Good afternoon, ladies and gentlemen, and welcome to the conference call about the 2022 half-year results of MAHLE Group. At this time, all participants have been placed in a listen-only mode. The presentation is available online. Please click on the Launch Web Presentation button, which was provided in the final registration email for this call. You can also download the presentation from the MAHLE investor relations website. During the Q&A session after the presentation, you are invited to ask questions via web chat or phone. On the call today, MAHLE Group is represented by Michael Frick, Chairman of the Management Board and CEO ad Interim and CFO, Jan-Frederek Thiele, Vice President Corporate Controlling, and Ralph Josephs, Vice President Corporate Finance. Now I would like to hand over to Mr. Frick.
Thank you very much. We are delighted to welcome you to our investor update call. My colleagues and I will now present to you the half-year results of 2022. After our presentation, we will be happy to answer any of your questions. The automotive industry is facing massive headwinds. These are, amongst others, especially the geopolitical tensions and the pandemic. The consequences are noticeable in all areas. Lower than expected market growth, supply chain bottlenecks, and shortage of certain raw materials and goods, as well as rising inflation. Facing all these challenges, we are continuously focusing on strict cost and cash discipline and the implementation of new measures to mitigate the effects. As mentioned, the challenges are affecting market growth. The market for light vehicles even declined by almost 2% in the first half of 2022. Europe, in particular, experienced a slump due to the consequences of the war in Ukraine.
COVID-19 lockdown significantly impacted the first half in China negatively. Nevertheless, according to S&P Global, production of passenger cars is expected to continue to slightly recover by almost 5% for the full year 2022. However, it is difficult to foresee the extent to which the consequences of the war in Ukraine, the resulting energy crisis, and the ongoing economic challenges mentioned will further impact vehicle production. Amidst these challenges, the pace of the transformation in our industry is continuing. According to our market analysis, the global share of battery electric vehicles, fuel cell, and hybrid-engine solutions is set to increase significantly. The 13% market share of today could rise to 30% in 2025, and to 70% in 2035. But this also means that at global levels, still around 50% of all new passenger cars, including hybrids, will be driven by efficient internal combustion engines. This scenario confirms our strategy.
We are working on the climate-neutral mobility of tomorrow with the aim of expanding our position as a leading system supplier in three strategic areas. The e-mobility module focuses on efficient and intelligent solutions for electric powertrain. As a provider of thermal solutions, MAHLE improves energy efficiency and increases interior cabin comfort. In the internal combustion engine segment, MAHLE focuses on cost leadership in core products for highly efficient and clean engines that can also run on e-fuels and hydrogen. The shown powertrain scenario mix for the future offers attractive opportunities for MAHLE, not only in the number of vehicles, but also regarding the potential revenue per light vehicle. The slide shows the overshooting revenue potential of alternative powertrains compared to the conventional internal combustion engine. With our past acquisitions and internal development efforts, the displayed factors increase throughout all future mobility drivetrains.
Let us also give you a few successful product examples out of many others. Vehicle electrification poses new challenges for thermal management. With our battery cooling plate, temperatures below 40 degrees Celsius are reached to cool the battery in hybrids and in electric vehicles. According to our sales plan, until 2027, around EUR 240 million annual sales is expected. Besides new comfort features as cabin pre-cooling, our electric compressor is an enabler for battery cooling, including supercharging, and ensures high efficiency to extend driving range. Until 2027, we expect annual revenues of even half a billion euros with this product. We are also accelerating our e-bike revenue. MAHLE's compact Pedelec e-drive system design gives manufacturers outstanding design freedom, important for design award-winning bikes. Annual sales of around EUR 300 million is expected until 2027. Already today, MAHLE generates over 60% of its sales independently of the passenger car internal combustion engine.
By 2030, this share is increased to 75%. Having briefly described our strategy, let's skip to the key financials of the first half, 2022. The implications of the economic challenges have left their mark in our financials. Despite all the headwinds, MAHLE sales realized growth with a rate of 4.1%, resulting in revenues of EUR 5.9 billion. Our EBITDA margin shrank to 2.1%. Profitability was hit by massively rising costs for materials, freight, energy, and personnel, and at the same time, by lower sales volumes. My colleague, Jan-Frederek Thiele, will give you more details later in the presentation. Whereas the consequences of the war in Ukraine, a huge impact on MAHLE and the whole economy, I would like to say that the direct impact on MAHLE is very low. Already before the war, MAHLE sales to third parties were only generated by less than 1% in Russia, Ukraine, and Belarus.
We are continuously supporting the transformation. MAHLE's nominal R&D costs are slightly higher compared to last half year. Although the equity ratio is negatively affected by the net loss, the equity ratio could be maintained at a level of above 20%. It is our clear intention to build up a higher ratio in future again. MAHLE is currently rated by Moody's Ba1, with negative outlook. MAHLE actively oversaw the challenges, shortages, and price increases brought with them. In general, cost risks for index raw materials are managed by use of price adjustment clauses with customers. For several raw materials, such as aluminum, the remaining net exposure is hedged. Nevertheless, we have never seen such a high cost increase in the past. Therefore, we are negotiating with our suppliers and customers to achieve a fair sharing of this burden.
In addition, new products regarding a lowering of premium freight costs are beneficial. A massive impact of these and various other measures will be visible going forward, especially in the second half of 2022. In consequence, it must be the target to realize more than 1% EBIT performance for the full year of 2022. With this, I would like now to hand over to Jan, who will give you more insights into our financials.
Yeah. Thank you, Michael. First, I would like to give you a general overview about our regional sales split, also in the light of increasing geopolitical tensions. MAHLE Group operates in 29 countries, covering all relevant OEMs across the globe. We regard our well-balanced regional footprint as an important prerequisite to best serve our customers and secure our independence. Our top 10 customers less than 50% of group sales, reflecting our outstanding customer portfolio diversification and customer independence. We also want to highlight that each shown customer group already includes all related sub-brands. In total, our revenue rose about 4.1% compared to last half year, resulting in EUR 5.9 billion, as Michael already mentioned. We managed to achieve constant organic revenue, where the market declined by almost 2%. The growth would be even higher if not a strong hit came from the lockdowns in China.
Our Chinese sales decreased organically about more than 21%. This harmed MAHLE Group's organic growth by around 2%. A positive aspect was a double-digit organic growth rate from a very strong global aftermarket business. Favorable currency translation effects, mainly from the appreciation of the U.S. dollar, the Chinese yuan, and Brazilian real, of EUR 215 million, are the key driver of the overall growth rate. The monthly sales view is characterized by the lockdowns in China during April and May. Nevertheless, we closed the first half of 2022 substantially outperforming our budgeted sales by 11%. For full year 2022, we expect a high single-digit growth rate in the revenues compared to 2021, predominantly driven by favorable FX effects. Organic growth will be minimal. Hence, we expect to see a sales level of around EUR 12 billion.
This outlook applies under the condition that we are not faced with further call of reductions due to customer shutdowns in the light of the difficult supply situation in general, or an intensified condition in gas supply. After strongly raising our profitability in 2021, MAHLE is affected by severe cost increases just as the automobile supply industry as a whole. Compared to last half year, a cost increase of EUR 314 million hit the result. Material after deduction of positive effects from price adjustment clauses, logistics, energy, and personnel were the drivers. Even for raw materials with existing price adjustment clauses, the rising prices are weighing on our results. This is due to time lags between the longer horizons of adjustment clauses with OEMs and rather short-term adjustments from suppliers.
The vast majority of the compensations negotiated with our customers will be improving our financials in the second half of this year. In addition to the higher costs, lower sales compared to the last half year worsened the current results. Accordingly, also the rolling net debt to EBITDA ratio rose to 4.1 due to various additional effects. EBITDA of previous years' second half was low, mainly due to supply bottlenecks at OEMs. Trade receivables and inventories rose about EUR 452 million compared to last half year, negatively influencing our net debt. The increase in inventories is mainly due to exchange rate effects, inflation-related price increases, and due to ongoing supply chain problems in order to ensure continued customer delivery. The increase in trade receivables is partly attributable to the seasonally higher level of sales.
With regards to the second half of the year, I can say that we clearly see an improvement and that the initiated measures Michael mentioned are already paying off visibly. The external challenges also reduced our operating cash flow, being at minus EUR 231 million. It reflects the negative performance influenced by drastically increased costs for raw materials, logistics, energy, and personnel. Cash out for restructuring of EUR 94 million further decreased the operating cash flow. The cash flow from investing activities reflects higher CapEx and is therefore lower than last half year. With these effects, the free cash flow is with minus EUR 417 million negative for half year 2022 and is mainly impacted by the drastically reduced operating cash flow. In total, the group's financial position is affected by various external effects, but the liquidity of MAHLE Group is, of course, insured.
What my colleague, Ralph, will show you now.
Thank you, Jan, and welcome everybody. I would like to start with the highlights. MAHLE just concluded a new term loan with European Investment Bank. They honored our R&D for zero-emission vehicle technologies with a EUR 300 million loan. The disbursement was in August 2022, and the final repayment is in 2032. With this loan, EIB approved MAHLE's substantial eco-friendly future investments, and at the same time, it broadens our investor base. Besides that, MAHLE gained further financial flexibility and independence in order to manage the upcoming challenges in the automotive industry. In February 2022, eight lenders agreed to our extension request of the EUR 1.8 billion revolving credit facility to 2025. Accordingly, the commitment of EUR 1.5 billion were prolonged until 2025. Until the end of 2023, MAHLE's maturities are amounted to EUR 300 million.
These maturities are well covered by our cash and free committed credit lines from our revolving credit facility of in total around EUR 2 billion. Our funding portfolio is well diversified. As mentioned, as of June 2022, free liquidity from committed credit lines plus cash was about EUR 2 billion. In the meantime, liquidity increased with a EUR 300 million EIB loan disbursed in August 2022. For MAHLE, ESG has an ever-increasing importance. Besides our EcoVadis rating with Silver Medal status, being amongst the best 25% in 2022, we report to our greenhouse gas emissions as part of the CDP. For 2021, the organization assigned MAHLE Group a climate protection measure, a grade B, which is well above average for our industry. To document our efforts, MAHLE is publishing a sustainability report yearly on the homepage. Last report was just published a few days ago.
By 2040, we aim to be carbon neutral in terms of all direct CO2 emissions and those associated with purchased energy. In Germany, we have already reached this goal in 2021. As a midterm target, we aim to reduce our Scope 1 and Scope 2 CO2 emissions by at least 55% by the end of 2030. To achieve this target, we are tackling actions in three areas. We aim to increase energy efficiency by 2% every year.
As an example, by operating our own photovoltaic systems, we are generating electricity from solar energy. We aim to increasingly use renewable energy sources to cover our electricity demand, and it will offset any remaining unavoidable emissions. Furthermore, emissions in the upstream and downstream value chain become increasingly important to our stakeholders. Therefore, we plan to integrate the Scope 3 emissions into our data recording. On this basis, we will develop a Scope 3 target as well as a roadmap. In the course of this, we intend to integrate CO2 targets in affected processes, e.g., awarding criteria of suppliers and processes. To officially approve the roadmap, MAHLE is committed to SBTi for Scope 1, 2, 3, and will develop science-based targets aligned with the SBTi criteria.
In conclusion, I would say that we are confident that the measures, especially regarding a fair sharing of cost burdens, will improve the results in the second half of 2022. We remain cautious due to the current economic situation and continue to proactively manage the challenges with various task forces. Thank you very much for your attention. We would now like to start the Q&A session.
Ladies and gentlemen, during the Q&A session, you are invited to ask questions via web chat or phone. If you would like to ask a question via phone, please press nine and star on your telephone keypad. To withdraw your question, press nine and star a second time. The first question on the phone conference comes from Peter Uhrig, Turntable Investment Management. Please go ahead with your question.
Hi, it's Alex, not Peter, but thank you very much for the presentation and for your time. A couple of questions from my side. Can you disclose what the $163 million provision in the cash flow statement was for? If this is cost savings, et cetera, then when's the cash value for provision expected to be incurred?
Could you briefly repeat the question that was in the fund flow or in cash flow?
Yes. In the cash flow from operating activities, you've got $163,831,000 increase in provisions. I'm just wondering what that specifically relates to.
Yeah. One second. You get the reply. We search for it and come back to you in a second, yeah?
Perfect. A follow-on question. Margin guidance for H2. You guys have mentioned about the impact of the pass-through measures coming through. Are you guys able to provide some numerical guidance?
Yeah. What we can do is talk about certain clarity. We have incorporated in the accounts for the first half of the year, a recovery of pass-through cost to our customers of EUR 35 million. For the full year, we see a complete different amount. We are in the process of passing on things to our customers now on a contractual basis. Predominantly as price increases with a continued effect, or partially on basis of one-off payments. That's the major lever to bring our negative EBIT margin to an expectation of 1% or higher. The other effects we are trying to realize cost savings in the supply chain, be it purchasing parts or be it transportation costs, also will contribute. But by far, the major contributor is pass on to customers.
We have realized already since the 30th of June, other $100 million overall, we are going to post in the second half, and there are other hundreds of millions to come.
That's great to hear. What proportion, you mentioned there a couple of different pass-through mechanics. How many of them are one-off payments, and how much of them have direct raw material pass-throughs, and what's the sort of lags that we should expect going forwards on them?
Right. For example, we have signed with one customer a contract last month. In this, I would say one-third is one-off payments, two-thirds continued price increases. That's a trend-setting achievement to be proven by the others to come. That's the kind of tendency. The majority, continued price increases.
Alex, if I can pick up your first question in terms of change in provisions and accruals. That's predominantly in the other category, as we call it, which is an increase on the provisions for goods received not invoiced yet, et cetera. So standard things, which have a certain seasonality. There have not been any significant buildups of additional restructuring accruals, if you're asking in that direction, and neither for major warranty cases or something of that nature.
Perfect. That's super clear. I suppose that kind of bridges me into the last question that I had, if that's okay, which is, what's your expectation for working capital normalization in H2?
Yeah. In the first half of the year, we had a build-up of inventories due to the, let's say, irritations in the supply chain, and also to prepare ourselves for being supply ready. This is going to normalize, and so we have a clear plan in place to free up EUR 250 million plus purely from inventories, first half to second half of the year.
That is very clear. Thank you. Thank you very much. I suppose I will sneak one last question in, if that is okay. Your bonds, your 2028s, are currently in the 60s for a kind of 10% all-in yield. Have you guys, or do you guys consider bond buybacks?
No, we do not. We have no intention to start any kind of bond buyback in this current situation.
Fully understood. Thank you very much for your time and for the presentation.
Our pleasure.
The next question comes from Haiyan Ding from ODDO. Please go ahead with your question.
Hello, good afternoon. I just want to have some confirmation. Did you mention you are expecting EUR 12 billion of revenues for the full year 2022 and an EBIT margin of 1% following the actions you have taken? Is that correct?
The expectation of EUR 12 billion sales is the current sales outlook, and the 1% is the minimum margin, EBIT margin, we are currently forecasting for the full year.
Okay. You are now at leverage 4.1. Where do you think, is there a kind of range where the year-end net leverage could be?
Yeah. If the assumption of working capital reduction is going to materialize and the profitability is going to follow our guidance, we see it falling back on 2 or lower.
Okay. Do you have any covenants which are linked to your leverage ratio?
No, we don't have.
Good. Your CapEx, can you give a full year CapEx guidance?
We had a view in our budget for this year, which was EUR 585 million. In light of the current, let's say, headwinds of the markets, we try to optimize further and try to bring it into the neighborhood of EUR 500 million.
Okay, thank you. Maybe one question from the recent Chinese lockdowns in different cities. Do you think your operations will be impacted again?
At this point in time, we have no direct impact. Not one of our plants is directly touched. Indirect effects, potentially possible, but no information yet in that regard.
Okay, thanks.
The next question comes from Markus Orschulik from Vontobel. Please go ahead with your question.
Yes, I have one question because I missed that. Can you elaborate how much working capital unwind you expect for the second half? I didn't get that. Thank you.
I'm not referring to receivables because that has its own volatility, and it's dependent on the sales of December, so it has a kind of unpredictable element. What we are going to manage is to bring down our inventories, and there, the expectation is that we can manage to bring it down by EUR 250 million plus compared to the half-year close.
Okay, thank you. Thank you.
Welcome.
The next question comes from Tom Swift, Morgan Stanley. Please go ahead.
Hi, everybody. Just, I guess a couple of questions from my side. Just to come back to the point of pass-throughs, just forgive me because I might have just missed it. So you said that it was EUR 35 million recovered in the first half, but for the full year, you are realizing around EUR 100 million to recover. Is that right? Or if you could just elaborate on that again, that would be great. Thank you.
Yeah. Thank you for the question. In the first half, we have realized an EBIT margin of negative 3.1%. Yeah. Our expectation is that for the full year, we are going to see 1% positive plus. Yeah. The major dominant part of that recovery will come out of cost pass on to our customers. There are other elements also. We try to optimize our supply chain. We try to renegotiate with our suppliers, and so on and so forth. So we are touching each and every cornerstone and stone. But the major element is the price recovery from our customers.
No, that is very clear. Go ahead.
Out of this, we have realized in the first half, in the accounts, EUR 35 million, and the rest is to come in the second half.
Okay. No, that is very clear. Thank you very much. And then, I suppose, just in terms of your EDI schedule and call-offs, how much visibility do you have in terms of firm orders? Is that a couple of weeks, and are you seeing any changes or significant cancellations beyond that?
Yeah. Currently, we do not see cancellations. We see month by month a slight increase of the call-offs. So with the July turnover, we got call-offs for the next three months, August, September, October. For August, September, they were higher than we had them the month before. So there is currently, from our point of view, a stability in the market, a stability in the call-offs, and a slight tendency that they are going up rather than down. We have no cancellations or any other further, let us say, negative tendencies visible.
Okay. That is clear. Just one more before I get back into you. On those call-offs, how are they matching up versus your budget expectations? I know you do not give them out, but given that you give sales, clearly you have a budget for the call-offs. How is it working against the budget there?
Currently, the call-offs are matching or are better than budgeted.
Perfect. Thank you very much.
Welcome.
At the moment, there are no more questions here in the phone conference. Maybe just for everybody, as a reminder, please press nine and star if you would like to ask a question here in the phone conference. For the moment, I would like to hand over for the online questions.
Right. There are three. One is: Can you elaborate on the level of inflation passed through to clients? I think that got covered already by the other questions. The next question was about, can you give a split of the impact of the different elements that affected EBITDA, raw materials, personnel, freight? Jan can give some details.
I can. Happy to do so. Are you referring to the split of the EUR 314 million I was mentioning? Biggest part of that was EUR 180 million, coming from material. Second biggest is personnel, with slightly above EUR 50 million. Then we have freight and special freight as well, being around EUR 60 million. The energy part, in comparison to last year's first half, was EUR 21 million. So that is the split you were asking for.
Then there is another third question about equity ratio. Could you talk about working to improve the equity ratio? Can you clarify the options on hand to achieve that? It is definitely not about accounting. In our current German commercial code interpretation, we are not capitalizing any R&D costs. It is definitely not about extending depreciation and amortization periods or any other things. The way we want to do it is result improvements, and so retain earnings. That is the way how we intend to bring it back. If the market irritations are going to reduce and our countermeasures are going to be in place and bringing the right improvement, this is definitely the right way to do it. Then there are other questions, this time by Ruben Schwarzkopf. Do you have a specific expectation concerning full year free cash flow 2022?
No, we have not calculated this, but for the full year, the tendency is that we are going to see a negative free cash flow. Would you be able to let us know about the current volatility of the call-off situation? I think we addressed that already. Timothy is asking, could you please discuss the gas situation in Europe and what potential impact you can envisage on MAHLE? Yes. Out of our 35 locations in Europe, a bit more than 10 are under risk. Germany, Czech Republic, Slovenia, Slovakia are countries where we have presence with a footprint with a certain risk. We have evaluated by location the risk, and came to the conclusion that our risk is less than suppliers earlier in the supply chain.
By this, whatever is going to happen, we will be negatively impacted by the non-available supply of free products rather than by the gas supply. That is the outcome of our analysis. Haiyan Ding asked, can you confirm that 1% EBIT margin forecast was for the full year? Yes, I can reconfirm. Michael Reynolds is asking, can you give an update on your search for a new CEO? As far as I am aware, we are getting closer to an announcement, and most likely this is going to happen this month, but final certainty needs to be gained.
Emmanuel is asking, "What is the part of the production facility based in Europe, notably in Germany?" I think that is a question we do not have the information in hand here right now, but you can make it approximate that 45% of sales are realized in Europe. According to this, a similar equivalent headcount number is based in Europe, and in Germany we have still production locations, yes, and roughly 10,000 people working for MAHLE. Next question is, "Could you please elaborate on the potential energy supply rationing, if this materializes?" Well, as said before, we will see a kind of rationing for gas. There we have some plants being exposed, but more indirect rather than direct due to the supply chain thing I have described. That is the list we got in writing.
Yes. We have a few follow-up questions here in the phone conference now, and the first one comes from Markus Orschulik from Vontobel. Please go ahead.
Yes. Coming back to your CapEx guidance, you expect EUR 500 million. Can you split between maintenance and growth CapEx? Then the other, what is your thinking on dividends?
Yeah. Let's start with the latter. The latter one is a simple calculation. There is a very limited dividend paid to the foundation, based on either the net income or the EBITDA. You can assume that there is a max of EUR 3 million- EUR 5 million based on the results of 2022. The CapEx, we do not have a split in exact terms, but Jan can give some.
Yeah, you can take as an approximation that around 60%-70% more or less comes into project CapEx for new product, for customer projects. Basically, the remaining 30% is somewhat split in maintenance and infrastructural invest as well. That obviously heavily depends on whether we have a growing business or whether we have a stagnating business, if you like. Yeah. That just as an indicative value for you.
Mm-hmm. Because I just want to compare it a bit to depreciation and amortization. That has used to be around EUR 600 million in the past. EUR 600 million, EUR 650 million. You are doing EUR 500 million. Okay. You are.
Your number of amortization includes purchase price allocation questions and goodwill amortization. We are talking purely about CapEx in machinery and equipment and buildings and other things. There, the equivalent depreciation number for this year is expected to be in the neighborhood of EUR 500 million. With our management targets, we are realizing the growth, we are realizing the transformation, and are not going beyond amortization or depreciation in that case.
Mm-hmm. Okay. Thank you.
The next follow-up question comes from Haiyan Ding from ODDO. Please go ahead with your question.
Thank you. I raised a question via webcast, so it has been answered. Thanks.
Okay. Thank you. Then we come to the follow-up question from Tom with Morgan Stanley.
Hi, guys. Just, I suppose on the energy cost, if you could possibly break out what the energy costs were last year for electricity and gas, and what the expectation is for this year, that would be very helpful. Thank you very much.
One second. We'll try to dig out the information. If you look at electricity in the European community, we had in Germany, for example, in the course of last year, an average something like EUR 50-ish per megawatt hour. That's in these days, approximate EUR 400 per megawatt hour. So you can see that there is a strong jump up. That's different country by country, location by location. It depends on the supplying energy company. But there is definitely that strong increase visible.
Okay. But nothing specific on your part.
No.
I mean, can I work that broadly and apply that to. Okay.
Yeah. I think we are touched by the markets as they are in general touching everybody. Yeah.
All right. Understood. Thank you very much.
For any further questions, please press nine and star on your telephone keypad if you would like to ask a question in the phone conference or submit them in the web presentation. At the moment, I would like to hand back over for the online question that we already received.
Sophie Whitman asking, "We have seen a decrease in some raw materials recently. Is it fair to assume some raw material tailwinds in the coming quarters, or will energy, personnel cost, and other continue to impact profitability?" I would say both is going to happen. We will have some aspects negatively touching us, continued increase in personnel cost and the energy story is not over. But definitely alloys, for example, had a peak level in March with $3,800 per ton, and it declined down to $2,400 per ton. It is still expensive, but less than it used to be. So in the second half, we have definitely, out of alloys and some other materials, tailwinds, but continued pressure from energy in general, personnel cost and other matters.
We have no more questions either in the phone conference nor via the web tool. I would like to hand back over to the company for the closing remarks.
Yeah. Thanks from the MAHLE team side. Thanks for your participation. Thanks for the open and in-depth discussion. We are happy to ask or respond also on other questions and looking forward to staying in touch with you and wish you a great day. Thank you very much.