Earnings Call: Q1 2019

Apr 29, 2019

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Subjea's First Quarter 2019 Results Conference Call. As a reminder, all participants are in a 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 Ebenstein, CEO of Sanjayfi. Please go ahead, sir. Thank you very much, Laurence Petch, Chief Executive Officer of Sergey Fi. Welcome to this conference call concerning the Q1 2019 results. I'm here with Yan Al Goran, Sergofi's Chief Financial Officer and Stephane Ocannou, Sergofi Investor Relations. I guess you all have the documents. We'll start on Page 2 of the documents with the highlights for the Q1 of 2019. The first point of the highlight is that SuriQ revenues ended up at €289,900,000 €390,000,000 At constant exchange, that means we are down 2.9% versus a market which was down in terms of production of cars worldwide by 6.7%. So we did better than the guidance we initially gave as we outperformed the market. The EBITDA came out at €41,300,000 3.6% on sales versus 20% in 2018. EBIT at €11,300,000 at 2.9% on sales versus 5.6 percent. Net results at €1,600,000 versus €11,200,000 in 2018. Free cash flow at minus €9,100,000 versus a positive €9,300,000 in 20 18. The 2019 numbers include €7,500,000 in terms of IFRS 16 €1,600,000 of operating cash consumption, of which €3,100,000 due to the start up of the new production plant in Morocco. Finally, in terms of debt, we ended at €328,900,000 The application of the IFRS, in IFRS 16, determined the recognition of €66,800,000 of financial debt right of use. Excluding this amount, net debt would have ended up at 260 2.1 versus 260.5 at the end of 2018. At the end of the presentation, again, Malabrand would be happy to answer all your questions on various studies. Continuing now on Page 3 with revenues as a geographical area. We see that Europe, which is the main reference market for 60% power save, was down 5%, and we reported 3.5% change or 3.6% constant exchange rate, so 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 euro 16% lower. So here, South America is 9.6% of our sales. It's a heavy impact of the exchange rate, especially in Argentina. And finally, in Asia, the reference market was minus 11.8%, and we reported minus 8.6%, of which we had a very severe drop in China. We reported minus 22.5 percent of sales in China. China sales at 17.2 percent, of course, important, but are of limited impact versus total sales of 389.9 percent in the quarter. Turning now on Page 4 to the revenues by business units. We see that at constant exchange rate, suspensions had the higher decline at 3.9% due to the end of life of some program And reported change at minus 6.9 percent, so suspension is also the more important in terms of exchange rate. And we see that it had a significant effect on the results. Filtration had a limited impact of the exchange rate despite the exposure to South America. And finally, on the other hand, we had a counter effect because due to Canadian dollar, U. S. Dollar parity versus the euro, at cost inflation rate, we were down minus 2.1%, but we reported flat sales. Coming to the client activities, during the Q1 of 2019, where we had underperformance was at Ford and Fiat Chrysler mainly. Ford and Fiat Chrysler, as you know, had a difficult Q1. And in the case of Sogeti, due to the fact that we serve Ford in China, the vehicle is even bigger as a designer of RSA. Whereas on reverse, Renault Nissan and KSR were quite strong during the Q1. These were the points I wanted to add around BMW still positively oriented in terms of growth. Moving now to Page 6, 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 3.44%. So it remains a difficult environment, of course. But as we expected in our guidance, the drop in China could have been 13.5% in the Q1 is forecasted at minus 3.4%. South America could be negative, and what is more negative in the second quarter is the minus 7.7% in Europe. Having said that, I would like to hand over to Lionel Laborde, Strategic Financial Officer, to comment on the financial results. Thank you, Laurent. So we are moving to Slide 7 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 suspension, and we'll come back to that. Also, an item which is explaining the deterioration of EBITDA is that in Q1, we had €1,900,000 of restructuring costs versus €1,100,000 a year before. If we move to the following page, so EBITDA margin by business unit. In suspensions, it goes down from 9.9% to 7.9%. Percent. So this reflects a drop in sales, of course. But also reduction in profitability in South America, 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 year in Brazil, which is hitting us by roughly €1,000,000 and the cost of our new start up 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. And 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 9. EBIT, as you can see, goes down from 5.6% to 2.9%. The main impact, of course, is the EBITDA reduction. Leasing. On January 1, we moved to IFRS 16 on leasing. This has an impact both on P and L and on our NSP. So in P and L, the EBITDA was increased by €3,000,000 versus the previous year, whilst the impact in terms of EBIT is roughly nil, it's €0.3,000,000 So EBIT, it's less EBITDA, less impact of IFRS 16, which is nil at EBITDA. Financial result is improving, with cash interest down CHF 1,300,000 versus the previous year. And net income going down from €2,800,000 to €400,000, still 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. So this includes all the ramp up zones, such as Morocco. So we'll wait till we have a solid profitability in such areas before we start looking deferred tax percent. Moving on to Page 10, cash flow. As Laurent pointed out, negative cash flow, so cash consumption of €9,100,000 in Q1 2019 versus positive €9,300,000 last year. A very significant €9,300,000 last year. A very significant impact is the implementation of IFRS 16. So in this 9th page 1, the net impact, so both the booking of the new lease commitments plus minor P and L impact is a cash consumption of €7,500,000 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. So without this impact, which we wouldn't have had a year ago, the cash consumption of Q1 is only €1,500,000 of which slightly more than €3,000,000 from Morocco alone. Significant impact as well in terms of net financial position. So without a new IFRS, the cash position would have increased from €260,000,000 end of last year to €262,000,000 so a minor impact. On top of this, we added €66,800,000 which is just a recording of all the prior lease commitments plus the new ones which we signed in Q1 of 2019. And we mentioned our estimation of the impact had we had IFRS 16 end 2019. So end 2018, it would have been already €60,000,000 So which explains why the net financial position goes from €262,000,000 to €329,000,000 Laurent? Yes. Thank you very much, Jan, for these detailed explanations of the various elements. I would like now to turn to the outlook for Page 11. Clearly, we are not satisfied with the results of the Q1. We expected a difficult start of the year. Let's now look at the Q2. 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, there is still a negative impact in Europe, which is 7.7%. In this environment, in the Q2, we see forecast lower sales reduction than the market forecast. So in clear terms, we continue to outperform the market. And more important than same in terms of profitability, EBIT, in percentage, for the Q2 is expected to improve compared to the Q1 due to the various actions we have ongoing. We are working with the manufacturers to make sure we pass on continue passing on the impact of raw materials. You've noted that for the first time in 6 quarters, we have not highlighted the fact that we had negative impact because during the Q1, we had a neutral effect in steel versus the Q1 of last year in terms of net impact in our P and L. And we expect in the Q2 and the Q3 and the Q4 to continue our work to accelerate some of the negative impacts of the increase of SKID of last year as well as having more positive trends in terms of the materials as some materials in steel are starting to go down, which will have a positive effect on the profitability of services suspensions activity. So, digital profitability, EBITDA for the 2nd quarter is expected to improve compared with the Q1. This is what we wanted to share with you and we'll be happy to now answer your question. Thank you for your attention. Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. The The first question is from Monica Bosio of Banca Gini. 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 Q1, you didn't have any raw materials impact and you recover in terms of pricing? Because the second question is if you can elaborate more on the full year indication of the raw material impact? And if it's better or worse than before, I presume better? And the second question is on the expectation on the 2nd quarter. As you look at the market provider forecast. Just a flavor from you. Don't you think that the expectation for China in the Q2 might reveal too bullish? And the third question is on restructuring. In the Q1, you had higher restructurings year on year. Can you just confirm us the guidance or the indication for the full year? Thank you very much. Thank you, Monica. Ronald speaking. So on raw materials, I thank you for pointing to this important point. I confirm that in the Q1 concerning still, contrary to the previous 6 quarters where we reported net negative impact between purchasing prices and selling prices, including the incorporation of materials. Remember that this has been last year €12,000,000 to Solvency roughly €2,000,000 per quarter. In this quarter, between the fact that some grades of steel has 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. So how do you see the full year? If the trends still 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 being volatile. If these movements continue, then we could have a positive effect between sales and purchasing. But at this point, I would not take it for granted. I would just confirm that in the Q2, we expect an improvement in the suspension. You remember that in our guidance, we said that the recovery of the cost of suspension is one of the key elements of this year. We'll confirm this for the second quarter. Okay. Laurent, just a follow-up. So at this point, can we say that the drop in profitability of the group is mainly due exclusively sorry, is due only to the drop in volumes and to the contraction of the reference markets? The 2 main factors for the let's say the main factors for the reduction of the deal. 1 is the volume, which we have emphasized quite a bit. The second, as Jan highlighted, is reduction in percentage of profitability, inflation and in suspensions, which is not connected to raw material because raw materials, as you said, was neutral in the quarter, but it's connected mainly to for South America for suspension, sorry, Argentina and China. And for inflation to Europe, where we had a low volume, including in aftermarket and OEM, South America and Asia. These are the main factors. Now having said that, we have not done a good job because our fixed cost in the Q1 compared with Q1 of last year have increased. So this is also reducing our profitability. Fortunately, we did not expect the market to be as bad as it came out in the Q1. 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. But looking at BB, there is also depreciation and amortization because as you know, we'll be investing to improve the competitiveness of the amortization, of course, with lower sales that exceeds the profitability. So these are the main the 4 main factors. But this time, it is not the steel, which is the reason why our numbers are going down. So that means with the actions we have ongoing, that's why we are reasonably confident that we will improve in the Q2 and if the economics continue sequentially quarter over quarter. Markets are still very volatile. That's why we limited our guidance to the 2nd quarter. Is that more clear, Monica? Yes. And for China, your flavor on China and the restructuring? So for China, what we've observed is that March was already better than February. And as far as VTC is concerned, even if there are risks in this guidance in China in terms of volume, we have several new products coming in production in the Q2 and in the Q3. So overall, we consider that with the start of production of new products, China will turn to growth for SOGIC and that might cushion some of potentially bad surprises in volumes versus the guidance we've just given. Okay. On restructuring, Monica, last year, we booked €8,300,000 of restructuring costs. This year, we are shooting for roughly €10,000,000 But €10,000,000 it's in a normal environment. That's to say, we need to be very prudent regarding market expectations. So if we are facing tough markets all year long, of course, we'll need to incur restructuring costs to reduce our fixed costs. The next question is from Renato Gargiulo, Filentes. Please go ahead. The sound is very difficult. Maybe you want to For me, it's very difficult to hear you. Your voice is a bit staggered by the phone call, I mean. Can you start again? Well, no problem. I will try it again. Yes, now it's better. Okay. So my question was on your outlook for the Q2. You are expecting to outperform the total market in 'nineteen 'nineteen 'twenty two. I was wondering given that clearly your highest exposure is to Europe, which is expected to further slowdown versus the 1st 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 are saying is China. We expect to grow, if you can provide any more indication about your expected trend in the Q2 of the year? Then my second question is on Morocco, if you can give any update about the start up of the new production plant and the expected contribution for this year? And lastly, my next question is on Brazil, if you can give an outlook for Brazilian market going forward. Thank you very much, Renato. Concerning the Q2, as I mentioned, we have new product starting in China. Concerning the sales in Europe for the Q2, we see a relatively strong demand coming up from the premium. You know that one of the things we did in the last 4 years since we joined with Jan was putting more focus on the growth with the premium. So we expect with Werner and BMW to have a recovery versus the Q1 in terms of volume. And we see also quite good volumes in Europe with the pace above coming up for the Q2. This was for the outperformance versus the market. Concerning Morocco, the situation is occurring. We have started some of our new products, and we had high status post in the first quarter for products which we start in the Q4. So what we 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. And then in the Q4, we have the start up 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. So situation will remain difficult in Q2 and in Q3, but we expect it to be not as difficult as Q1 because in Q1 we have more than €3,000,000 of cash amount, which is too high. Coming up in terms of situation in Brazil, lots of uncertainty, part of volumes in Brazil are linked with the Argentina economy. Argentina economy is quite worrying. You know that we have more than 50% of inflation over 12 months. We have hyperinflation in Argentina. And some of the cars made in Brazil are exported 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. And therefore, if we look at the month of April, for instance, the month of March, sorry, the sales of cars in Argentina was at minus 54%. So the Argentina market is very depressed. And of course, this is depressing not only the Argentina activity, but also the Brazilian activity. So we do not expect significant improvements in Brazil over the next months. It still has a very much competitive situation there in terms of aftermarket. I have a follow-up on the operating leverage because if I look at your Q1 results, you lost €16,000,000 in sales and roughly €10,000,000 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 for mix or in another way, what still can be considered nonrecurring, which had an impact on Q1 operating leverage? Thank you, Martino. Jan, you want to give some more favor to this? So if you can see EBIT or the EBITDA, but we'd rather go for EBIT now. Well, actually, I was looking at gross margin, the contribution margin or EBITDA adjusted for IFRS 16? So it's roughly €10,000,000 at each level, if I'm not wrong. Okay. So year on year, roughly, the volume impact is slightly higher than €4,000,000 in terms of contribution linked to volumes. The margin deterioration is roughly €2,500,000 Then we had increases in fixed costs of €2,300,000 And then what happens is that we have a favorable impact on IFRS 16 by €3,000,000 year on year. Okay. And So I have ForEx, it's negative. It's not huge year on year. ForEx is negative by €1,000,000 of exchange differences. Okay. Is there anything which can be considered nonrecurring, namely the Morocco plant startup or anything else? At which level? Gross margin EBITDA, as you prefer. It's not the same. Because in gross margin, we had a negative hit in Q1, which is linked to the fire in 1 of our suspension plans, which is overall offset by insurance recovery at EBITDA level, especially fitting the gross margin. And this, of course, will be nonrecurring 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 from the beginning to early. So one of these events is taking. Okay. Okay. Thank you. The second question is on still on the guidance. If we take the minus 7.7 percent 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, similar or similar? The question is the difference in sales Q2 to Q2 versus Q1 to Q1. Is that the question? Yes. The question is, in Q1, you had minus 3% at constant ForEx. You are now indicating Europe production should be down 7.7 percent, in Q1 was down 5%. Knowing you have 60% of sales in Europe, should we expect worse or similar performance in terms of declining sales compared to the 3% you had in Q1? So, 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. And 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. And the underlying assumption of the restructuring costs in this guidance? For Q2? Yes. For Q2, it's roughly €2,000,000 It was €1,600,000 a year ago. So for the timing, as I said before, we've it's business as usual in terms of restructuring. That's part of the Automotive business. But if the market keeps on going down, strongly down, we'll kick off some heavier restructuring. But for the time being, it's not in the pipe. Okay. Very last questions are on the impact of the asset deconsolidated and the updated guidance for the CapEx for the full year. Concerning the assets we are de consolidating, this is an event which will fall during the Q2. So 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. Maybe, Laurent, we can help the analyst. The sales of the asset to be deferred, which is held for sale, were €53,000,000 last year and the EBIT was €1,800,000 Okay. Thank you. That's 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. The next question is from Alexandre Laverdie of Kepler. Please go ahead. Yes. Good morning. Thank you for taking my questions. The first one regards the outlook that you provided in outlook for Q2. But 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%. We you have one of your competitors who reported this morning that actually they expect global production to decline in the low- to mid single digits. I mean 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 1 or minus 3? This will be the first question. I will ask the other question after this. 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, but for the time being, we stick with that. In terms of performance, we are showing in the Q1 that we are outperforming the market. And concerned that in the Q2, 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. So it remained quite high in Q1. I think the full year guidance was around 50%. Is it something that you confirm? And the final question, so regards production. So we have some deadlines in September with the real driving emissions in the WSPP on FCDs. 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? So on the tax rate, roughly, it's going to be in line with the guidance we initially provided. Then 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 a normal tax rate. So 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 in Brazil. So this can trigger unusual situation. But for the time being, we are not changing our guidance. And on the Yes, concerning the production RDE and LCE, the informations we're having is that customers are better prepared. So we do not expect significant disruptions from Gentlemen, there are no more questions registered at this time. Thank you very much for your participation to this call concerning the first quarter 2019 and the outlook for Surjeet. Wish you a very good day. Thank you very much.