Earnings Call: Q3 2018

Oct 22, 2018

Good evening. This is the Chorus Call conference operator. Welcome and thank you for joining the SOGEPI 9 Month 2018 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 Henbenstreit, CEO of SoGESI. Please go ahead, sir. Hello. Good evening, everybody. Laurent Danske, Chief Executive Officer of Surgesi. I am today with Ian Albras, our Chief Financial Officer and Stefano Cano, Investor Relations, to present you the 9 months results for 2018. Welcome to everyone. You have the presentation, which is online, so I will follow through the slides. Let's start with Page 3, which is 9 month 2018 highlights. We're happy to report that revenues at constant exchange rates are up by 3.3% at 1 point €2,000,000,000 outperforming the market. The market was at plus 0.8%. Basically, we are outperforming the market in all regions. In Europe, we are close to the market as we see more details. But overall, that shows that our guidance of moderate outperformance was cautious as far as the top line was going. On the EBITDA, we are reporting an EBITDA at €153,100,000 at 12.6% on sales versus 13% in 9 month 2017. These numbers are including the exchange rates impact on which Nicolas Le Bon will be available for comments if you have questions. The EBIT is coming up at €63,700,000 at 5.2 percent on sales compared with 5.7% in 9 months 2017. And the net result is coming at EUR 23,100,000 versus EUR 27.9 €1,000,000,000 in the 9 months 'seventeen. The free cash flow is coming at 20 2.7% negative compared with the positive of first €2,500,000 which is mainly due to unfavorable working capital on which I will comment later and investments in India where you know that we bought the share of minority shareholder for our filtration and air cooling activities and the investment in Morocco. The debt on EBITDA ratio is stable at 1.4. The numbers are presented according to IFRS Looking on Page 4, if we look at the Q3 activities, we have a different set of numbers compared with what we had before. Do you remember that at the end of the 6 months, we had a higher growth on suspension than on filtration and then on AMCOLIN. If you look on Q3, we have a reversal of this as constant exchange rates, we have Enkolim growing 5%, inflation growing 4% and suspensions growing 1.5%. So all three business units grow above the market. Same observations at the 9 months. We have constant exchange rates. We have growth of 0.7 for NCOOLIN, 3.1 for filtration and 5.3 for suspensions. Revenues by geographical area, going on moving on to Page 5. What is, of course, important is the impact of exchange rate, not so much in Europe, because in Europe, customer exchange rate over 9 months, we have growth of 0.4 negative compared with the market, which is 0.4% negative. Looking on the Q3, the reference market is down 6% and we are down 3%. So we are better than the markets underlying. In Q3, we are growing 13.2% in North America with reference market is at 2%. And in South America, we are growing 22% at constant exchange rate versus the market at 2.5%, which reported due to the devaluation of the peso and Brazilian reais translate into minus 15.6%. And in Asia, we are growing at concentration rate at 8.6%. So overall, in terms of growth for reference market of 2% down, Surgery has been growing 3.5% at Constellation rate. So satisfactory growth rates, both what I had seen as a moderate outperform. Moving on to Page 6. The results came in with a reduction dose of absolute and percentage terms of EBITDA after the positive effect of EUR 6,600,000 related to the final settlement of the system motor claim. Let me stop a bit on that. This information is already known, but I would like to emphasize that it's a very positive event for Surjeet as it eliminates substantial risks that we had in the past. This is an event of the 3rd quarter with a positive impact in terms of P and L and neutral impact of cash over time. Exchange rate impact was €6,400,000 negative on the EBITDA and the higher steel prices impacted suspensions for €9,000,000 As we did in the previous quarters, this is impacted in our P and L, that in the EUR 9,000,000 that we have not been able to translate to our customers. Nevertheless, what I would like to say that we had some successes in the Q3, which we expect to recover money in the Q4 or in the Q1 of next year, depending how the negotiations on the application dates are going. But here, I would say we see some positive as far as the negotiations with the customers for the foreseeable future. On the net income, we are coming in at €23,100,000 versus €27,900,000 last year. Let's move now to Page 7, which is, I would say, the more significant element of the Q3, which is unfavorable working capital. Let me explain what happened basically in the Q3 of last year, we have done a very good job in terms of getting paid by our customers aligning our supplier payments. We didn't do as good as a job during the Q3 of this year as we had a deterioration of EUR 18,000,000 between suppliers and customers. This is a temporary effect. We look forward to a good deal of mix in the Q4. The cash out relating to the new start up the start of the new plant in Morocco accounted for approximately Q4. I had mentioned before the purchase of the minority shareholders of the Indian subsidiary, which is €16,700,000 negative. And on top of that, Jan will comment that we had lower factoring at the end of September 2018 and at the end of September 2017, the difference is between 97.6 percent whereas last year we had 94.7 percent which of course impacts the cash as we reported. If we take a broader view above, I would say, the immediate financial results, Geresi continues to have a well balanced client mix. We are happy with the growth at Daimler, which is crossing the 10% threshold on our sales. I had mentioned that going with the premium car manufacturers was one of our orientations. We're also happy with the growth at Volkswagen Audi. BMW, we have booked some interesting businesses, but this is coming to the out years. So it's not for this 9 months of the analysis. Again, taking a broader look at our strategic positioning in terms of future growth, We've identified different segments, whereas we apply different strategies. We are number 2 in Europe on stabilizer bars and number 2 worldwide in manifold, we are number 1 in gas and market in France, we are number 4 worldwide in the oil filters, whereas we have challenges on most of the other categories and we are implementing a harder strategy on the fuel filters due to the evolution of the business, which I will talk more about later. On Page 11, we see that we have refocused our performance drivers on 4 elements and taken as element number 3, pricing power. Due to our difficult experience with the increase of steel where we had more increases than we expected. We've been putting more emphasis on pass through negotiations on raw materials and exchange fluctuations, which is key to the profitability of Sejuicy going forward. As far as Shop Floor is going, I confirm that we are aiming at around €15,000,000 of cost reduction this year, of which 75% will translate into the P and L, both in terms of direct labor and in terms of car production. Moving on to Page 12. We confirm our targets over the next 5 years to get €75,000,000 of cost reduction, of which 75% should percolate into the P and L as we are preparing for budget for next year. On Page 13, we have a sample of the digital initiatives, which we are launching, which range from automated driving vehicles in Noreal to 3 d printing in Nordea as well as cobots, which are directly productivity elements, both in Orbe, in Wuxiang and in San Antonio. These initiatives will bear fruit next year. Moving on to Page 4 team. We remind you of 2 important initiatives, which is the plants in Mexico, whose growth is mainly related to suspension and the plants in Morocco, which is dedicated to filtration. Moving to Page 15, we are pleased to confirm the choice of Romania for the location of our suspensions Eastern Europe plant. The project is ongoing now and we are in negotiations with the Romanian government to obtain grants for these important investments. Taking again a broader look at the electrification as we need both to manage the short term but also what is coming up in terms of trends. I would like to take you to Page 8. We have revised our forecast for the out years in terms of evolution of the technology. We see in 2027 roughly the same numbers of cars, which is 110,000,000 cars compared with 92,000,000 this year. So this is close to our prior forecast. There is no significant deviation. What we are seeing is a revision of the electric vehicles to around €10,000,000 instead of €15,000,000 and the revision of hybrid from 2017 to €13,000,000 Still that means that both hybrid and EV will each capture half of the growth of the market. Hybrid vehicles having internal combustion engines, that means overall that I think it's forecasted to keep growing. So for the next 10 years, we see the market continue to grow. Of course, diesel is declining. Actually, for 2017, we had a forecast of €15,000,000 but the year finished at 2017. So we had a higher starting point where we now point to a lower ending point at €11,000,000 instead of 12 in 2027. So we are preparing ourselves for this for the interim trial as well as capitalizing on the growth on the gasoline and the growth on the hybrid. Moving on to Page 19, we confirm that even if all scenarios predict an increase of EV, the total IC powertrain could remain flat or substantial part of the market. Hybrid powertrain is a first step towards the world of multiple powertrain. The rise of electric vehicle is depending on key factors, which are becoming more apparent month after month compared with, I would say, the general enthusiasm for EV, which we had seen last year. And the rise of hybrid battery electric vehicles and 2 cell electric vehicles are for opportunities for suggesting. I would like to remind on Page 20 the 3 press release, which we've made so far, 1 on Volvo for hybrid with engine cooling pump, which is specifically developed for hybrid engine. The award of battery pack cooling manifold for Renault Nissan, which is distributing the coolant for the battery pack. And last but not least, the coolant module for German sports car, which is really the coolant to the battery, electric motor and the power electronics. Now moving on to the various powertrain. On Page 21, we've recapped the list of new products we are having. Moving on to Page 22, we've recapped the new products we have on the battery electric vehicle, whereas on Siltration, we only have the high performance scanning air filter, which is remaining for battery electric vehicle. And then on fuel cell electric vehicles, we are taking closer look to this market. We see that we'll be able to provide more parts on the fuel cell electric vehicles than we expected and certainly more value. Hydrogen manifold is a very interesting topic for which we are in discussion. I hope to be able to announce some good news on this. And on the filtration side as well, we see more clearly what the filtration needs will be for the fuel cell electric vehicle. Basically, the air convenience for the fuel cell needs to be clean, that's the purpose of the air filters, needs to be dehumized. And then there needs to be water separation, which could be either on the filtration side or on the air and cooling side. This is a subject where we expect news in the next weeks. Moving on to the one point before us, which is Page 24 on Solvency Ventures. We are pleased to announce that we have one joint development agreement going on with the start up related to fine particles emissions. And we are actually working on the second development agreement with another startup on another subject. So this initiative is moving on, and we look forward to more opportunities there for next year. On 2018 outlook, moving on to Page 25. Despite the current uncertainties of the global market, the group confirms expectation that it will outperform the market at constant exchange rates. So we removed the moderately outperformed what we had before. The group expects to achieve full year of net result in line with that of 20 17 despite the increases in the cost of raw materials and the adverse impact of exchange rates. So we are confirming our guidance, which we had given at the end of the 1st 6 months. And we also want to highlight that the group expects to have positive free cash flow in the Q4 and we are not recuperating some of the working capital that we didn't have in the Q3. Well, this is what I wanted to tell you with this business presentation and together with Jean Alvaro, we'll be happy to answer any questions you may have. Thank you very much. Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. The first question comes from Monica Bosio with Bancaene. Please go ahead. Good evening, everyone, and thanks for the indication on the factoring. I would have a few questions. The first one is on the growth of your reference market. Over the 9 months, your reference markets had a growth of 0.8%. I was wondering if you can give us some indication on the growth by year end. It could be even lower than 0.8%, I don't know. And some flavor on 2019. And the second question is on the impact of the commodities. In the 1st 9 months, the impact was negative for EUR 9,000,000. Maybe you told, but I lost that part. You are expecting to recover part of the commodity rise in the 4th quarter. Can you just quantify the impact of the rise of the raw materials in the 3rd quarter? And how much of the total increase over the year are you expecting to recover by the last quarter? The third question is on the tax rate. It seems to me that it was quite high in the Q3. If you can give us an explanation and an indication by year end. And the very last is on Mexico and Morocco. Morocco will be operative in 2019, if I remember right. And can you give us an indication of the revenue contribution of Morocco and of Mexico for the next year? Thank you very much. Hello, Monica. Thank you very much for your question. So on the reference markets, what we see for the full year is the reference market of going up 0.7%. 0.7? Yes. On the commodities, we have communicated the impact on our P and L of €6,000,000 at the end of the 1st semester, €9,000,000 for the 9 months. So basically, the additional impact versus last year is EUR 3,000,000. What we expect to recuperate in the 4th quarter could be upwards from EUR 2,000,000. Okay. Did I answer your first two questions? Yes, sir. Now we hand over to Ivan for the tax rate. Thank you. Hi, Monica. Hello. It is true that at the end of the 1st 9 months, we had a high tax rate, which is in the region of 41.6%, so above what we expected. Actually, what happened is that we have 3 elements. 1 is Morocco, which is a start up. Until we have the country up and running, we are not going to activate losses, deferred tax losses. So it impacts our tax rate. The second one is India. India, as you understood, we had to adjust the purchase price of India and this went through financial results for EUR 1,800,000 and there is no tax impact on this. And the third one is there is one country in which we are incurring losses, which is aggressive, in which we have lost €5,000,000 So we are aiming at going for breakeven in Brazil next year. Without these three elements, 2 of which Malco and India will vanish next year, The tax rate would have been 35%. In terms of full year vision, we are shooting we are now shooting for the tax rate for the whole year in the region of 41%. 41%. Okay. Thank you. Your last question concerning Morocco, we expect next year more than €20,000,000 of sales for next year. Concerning Mexico, it is a bit early to say because we are looking at different options. Based on what the outcome will be for the implementation of the new agreements in North America between Mexico and Canada. For the time being, the messages we get from our customers is that our Mexican location is fine and we have no sign of either volume reduction or production transfer out of Mexico into the U. S. But we are carefully reviewing the situation. That's why it's a bit early to tell you the final expectation for Mexico. Okay. Thank you very much. Very clear. Thank you. The next question comes from Martino De Ambroggi with Equita. The first question is on the guidance at EBITDA level. In the last call, you mentioned to be able to generate an EBITDA in excess of what recorded in the second half of the last year, which means roughly more than 197,000,000 Do you confirm this figure for the visibility that you have right now? Yes. So at the end of Q3, we are at EUR153 1,000,000. We now plan to land in the region of EUR 200,000,000 for the full year, excluding EUR 6,600,000 from the claims. Okay. Including the 6.6%. Okay. Always on the guidance because you are reiterating the flattish net profit for the full year, which means roughly 27,000,000 dollars Last time, I remember, you mentioned no recurring costs that I estimated around €5,000,000 for, I suppose the plant that you recently announced to be sold. But during the last call, you still didn't include, I suppose, the €6,600,000 for the claim check settlement. So just to understand, you are confirming this figure, but this figure, the previous quarter, didn't include the $6,600,000 of the Jumbo settlement. Previous figures did include an amount of the settlement of the claim. The final settlement was more favorable. And now the new guidance in the region of €200,000,000 includes the full amount of investment, let's just say €6,600,000,000 That's for the EBITDA. And for the net, we confirm our guidance that the net, including the impact of the settlement and including the sale of the plant, would leave the region of the natural resources assets. Okay. The last question is on projections. So now you have solved the issue of the jumbo claims. So I was wondering what your attitude on one M and A going forward, if you are actively looking at something? 2, a buyback, if it's something you could take into account and 3, a business plan presentation if and when eventually you are planning such an event? Thank you, Martino. As far as sales M and A, as has been communicated by the full year and by Monica Mondani, we are actually looking at different opportunities for those 3 business units. We are looking on a regular basis to, I would say, 3 or 4 different sites. So far, none of them has been convincing enough. The 3 criteria on which we are searching is the customer. Do we, through these potential deals, and reach our customer portfolio or move ahead in our target of growing premium car manufacturer while keeping balanced portfolio with Sunrise. The second criteria which we're looking at is the geography. You know that today, so you see it's very strong in Europe, which is a good thing. In North America, we are quite balanced compared with the car production. And in Asia, 10% of our sales were basically 60% of the world car production. So this is certainly the area where we have the highest two point in it. Then the 3rd dimension for which we are looking actually at M and A is, of course, technology. Technologies are evolving and we are looking at different options in terms of accelerating our growth, especially where we are challengers or where we are leaders to have a stronger position. But for the time being, we have nothing to announce on the M and A side, but it continues to be one of our important activities. We are looking at different files, either they are coming on the market or it is subjects which we are initiating by ourselves because we believe that could create synergies for Surgessy. So this is the answer to your first point. Answering your second question on the buyback, which is a perfectly legitimate question. As you understood in the Q3, our working cap was not so great. So certainly it was not the time. We have a good target of recuperation for the Q4. I would say we first need to stabilize our cash generation and then we'll be able to look in a quiet way to see if share buyback is a good option. Certainly, at the value as it is today, it is an interesting option. But first, let's fix the cash generation from the operations before we look at it. Now in terms of business plan, we do not have a date for business plan presentation. I think we have given you a bit more guidance than we did before, both for the end of the year, that's what we did at the end of the semester. We are doing the same. So if we don't go for a full business plan presentation, the question will be whether we give you some more guidance when we present our results in February for the full year and give guidance for next year. But we got your message. Okay. If I may, just a follow-up on the free cash flow. What do you consider a satisfactory free cash flow or, as you mentioned stabilized free cash flow before thinking about buyback? You see that this year we had some massive effects like India, for instance, we had an important element with Morocco. So we don't have this every year. Last year, we had a strong free cash flow. This year, we are aiming at a lower number due to the coupon we had in the first 9 months. We're probably able to tell you something on this in February. Okay. Thank you. The next question comes from Roland Kuehnen with Value Holdings. Please go ahead. Yes, good afternoon from my side. First question would be on add on question on the free cash flow and on the purchase of the minorities in India. Could you give me a hint where do I find this number in the free cash flow statement? Because nearly the same numbers of the free cash flow from investing we see than last year. So EUR 25,000,000 intangibles and EUR 66,000,000 in intangible assets. And the second question would be on the depreciation in the Q3. If my calculations are right, these depreciations are €3,000,000 higher than last year. What are the reasons? I have in mind that you told us in the Q2 call that you are working on specific operations, but could not be more precise on this. Maybe you could be more precise in this call. Thanks a lot. Okay. Ron, Elszewski speaking. So I will just answer the last point. As far as the operation we are talking about is we are looking at the disposal of plants in France, which is supplying air ducts. This is part of our air and cooling business. The base technology for these plants is the blow molding technology. There are 2 ways to do ducts. You can do them by blow molding, which is for hollow parts is a typical technology or you could do them by injection. So what we are looking at proposing is this plant in France, which is in the Vosges region. The name of the plant location is called Fraise, s r a I v e. Where are we in the process? We have found a potential buyer, which is a Turkish company called Husler. This company is specialized in blowering. And this company has an interest in taking over this plant and putting there some new business of global engineering based on the competencies that we have developed. And as for us, we are concentrating on the intake manifold and on the cooling, which is basically the pumps, the water outlet housing, the valves and the injected ducts. We look forward to sell this plant and that's the operation we intend to close at the end of the year. This is for the operation which is ongoing. Now I would like to hand over to Jan to answer your 3 remaining questions, which is the free cash flow, the purchase of minority and the depreciation in the Q1. So the purchase of minority shareholders, it's quite simple right now. We had minority shareholder with 30% of our Indian subsidiary. They had a good option. They exercised it at the end of October of last year. And therefore, we have done a valuation for this business, which is a booming business. This business is growing by 24% this year. It has an EBITDA in the region of 20%. So it's a solid business. And we bought the 7% for an amount of EUR 16,800,000. Parts of that amount hit our results this year because we had factors for EUR 15,000,000 in the 2017 year end results. And since the business improved in 2018, it improved the valuation of the business and the value of the business. In terms of D and A, you're right. In Q3, we had EUR 3,000,000,000 more D and A than we had last year. The reason is quite simple as we are investing more over here. This has a point translate into more D and A. There is also a secondary impact, which is as we've moved to IFRS 15 this year, IFRS 15 has a strong impact on such a scheme in a way. Tooting used to go through the gross margin. Now it is capitalized and amortized over 4 years. And so you will see a recurringly more D and A than we used to have before the implementation of IFRS 15. But IFRS 15 has no cash impact. It's just an accounting matter. Okay. That's clear. But the year 2017 was recalculated. So the most part of the delta of EUR 3,000,000 comparing with 2017 coming from the investments you told me? It's more intangible CapEx and more intangible CapEx over the last few years. Okay. So the nearly EUR 30,000,000 in depreciation is more or less a run rate for the next quarters then? You might get €1,000,000 more in Q4. Okay. Thanks a lot. That's clear. Gentlemen, there are no more questions registered at this time. Well, thank you very much. If there are no more questions for today, I would like to thank very much all the participants. I wish you a good evening, and we look forward to have you again online for the results of the full year, which will be announced in February. Thank you very much. Have a good evening, everybody. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.