Good morning, after all. I am Maxime Marie from the DB European Auto Team. Thanks, everybody, for being with us today. It is my pleasure to be joined today by Michel Favre, CFO of Faurecia, for this session. The format is a fireside chat for about 35 minutes. I will ask some prepared question, and also any questions you may have. You can ask those question using the box you'll find on the webcast page. Only I will see your question, but I will be able to pass it on and ask Michel about it. With this, now we can start our chat.
Michel, to start with a big picture question, may you begin by sharing your view of the market, the shape of demand and recovery that you're seeing in the different geographies, what you are hearing from your clients regarding the production ramp-up, and also how much visibility that you have currently on their ramp-up plans?
Thank you, Maxime. Good morning or good afternoon, according to your region, to everybody, and thank you for your attendance. It's a very good question because we see a relative very contrasted. China, we think that inventories are limited. We have seen in the current period, since January, that production is in line with the retail sales, which is good.
We see figures confirm, which means that when I made the start of uncertain of April, I was giving a clear highlight on the fact that we'll be at budget, even slightly better, in June. I fully confirm the figures at some millions EUR. Millions EUR positive, moreover, I will say a difference. Clearly, China, we have a better and better view. I will say we have a two-month view. July will be in line with June.
After that, we'll see if figures continue to improve and if we can speak of a real recovery of China. When I say a real recovery, because when we see the figures pre-crisis, post-crisis, we are still at -20% on volumes of the market respect to 2017. Moving to North America. North America, car makers have continued to sell during the crisis. They have a lot of orders to deliver. Today, we can say that for them, inventories are limited.
This means steady calls for June and July. Of course, afterwards, it will depend on the success of the retail sales of June. This, I will say, pattern is positive. Apparently, this conference, some, I will say, car maker managers have confirmed that. We have positive messages that we receive from our core, I will say, customers. I can only confirm that.
Of course, they have a better view than myself. Europe is much more contrasted. We're surprised to see that between car makers and dealers, a lot of inventories, probably there are 500,000-700,000 cars, additional to the normal level as inventories. Probably car makers face some cancellation of orders, probably on sector like rental cars have canceled some orders.
This has a material impact. This is driving, for the moment, a smooth recovery. When I say smooth, that means that May, for instance, was only a 30% normal month. June is better, but will be between 72%-74%. For our view on July, with the calls we have, will be on the same magnitude. We see a higher volatility on the calls, programs, than in other regions.
Europe has still to be stabilized, and probably we'll need September to see more stable programs, et cetera, figures for the future. If I speak about the picture for the second half, you know that IHS has put 10% -11% even. Probably they are too r ich, I think, for China. Even for North America. Europe could be on the opposite, I will say, too optimistic. It is our view at Faurecia today.
Thanks a lot. Maybe you mentioning Europe and the fact that you have some inventory, some over inventories, not only at dealers and OEMs. We have seen different governments laying out their incentive plans in the past weeks in order to revive a bit the industry. Do you believe that this could trigger an acceleration, potentially, of the ramp-up, fixing the over inventory that we are seeing in the industry? Do you think that it's not enough?
It was a clear goal of the French government. It is why the French government has defined a level of 200,000 cars. The core French contribution, number one, should be to absorb 200,000 cars of over inventory, which is a sleeping contribution respect to the figures I gave before. German government was more focused on these hybrid for the reason that the ecologist party.
They were unable to make the same kind of incentive than the French one. On the opposite, it is important that they have reduced the VAT by 2% because this will help, probably, the demand by the end of the year. When it happened in China, it was quite impressive. Probably this will help the production in Germany in the last month of the year.
Understood. With regard to your clients and OEMs, did this crisis change some of their plant, meaning delayed some of their production plant or even canceled some of their production plant? Where I'm going with that is that you mentioned initially that with regard to the outperformance and the pipeline of orders that you have, you were expecting a bit less outperformance in 2020 initially before a ramp-up and an acceleration from 2021 on. Is that still the case? Did you see any meaningful change in the plant that your customers have with regard to the ramp-up of some productions?
It's a good question. We see average, because of course you have some exceptions, et cetera, a two month delay. To launch a new car is a very big deal for the car makers. With the lockdown period, they prefer to delay by two months. It's what today we experience as an average. This will have some impacts, manageable, but it will have some impact for us because we are gaining market share. To be honest, it's not material. I can confirm today the outperformance expectations for the full year that we are targeting.
Understood. With regard to some of the other suppliers and maybe smaller suppliers, we are hearing some of them are actually struggling. You're talking about a two-month delay. Are you seeing in some specific cases some more bottlenecks within the supply chain due to some other suppliers that would be struggling to ramp up again or have been hit maybe a bit harder by the crisis the past few months, which could trigger some disruption within the supply chain in the current environment or in the coming months?
You know that it is the sense of your question, that there is a very important integration of all the supply chain. We have managed that during the lockdown. We have made even two supplier conventions to communicate with them, to give them a clear highlight of what is happening, when things will restart. We have, of course, a grid to manage what are the risky suppliers. Many risky suppliers, the main risk is financing, to be clear.
We have renegotiated with banks to be sure that banks will be able to give, I will say, the reverse factoring if the supplier asks for it. This will be the easiest way for suppliers to be financed in case of struggling. We think, and we continue to manage that. We think that on a Faurecia basis, we have limited risk.
I will not say no risk, but very limited risk. I cannot speak for car makers. Of course, some car makers have identified as well some difficulties, but I cannot speak for them.
Understood
For the moment, what has been restarted, all the plants have restarted, all the molds for this have restarted. We don't see for the moment a struggling in the chain. Probably car makers have made what is necessary, some advancement, et cetera, to secure that.
Understood. Given the situation that you've mentioned in the different geographies, maybe you go through the current utilization rate that you're seeing at your different plants and when you expect that you will be back to a more normalized level.
I can be provocative?
Of course.
We were on a basis of 91 million cars production worldwide 2017. Last year was 85. This year, according to our view, will be between 62 and 64. Next year, we are making our assumption on the basis of 72. 2022, probably 82. We recover the 2018 figures only in 2023. I am speaking, unfortunately, of low utilization rate for Faurecia.
Now we are making our own work with some additional restructuring. Unfortunately, we speak of something like 60%, which means that many plants I have at least one shift reserved to make additional production. This problem of capacity in the automotive sector is a reality. Car makers will probably have to close some plants, and I can assure you that we will do our homework on this.
Understood.
We are preparing some restructuring plan. As a guidance, I can tell you that instead of EUR 100 million of restructuring this year, we'll more than double this figure in 2022.
Understood. That leads me to my next question, which was actually with regard to your cost-saving plan that you already had in place for 2020. You already assumed some annual savings going into the year. If you could go through a bit the different measures that you've implemented since to face, well, first the crisis and the temporary measures that you've implemented during the crisis, and also the measures that you've implemented on a more sustainable level that will also benefit the coming years, even after the COVID crisis is fading away.
We will be talkative on that in July. We have to differentiate what is short term and what is structural. Short term means that we have dismissed the temporary people. We have frozen a lot of requirements. We have stopped the major part of subcontracting. We have no consultants. We are using downtime subsidized by governments, et cetera. This is a big part of the savings of the first half. On top of that, we have some structural savings.
That means we have simplified. We have the product lines. We have made some restructurings. We have implemented SAP, et cetera. This more or less, I would say we will make something like EUR 500 million cost-cutting program in first half, two-third are short-term, one-third is structural. When we go to the second half, it's clear that the short term will be much less because volumes are coming back.
Structural will be increased. I have given you a first figure for the structural. You can anticipate that it will be much more in the second half. Of course, this will continue to be amplified next year, because we are increasing the restructuring program. Our target is to reduce, of course, the break-even points. Our target is to confirm our 2022 ambitions, but with lower volumes than before.
Today, we have a guidance of 8% operating margin, 4% cash flow on the basis of a worldwide volume of 87 million vehicles. We want to repeat this guidance, but with a lower volume of probably 5% lower worldwide volumes. It is our ambition. It is on this side we are working. If you allow me, I will be more precise, probably in July, on these topics.
Understood. Maybe to stay on this topic, you've mentioned that actually, thanks to the measure that you've implemented, you've been able to reduce the volume passthrough to 25%, thanks to all the cost savings, temporary and the sustainable one that you are implementing. Well, first, are you confirming this figure? As we move into H2, you will have less volume pressure for sure, but some of these temporary measure will actually fade away and disappear. Could you maybe go through what kind of volume passthroughs that would imply for first H1, but also going into H2?
Thank you for the question. Firstly, the passthrough, which we just call passthrough, I don't know which is the right word in English, I take your expression. We have a margin on variable cost of 27%. To make only 25% means a lot of improvements and a lot of flex and cost-cutting on the fixed cost, which was last year 19% of our sales. I confirm the 25% passthrough for the first half. Our target is, of course, because we'll have an impact on the second half, because probably the third quarter at least, will be lower than a normal quarter due to Europe. We'll see for the last quarter. I confirm that we will do better in the second half.
Maybe closer to a 15%-20% kind of level would be an achievable level, you think, going into H2?
We have to fine-tune our budget. You cannot commit today to 20%. Anyway, 20% is the target that we have inside on the additional volumes. When I speak of figures going back to 72 million, 82 million, we are clearly targeting a passthrough, as you say, of 15%-20% increase of margin on these additional figures.
Understood. In the Q1 sales call, I think you mentioned that the cash burn for the H1 could be reaching close to EUR 1 billion. I just wonder now that you have a bit more visibility on this topic, if you think that's still the relevant figure to think about. Also what kind of expectation you have going into the second part of the year with the working capital recovering and notably with June starting to benefit from incentive. How fast do you think you can offset the cash burn you've seen so far, thanks to a recovery of orders?
It's a good question, because when I was making this close of the first quarter, I was thinking to EUR 3 billion of sales drop or loss as you want due to the COVID-19. We are more at EUR 3.3 billion, because Europe is a smooth recovery. On this basis of EUR 3.3 billion, which has a direct impact on the factoring, which means on the factoring of receivables, which will drop probably to EUR 600 million. We are more today thinking to EUR 1.2 billion. Clearly, a significant cash burden on this first half, mainly due to, I would say, the working capital evolution with the lag between suppliers and customers, and we have a 20 days difference. Second, which is a EUR 700 million, with this drop of factoring.
Taking our assumption, we will recover normally major part or total part of the working capital lag. We will recover a big part of the factoring. It depends on the course of sales of the last quarter. This EUR 1.1 billion, normally will be recovered in the second half. What will impact my cash in the second half will be mainly the lack of EBITDA, and mainly the lack of EBITDA of the second quarter, which will impact my cash flow of the first quarter. We have always, as you know, a lag of this kind of impact. All together, I will say my guidance will be to halve as a net cash flow burden. EUR 1.2 billion in the first half, probably full year, EUR 500 million-EUR 600 million negative. It is my view today of what will happen to Faurecia.
This crisis will have a very significant impact on Faurecia and I think on the sector. This is taking into account a big drop of CapEx, more than 30%, a drop of R&D, mainly the gross R&D, which means the R&D activation, by something like at least EUR 100 million, and an increase of restructuring cash out of minimum EUR 75 million.
If I'm looking beyond 2020, notably the drop of CapEx you're mentioning here and the drop notably on the EBITDA, does that mean that we could have a catch-up next year on some of those aspects, and that would affect working capital recovery, or that's mostly well delay in term of a program that you've mentioned earlier that's covered by this, and we won't see a catch-up at some point from this?
On the working capital, normally we'd have cleaned the situation by the end of the year. I don't expect a big impact next year. We will have growth next year, normally. The growth, effectively, if I take my 2022, it will be modarate , respect to the last quarter. No big impact on the working capital. We'll have rebuilt a taxable EBITDA, next year.
We will continue to reduce CapEx because with this kind of volumes, of course, we don't need capacity. CapEx will be limited, probably EUR 500 million. We optimize the R&D. My target today is not still a guidance, but I hope it will become a guidance, will be to reach EUR 500 million net cash flow, which was, if you remember, our track record. Which is important because I think cash generation in this kind of period is key.
Margin-wise, on this base of 82 million, we should be able to restore an operating margin between 6%-7%.
Already in 2021?
Yes.
Understood. Maybe can you go through a bit the perimeter effect that you are seeing this year, notably, Clarion and SAS. That was supposed to provide some support on your margin improvements for the year. Can you elaborate if that's still going to see an improvement this year and how the restructuring is going, notably at Clarion? Has there been any change there due to the current situation? Have you accelerated some plans, notably, on that part?
SAS is mainly European. Unfortunately, and mainly European and mainly Brazilian. SAS has been clearly impacted by the lockdown. We are today restarting SAS with a very good activity for Tesla. I can mention that Tesla is making its plan in China, which is good for us. Next year, it will be Europe. We have a huge exposure as interiors and cockpit for Tesla. Clarion, of course, is impacted by JLR and on top of that, by Nissan. Clarion is significantly impacted.
I think with respect to the guidance, perimeter will be more EUR 550, EUR 500 million-EUR 600 million, I think, something like that, for the full year. Much less, unfortunately, than expected. With a contribution which will be normally slightly positive, which is not bad respect to what is happening. Clarion itself, we have made the restructuring.
We are adding restructuring respect to the situation of Nissan. We are simplifying as well the number of product lines. We are further going in depth in the cost base. We have a big plan to reduce the electronic cost. All of this must contribute when with the new models to confirm the 6% operating margin expectation we have for Clarion for 2022.
Understood. I also had a question with regard to COVID-19. I was wondering if you could elaborate a bit on if you think there will be a lasting impact from the COVID-19 on how you or the supply chain work, how you and your clients work together, how you plan for product development going forward, or you think it was a temporary effect on your activity, and there won't be many changes in how the industry works beyond that?
I think it depends on the customers. I think that integration between the industry has improved. Digital tools have improved. Communication was key in this period, but it has worked. Clearly there was a need for everybody to massify. To reduce the number of suppliers to interface, starting with Faurecia, but not only. This is my conviction. The trend to massification, standardization, simplification, digitization will be accelerated.
This will be a definitive change of, I would say, the way to work in this activity. Probably due to the constraints, financial, et cetera, it will be a fantastic opportunity to reduce the complexity of the models, powertrain, the options, whatever. We have some suggestions to make with customers. They need to make savings, and we can propose some savings.
Things which were impossible before on the way to work with them or on the technical productivities, we hope that it will be much easier to drive this proposal to customers in the near future.
Understood. With regard to the trend and going toward a massification, that leads me to my next question, which is, do you expect this will accelerate the trend of consolidation within the industry? Do you see notably some smaller suppliers that are struggling a bit, becoming attractive target for you or some of your peers? If there is accelerated consolidations, will Faurecia be part of it in the near future?
Firstly, consolidation will happen. I think it was the law. It is the law in this industry, and every crisis is accelerating this trend. It will happen. Second question, will we buy or not some companies? Today, we are focused to restore our basis. The level of debts has been increased, will be at a level, I would say leverage above two.
We say it's not my priority. Well, I think in a way, it's not a short term. I would say short term is 2020 concern. If I take this story, we were participating to consolidation under the request of customers, which is a clear asset. We made three acquisitions after the crisis of 2009, driven by customers. If it will happen, it will be probably the same case. The picture was, it was a very low price at that time.
I can give an instance. We were buying Plastal, the exterior, I would say, player under the request of a very famous car maker. For a price close to zero. We were reselling that in 2014, 2015 to Plastic Omnium with a nice price. It could be very aggressive, but anyway, to be seen. We are not in a hurry at all.
That's very clear. Thanks a lot for that. I think that I've reached the last question I had on my list. Maybe you can have some closing remarks with regard to the current trend that you're seeing in case someone is asking me another question for you. I leave the floor to you for some closing remarks, and I'll get back after if I get some additional question to ask you.
Maxime, thank you for your questions. As you have understood, we are focused first to limit the impact of this crisis. Second, to secure the rebuilding of our financial figures. Clearly to be able to confirm all our guidances for 2022. In a period where, if I take the previous, I would say, cycles of crisis, clearly, probably the sector will take advantage from 2021 onwards on a quick, I would say, recovery on volumes.
That's very clear. Thanks a lot, Michel, for participating to our conference. After this, for everybody on the call, you will have Veoneer and Yandex presentation that will be starting in a few minutes, stay around. Michel, thanks again for this, and everybody, have a nice day. Thank you.
Thank you very much. See you soon. Bye-bye.