Good evening to all. Thank you for joining the presentation of our 2022 annual results.
My presentation will last 20 minutes and be followed by a Q&A session for another 40 minutes. I will handle the Q&A session together with Valeo CFO Robert Charvier.
Almost exactly one year ago, we presented our Move Up strategic plan and our financial outlook for the period 2022 to 2025. Today, I come to show you that we are delivering on the commitment we made last year for 2022. There are in my presentation today four main points that demonstrate that we deliver. We have achieved the 2022 guidance in a very challenging environment. Our growth is driven by the acceleration of ADAS and high voltage electrification.
We recorded a very high level of new profitable orders at EUR 32.6 billion, with very strategic orders and acceleration in electrification and ADAS. Finally, we show a 2023 guidance in line with our Move Up plan, which means a significant improvement compared to 2022 after a statement of the full impact of the high voltage business.
Now let's look at these results in more detail. As I said, 2022 guidance is achieved. We did it in a very challenging environment: a runaway inflation, a continued shortage of electronic components, a low level of automotive production, and of course, the consequences of the lockdown in China and the war in Ukraine. Our turnover, which exceeded the symbolic EUR 20 billion mark for the first time, reached the higher end of the range that we had set.
EBITDA reached 12%, and the operating margin 3.2%, the low end of our target range. Our free cash flow now was EUR 388 million, exceeding expectations, which were EUR 320 million. We achieved a good operational performance. Once again, we delivered to all our customers despite the shortage of electronic components.
Despite a low level of car production, our total sales reached just above EUR 20 billion. This represents a 16% reported growth and 9% like for like. Reported OEM sales growth reached 18%, and we had another very good year in the aftermarket with 9% growth like for like. Our order intake jumped by 48% at EUR 32.6 billion. Let me share with you three key characteristics of our 2022 order intake.
For number 1, it's a highly profitable order intake. We are applying a very strict discipline in getting new orders. These orders are taken at a margin that is significantly above the one targeted in 2025 in our Move Up plan, leading to further improvement of our profitability beyond 2025. Second point, regarding orders relating to electrification, 2/3 of the orders of powertrain and 2/3 of the orders of thermal are related to high voltage electrified vehicles. Regarding high voltage powertrain, those orders concern both existing and new customers, existing and new regions such as North America, as well as a fair share of new technologies such as 800 volt silicon carbide.
Third point, our orders in ADAS represent 3 times our ADAS OEM sales in 2022, including strategic contracts on large domain controllers, on software, on LIDAR.
Let's come to our 2023 guidance. It's made including uncertainty regarding automotive production. We input a growth of the global production from 0% to 3.3%, which is the S&P forecast, and an assumption of a net inflation, as well as our own cost reduction measures. In this table, we call adjusted the reintegration of our high voltage business as of January 1st, 2022, a kind of pro forma basis. Given these uncertainties, here is our guidance for 2023. Solid growth with sales between EUR 22 billion and EUR 23 billion.
An operating margin of between 3.2% and 4% with a significant improvement on a pro forma basis of our profitability of 0.8 percentage points to 1.6 percentage points compared to 2022. An EBITDA between 11.5% and 12.3%, also an improvement.
A free cash flow of over EUR 320 million, also in significant improvement versus a pro forma 2022 of EUR 205 million. As in 2022, there will be a significant improvement in our financial performance in the second half of 2023 compared to the first half of 2023. This guidance is in line with our Move Up trajectory. As sustainable growth is at the center of our strategy.
Our group is supported by strong governance. As we committed, the roles of chairman of the board and CEO are now separated. Gilles Michel is our newly appointed Chairman of the Board. Valeo's board of directors is marked by its strong independence and the diversity of its members. We're also transforming the group to drastically reduce its carbon footprint year after year and contribute to carbon neutrality.
In 2022, our greenhouse gas reduction results are better than the annual emissions targets of our CAP 50 program and trajectory. We are regularly recognized as a benchmark player in most of the ESG indices. Let's go into the details of our performance by region. We are outperforming global automotive production by three percentage points on a like-for-like basis.
On an adjusted basis, as a reminder, if you include the growth of our high voltage business, this growth shows an outperformance of 5 points, which is fully in line with our Move Up plan. This outperformance is across all our operating regions to various degrees. Our outperformance reach 11 points in Europe, 3 points in North America, 17 points in South America, and 1 point in Asia, as well as in China.
You can note that China now represents 17% of our OEM sales. In this same conference, at the end of Q3, I shared with you my expectations of an acceleration of our growth in Q4 2022. As you see here, our outperformance accelerated significantly, reaching 19 points on an adjusted basis. Please have a look at the acceleration in ADAS, +45%, and in powertrain high voltage, +76%. Let's look now at the performance of each of our business groups. Sales of our comfort and driving assistance systems business group increased by 18% on a like-for-like basis.
This represents an outperformance of 11 points compared to the automotive market. This outperformance was driven by ADAS, for which sales increased by 29% like-for-like.
2022 was marked by numerous starts of production, strong growth in Europe, in China, in North America, highly driven by cameras. In particular, for front cameras, we are on the course to become number one partner of Mobileye in 2024. Sales of our powertrain systems business group now. They increased by 12% like for like, including high voltage. This is 5 points above the market. The high voltage business already represents more than EUR 1 billion of OE sales. It's 32% growth like for like.
The year was marked by key starts of production and market share gains in North America, major wins with existing and new customers on all the high voltage powertrain technologies, including 800 volt silicon carbide and in all the production regions.
We have the industrialization of the Valeo Cyclee, our new e-bike assistance system, for which we already have 25 customers. The integration of our former JV, Valeo Siemens, was a major event for us starting July 2022. This integration is fully in line with our plan in terms of order intake, in terms of growth, in terms of product roadmap synergies, and this is important, the loss reduction that we planned in the powertrain high voltage business. The Thermal Systems business group now.
It increased its sales by 12% like for like and outperformed by 5 points. In particular, we accelerated our sales in Europe for electrified cars and in China as well, both with German and Chinese customers. Two-third of the orders in 2022 concerned e-thermal systems for electric cars.
Our visibility business increased by 5% like for like, underperforming the market by 2 points. This temporary underperformance is essentially due to the shortage of electronic components that led to an unfavorable product mix, more halogens, less LED headlamps. As the shortage improves, this business group outperformed by 6 points in Q4 2022. It will keep improving in 2023, supported by many more starts of production compared to 2022.
This business is going to benefit from added value in new very sophisticated LED pixelization and new opportunities with the extension of lighting to many surfaces, such as illuminated grills and logo or light surfaces. Remember, lighting everywhere. Our aftermarket business enjoyed a strong growth all throughout the year, with a total of 9% like-for-like. Also reported after a record like-for-like growth of +22% in 2021.
This growth is the conjunction of the aging global fleet of cars, increased market share, increased scope of business, as well as price increases. The group's EBITDA reached 12% of turnover, in line with the guidance in a very challenging environment. Three business groups contributed to the growth of our EBITDA in value. The EBITDA of our comfort and driving assistance business group increased EUR 84 million. It's the highest in terms of EBITDA margin at 15.8%, taking advantage of ADAS acceleration.
The EBITDA of Powertrain grew EUR 53 million to reach 10.9%, which was impacted in H2 as planned by the Valeo Siemens eAutomotive integration. The profitability of Powertrain is as planned. This is so important. The improvement of the former VSeA is as planned. This is so important.
Our visibility business EBITDA reached 13.1%, almost in line with last year. The business group which delivered lower EBITDA in value is Thermal. The EBITDA of our Thermal Systems business group is 7.3%. This particular business group had several headwinds.
One is the unexpected low volume of some key contracts they had in Europe, and another one is due to the fact that our contracts are indexed on the LME price of aluminum, while our costs are based on LME plus a premium that reflects the additional cost of our suppliers in terms of energy for transportation, for instance. This premium cost has largely diverged from LME. In terms of profitability, we achieved the guidance despite multiple headwinds throughout the year, at the top of which, inflation.
Our operating margin reached 3.2% of sales in line with our guidance. Our gross margin reached 17.2% of sales, down by 40 basis points. In 2022, we continued our efforts to bring down our net R&D cost to 6.5% of sales by 2025. That was a Move Up commitment. Actually, we reached 6.8% in 2022, demonstrating the efficiency of our standard and of our platform approach. The IFRS impact is limited to +0.4 point, which confirms the quality of our earnings.
The JV and associates amounted to EUR 115 million, which takes into account EUR 82 million of losses related to the Valeo Siemens eAutomotive joint venture in H1 2022, + EUR 181 million positive income due to the reevaluation to fair value of our 50% equity interest in Valeo Siemens eAutomotive before the full takeover in H2.
As you can see now here, our gross margin is impacted positively by +0.5 point volume effect +1.1 point effect from the product mix. The gross margin is, however, negatively impacted by the net -0.9 point impact of inflation on our material costs. It's in line with the guidance of around EUR 200 million of non-compensated.
It's negatively impacted as well by -0.3 points net impact of salary over inflation, in line with the guidance of EUR 60 million I indicated before. We have -0.4 points as well due to operational efficiency and synergies, and after deduction of the dilution effect due to price increase.
The perimeter effect following the integration of Valeo Siemens eAutomotive in H2, which has a -0.4 points impact on the gross margin. Here you can see the bridge of the operating margin, the -0.4 points effect on the gross margin, -0.6 points effect on R&D expenditures, and +0.2 points effect of the efficiency plan of our operating margin.
The group net income amounts to EUR 230 million, and as I just said, it includes a positive one-off of EUR 181 million related to VSeA shares revaluation. It also includes a negative EUR 43 million one-off impairment charge linked to full write-downs of our assets related to Russia. The cost of debt increased to EUR 131 million in the context of rising interest rates and the refinancing of Valeo Siemens eAutomotive's debt. In 2022, we generated a free cash flow above the guidance. One of the ways in which we have achieved this is through strict control of tangible investments.
We have managed to keep them at a rate of 5.2% of our sales, well below the 5.5% targeted in Move Up for 2022. Our free cash flow reached EUR 388 million. In particular, it results from the contribution of EBITDA. It also results from a slight positive working capital contribution of EUR 99 million. Our inventory level remains high to secure deliveries to customers in the context of the shortage of semiconductors.
This situation is temporary and will be reversed with the gradual normalization of supply chains. It also results from the strict control, as I said before, of our CapEx. All this leads to a net-to a debt of EUR 4 billion, the peak of the debt already integrated into our Move Up plan following the integration of VSeA. This number is fully in line with Move Up.
Our Move Up plan priority is de-leveraging. Our leverage ratio is 1.67, in line with Move Up and far below the covenant level. We confirm our priority on de-leveraging. As you remember, during the presentation of our Move Up plan, I set the objective of disposing of non-strategic assets worth around EUR 500 million by 2025.
At the end of 2022, we have already signed three transactions for a total value of EUR 80 million. Several other operations are currently under consideration and in advanced discussions for total value of around EUR 120 million. Other disposals for a total value of EUR 300 million are identified, with a timing that will depend on market conditions in order to maximize the proceeds.
Valeo will submit to the vote of its shareholders at the next annual general meeting an increase in the dividend to EUR 0.38 per share, which is 9% more than 2021.
The progressive increase of the dividend per share continues. Now, before opening the Q&A session, I just would like to conclude by reminding you that in 2022, we've been able to keep up the guidance in the very difficult context that we are all aware of. We have accelerated in ADAS and in electrification, fueling our growth and our order intake. In 2023, we will show a strong improvement of our profitability and our cash compared to adjusted 2022 data. You will see as well a further acceleration of Valeo in electrification and ADAS, which will continue to fuel our strong growth.
Well, thank you very much for your attention. Robert and I are now available to answer your questions. Thank you.
Thank you.
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We ask that you please limit yourself to one question and one follow-up question, allowing others an opportunity to ask a question.
We'll first hear from Giulio Pescatore of BNPP Exane.
Hi. Thanks for taking my question, Giulio. The first one on the guidance. Your guidance was so conservative in 2022 that you managed to reach it, and not even at the lower end, despite the war in Ukraine and the whole consequent impact of inflation, which I think is, it's a very good result. Looking ahead, is it fair to assume that you have taken a similar precaution stance on your targets for 2023? Is this an all-weather guidance? Any comments on that would be much appreciated. Then I have a follow-up on ADAS, please.
Well, thank you for your question. I don't know whether it was conservative in 2022. At the end of the day, we achieved to deliver the guidance. We were, of course, aware and well aware of the uncertainties that were in this automotive industry in 2022. We were aware of the inflation. We were aware, of course, of the risk of lockdowns in some places of the world. We were aware that the production was going to be constrained by a shortage of semiconductors. Given these uncertainties, we decided to size to put a guidance that we could achieve in 2022.
we have achieved the guidance in 2022, and I want to thank again the extremely strong commitment of all the teams of Valeo to show, to demonstrate resilience and, at the end of the day, deliver all aspects of the guidance. Now in 2023 or looking into 2023, there are uncertainties. There are uncertainties when it comes to the global production. is it going to be 82 million cars? Is it going to be 85 million cars as S&P forecast? There are uncertainties relative to inflation.
There are multiple uncertainties where, when we look at the situation in 2023, we believe that the guidance that we are, showing to you today is well-adjusted, given the uncertainties and the headwinds that the auto industry continues to face.
Thank you. Very clear. The second one on ADAS. Mercedes announced last night that they will be switching to Luminar LIDAR sensors starting from 2024. I think you were supplying to Mercedes before your previous generation of SCALA 3 technology. What do you think made a difference here for Luminar? I know you already have a contract with Stellantis and, we cannot assume that you're going to win every business. Are you comfortable with your position or your competitive positioning in ADAS? How, what is making a difference for carmakers as they choose this critical component? Thank you.
First of all, on ADAS, globally speaking, we have an extremely strong momentum, and this momentum is demonstrated by our growth in 2022, that was 29%. It's demonstrated as well by the order intake that we had in 2022 at three times our sales. In terms of ADAS, the momentum is extremely high at Valeo, and I think we have, a very strong leadership when it comes to ADAS. Now, your question is specific to the LIDAR technology. I'm going to tell you something. I'm not going to comment one or the other contracts. What I want to tell you that our third generation of product, which we call SCALA3, is now under, test at many different OEMs.
We have announced, already the order from Stellantis a few months ago. The commercial dynamic, the commercial momentum of this product is extremely strong. I'm extremely positive, and I'm extremely optimistic that, in the weeks to come, we will be able to announce new orders when it comes to our lidar technology. Please keep posted for next coming positive news on our lidar technology.
That's great to hear. Thank you.
Yes.
Our next question for today will come from Michael Jacks, Bank of America.
Hi. Good evening, Christophe. Two quick questions, if I may. On the first one is on the guidance. What is the level of cost inflation and pass-through that's been built into the 2023 guide? The second question is just on order intake. What was the actual value of the order intake attached to the high voltage powertrain business in the second half? Does this now take you to a 100% book status in relation to your 2025 revenue target? Thank you.
Well, thank you for your question. The first question is on the pass-through. There's a new wave of inflation in 2023. As I said, it's about electronic components, it's about energy, it's about wages. And that's a true inflation wave that's coming on us. Well, now we are a little bit experienced because we had quite a similar wave or high wave in 2022 that I think we managed quite well. We're going to manage this new wave in the same, in a similar way. That's going to take some efforts that are going to be a mix of price increases that we're going to get from our customers and internal productivity measures.
You remember we had an efficiency plan last year, we are continuing on this efficiency plan in 2023. The solution of the inflation wave that's in front of us is on prices, on the one hand, and on the other hand, on internal productivity measures. Thanks to the combination of these two, we're going to manage this inflation wave the same way we managed it last year. Coming to your second question the order intake of powertrain high voltage is not a metric that we're going to report anymore. We are reporting on the order intake of Valeo, and we're going to report on things like 2/3 of the order intake of powertrain is electrified. I'm going to give you a sense.
We have communicated at the end of S one 2022 that we had accumulated EUR 3 billion of order intake in 2020, in the first half of 2022. We have not stopped working at the end of S one, and we have continued to take orders in the second half of 2022. At the end of the day, the amount of order intake that we could secure in high-voltage powertrain is very much in line and coherent with the objective to have sales exceeding EUR 4 billion in high-voltage powertrain after 2025. I think we are on track when it comes to the order entry of the high-voltage part of our powertrain business.
Good. Good. Thank you. Just following up on the first one, should we think about a similar cost inflation level in 2023 as compared to 2022, so somewhere around the EUR 260 million mark?
Could you repeat your question, please?
In value terms, should we think about the cost inflation development in 2023 at a similar level to what we saw in 2022?
The cost of inflation, the additional costs that we're going to face in 2023 are going to be significantly lower than the one we had to face in 2022, just because the raw material increase that we saw in 2022 seems not to happen in 2023, and even some raw material are decreasing, as . The inflation is made in 2022, 2023 of new categories, different categories. It's energy on the one hand. It's still electronic components, similarly to 2022. It's wages. There are new categories. Overall, the inflation wave is lower in 2023 than it has been in 2022.
Thank you.
Our next question comes from Philipp Koenig Goldman Sachs.
Yeah. Good evening, guys, and thank you also for taking my questions. My first question is just on the R&D. Can you just comment on R&D in 2020-2023? Do also with the order intake that you took, can you expect R&D to step up again because it obviously stepped up already quite meaningfully in 2022. In terms of the IFRS impact, I know it was lower than in previous years, but it did step up quite a bit from H1 to H2. Any sort of guidance on the IFRS impact for 2023? My second question is just sort of on the start to the year, we sort of had a bit of mixed messaging from other companies.
What can you sort of say on the volumes, availability of semiconductors, in the first two months of the year? Thank you very much.
Thank you for your question. Well, when it comes to R&D, we have very good news in 2022, and I would like to spend a little bit of time on that. We have higher R&D in 2022, but we have higher revenues as well, or significantly higher revenues coming from our R&D. Therefore, the metric that we are using to really demonstrate our progress in terms of R&D costs is the net R&D. It's the R&D we spent minus the revenues we get from our customers from this R&D. If you remember in 2021 pro forma, our net R&D was 7.9% of our sales. In 2022, our net R&D is 6.8% of our sales.
We went from 7.9% in 2021, sorry, to 6.8% in 2022. This is 1.1 point improvement, which is a great improvement. Now, where is this improvement coming from? This improvement is coming from the R&D synergies that we announced from the integration of Valeo Siemens on the one hand, and on the other hand, it's coming from a lot of progress we make on standardization, platformization of our R&D, so that the amount of R&D we spent for each EUR of order intake is being lowered in a significant manner. I think this extremely good news for our business model had to be highlighted, and I'm pleased that your question gives me the opportunity to highlight it more.
When it comes to the volume and the trading at the beginning of the year, it's not maybe as good as I would like it to be because, in China we still had, in January, some impact of COVID. We're seeing in China the volumes and the activity coming back in this second half of February. Globally speaking, when I look at January, when I look at the forecast we have for the next three months, when I look at the overall EDI that we see from our customers, we are comfortable with the guidance of between EUR 22 billion and EUR 23 billion of sales that we communicated to you during this meeting.
Thank you. Can I maybe just give one quick follow-up question? You obviously mentioned that the operating margin should be rather skewed to the second half of the year with an improvement. Is there any sort of number that you can give us in terms of H1 to H2? I think last year you guided to around 150 basis points. Should we assume something similar for this year?
I think it's too early to answer to this question precisely. We'll give you more update as time goes on. There's a couple of fundamental reasons why H two is going to be higher than H one. One is that the volumes, production volumes in H two are going to be higher than the volumes in H one. S&P numbers are showing a market or production volume in H two that's 1.6 million cars higher than the production volume of H one, point number one. Point number two, and that was the same in 2022, there are some discussions with our customers that unfortunately take more time than we expect. This is a fact.
This was a fact in 2022, this is why we get a significant amount of compensation in H 2 2022 with a carry-back effect from January 1st, 2022. I have to say, unfortunately, it's going to be the same pattern in 2023. There will be some resolutions of ongoing negotiations at the beginning of this year, I know as well that for some other customers, it will unfortunately take more time. It's too early to say at which exact speed we're going to resolve all the existing ongoing negotiations. This is why I'm not in a position today to answer your question. I know that the profitability in H 2 will be significantly above the one of H 1.
Great. Thank you very much.
We'll keep you posted.
Next we'll hear from Thomas Besson of Kepler Cheuvreux.
Thank you very much. It's Thomas of Kepler Cheuvreux. I have a few questions, please. First, I'd like you to talk about the order intake. Historically, Valeo probably had an excess degree of confidence in explaining us that the order intake was going to translate necessarily into revenues in the future. Can you help us understanding how it's built now in terms of volume assumptions, take-up assumptions in terms of options, et cetera. Maybe mention to us if you plan to disclose the regional and business split of that order intake as you used to, or if it's not something we're going to get. That's my first question.
Thank you, Thomas, for your question. On the first one, we are applying on the accountability of the intake an extremely strict discipline. This is something that together with Robert, since the beginning of this year, we are extremely strict with our teams. We are never using any more any volume communicated by our customers. The order intake that we have put in 2022 is an order intake which is not based upon the volumes communicated by our customers. It's based upon our own assessment of the volume, our own assessment of the volume is at the time when we record the order intake based on S&P. This is the way we do. I think it gives a lot of credibility to the calculation of the order intake.
We started this new process together with Robert at the beginning of 2022, so the full order intake of 2022 relies on volumes which are in line with the market and not in line with some dreams of customers to do more cars than they can actually build. Point number one. Point number two, this order intake is coming with a high profitability. Here as well, together with Robert, we are putting an extremely strict discipline in the selection of the order intake. This order intake is coming with a higher profitability than before this is a statement that we made or I made during my presentation. Point number three, the order intake by business group is not a reporting metrics. This is not something that we are reporting.
We are reporting the order intake globally. I gave you some hints. I gave you the hints that there's a tremendous momentum on ADAS, 3 times the sales on higher sales because we increased significantly our sales of ADAS in 2022. I gave you as well the hint that on electrification we are accelerating, so there's a pretty large amount of this order intake that's on powertrain high voltage and that's on thermal e-systems or systems for e-cars.
Thank you. I have simple modeling questions maybe to follow. Could you give us some indications on the absolute level of CapEx, interest and tax charge in 2023, please?
I'm sorry, Thomas, I didn't get your question. Can you repeat it, please?
Of course. Can you give us some indications about the 2023 absolute CapEx interest charge and maybe an indication of where the tax rate is going to go to after a relatively high tax rate the last couple of years?
Robert will answer this question.
concerning the tax rate, our target is around 35%, sorry. concerning financial expenses, interest, we should be between EUR 140 million and EUR 150 million. concerning our CapEx, we should be around or slightly above 5.5% of our sales.
Which is a catch back of 2022. You remember in 2022 we had planned to decrease our level of inventory. It was not possible. Frankly speaking, it was not possible given the disruption of the supply chain. We kept our inventory at a pretty high level. At the same time, we compensated by significant reduction of our CapEx. This was valid in 2022. In 2023, we will have to accept and implement some additional CapEx, probably a little bit higher than the 5.5%-
Yeah.
that we have in our business model. At the same time, we will compensate by a reduction of the working capital because there's a lot less disruptions in the supply chain that we had in 2022. For instance, the sea freight had cycles that or transportation time that increased by two weeks, pretty much for 2021 and 2022, and now it's back to normal. We can reshape the loops, the logistic loops that we had to agree on during 2022. We can change this as soon as now.
Clear. Thank you very much. Can I add a very quick follow-up, please?
Go ahead.
Can I ask if we have seen the trough in terms of margins for your two weakest divisions which have been now for a while, Thermal Systems and Powertrain. In H2, you were respectively at 6.5% for Thermal, 9.8% for Powertrain. Do you think this is the absolute low or this may still decline in some of this business in H1 2023?
Oh, that's a good question. Well, I will differentiate powertrain and thermal. On powertrain, we are on track. If you take back the Move Up presentation, the objective for powertrain in Move Up for 2022 was 10.4% of EBITDA, and we have reached 10.9% of EBITDA. Powertrain is doing better than planned. It's doing better because the integration of Valeo Siemens into Valeo and into powertrain works, and works well. I really want to insist on that.
This integration is a success, delivers results, delivers synergies, and therefore we have an improvement of the PTS financial delivery versus the plan. This was true in 2022, and I expect it to be true in 2023 as well.
It means I expect a further improvement of powertrain year after year according to the plan or ahead of the plan that we showed during Move Up. When it comes to thermal, it's a disappointment. I will not hide it. It's a disappointment in 2022. It has reasons, it is a disappointment. the main reason is the divergence of the price of the aluminum LME and the price we buy aluminum.
If I put in your hands the products of thermal, it's very simple: it's just aluminum. It's aluminum that is cut, it's aluminum that is stamped, it's aluminum that is braised, it's aluminum that is assembled. This is about aluminum. When we have a fundamental disconnect between the aluminum we buy and the aluminum we sell, it gives the results that you've seen at thermal.
We have reacted extremely strongly towards our customers to make sure that we're going to change the index that is used for the thermal business, which used to be LME, and which is going to be LME plus all the additions to the LME price. I mean, the energy, I mean the premium, I mean the additive, because we have magnesium in the aluminum and so on and so forth.
I do believe that we have the lowest point of profitability of thermal in 2022, that we're going to grow from there, but it's a true disappointment for all of us to see thermal where we have seen it in 2022. Overall, we could achieve our guidance. It means that we have had all the good news to compensate for it in 2022.
Thank you very much, Alexandre. Our next question comes from Christoph Laskawi of Deutsche Bank.
Good evening. Thank you for taking my questions as well.
The first one would be, also coming back to the order intake and the margins that you've highlighted. My question would be, did you change the contract structure to some degree on the indexation or cost components so that the margin that you highlight today will be the same in basically every macro environment when it comes to input costs also in 25, outside of the volumes which you highlighted you take a haircut to? Are there still, say, indexation deltas that you've highlighted with thermal which could impact the margin either way, up or down?
Then on 23, the outperformance that is implied, could you just give a rough comment if we should expect the same pattern of outperformance like in 23, so more back-end weighted? Will the business units sort of more align to one another, or will there be another big spread between the units? Thank you.
Your second question is related to sales of 2023, right? Outperformance of sales.
The second one, yes. Yes.
The first one being on order intake. On the first one on the intake, in the contracts we have with our customers when it comes to the orders we were awarded in 2022, there's much better indexation than what we had before. We're learning the lessons. The auto industry is learning the lessons. I think nobody wants to spend 6 months of the year to negotiate things that should not be negotiated because they are so obvious. As a consequence, it means that the contracts of 2022 are much better indexed than what we had before.
Now, not everything is indexed. For instance, labor is not indexed.
What we have in our plan and what we have in our calculation of margins for the businesses that we got in 2022 includes the assumption of an inflation in the years to come. It means that when we make our calculation of margins, we account for an increase of wages in 2023, in 2024, in 2025, in 2026, based on a significant inflation in the years to come.
As a consequence, we are believe we are on the safe side. We believe that we are taking the assumptions that are right and that protect the margins of Valeo, and that makes meaningful the profitability of the order intake that I've reported to you today. Related to the second question, on the 2023 sales, you can expect continued acceleration of ADAS.
You can expect a continued acceleration of high voltage powertrain. What has been the success of Valeo in 2022 should be again the success of Valeo in 2023. There's one gap, as I said in my presentation, visibility. Visibility has been lagging behind in 2022 for several reasons that I will not come back on now because I already explained it. It has turned in Q4, as explained, 6-point outperformance in Q4 visibility when it was or it has been an underperformance for the last two years. As a consequence, I expect that the outperformance of visibility will be there in 2023. This is what we see in our budget and in our numbers.
Very clear. Thank you.
Our next question will come from Sanjay Bhagwani of Citigroup.
Hi. Thank you very much for taking my question also. My first question is on coming back on the thermal you mentioned.
You mentioned that you are basically changing the indexation to make it like LME plus some premium. Is that already done now? Let's say for example when we look at the LME price for aluminum for Q1, then automatically the customers will apply the prices which are like much lower than what they were last year. Customers would be expecting the price downs on that. If I understood it correctly, you are still paying the prices which are higher than the current price.
Is this, change in the contract already happened, or this could be a drag for, let's say, another half year or slightly more? That's my first question.
Well, thank you for your question. It's a very good question. Obviously we're not discovering on February 23rd that we have a problem on aluminum. We have discovered this as this divergence was created, and this divergence appeared sometime around midyear of 2022. Therefore, we reacted very strongly, and we engaged into renegotiation with most customers.
On the largest customers of thermal, this renegotiation has happened, and we are enjoying higher price of the aluminum we sell to them at the beginning of this year. It's not done on all customers yet. We're going customer after customer. It takes some time as you can expect. We're seeing some support from our customers on this aspect.
Thank you. That is very helpful. Coming onto the electronics cost inflation, are you also expecting electronics inflation as much lower this year? I guess on aggregate you talked about cost inflation is going to be significantly lower this year. Is that the same message on electronics as well? Also, are you already in discussions with adding the electronics components into the contract as well? Any more color on that would be very helpful as well.
Well, thank you, as well for this interesting question. The surcharge, the price increase, cost increase of electronic components in 23 is lower than the one we had in 22. It's still significant, but it's lower. I think it answers your question. We don't really have an indexation on electronic components in our contract because there's no index of electronic components. There's no existing index.
You have index on energy, you have index on transportation, you have index on raw material, of course, on all kinds of raw material. You have index on rare earths. You don't have any index on electronic components. By the way, the situation is very different, whether it's a passive component, an active component, a microprocessor, a MOSFET, a power module or you name it. So there's no existing index.
There's no indexation on electronic components. We have on electronic components discussions that are category by category with our customers. These are not the most difficult conversations because there's still a shortage, because our customers still want to secure having the right amount of electronic components in 22. As a consequence, these discussions on electronic components, because we had them already in 22, because it's very factual and easy to understand, are not the most difficult ones we have in 23.
What is more difficult is energy, it's wages, because it's new. We have, customers and us, the expertise and the experience of managing electronic components for already one year. That's pretty easy to do.
Thank you . If I understood this correctly, electronics still requires negotiation, but this will be much faster now because you already have the processes in place.
That's correct.
Is that fair to say?
That's correct.
Yeah. Thank you. Thanks.
Our next question comes from Pierre-Yves Quemener of Stifel.
Yes. Good evening. This is Pierre with Stifel. I would have two follow-up to be sure that I fully understood what you. On your previous answers. The first one, going back to inflation. Christophe, you mentioned that the cost inflation, the net cost inflation for 2023 should be significantly lower. Are you talking about the lower than the EUR 200 for input cost of last year or for the overall inflation of-
EUR 260 million, if we include the labor cost, could we have a ballpark number? Are you baking in 50% less inflation, 60% less inflation? Would be the first question. The second question is on the high voltage business. I appreciate that you disclose the impact of the former VSeA consolidation on the gross margin of, I think, been a headwind of 40 basis points in 2022. Is this the same impact at operating level, or is it significantly higher if we are to factor in the SG&A R&D cost attached to the business? Thank you very much.
I will answer the first question. I will let Robert answer the second one. On the first one, what I said is that the inflation wave is lower in 23 than it has been in 22. When I say that, I mean the gross amount of the inflation wave. The problem we have to tackle is lower in 23 than the one we had to tackle in 22. Now, this inflation wave will be addressed by a set of two measures. Point number one, price increases at our customers. Point number two, productivity measures, cost reduction items at Valeo.
The combination of these two elements, price increases on the one hand and productivities on the other hand, on a basis that's lower than the basis of last year, is leading to a compensation of the gross inflation of 23 in our P&L.
This is what I wanted to share with you. I hope it clarifies where I was not clear enough before. Robert, the second question.
Concerning the second question, you have seen that in the bridge, concerning the operating margin between 21 and 22, we didn't show any figures concerning the change of perimeter linked to Valeo Siemens. This is because when we take into account the impact of the gross margin, there is almost no additional impact when it comes to the cost which are below the gross margin. You can consider that the impact of Valeo Siemens on the operating margin is the same order of magnitude as the one on the gross margin.
Very clear, Robert. One last question. Christophe, don't be mad at me. You assume you will be able to fully compensate that new wave, which growth amount is lower than in 2022? That's the correct understanding through price increases and productivity?
Well-
Thank you.
Our target is a full compensation, for sure. I'm sure you have noticed that we've not guided for a specific number when it comes to the operating margin of next year, but on a spread. There's room for different kinds or different levels of compensation.
Okay. Thanks for the colors.
Mm.
Our next question comes from Himanshu Agarwal of Jefferies.
Jefferies, thanks for taking my questions. The first one I have is on the cost inflation. Given in 2023, OEMs are likely to cut prices to support demand. When you are negotiating about the cost inflation regarding energy and wages, are you getting any pushback from OEMs? What level of confidence do you have in able to basically get the price compensation?
When should we start seeing this reflected into your earnings? Is it more going to be in Q1 or Q2 when we start seeing the price headwind EUR 75 million-EUR 100 million, but it is in fact a EUR 100 million tailwind? What changed in the last two months? Because you mentioned inventory is still at an elevated level. Thank you.
Thank you. I will take the first question. Robert will take the second one. I think the answer to the first question. Of course, there's pushback. I will not tell you that we are welcomed with flowers when we ask for price increase linked to wages and energy. Of course, we need to have these discussions. In some cases, they are tough. In some cases, they are difficult. In some cases, we have to use our pricing power because we have pricing power with our customers. Not everything is written in a contract.
We are supporting our customers in many different ways. Some ways are planned contractually, some are not planned contractually. We have pricing power versus our customers.
It's tough, it's difficult, but I think we have a good track record in 2022. You remember when I mentioned this lack of compensation in 2022 and gave an order of magnitude, there was a kind of surprise in the financial community.
We have been able to evaluate quite well what was going to be the impact in 2022. I think we are in a position to evaluate quite well what's going to be the impact in 2023. We have encapsulated the different scenario in the spread of profitability that we have guided for today. It's tough, but it's going to happen. Robert.
Concerning the free cash flow, you are right. When we communicated our sales for Q3, we were more pessimistic concerning the evolution of the working capital and especially concerning the evolution of the inventories. At the end of the year, finally, it was better. I have to recognize that our forecast in terms of inventories were too pessimistic.
On the other hand, we have also been helped by the fact that during the last quarter, or we were able to take advantage on a better customer mix in terms of payment terms. The sales in Europe and the sales in North America were higher than what we were expecting in October.
It has also, it had a positive impact on the working capital. This is what I can say. T he management, the forecast of the working capital is probably one of the things which is the most difficult in finance, especially when the supply chain is very much disrupted. This is what I can tell you.
Well, I would like to thank you very much for your attention. We are just above the hour, and we are at the end of this Q&A session.
I'm sorry for the questions that could not be asked and therefore could not be answered, but I'm sure there will be other opportunities to address your remaining questions. Thank you very much for your attention, and have a good evening.