Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Sogefi 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. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Laurent Hebenstreit, Chief Executive Officer of Sogefi. Please go ahead, sir.
Thank you. Hello, Laurent Hebenstreit speaking. I am here with Yann Albrand, our Chief Financial Officer, and Stefano Canu, our Investor Relations. I would like to start the presentation going on page two of the document, which has just been released, with the 2017 highlights. Our revenues are up in 2017 by 6.2%, that is EUR 1.672 million. At constant exchange rate, they are up 7% compared with the market growing around 2%. It is five points of growth above the market. The EBITDA is up 8.6% and reaches 9.9%. The EBIT, sorry, at EUR 85.4 million, is up 14.6%, reaching 5.1% of sales. The net result, which is EUR 26.6 million versus EUR 9.3 million in 2016. Last but not least, cash is king. The free cash flow at EUR 34.4 million versus EUR 31.2 in 2016.
I would like to make two comments here before I hand over to our CFO, Yann Albrand. The tangible CapEx investments in 2017 were EUR 68 million. If you add EUR 68 million to EUR 34 million of net free cash flows, you see that the net cash generation, before tangible capital expenditures, exceeded EUR 100 million. I think it is an interesting number to remember, as this is to be compared with what it was last year. The EUR 31.2 million of free cash flow of last year included around EUR 16 million of one-off. That means the real net free cash flow generation net of the one-off was EUR 16 million. If you add this with the capital expenditures of last year, you will reach EUR 75 million. That means that between last year and this year, the cash flow generation of Sogefi has improved by EUR 25 million.
EUR 25 million is close to 1.5 points of sales. This is a larger number than the growth in the EBITDA. Now I will continue telling you the sales of our business units. On page three, you see that Suspensions achieved 36% of our total sales, filtration 34%, and Air & Cooling 30%. As far as customers, it was a year of growth and strong growth with the Schaeffler Group, mainly driven by Suspensions with the Jeep Compass in Europe, in China, and in the new plant in Mexico. If you go to page five, we see that the growth of the business units were different. You see that at constant exchange rate, which is comparable with the market, Air & Cooling grew 5.6%, filtration grew 7.1%, and Suspensions grew 8.9%, which combined gives the 7.3% of growth at constant exchange rates for the year 2017. Sorry.
If we look on page 6 to the revenues by geographic area, we have a different picture showing that in Europe, at constant exchange rate, Sogefi 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 continuing in Asia at 23.3%. We have an interesting table on page 6 which compares the growth at constant exchange rate. What you see that at constant exchange rate, quarter by quarter, the first quarter showed a double-digit growth. The second quarter and the third quarter were comparable with, again, a substantial growth in the fourth 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 Sogefi, which Yann Albrand will now detail for you. Yann.
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. 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. At EBITDA level, we had some items which did not impact previous quarters. You can see that EBITDA, which was 9.5% in Q3, went down to 8.4%. Actually, what happened? Despite good sales and a better contribution margin, we had two elements which struck Q4. In Q4, we booked an accrual of EUR 3 million on the litigation of an administrative nature linked to past activities into the filtration BU.
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 Sogefi 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. Therefore, this starts to give us a lower absorption of our fixed cost just due to exchange rate. 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 EUR 3 million write-off of intangibles. It's research and development, which we believed we need to take out of our balance sheets.
When we go below EBIT, in financial expenses, you see that we had a EUR 6.4 charge in Q3 and a EUR 12.4 million 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 one of our businesses, and the minority shareholder has exercised his India put option. We, every year, revalue this option and considering better prospects in the coming years, this gives rise to a charge of EUR 6 million to increase the value of the businesses we are going to buy by EUR 6 million. This is hitting 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.
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&L is made of material. As we commented in previous quarters, the cost of steel 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%. This was achieved despite higher restructuring costs than in the previous year, EUR 11.2 million incurred during the year versus EUR 5 million in the previous year.
Despite the EUR 3 million of administrative litigation, which I referred to regarding Q4 of 2017. Moving on to page 9. Whilst EBITDA went up by 8.6%, EBIT went up by 14.6%. This was achieved despite the write-down of the fixed asset of our Brazilian subsidiary. We wrote down EUR 6.2 million in 2017. We already had written off EUR 4.8 million in the previous year. 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 EUR 31.5 million last year, roughly speaking, we have the same cost in 2017. Actually, two items go in the opposite direction.
First of all, as I explained on Q4, we booked a charge of EUR 6 million, which is the revaluation of the India put option of our minority shareholder in India. This is an exceptional cost, a non-recurring cost. This was counterbalanced by less cash interest, because cash interest went down by EUR 5.3 million 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 our foreign entities. EBIT went up by 14.6%. Net income went up by 185%. A big change on net income is that the tax expense in 2017 was only EUR 22.9 million, whilst it was EUR 32.6 million a year ago.
Just a reminder, last year we had to book a one-off tax charge of quasi EUR 7 million, which was related to accounting treatment of the warranty claims last year. This happened in 2016. We have no repeat in 2017, and this explained the biggest variation of the tax charge in 2017. 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 three years was the reduction of indirect costs versus sales. We were at 19.6% in Q4 2015, down to 18.9% at the end of 2016. We now are down to 18.5% in 2017. If you move on to page 11, you have the full P&L. As Laurent mentioned, sales increased by 6.2%.
Contribution margin, the percentage decreased, but in absolute value, it went up by 5.4%. Since we had better absorption of indirect costs, EBITDA went up by 8.6%, despite one-offs, which were booked in EBITDA. Financial expenses, I already mentioned that in the EUR 31.7 million, you have EUR 6 million of one-off due to the fair value of the India put option. You can see the very significant impact of the improvement in income tax, which allows us to move from a net income, which was only EUR 9.3 million last year, to EUR 26.6 million in 2017. Moving on to page 12, cash flow. Cash flow, as Laurent mentioned, when you look at the global numbers, free cash flow stands at EUR 34.4 million. It was EUR 31.2 million last year.
It doesn't show a big change, but you must bear in mind that last year included positive one-offs of more than EUR 15 million, which were linked to the warranty claims. We cashed EUR 9.6 million from Dayco, the seller of the Air & Cooling business. We also cashed EUR 5.7 million coming from tax disputes. When you take out these non-ordinary items from 2016, the figures change slightly. Instead of comparing EUR 34.4 million with EUR 31.2 million in the previous year, the figure without non-ordinary items actually is EUR 34 million versus EUR 15 million last year. That's to say we more than doubled performance. As a result of which, net debt went from EUR 299 million to EUR 264 million. This debt reduction was achieved despite a significant increase of CapEx. CapEx, we mentioned the evolution.
We are investing in our future, CapEx went up from EUR 59 million of tangibles last year to EUR 68 million in 2017. All in all, a good cash flow despite investing more in the future of Sogefi. 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, EUR 4 million less factoring than a year ago. 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 sales went up by more than 6%, nonetheless, we reduced inventories. In one year, inventories went down from 10.5% of sales to 9.5% of sales. This is an effort we want to keep on in the coming years. I'm going to hand over to Laurent.
Thanks, Yann. Thank you very much for clarifying the various effects which make the reading of the Sogefi P&L and balance sheet performance worth some explanations. On the tangible investment, you see that in 2013, the company had invested EUR 36 million, EUR 42 million in 2014, EUR 59 million in 2016. I will just reiterate what I said at the beginning of the conference call. If you add up to the EUR 59 million of tangible CapEx, the net free cash of EUR 15, you go up to EUR 75. If you add up to the EUR 68 million of tangible investment of this year, the EUR 34 million of net cash generation, you reach more than EUR 100 million, which is a nice mark to be achieved by Sogefi. The difference between EUR 100 and EUR 75 is EUR 25 million, which is a 1.5 point of improvement on the cash generation.
Which is, of course, quite different from the improvement in the EBITDA, as we reported in the P&L, due to all the effects which Yann has explained. A solid cash flow generation, which helps us prepare for the future. Why do we keep investing more and more money into Sogefi? 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. At the end of 2017, I'm very pleased to say that we have achieved 17.8%. I had mentioned that we had a first objective to reach 20% in the future, 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.
The automotive business is capital intensive, 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 Sogefi, 2017. This translates into the leverage, the debt and 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, Middle East, and Africa for Suspensions. We have not yet the right yet to announce it, but it's maturing very well.
In Europe, as you see from this bubble in the middle, Sogefi 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 Suspensions. 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, Sogefi is expecting to moderately outperform the market at constant exchange rates. Thanks particularly to the growth initiative in Mexico, which started in 2016 and ramped up in 2017, and Morocco, which will start production this year in 2018, and a higher result despite the further increase in steel costs. Voilà. This is a quick run through our presentation, and from there, we will be happy to take questions.
Excuse me. This is the Chorus Call conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone with a question may press star and one at this time. The first question is from Mr. Niccolo Storer of Mediobanca. Please go ahead, sir.
Yes. Good afternoon, sir, and thanks for taking my questions, which are three. The first one is on the fourth quarter accrual of the EUR 3 million for litigation. If you could elaborate a little bit more on that, and if you can indicate in which line of the P&L we found this EUR 3 million. The second question is on the outlook you just mentioned, Laurent. Is it possible to assume that the outperformance will come from the markets which are strictly related to the two new plants? Or should we expect some outperformance also in Latin America and Asia? Very last question is on the tax rate. If I understood well, you, Yann, said before that we should expect a normalization towards 30%. Is this correct? Did I understand well? Thank you.
Hi, Niccolo. Regarding the accrual on the litigation, in the P&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. First of all, this is a distinction by business units. As far as the markets where we expect the outperformance, in Latin America, we have a significant aftermarket filtration business, which is not growing in line with the OEM business. In Latin America, we do not plan to outperform the market because of this. 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 Sogefi activities. That's why overall, we are talking of a moderate outperformance. In 2017, we outgrew the market by around five points, including the aftermarket effect.
In 2018, we are more looking at 1%-2% outperformance of the market.
Thank you.
Tax rate.
Niccolo, on the tax rate, what we project in 2018 is to go below one-third of pre-tax income in terms of tax charge. We now should look forward to a normalized tax between 30% and 33% in the coming years.
Okay, thank you. Which is the main driver of this huge reduction in the tax burden? Thank you.
Well, as I mentioned earlier, last year, we had a EUR 6.7 million 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. This was a one-off, which we didn't have in 2017, 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, sir.
Yeah. Good afternoon to everybody. Thanks for taking the question. First one is about the one-offs of 2017. Just to give a complete picture about the full year 2017, I was counting Brazil, EUR 6 million, accruals in filtration, another EUR 3 million, higher write-off of EUR 3 million. If I'm not wrong, in H1, you already posted another EUR 1 million of non-reoccurring items in the non-ordinary non-operating income expenses. Am I wrong in doing this math? It should be around EUR 30 million of one-offs in 2017 or not?
Okay, this was the first question.
Yeah.
Do you want to continue with the other questions while Yann is going?
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 zero, or did you improve them? The third question relates to these put options of the Indian subsidiary, but just to give him an idea of until when there will be, let's say, these put option in place and what are the conditions and what is your idea about it. Thank you.
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 decided to sell. 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. That will put an end to this option because it will be exercised and paid by Sogefi, which from now on will have 100% ownership of the Indian business.
Yeah. Sorry. What is the amount of the liability on the balance sheet related to this?
On the balance sheet at the end of 2017, we carry EUR 15 million of value of the 30% minority shareholding.
Okay, perfect. Thank you.
The next question is to Oh, excuse me, sir.
To answer one of the questions, which is on Latin America. On Latin America, what we can say is that the profitability in Suspensions in South America, Latin America, has been improving. It is still below the average of Suspensions, so it's still not where it needs to be, but it has been improving. As far as filtration, we've had two effects as far as profitability is concerned. We've had a deterioration in Argentina linked with competition from imports from outside South America. 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.
Both in terms of profitability and in terms of cash generation, this region is still below the average. 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.
As you have understood, we have a certain number of one-offs in 2017. We have EUR 3 million of administrative litigation, which impacts the EBITDA. We have slightly more than EUR 6 million of write-off of the fixed asset of the Brazilian business, which go below EBITDA, between EBITDA and EBIT. You have EUR 6 million of fair value of India, which go below EBIT.
You get the three numbers.
If we add up the three numbers, we get the EUR 15 million of one-offs.
Okay. In the last quarter, if I'm not wrong, there were also EUR 3 million higher write-offs. This is higher just compared to Q3 then of last release.
Michele, in the year, write-off of intangibles totaled EUR 5 million, 3 of which were booked in Q4. Actually, we do the exercise twice a year, in June and in December. These EUR 5 million, it is the price to pay to do business.
Okay.
The car makers keep on asking us to do developments. They change their mind, and part of this effort needs to be written off. It is EUR 5 million this year. It will not damage, let us just say. It might be EUR 3 million next year, EUR 6 million. It is a part of the cost to do business.
Yes. Okay, perfect. Thank you very much. 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 Prini of Kepler. Please go ahead, sir.
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 inflation of raw materials with some time delay to your clients? Second point, do you still expect that net working capital, chiefly inventories, still contributes to be cash-generative even in 2018? Last one, if you can give us some idea on the restructuring cost you expect for 2018, so basically the cost that have been EUR 11.2 million in 2017. Thank you.
Thank you. On the raw material, we are not happy with the EUR 13 million which we are disclosing, which is a net effect of steel cost increase, steel prices increase, plus or minus productivity from suppliers, plus or minus productivity to customers. That means we have not been able, in 2017, to pass all the increase of the steel net of the productivity effect. It's one of my top priorities in 2018. In the context where steel continues to increase, is to improve our ratio of transfer. In the end, Sogefi cannot support alone the cost of steel. It needs to be shared. 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 Yann pointed out, improved the percentage of inventory on sales. We believe there are further opportunities to improve. It is part of our effort, which we call shop floor Sogefi Excellence System, which we've shared with you, to continue to improve on the inventory side. Last but not least, on restructuring, we would keep the same as what we said last year, which is between EUR 10 million-EUR 15 million as a bracket.
Okay. Thank you.
The next question is from Mr. Gabriele Gambarova of Banca Akros. Please go ahead, sir.
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 spring technology. You experienced some problems in the past, so I was wondering if you have any news on that front. 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 markets with low margin but higher volume. This is something we are still working on with no news to communicate today. On the plants, in Mexico, we are ramping up, but it is a relatively slow ramp-up. At this point, the capacity usage is 35%, we are by far not full in Mexico. Morocco is really starting June, July of this year. At the end of the year, we will probably be around 15% capacity usage. It's really the start.
Okay. Thank you.
As a reminder, if you wish to register for a question, please press star and one on your touch-tone telephone. We have a follow-up question from Mr. Niccolo Storer 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 amortization going forward? 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 amortization. I also think that between 2016 and 2017, the amount has remained broadly flat-ish. What should we expect going forward? Thank you.
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 Baldelli 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, fat on the interest rate that you are paying that probably can lead to some savings in 2018. If you can give a flavor about it. Thank you.
This year, we have EUR 31.7 million, including EUR 6 million of fair value of India.
Which is operating interest. It's on the line interest.
Which is in the line interest, but which has nothing to do with it. You should take out the EUR 6 million, we would be at EUR 25.7 million, we believe we are going for a EUR 2.3 million further reduction of interest in the year to come.
Okay. Thank you very much.
Once again, if you wish to register for a question, please press star one on your touch-tone telephone. For any further questions, please press star one on your telephone. Gentlemen, at this time, there are no questions registered.
Thank you very much for your participation to this conference call. I wish all of you a good day and a good week. Bye-bye.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.