Earnings Call: H2 2017

Feb 26, 2018

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Progyny Full Year 2017 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 Hennstreit, Chief Executive Officer of Steljet. Please go ahead, sir. Thank you. Hello, Laurent D'Estrees speaking. I'm here with Jan Albrands, our Chief Financial Officer and Stefano Cano, our Investor Relations Officer. I would like to start the presentation going on Page 2 of the document, which has just been released, the 2017 highlights. Our revenues are up in 2017 by 6.2 percent at €1,672,000,000 And at constant exchange rate, they are up 7.5% compared with the market growing around 2%. So it's 5 points of growth above the market. EBITDA is up 8.6% and reaches 9.9 percent. The EBITDA the EBIT, sorry, at €85,400,000 is up 14.6%, reaching 5.1 percent of sales and the net result, which is €26,600,000 versus €9,300,000 in 2016. Last but not least, cash is king. The free cash flow at €34,400,000 versus €31,200,000 in 2016. I would like to make 2 comments here before I hand over to our CFO, Yanivain. The investments, the tangible CapEx investments in 2017 were €68,000,000 If you add €68,000,000 to €34,000,000 of net free cash flow, you see that the net cash generation before capital expend tangible capital expenditures exceeded €100,000,000 I think it's an interesting number to remember as this is to be compared with what it was last year. The €31,200,000 of free cash flow of last year included around €16,000,000 of one off. That means the real net free cash flow generation net of the one off was €15,000,000 If you add this with the capital expenditures of last year, you will reach €75,000,000 That means that between last year and this year, the cash flow generation of SOGICI has improved by €25,000,000 And €25,000,000 is close to 1.5 points of sales. And this is a larger number than the growth in the EBITDA. So now I will hand I will continue in telling you the sales of our business unit. On Page 3, you see that suspensions achieved 36% of our total sales, filtration 34% and including 30%. As far as customers, it was a year of growth and strong growth with the Fiat Chrysler Group, mainly driven by suspensions with the ship compass in Europe and China and in the new plant in Mexico. If you go to Page 5, we see that the growth of the business unit were different. You see that the at constant exchange rates, which is comparable with the market, Air and Cooling grew 5.6%, filtration grew 7.1% and suspension grew 8.9%, which combined is the 7.3% of growth at constant exchange rate for the year 2017. Now if we look on Page 6, the revenues by geographic area, we have a different picture showing that in Europe at constant exchange rate, sogepi grew at 5%, which is higher than the market. In North America at 3.3%, also higher than the market in South America at 16.1% with a strong growth continued in Asia at 23.3%. We have an interesting table on Page 6, which compares the growth at constant exchange rate. And what you see that at constant exchange rate quarter by quarter, the Q1 showed double digit growth. The Q2 and the 3rd quarter were comparable with again a substantial growth in the 4th quarter. The difference between the 9.4% at constant exchange rate and the 6% reported change during Q4 is an indication of the importance of the foreign exchange on the numbers of Surgesis, which Jean Laurent will now detail for you. Yes? Thank you, Laurent. Moving on to Page 7. Before we get into the full year results, we wanted to highlight what happened in Q4 2017 versus the previous quarter. So as Laurent just mentioned, sales did well because ahead of last year at constant exchange rate by 9%, but versus the previous quarter still up by 6.5%. Contribution margin held, it actually increased from 28.2% to 28.4%, which is good news. Then at EBITDA level, we had some items which did not impact previous quarters. You can see that EBITDA which was 9.5 percent in Q3 went down to 8.4%. Actually what happened, despite good sales and better contribution margin, we had 2 elements which struck Q4. In Q4, we booked an accrual of €3,000,000 on the litigation of an administrative nature linked to past activities in the filtration BU. So something it's a one off hopefully and it's something we uncovered in 2017 and which we hope to clear shortly. The second point, which is starting to impact us is the strong euro. As strategy is mainly European based, we have most of our fixed cost in Europe whilst a significant part of our sales come from non European countries. And therefore, this starts to give us a lower absorption of our fixed costs just due to exchange rate. And since we are facing a strong euro in 2018, this might continue to impact us in the coming year. Going down below EBITDA, as we do every 6 months, we do an impairment test of our intangibles. And in the month of December, we booked a €3,000,000 write off of intangibles. So it's research and development, which we believed we need to take out of our balance sheet. Then when we go below EBIT, in financial expenses, you see that we had a €6,400,000 charge in Q3 and a €12,400,000 charge in Q4. What happened? In Q4, a one off, which is coming from the revaluation of the fair value of what we call India put option. In India, we hold 70% of 1 of our businesses and the minority shareholder has exercised his put option and we every year revalue this option and considering better prospects in the coming years, this gives rise to the charge of 6,000,000 to increase the value of the businesses we are going to buy by €6,000,000 So this is sitting in Q4. It won't hit normally the coming year because we believe we now are at the fair value of that business. Moving on to Page 8. Back to full year basis. So on a full year basis, you can see that the contribution margin went up by 5.4% in 2017 despite various impacts linked to the increase of the cost of steel. This mainly impacted our suspensions BU, which has a very significant share of its sales in material, more than 50% of the P and L is made of material. And as we commented in previous quarters, the cost is still vastly increased especially in the second half of the year. Nonetheless, due to better absorption of our fixed cost, which went down from 18.9% to 18.5%, with a reduction of total labor costs to sales from 21.4% in 2016 to 20.8% in 2017, we increased EBITDA by 8.6%. And this was achieved despite higher restructuring costs than in the previous year, €11,200,000 incurred during the year versus €5,000,000 in the previous year. And despite the €3,000,000 of administrative litigation, which I referred to regarding Q4 of 2017. Moving on to Page 9. So while EBITDA went up by 8.6%, EBIT went up by 14.6%. And this was achieved despite the write down the fixed asset of our Brazilian subsidiary. So we wrote down €6,200,000 in 2017. We already had written off €4,800,000 in the previous year. So we now believe we have a quasi clean balance sheet in Brazil. So we should be covered from now on. In terms of financial results, you see that the financial result which was financial expenses of $31,500,000 last year, Roughly speaking, we have the same cost in 2017, but actually 2 items go in the opposite direction. First of all, as I explained on Q4, we booked a charge of €6,000,000 which is a revaluation of the put option of our minority shareholder in India. So this is an exceptional cost, it's unrecurring cost. And this was counterbalanced by less cash interest because cash interest went down by €5,300,000 in 2017 versus the previous year. Why did it go down? Better negotiation of our conditions, better NFP during the year and better management of the interest of offering entities. EBIT would sell went up by 14.6%. Net income went up by 185%. So a big change on net income is that the tax expense in 20 17 was only €22,900,000 whilst it was €32,600,000 a year ago. Just a reminder, last year, we had to book 1 off tax charge of quasi €7,000,000 which was related to accounting treatment of the warranty claims last year. So this happened in 2016. We have no repeat in 2017. And this explained the biggest variation of the tax charge in 2017. But as you can see, we are going back to the normative tax charge, which the figures to come should be around 30%, 30 plus. Page 10. As I explained before, one major achievement in the past 3 years was the reduction of indirect cost versus SAES. We were at 19.6% in Q4 2015, down to 18.9% at the end of 20 16. We now are down to 18.5% in 2017. If you move on to Page 11, then you have the full P and L. So as Laurent mentioned, sales increased by 6.2%. Contribution margin, the percentage decreased, but in absolute value, it went up by 5.4%. And since we had better absorption of indirect costs, EBITDA went up by 8.6% despite one off which were booked in EBITDA. Financial expenses, I already mentioned that in the €31,700,000 you have €6,000,000 of one off due to the fair value of the Indian put option. And you can see there's a very significant impact of the improvement in income tax, which allows us to move from net income, which was only €9,300,000 last year to €26,600,000 in 2017. Moving on to Page 12, cash flow. Cash flow, as Laurent mentioned, and you look at the global numbers, free cash flow stands at €34,400,000 it was €31,200,000 last year. So doesn't show a big change, but you must bear in mind that last year included one offs, positive one offs of more than €15,000,000 which were linked to the warranty claims. We cashed €9,600,000 from Daikou, the seller of the air and cooling business. And we also cashed €5,700,000 coming from tax disputes. So when you look when you take out these non ordinary items from 2016, the figures changed slightly. Instead of comparing 34.4 with 31.2 in the previous year, the figure without non ordinary items actually €34,000,000 versus €15,000,000 last year, that's to say we more than doubled performance. As a result of which, net debt went from 2.99 €1,000,000 to €264,000,000 And this debt reduction was achieved despite a significant increase of CapEx. CapEx, we mentioned the evolution. We are investing in our future and CapEx went up from €59,000,000 of tangible loss last year to €68,000,000 in 2017. So all in all, good cash flow despite investing more in the future of Sogepi. At the bottom of the tab, we have added the numbers for factoring. As you can see, these numbers were achieved with less factoring than a year ago, basically €4,000,000 less factoring than a year ago. So a solid cash flow in 2017. If you have a look at Slide 13, we have focused on significant items of our balance sheet. What we wanted to insist on was one item which contributed to the good cash flow performance of 2017, which is a strong effort to reduce inventories. You saw that our size went up by more than 6% and nonetheless we reduced inventories and in 1 year inventories went down from 10.5% of sales to 9.5% of sales and this is an effort we want to keep on in the coming years. I'm going to hand over to Laurent. Thank you, Ian. Thank you very much for clarifying various effects, which make the reading of the strategy P and L and balance sheet performance were some explanations. On the stone shipper investment, you see that in 2013, the company had invested €36,000,000 €42,000,000 in 2014 €59,000,000 in 2016. I will just reiterate what I said at the beginning of the conference call. If you add up to the €59,000,000 of tangible CapEx, net free cash of €15,000,000 you go up to €75,000,000 And if you add up to the €68,000,000 of tangible investment of this year, €34,000,000 of net cash generation, you reach more than €100,000,000 which is a nice mark to be achieved by Surjeet. And the difference between €175,000,000 is €25,000,000 which is 1.5 points of improvement on the cash generation, which is of course quite different from the improvement in the EBITDA as we reported in the Q1 due to all the effects, which Jan has explained. So solid cash flow generation, which helps us prepare for the future. Why do we keep investing more and more money into Surjeet, it is because as you see on Page 15, the return on capital employed is increasing. At 10% in 2015, we had reached 14.9% in 2016. And at the end of 2017, I'm very pleased to say that we have achieved 17.8%. I have mentioned that we had a first objective to reach 20% in the future. And you see that we are on our journey there to continue improving the return on capital employed. As we invest more money in the company, it's important to keep a good control on capital. Capital intensive, so it's important to have a good control on the return on capital employed. It's labor intensive, that's why the total labor on sales is such an important indicator. On those two measures, it was a good year for 2018, 2017. And this translates into the leverage, the debt on EBITDA ratio. You see that we have achieved 1.59, which is a leverage which supports profitable growth strategy. Moving to Page 17, it's just a quick look at our profitability improvement plan. We focus this presentation on the competitive footprint. Moving on to Page 18. I'm pleased to confirm that we are in the final stages of our project for Eastern Africa for suspensions. We have not yet the rent yet to announce it, but it's maturing very well. In Europe, as you see from this bubble in the middle, Surfaces historically had mostly high cost country plants. We are developing our low cost country footprint with Romania for air cooling, with Morocco for filtration. And we will announce in the coming months the project in this region for suspension. Having said that and talking about the future, let's move to Page 19 and the outlook. In 2018, we expect the global automotive market to grow by around 1.5%. In this scenario, Rugerci is expecting to moderately outperform the market at constant exchange rates, Thanks particularly to the growth initiatives in Mexico, which started in 20 16 and ramped up in 2017 and Morocco, which will start production this year in 2018 and the higher results despite the further increase in cost. This is a quick run through our presentation and from there we'll be happy to take questions. This is the Chorus Call conference operator. We will now begin the question and answer session. The first question is from Mr. Nicolas Dorer of Mediobanca. Please go ahead, sir. Yes. Good afternoon, sir, and thanks for taking my questions, which are 3. The first one is on the Q1 accrual of the $3,000,000 for a litigation, if you could elaborate a little bit more on that. And if you can indicate in which line of the P and L we found this $3,000,000 The second question is on the outlook you just mentioned, Laurent. Is it possible to assume that so growth, the outperformance will come from the market which are restricted to the new 2 new plants? Or should we expect some outperformance also in Latin America and Asia? And very last question is on the tax rate. If I understood well, you Jan said before that we should expect a normalization towards 30%. Is this correct? Did I understand well? Thank you. Hi, Niccolo. So regarding the accrual on the litigation, in the P and L, it goes into other non operating expenses. Okay. Okay. On the outlook, you've seen in 2017 that our growth was different by business units. We see a continuation of this trend with different growth rates between the business units. So first of all, this is a distinction by business unit. And as far as the markets where we expect the outperformance, in Latin America, we have significant aftermarket filtration business, which is not growing in line with the OEM business. So in Latin America, plan to outperform the market because of this. I mean, the OEM market is still growing quite fast, faster than what the aftermarket market is growing. In Asia, we see a continuity of the growth in China with less growth in China in the specialty activities. And that's why overall, we are talking of a moderate outperformance. In 2017, we outgrew the market by around 5 points, including the aftermarket effect. In 2018, we are more looking at 1% to 2% outperformance of the market. Thank you. Tax rates? So Nicolas, on the tax rate, what we project in 2018 is to go below 1 third of pretax income in terms of tax charge. So we now should be we should look forward to a normalized tax between 30% and 33% in the coming years. Okay. Thank you. And which is the main driver of this huge reduction in the tax margin? Thank you. Well, as I mentioned earlier, last year we had a €6,700,000 exceptional one off, which was linked to the claims because we had to book taxes on the cash received or to be received on the claim. So this was a one off which we didn't have in 2017. And we did a lot of cleanup on deferred tax in the past years, which we won't incur in the coming years. Thank you. The next question is from Michele Baldelli of Exane. Please go ahead. Yes, good afternoon to everybody and thanks for taking the question. First one is about the one offs of 2017. But just to give a complete picture about the full year 2017, because I was counting Brazil €6,000,000 accruals in filtration under the €3,000,000 higher write off of €3,000,000 And if I'm not wrong, in H1, you already posted another €1,000,000 of nonrecurring items in the non ordinary non operating income expenses. So am I wrong in doing this math because it should be around €30,000,000 of 1 offs in 2017 or not? Okay. This was the first question. Do you want to start with the other questions? Yes. So the second question relates to the Latin American business. I would like if it's possible to get a feeling about the margins in this area, if it's still, let's say, very low or close to 0 or did you improve them? And the third question relates to these options of the Indian subsidiary. But just to give him an idea of until when there will be, let's say, this put option in place and what are the conditions and what is your idea about it? Thank you. So Michele, maybe I'll start with the last question on the put option. As I mentioned earlier, the put option was exercised. That's to say, our minority shareholder who holds 30% of our business has defined it to sell. And thus we are entering into a round of negotiations and we should get to an agreement, let's say, probably in Q2 of this year. So that will put an end to this option because it will be exercised and paid by Sotheby, which from now on will have 100% ownership of the Indian business. Yes, sorry. And what is the amount of the liability on the balance sheet relative to this? So on the balance sheet at the end of 2017, we carry EUR 15,000,000 of value of the 30% minority shareholding. Okay, perfect. Thank you. The next question is to excuse me, sir. I answered one of the question, which is on Latin America. So on Latin America, what we can say is that the profitability in suspensions in South America has been improving. It is still below the average of suspension. So it is not working, but it has been improving. As far as filtration, we've had 2 effects as far as Crocell is concerned. We've had a deterioration in Argentina linked with competition from imports from outside South America. And we've had an improvement in Brazil. Overall, in filtration, the net effect of Argentina and Brazil was an improvement in the cash generation. In the end, cash is king and if we want to understand what's going on, we need to look at the cash. In filtration, the cash improved in South America and in suspensions, it improved as well. Growth in terms of profitability and in terms of cash generation, this region is still below the average. So we are working hard and we are continuing some of our restructuring actions are there. We are continuing to work very hard to bring Latin America to where it needs to be as far as profitability and cash generation. Now there was a question on the total of the one offs. So as you have understood, we have certain number of one offs in 2017. So we have €3,000,000 of annual stratification which impacts the EBITDA. And we have slightly more than €6,000,000 of write off of the fixed asset of the Brazilian business in which go below EBITDA, so between EBITDA and EBIT. And then you have €6,000,000 of fair value of India, which go below EBIT. And if we balance the three numbers, we get to €15,000,000 of 1 offs. Okay. But in the last quarter, if I'm not wrong, there were also $3,000,000 higher write offs. This is higher just compared to Q3 than of last release? Michele, so in the year, write offs of intangibles totaled €5,000,000 3 of which were booked in Q4. Actually, we do the exercise twice a year in June and in December. These €5,000,000 it's a price to pay to the business. We the carmakers keep on asking us to do developments and then they change their mind. And so part of this effort needs to be written off. So it's €5,000,000 this year. It won't vanish, let's say, it might be €3,000,000 next year, €6,000,000 It's a part of the cost to do business. Okay, perfect. Thank you very much. And just a final question on CapEx for this year, what shall we assume? A bit more than last year. Okay. Thank you. The next question is from Filippo Filippi of Kepler. Please go ahead, Filippo. Yes. Good afternoon. Three questions from my side. The first one, could you tell us if it's possible for you to transfer part of inflecture raw materials with some time delay to your clients? And second point on do we still expect that net working capital, chiefly inventories, still contributes to be cash generative even in 2018? And the last one, if you can give us some idea on the restructuring cost you expect for the 2018, so basically the cost that have been EUR 11,200,000 in 2017? Thank you. Thank you. On the raw material, we are not happy with the EUR 13,000,000 which we are disclosing, which is net effect of steel cost increase, steel prices increase, plusminus productivity from suppliers, plusminusproductivity to customers. I think we have not been able in 2017 to pass all the increase, so they're still net of the productivity, the productivity effect. So subject where we are one of my top priorities in 2018. The context we are still continues to increase is to improve our ratio of transfer. Because in the end, Surgi cannot support alone the cost of fees needs to be shared and the proportion which is shared with the customer needs to increase. Having said that, this is subject to negotiation with the car manufacturers. On the working cap and on the cash generation, you see that we are, as Jan pointed out, improved percentage of inventory on sales. We believe there are further opportunities to improve. It is part of our effort, which we call shop floor strategy excellence system, which we shared with you, to continue to improve on the inventory side. And last but not least, on restructuring, we would keep the same as what we said last year, which is between €10,000,000 to €15,000,000 as a bracket. Okay. Thank you. The next question is from Mr. Gabriela Gambarova of Banca Akros. Please go ahead. Yes. Good afternoon and thanks for taking my questions. A couple of questions. I was wondering if you have any update on your reinforced glass fiber springer technology. You experienced some problems in the past. So I was wondering if you have any news on that front. And the other question relates to the new plants in Mexico and Morocco. I was wondering if you could share with me the level of, let's say, capacity utilization in Mexico. And basically, what could be the, let's say, the capacity utilization you're going to have for Morocco? Basically, when could be the start of production this year? Okay. Thank you very much. On the composite spring, there is no new news. We are still working on this technology, evaluating the potential for niche markets with margins and the potential for mass market with low margin but higher volumes. So this is something we are still working on with no use to communicate today. On the plants in Mexico, we are ramping up, but it is relatively slow ramp up. So at this point, the capacity usage is 35%. So we are by far not fully in Mexico. And Morocco is really starting June, July of this year. At the end of the year, we will probably be around 15% capacity usage. So it's really the start of it. Okay. Thank We have a follow-up question from Mr. Niccolo Sore of Mediobanca. Please go ahead. Yes, thank you. I follow-up the question of Mr. Baldelli on CapEx. What should we expect in terms of depreciation and amortization going forward? Because over the past few years, we have seen a jump in capital expenditure by the company, which so far has not been followed by a massive increase in depreciation and amortization. I also think that between 2016 2017, the amount has remained broadly flattish. So what should we expect going forward? Thank you. So Niccolo, we expect an increase in 2018. It should not be more than 10% versus what we incurred in 2017. Thank you. The next question is a follow-up from Michele Farzelli of Exane. Please go ahead, sir. Thank you. Just a quick follow-up on the interest charges that you expect for this year because I imagine that there is still some, let's say, factor on the interest rate that you are paying, but probably could lead to some savings in 2018, if you can give us a little about it. Thank you. So this year we have €31,700,000 including €6,000,000 of fair value of India. Which is in the line interest. Which is in the line interest, which has nothing to do with it. So you should take out the €6,000,000 so we would be €25,700,000 And we believe we are going for a €2,300,000 further reduction of interest in the year to come. Okay. Thank you very much. Gentlemen, at this time, there are no questions registered. Thank you very much for your participation to this conference call. We wish all of you a good day and a good week. Bye bye.