Earnings Call: H1 2018

Jul 24, 2018

Afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the 4 JV First Quarter 2018 Results Conference Call. As a reminder, all participants are At this time, I would like to turn the conference over to Mr. Laurent Hedenstrait, CEO of CJP. Please go ahead, sir. Hello, Laurence Del Stret speaking. I am together here with Stefano Cano, Investor Relations and Pierre Mel Blanc, Chief Financial Officer Laurent Ben Stel, Chief Executive Officer of SurjeFy. Welcome to this first half year twenty eighteen conference call. I would like to use Page 3 of the presentation, which is called First Half Year twenty eighteen Highlights. We are pleased to report revenues at constant exchange rates up 3.2% at €139,100,000 outperforming the market. The world market production for passenger cars vehicles grew by +1.7 percent. So this is a significant outperformance for Sergey The EBITDA at €104,000,000 at 12.4%, it came out lower than last year with 2 main effects to which I will come back. 1 is a foreign exchange, the other one is the increase of the steel costs. EBIT for the same reasons came out as 5.3%, EUR 44,400,000 net results at €17,000,000 compared with €19,400,000 So we can say on the P and L side that despite negative wins headwinds from foreign exchange and from the increase of the steel prices, steel costs. So you see results come out with a net result at €17,000,000 in the first half. The free cash flow came out at €3,900,000 We had a very strong cash flow last year of €19,000,000 in the first half. We will come out later in the presentation on why we have the difference. Some of it comes, of course, from lower profitability, which we have mentioned before and the others mainly from effects of investments. The debt to EBITDA ratio came out at 1.3 compared to 1.5 before, which is a positive sign that the financial situation of the company overall continues to improve. So two positive highlights over performance of the sales improvement of the debt on EBITDA ratio on the negative side, pressure on the foreign exchange and on the steel. If we look now at Page 4, what we see on Page 4 is the sales by business unit. We insist on this because we have in this first half year a divergence in the performance of the business unit, which starts with the sales. At constant exchange rate, suspension was growing 7.1%. This is where we have the major negative impact on the steel. Suspension is impacted by the foreign exchange. You see that in the difference between the 7.1% at constant sectionary and the 1.9% growth as reported. On filtration, we had a growth of 2.7%, so still higher than the market. And we see also the impact of the foreign exchange because we report at current exchange rate a decline of minus 4%. And last but not least, Air and cooling at constant exchange rate is showing a reduction of 1.2%. At constant exchange rate, the effect is mostly due to North America, where in the first half year, we didn't have we had a reduction of our sales, which is linked to the phase out of a product and the phase in of this product, which will come in the second half. It's an air intake manifold for the North American market. Due to foreign exchange impact on Air and Cooling, the decline at current exchange rate was 5.1%. We also highlighted Q2. We are ready to answer your questions on the Q2 compared with the Q1, which was quite different than last year. Because in the second quarter, actually, we had an increase in activity compared with the Q1. We had more activity, but we had much stronger impact of the foreign exchange. Moving on to the revenues by geographical area. What I would like to highlight is mainly North America, which is at constant exchange rates, growing 1.6%, whereas the reference market has been declining by minus 2.9%. This refers also to my comment on urine cooling, which is more exposed to North America before. As far as Asia is concerned, we still have nice growth at 13.5% at constant exchange rate. And in South America, with reference production market at 10.7%, You can look at the glass half full or half empty. Half full is at constant exchange rate 13.5% increase. At reported change current exchange rate minus 14%. So our exposure to South America is, of course, higher exposure in terms of foreign exchange impact due to the fluctuation of the Argentinean peso and the Brazilian reais. Moving on to the results on Page 6. We just highlight here that the value of the impact of the exchange rate in the first half is €5,400,000 in terms of results. The negative impact of higher steel prices is €6,000,000 on the first half. Which was €3,000,000 in the Q1, €3,000,000 in the second quarter. So therefore, we had €6,000,000 Unfortunately, we have not been able yet to close the gap on the steel, which is impacting negatively. And as you see, our EBITDA is going down €10,000,000 So we have here 2 variances of €11,400,000 compared with the €10,000,000 reduction which we are showing. On the net income, just commenting on the fact that this was after €11,800,000 of tax expenses in 2018, down from 14.9 percent. We are in line with what Jan indicated as a normalization of our tax expenses going forward. Moving on by business unit on Page 7. The results, we are missing €10,000,000 on EBITDA, but actually Air and Cooling is improving in percentage very significantly from 15.5 to 16.2. Flutization is improving slightly despite the negative impact of the exchange rate. And we see clearly that our program is in suspensions where the main issue is steel. We also have other negative effects as far as productivity is concerned in suspensions. Moving on to the free cash flow. Maybe, again, you would like to comment on the Page 8. So on free cash flow, the main difference is the start up of 2 new plants. The main one is Morocco, which we already commented with a cash burn in the first half of EUR 9,000,000, which, of course, didn't exist a year ago. And the second is the EUR 3,000,000 cash burn for an expansion of a plant in Slovenia. So these 2 new plants explain €12,000,000 out of the €15,000,000 adverse difference versus prior year. The rest is partly linked to less profitability, but mainly to working cap impacts, which we are going to improve in the second half. Thank you, Ian. Moving on in terms of perspectives beyond the financial results to provide a broader perspective, I would like to go to Page 10. In the last 3 years, we have been doing 3 things at SUEZY. We've been improving profitability, currently facing some headwinds on steel and on foreign exchange. We have been investing in new plans to build a competitive footprint for the future. And we have been refocusing our efforts on technology and growing with Daimler and with BMW. So we are pleased to report here growth with Daimler, which is very satisfactory. This is mainly driven by air and cooling, where we have the start of a new engine, which is an engine which is common between Daimler and Renault Nissan Group. It is a gasoline engine where we supply the intake manifold. This is a market share increase for intake manifold at Daimler. So this is satisfactory. I'll be happy to answer if there are questions on the variations with the other customers. Moving on, on Page 11, as far as product and leverage, we put an overview of our position in terms of the different positions we are having, where with products where we are in the harvest strategy, which is mainly the fuel filters, the positions where we are in the Challenger, where we have more growth opportunities and the positions where we have clear leadership positions being number 2 worldwide in the manifold, number 2 in Europe on step bars, number 4 worldwide on the oil filters and number 1 in France in the aftermarket with the Pure fragrance. We continue our efforts to increase profitability with 4 elements. We've changed a little bit the presentation here. Purchasing has not changed. Short floor, we've included our efforts on Industry 4.7 4.0 and digitalization. I will come back to that. We've changed the wording on the point number 3, which is which we call pricing power, which is not just a change of wording, it was program management, who was there in number 3. The idea is that our efforts on pricing not only are focused on programs, but are also focused on current products. The case of the steel is a good case in point, but we are also having a broader initiative, which we will deploy during the second half of the year on working on the pricing power of the 3 business units of Sogenti as we anticipate a continuation of the tensions on the raw materials as well as the energy costs and the labor costs going forward. Therefore, that's why we've changed the orientation of these initiatives to be initiatives on pricing power. On point number 4, indirect cost reduction is continuing. As Jan was saying, we are starting 2 new plants. So of course, this has an impact of increasing the cost, but if you look at the cost in the existing plants, we continue our program on reducing the indirect cost. As far as the cost reduction plan, which is on the shop floor, which is item number 2 of this plan, if we move to Page 13, we have recalculated the perspective of the cost reduction that we plan to extract from the plant. And we now project €75,000,000 of cost reduction targets over the next 5 years. That means out of the €100,000,000 of addressable costs, we are now targeting €75,000,000 in the next 5 years. Continuing with the digital initiatives on Page 14, we have been successfully rolling out automated guided vehicles in Montreal. We are moving on the dematerialization of production boards. We are deploying several initiatives on the Internet of Things. We now have multiple cobots, which are robots, which are human friendly in the plants in Orbea, in Lugerne, in Sao Antonio. We are developing SmartVision in Ville, in Dwea, in Alvesua and in Marseillac and 3 d printing in Orbea as we believe that the end cooling products is where we could see a real impact of the digitization initiatives. If you go to Page 15 now, which is our 2 main initiatives as far as competitive cost country, the competitive footprint. Mexico is continuing its growth mainly for expansion. And as Jan was saying, the cash burn for inflation in Morocco is €9,000,000 We had almost 0 sales in the first half of the year. We expect the sales from Morocco next year to be around €25,000,000 with much higher profitability than the average of Surgencies today. Moving on to Page 16. We continue working out on the Hungary and Romania for the large plants in suspension. And as we are currently negotiating with both governments, we cannot announce more in here. The goal is to have these plants being in operation, producing the first parts for presales in 2019 with a significant volumes coming up in 2020. As far as business news, we are actively working on the evolution of the powertrain evolutions. We remind on Page 18 that we are working on 4 categories. We are working on pure internal combustion engine, on hybrids, which are also using commercial engine, on battery electric vehicle and on fuel cell electric vehicles. A short reminder on Page 19 of 2 press releases. 1 on the battery pack cooling manifold for Renault Nissan, which was an innovative solution which we developed for Nissan and one on the engine coolant pump for hybrid engines, new generation of engines for Volvo, which is optimized for hybrid and where Sorelasty was chosen, which is interesting for us as it is both a premium customer and a leading customer as far as going to new energy vehicles, and this will be produced in China. Moving on to the last page of the presentation, which is the outlook. Despite the current uncertainties in the gold car market, the group confirms the expectation that it will moderately outperform the market at constant exchange rates. Although you've seen that in the first half, it was more than a moderate over performance. Thanks to the growth initially in Mexico and in Morocco. The group also foresees net results on a full year basis in line with that of 2017, despite the increases in the cost of raw materials and the adverse exchange rate. Thank you very much for your attention. Jan Albrond and myself will be happy to take your questions. This is the conference. Operator, The first question comes from Monica Dozio with Vancaina. Please go ahead. Good afternoon, everyone, and thanks for taking my questions. Actually, I have a few ones. The first is related to Europe in the second quarter. Can you please comment a little bit on the performance of the project in Europe in the second quarter, which at constant exchange rates was at plus 1.3 percent, while the reference market production was up by 4.7%. The second question is related to the EBITDA margin in the 2nd quarter, which sat at 12.1%. Well, if I remember well, in occasion of the Q1 results, the company was expecting a trend in line with the Q1, which was at 12.6%. I can imagine that this is due to the sea prices and to the fact that there is no any kind of reversion so far. I know it's a difficult question, but I would appreciate if you can give us some highlights on what do you expect in terms of margins for the second half of the year. The second question is on restructuring. Restructuring were quite low also in the Q2. I'm still wondering if you stick with your target of total restructuring of maximum €10,000,000 for the full year? Or are you guiding for something lower? And the very last is on the total CapEx. Can we imagine a total CapEx tangibles and intangibles by the end of the year in the range of EUR 130,000,000 And the tax rate, it has been particularly high in the second quarter. I remember that Jan guided for something in the region of 30% by the end of the year. I'm just wondering if this is still the case. Thank you very much. Thank you, Monica. Hello. On the Q2 sales, you're right. One of the factors which in Q2 is aftermarket. In aftermarket in Europe, one of our large customers has pulled forward the promotion, which was usually done in the 2nd quarter, which was done in the Q1 actually. So this is an important factor. I remind everybody that in the filtration, aftermarket in total represents 60% of the sales, OEM represents 40%. So if we compare with car production, in the case of aftermarket, the comparison is difficult because the same in aftermarket basically, they have nothing to do with the production of the period. They have to do with the car park and with other factors. So what has happened is, as I mentioned, we had a pull ahead of the sales in aftermarket in Q1 rather than in Q2. This is one of the factors which explains why the sales come out lower than the evolution of the market. Now on the EBITDA in Q2, you are right. This is mainly the steel impact because we had again negative impact of €3,000,000 remaining in our numbers. What I can tell you is that towards the end of the second quarter that's not booked in this quarter, we started to have some progress, limited progress on the negotiation on the steel pricing. And I don't know if you're saying you want to answer now or later on the H2 EBITDA indications. On the EBITDA, we plan to be EBITDA of last year in the second half, slightly above. As far as the comparison, Monique, you also have to remind that last year, the gross margin of the Q2 was quite good, much higher than the EBITDA than the gross margin of the Q1 or the variable margin. So when we compare quarter to quarter, there is an effect of last year, both in terms of volumes and in terms of percentage of gross margin. Sorry to interrupt you. I didn't catch Jan answer, unfortunately, because the volume was really low for the second half. So Monica, what we plan to do in the second half is to beat the EBITDA in the second half of last year. Okay. Thanks. Okay. On the restructuring outlook, Yan? On the restructuring, we plan to be roughly in line with the restructuring we have in Virgo. 1 year ago, okay. On a full year. On a full year. On the CapEx, now we have in the CapEx the tooling, which due to the EFS, which is changing a bit the understanding. If we are talking of tangible CapEx outside of Vitruvio, which is the first important element, due to the fact that the cash generation situation in the first half was not as good as we expected. We've been focusing on limiting our CapEx, on tangible CapEx for the full year. We are aiming to be flat, whereas in the first half, we have an increase of €4,000,000 So that's for tangibles. And for intangibles, because we were expecting, in general, total CapEx, including intangibles, well above EUR 100,000,000. So I was wondering if you can give us some indications also for the intangibles. On tangible plus intangible, we are still going for slightly more than EUR 100,000,000. Okay. But not €130,000,000 €130,000,000 with the tooling. With the tooling. Because what you have to take in consideration is due to the EFS, now tooling is in CapEx. Yes. So 130 with the tooling. It's slightly above 130 including the tooling. Perfect. The main element Laurent just mentioned is that on tangible CapEx, we decided to limit our capital investment during the second half of the year in order to land roughly at the same level as last year on a full year basis. Okay. As far as intangible, what we are talking about is capitalization mostly of R and D. We have continued to increase R and D during the first half year. The fact that we have headwinds on foreign exchange and steel does not prevent us to continue to take the right decision as far as the future of the company is concerned on increasing the R and D investments in line with the technology presentation of last year. Okay. On income tax, Monika, last year, we had a global ratio of 43%. We are still shooting for an improvement. It's not going to be as good as we planned. So it's a question of where we generate the profits and how we generate some losses. So we are more shooting for an income tax rate on a global basis between 37% 38%. 37%. Okay. Thank you very much. The next question is from Henao Gorgelo with Fidentiis. Please go ahead. Yes, good afternoon. Well, my first question is on European market. Looking at the second half of the year, if you expect to narrow somewhat the gap versus the total market? And related to this, if you are seeing any further disruption related to the new rules for emission tests? And if you are seeing any disruption also related to the potential duties on European carmakers, U. S. Duties? Then my second question is on profitability. So apart from the fuel costs, if I understood, you were talking also about some issues on profitability for the suspensions. Could you please give us any more color on it? And then my third question is on M and A. If you just can give us an update if you're seeing more opportunities around us in terms of valuation? Thank you. Thank you. What we are projecting as far as volumes in the second half is, I would say, according to IHS, at a worldwide level, little bit more growth than was in the first half. In the first half, we had 1.7% growth of the world market. And we project for the full year, we project 2.1% for the full year, which means that the second half like for like is a bit more growth at the worldwide level. You're right, there are some uncertainties on WLTP and the new test cycle and emissions. We do not see major disruptions for suggesting right now. Basically, the disruptions which customers are having with cars, they put on car park, waiting for emissions is so far not impacting us. From the latest release we received from the customer in July, there is no sign that there would be significant disruptions. We are expecting to know more beginning of September, I would say beginning to mid of September when the customers will release their forecast for the end of the year. By now, we will see more of what's going on. But so far, we do not expect significant disruptions for Suezi on volumes on H2. On the profitability of the suspensions, it's you're right, there are 2 issues. The €6,000,000 of deterioration of the steel impact is not the full story because we also have in suspensions, higher quality requirements from our customers. And this is generating for the time being more quality walls and more costs inside the company. That means the quality we deliver is according to what the customer expect, but at higher cost for services. So this is something we are working as a priority to resolve over the second half year. Coming to the mergers and acquisitions. What we see is a continuation of the trends with some players going pure play on powertrain with the move of Continental announcing that they will separate their activity for Powertrain, following the move which Delphi has done already. So far, what we observe on the market is there are not very many transactions coming through for probably reasons that a number of investors or firms look at the market as being probably towards the peak of the production volumes worldwide. Although we continue to have some growth, There is no expectation of significant growth, potential downside. And therefore, although there are more assets for sale, we will see more files. There are not more deals coming through as everyone is more watchful. I confirm that we continue in the logic that was communicated last year by Monique Mondragon and this year again by Rodolfo de la Veneti to look at various files. Nothing new to communicate at this point to investors. Thank you. If any, just one follow-up. On Morocco, you are targeting 25,000,000 sales next year. I was wondering when you do expect to reach full production utilization? Thank you. Our initial plan for the phase one of Morocco was calling for €30,000,000 I think we will be in the full rhythm to 25 total for the year, which will be lower at the beginning and higher at the end. So I think we'll be full speed in 2020 in Morocco. The next question is from Alexsane Roveredi with Kepler. Please go ahead. Good afternoon, gentlemen. I've got two questions. The first one, could you please confirm that you expect for the full year global production at 2%? Because I think you were slightly more cautious on that side. And the second one, what is the impact from the start up costs in the P and L? Because I saw the impact on the cash flow, but not on the P and L. Thank you. Thank you. I'm not sure if I heard the correctly because it sounds very good. Your first question, could you please repeat the question, the first question? Yes, sure. It was on the your expectation for the auto production this year. Could you please confirm that you expect 2% because I thought you were slightly more cautious? We expect 2% growth for the car production worldwide, yes. Okay. Thanks. Which is IHS, it's not specific to Surgesis. Okay. So it's usually used as a base. On the startup costs on the P and L, Ian, we said €9,000,000 for cash impact. Of which how much in the P and L? In the first half of twenty eighteen, we had fixed cost without revenue of roughly €1,000,000 in Morocco. Okay. Thank you. The next question is from Martino De Ambroggi with EBITDA. Please go ahead. Thank you. Good afternoon, everybody. On your net profit guidance for the full year, which please stop me if I'm wrong, now is in the region of 27,000,000 roughly €27,000,000 in line with last year. So that's the starting point. Just to understand, 1st of all, which is the underlying assumption of EBIT that you have in your mind for this net profit guidance? Martino, we said in terms of EBITDA that once we were €10,000,000 down in the first half, we expected to beat the years ago numbers in the second half. And so that's what we have stated. In terms of EBIT, it will be slightly different because in the second half, we'll have one off impact below EBITDA. Referring to? Referring operations. Because I'm trying to reconfiliate the net profit. So you mentioned tax rate now is 36 percent, 38 percent for the full year. In my notes, I had a previous indication in the region of 30%. So this is one of the reasons why there should be such a difference. Am I right, the 38%, 36% is just for the current year? Yes. And going forward, which could be the normalized tax rate? Normalized should further decrease. It's already decreases in 2018 versus 2017, and it's meant to still go down in the following years. But there is a point of arrival that you have in mind? Between 30% 33%, depending on the countries. Okay. And the difference between your previous indication and the current one is due to? It's simply when you have pretax result, it depends what is made of. And it usually is a mix of profits and of losses. And in some countries, we still are running at losses and we have more losses. And therefore, the ratio between taxes and pretax at the end really is higher. Okay. There is nothing structural? No, no, it's structural. This is geographic. This is geographic, dollars €1,000,000 I would say. And always on the full year guidance, what are your assumptions on raw materials? Do you have the €6,000,000 negative impact in the first half? And ForEx? What we have in the second half, as Jan said, is as a forecast, is a moderate improvement of the situation. But I would not venture into giving exact numbers as this is a continuous fight with our suppliers on one side and with the customers on the other side. As I indicated in the beginning of the call towards the end of the second quarter, we get some more positive elements from the customers as far as taking into account the steel price increases. But it's not a number that I'm willing to share publicly. Okay. I remember in your previous call, you mentioned to be able to recover at least 50% of the increase in steel price. In your initial remarks, you mentioned that is probably becoming more difficult than initially expected. So the impact that you had in the first half and what you will have in the full year is mainly due to the impossible it's not possible to recover the 50% you expected or it's just a delay, but you are still confident in getting your goal? Okay. There are 2 thank you for precise question because it's a complex matter. As far as the percentage is concerned, we have achieved 50% at the end of the first half. But the steel price has continued to increase in Q2 and therefore the negative EUR 3,000,000 of the 2nd quarter is higher than what we expected with the 50%, because 50% of X if the X is higher, of course, the negative impact remain higher. So what we are aiming at for going forward is not to stay at 50%, is to go more towards 70% to 75% recovery for next year. So it's up to us between now and the end of the year to obtain from the car manufacturer the recognition of 70% to 75% of the steel. We see a continuation of the steel increase in Q3. Therefore, that's why in order to improve our results, we need to improve the percentage of the recover as well. If we would say at 60% of the results with the gain deteriorate. I don't know if you can't clear my situation. Yes, it's a difficult issue. A very quick question on Brazil. You didn't mention any impact or you didn't quantify any impact from the strike that stopped the production for several days. So it shouldn't be a relevant impact. It was a relevant impact in the Q2 because during the month of May, we had a stoppage of basically 10 days of production out of normally 20 days of production in a month. We had half of the sales, normal sales in Brazil from the month of May. It's part of the reasons why the Q2 was weak is because, of course, we could not diabolize 50% of our costs within 10 days, meaning that this strike was a wild strike, it was not expected and not planned by anyone. So this has impacted both the sales, but it's also impacted in terms of cash flow because the shock of the strike has created disruptions continuing inside June. And part of our overstock at the end of June is linked in Marco Sur with the strike, which has happened in May. Therefore, it was a significant event of the Q2. Yes, but you didn't quantify it even roughly. Just on Brazil, we had a cash burn of roughly EUR 2,000,000 which was linked to the general strike, which we are going to have to fix in the second half. Okay. Very last on the Indian put option exercise, no news was EUR 15,000,000 to be cashed out in the second half? Discussion is still ongoing. Price to be more in the region of 15 plus, likely to happen in the coming weeks or months, but not yet finalized. We have not reached a full agreement on the final price of the 30 percent. Okay. Thank you. The next question is from Gabriel De Gambaira with Bank Acres. Please go ahead. Yes, good afternoon. Thanks for taking my questions. Just a couple. The first one is on the free cash flow you expect for this year. Can you share with us a target you have in mind? And the second one is on the suspension plan you are you want to create to build in Eastern Europe, if it is possible to understand what could be the contribution in 2019 and basically a full steam in 2020 to your P and L? Thanks. So maybe I'm going to take the one on numbers. So on free cash flow in the second half, leaving aside cash in or cash out linked to variations of perimeter, I'm referring mainly to India, we expect a free cash flow on the second half, roughly in line with that of the second half of last year, which was EUR 15,400,000. Concerning the suspension plant in Eastern Europe, thank you for the question, it's a very important element. But it is a bit early as long as we've not finalized negotiations on the localization of the plants with rather holes and then give you a full package communication on the investment in the suspension plans in Eastern Europe. Until now, it was Eastern Europe, Middle East, Africa. Now it's clear that it's Eastern Europe. Now it's between Hungary and Romania. So I expect that before the end of the year, we'll be able to communicate full scope on this project as we've been doing for the other projects. So it's just a bit early. Okay. And just a quick follow-up on this. You have been speaking about this project since at least 9 months. Is the overall process on time? Do you have any specific issue? Or I mean, is it everything okay with this? Yes. It is everything okay with this. The reason why it's taking time before we announce it is the fact that as this is a significant investment, we want to extract the best possible conditions from the host country. And that is taking time to be finalized. Okay. Thank you. The next question is from Roland Creanen with Value Holdings. Please go ahead. Yes, good afternoon from my side. Thanks for taking my question. A follow-up on the question or your comments on the results for the second half twenty eighteen. I didn't catch it rightly. You said something about extra burden between EBITDA and EBIT in the second half of the year. Am I right? Or please, could you be a bit more precise on that? I was not too specific on what is going to happen EBITDA. What I said before is that we plan to beat the EBITDA the first of the first half of the second half of last year in 2018. But we are working on an operation which will have an impact below EBITDA. But at this stage, I can't say anymore. Okay. Thanks. So thank you very much to everybody for participating in this call. And I look forward to be again in contact with you for the call at the end of October for the results of the 3rd quarter. I wish all of you good vacations as I guess most of you will take some days of rest before we started again at the end of August. Thank you very much to everybody.