in our accounts. How do we see the full year?
If the trends in steel continue, which is having some grades of steel which are going down, and we need to be careful because there are movements which are still a bit volatile. If these movements continue, we could have a positive effect between sales and purchasing. At this point, I would not take it for granted. I would just confirm that in the second quarter, we expect an improvement in the Suspensions. Remember that in our guidance, we said that the recovery of the Suspensions is one of the key elements of this year. We confirm this for the second quarter.
Okay, Laurent, just a follow-up. At this point, can we say that the drop in profitability of the group is due only to the drop in volumes and to the contraction of the reference markets?
The main factors for reduction are, one is the volume, which we have emphasized quite a bit. The second, as Yann highlighted, is a reduction in percentage of profitability in Filtration and in Suspensions, which is not connected to raw materials, because raw material, as we said, was neutral in the quarter. It's connected mainly to South America for Suspensions, Argentina, and China, and for Filtration to Europe, where we had a low volume, including in aftermarket and OEM, South America, and Asia.
Okay.
These are the main factors. Having said that, we have not done a good job because our fixed costs in the first quarter, compared with first quarter of last year, have increased. This is also reducing our profitability. Frankly, we did not expect the market to be as bad as it came out in the first quarter. It came out lower than what we expected, and we have not been able to flex the fixed cost, which has also had an impact. Looking at the EBIT, there is also depreciation and amortization, because as you know, we've been investing to improve the competitiveness of the plants, and we have higher depreciation and amortization. Of course, with lower sales, that hits the profitability. These are the four main factors. This time, it is not the steel, which is the reason why our numbers are going down.
That means with the actions we have ongoing, that's why we are reasonably confident that we will improve in the second quarter. If the economics continues, it could show quarter-over-quarter. Macroeconomics are still very volatile. That's why we limited our guidance to the second quarter.
Okay.
Is that more clear, Monica?
For China, your flavor on China and the restructurings?
For China, what we've observed is that March was already better than February. As far as Sogefi is concerned, even if there are still some risks to this guidance in China, in terms of volume, we have several new products coming in production in the second quarter and in the third quarter. Overall, we consider that with the start of production of new products, China will turn to growth for Sogefi, and that might cushion some of potentially bad surprises in volumes versus the guidance we just gave.
Okay.
On restructuring, Monica, last year we booked EUR 8.3 million of restructuring costs. This year, we are shooting for roughly EUR 10 million, EUR 10 million, it's in a normal environment. That's to say, we need to be very prudent regarding market expectations. If we are facing tough markets all year long, of course, we'll need to incur restructuring costs to reduce our fixed costs.
Okay. Thank you very much.
The next question is from Renato Gargiulo, Fidentiis. Go ahead.
Renato?
Yes.
Renato, the sound is very difficult. For me, it's very difficult to hear you. Your voice is a bit staggered by the phone call, I mean. Will you try again?
Well, no problem. I will try it again.
Now it's better.
My question was on your outlook for the second quarter. You're expecting to outperform the total market in 2022. I was wondering, given that clearly your highest exposure is to Europe, which is expected to further slow down versus the first part of the year, could you give us any more indication about which markets or which clients are you expecting to outperform versus total market? One, clearly, you were saying is China, where you expect to grow. If you can provide any more indication about your expected trend in the second quarter of the year. My second question is on Morocco, if you can give any update about the startup of the new production plant and the expected contribution for this year. Lastly, my last question is on Brazil, if you can give an outlook for Brazilian market going forward. Thank you.
Thank you very much, Renato. Concerning the second quarter, as I mentioned, we have new products starting in China. Concerning the sales in Europe for the second quarter, we see a relatively strong demand coming up from the premium. You know that one of the things we did in the last four years since we joined with Yann was putting more focus on the growth with the premium. We expect with Daimler and BMW to have a recovery versus the first quarter in terms of volume. We see also quite good volumes in Europe with the PSA Group coming up for the second quarter. This was for the outperformance versus the market. Concerning Morocco, the situation is the following. We have started some of our new products, and we've had high startup costs in the first quarter for a product which will start in the fourth quarter.
What we will see in Morocco is sales, which will be stable during the second and the third quarter versus the first quarter with an improvement we expect in terms of less cash burn. In the fourth quarter, we'll have the startup of this new product, which will significantly improve the situation in terms of sales, in terms of absorption of fixed costs, and in terms of cash. The situation will remain difficult in Q2 and in Q3, but we expect it to be not as difficult as Q1. In Q1, we have more than EUR 3 million of cash burn, which is too high. Coming up in terms of situation in Brazil, lots of uncertainty. Part of the volumes in Brazil are linked with the Argentina economy. Argentina economy is quite worrying. You know that we have more than 50% inflation over 12 months.
We have hyperinflation in Argentina. Some of the cars made in Brazil were exported to Argentina. The difficulty is that for the time being, the economics of Argentina is deteriorating, both in terms of purchasing power, income, but also in terms of financing for buying cars. Therefore, if you look at the months of April, for instance, the months of March, sorry, the sales of cars in Argentina was at -54%. The Argentina market is very depressed. Of course, this is depressing not only the Argentina activity but also the Brazilian activity. We do not expect significant improvements in Brazil over the next months. Still have a very much competitive situation there in terms of aftermarket.
Okay. Thank you. Thank you very much.
The next question is from Martino De Angelis of Equita. Please go ahead.
Thank you. Good morning, everybody. I have a follow-up on the operating leverage, because if I look at your Q1 results, you lost EUR 16 million in sales and roughly EUR 10 million of gross margin, which is quite a high percentage of sales. You provided us some more details, but could you help us in splitting this effect in terms of roughly volumes, which for sure is the main driver, price mix, ForEx? Or in another way, what still can be considered non-recurring, which had an impact on Q1 operating leverage.
Thank you, Martino. Yann, you want to do some more flavor to this?
If you compare the EBIT or the EBITDA, we would rather go for EBIT now.
Actually, I was looking at gross margin, the contribution margin, or EBITDA adjusted for IFRS 16. It's roughly EUR 10 million at each level, if I'm not wrong.
Year-over-year, roughly, the volume impact is slightly higher than EUR 4 million in terms of contribution linked to volumes. The margin deterioration is roughly EUR 2.5 million. We have increases in fixed costs of EUR 2.3 million. What happens is that we have a favorable impact on IFRS 16 by EUR 3 million year-over-year.
Okay. ForEx?
ForEx, still negative. I have ForEx, it's negative, but it's not huge year-on-year. ForEx is negative by EUR 1 million of exchange differences.
Okay. Is there anything which can be considered non-recurring, namely the Morocco plant startup or anything else?
At which level?
Gross margin, EBITDA, as you prefer.
In gross margin, we had a negative hit in Q1, which is linked to the fire in one of our Suspensions plants, which is overall offset by insurance recovery at EBITDA level, which is hitting the gross margin. This, of course, will be non-recurring because the plant is going back on track at the end of April.
That's why, Martino, the contribution margin of Q1 is not fully comparable with neither the past nor the future because of this one event. That's why we've focused the communication here on the EBITDA, excluding to where this one-off event is negative.
Okay. Thank you. The second question is still on the guidance. If we take the -7.7% volumes for Europe, knowing you have 60% of sales in Europe, should we expect a performance, okay, excluding Forex in Q2 worse in terms of decline of sales compared to Q1 or similar?
The question is the difference in sales Q2 to Q2 versus Q1 to Q1? Is that the question?
Yeah. The question is, in Q1, you had a -3% constant Forex. You are now indicating Europe production should be down 7.7%. In Q1, was down 5%. Knowing you have 60% of sales in Europe, should we expect a worse or similar performance in terms of decline in sales as compared to the 3% you had in Q1?
Martino, we expect a better performance. We expect to beat the market on a worldwide basis, and our projections for Q2 indicate that considering this decline in market, most probably our sales will also decline, but should less decline than in Q1 versus Q1 of last year.
Okay. In terms of EBIT, you are referring in absolute value in your guidance. Is it referring to the absolute value or as a percentage of sales?
Well, actually, we are shooting, for the time being, for an improvement both in absolute and in percentage.
Okay. The underlying assumption of the restructuring costs in this guidance?
For Q2?
Yep.
For Q2, it's roughly EUR 2 million. It was EUR 1.6 a year ago. For the time being, as I said before, it's business as usual in terms of restructuring. That's part of the automotive business. If the market keeps on going down, strongly down, we'll kick off some heavier restructuring. For the time being, it's not in the pipe.
Okay. Very last questions on the impact of the asset deconsolidated and the updated guidance for the CapEx for the full year.
Concerning the assets we are deconsolidating, this is an event which will unfold during the second quarter. We will inform you in due time of the parameters of this. We are not ready now to communicate about this. This was for the first question. For the CapEx, Yann?
Maybe, Laurent, we can help the analysts. The sales of the asset to be declared, which is held for sale, were EUR 53 million last year, and the EBIT was EUR 1.8 million.
Okay, thank you. Just CapEx now.
CapEx, it's mainly based to the overall environment. We started cutting on CapEx in Q4 of last year, considering the trend in sales. We shall need to view the situation very cautiously. If the market goes down, we'll cut on CapEx. If not, CapEx should be higher than last year.
Okay. Thank you.
The next question is from Alexandre Laferrière of Kepler. Please go ahead.
Yes, good morning. Thank you for taking my question. The first one regards the outlook. You provided an outlook for Q2. If you look at the full year, what is your assumption for the full year in terms of global production? Because I think IHS expects around minus 1%. You have one of your competitors who reported this morning that actually they expect global production to decline into low to mid single digits. What's your assumption on that, and do you confirm that you will perform in line with the market, or do you expect to outperform, let's say, if you have a minus one or minus three? It will be the first question, I will ask the other ones afterwards.
Thank you. Concerning the market, we stay with the initial forecast, which was to have 2019 in line with 2018. In line is broad enough to allow a few percentage points lower. For the time being, we stick with that. In terms of performance, we are showing the first quarter that we are outperforming the market, and we confirm that in the second quarter, we should as well outperform the market by 300 to 400 basis points. This is what we can say today.
Okay. Thank you. Second question is on the tax rate. It remained quite high in Q1. I think the full-year guidance was around 50%. Is it something that you confirm? The final question also regards production. We have some deadlines in September with the Real Driving Emissions and the WLTP on FCEVs. What's your view on that? Do you expect some disruption in Europe in Q3, or do you feel like the customers are much better prepared than last year?
On the tax rate, roughly it's going to be in line with the guidance we initially provided. It can change because it's fairly simple. If we have drops in volumes in certain areas where the market is shaky, this triggers losses, and this can trigger abnormal tax rates. Situation will vastly depend on markets such as Mercosur, where, as Laurent pointed out, the market production dropped very significantly in Q1 in Argentina, and it dropped by 10% in March from Brazil. This can trigger unusual situation. For the time being, we are not changing our guidance.
On the-
Yeah, concerning the production, RDE, and FCV. The information we are having, that customers are better prepared, so we do not expect significant disruptions from there.
Okay. Thank you very much.
Okay.
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Thank you very much for your participation to this call concerning the first quarter 2019 and the outlook for Sogefi. Wish you a very good day. Thank you very much.