Deutsche Bank Global Auto Industry Conference

Jun 10, 2020

Good morning after all. I'm Maxime Malef 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 thirty five minutes. I will ask some prepared question And also any questions you may add, you can ask those questions 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. So with this, now we can start our chart. So 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 observation to everybody and thank you for your attendance. So 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 April, I was giving a clear highlight on the fact that we'll be at budget even 30 better in June and I fully confirm the figures at the millions, millions positive more, I will say difference. So clearly, we have a better and better view. I would say we have a two months view. So July will be in line with June. But after that, we'd see if figures continue to improve and if we can speak of a real recovery of China, when I say real recovery because when we see the figures pre crisis, post crisis, we are still at minus 20% on volumes of the market with respect to twenty seventeen. Moving to North America, North America carmakers have continued to sell during the crisis. So they have a lot of orders to deliver. So today we can say that for them, are limited. So this means steady calls for June and July. And of course afterwards, it will depend on the success of the retail sales of June. So this, I will say, pattern is positive. Apparently, in this conference, some, I will say, carmaker managers have confirmed that. We have positive messages that we received from our core, I would say customers, which is I can only confirm that, of course, they have a better view than myself. Europe is much more competitive. We're surprised to see that between carmakers and dealers, a lot of inventories, probably there 1,200,000 to 700,000 cars, additional to the normal level of inventories, probably carmakers face some constellation of others, probably in sector like rental cars as considered some others. So this has a material impact. So 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% to 74%. And for our view on July with the cost we have, will be of the same magnitude. We see higher volatility of the calls programs than in other regions. So Europe has still to be stabilized and probably we'll need September to see more stable programs, etcetera figures for the future. If I speak about the picture for the second half, you know that IHS has put minus 10 minus 11% even. Probably, they are to be reached, I think, for China, even for North America. Europe could be on the opposite, I would say too optimistic, it is our view as for us here today. Thanks a lot. And maybe you mentioning Europe and the fact that you have some inventories, some other inventories, notably 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 inventory, the over inventory that we are seeing in the industry? Or do you think that it's not enough? Yes. It was a clear goal of the French government. It is why the French government has defined a level of 200,000 cars. So the co French contribution normally should be to absorb 200,000 cars of other inventory, which is a significant contribution, I expect to the figure I gave before. German government was more focused on this hybrid for the reasons that the ecologist party. So they were unable to make the same kind of incentives and 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. So probably this will help the profession in Germany at the last month of the year. Understood. And with regard to your clients and OEMs, did this crisis change some of their plan, meaning delayed some of their production plan or even canceled some of their production plan? 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? And did you see any meaningful change in the plan that your customers have, which we get to the ramp up of some productions? It's a good question. We see average because of course you have some exceptions, etcetera, the two month delay. To launch a new car, it's a very big deal for the carmakers. But with the lockdown period, they prefer to delay by two months, right? It's what today we experienced as an average. So this will have some impacts, manageable, but which will have some impacts for us because we have any market share. But to be honest, it's not material. So I can confirm today the outperformance expectations for the full year that we are targeting. Understood. And 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 the two months 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? I've 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 gives a sense of your question that there is a very important integration of all the supply chain. We have managed that and 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 agreed to manage what are the risky suppliers and mainly risky suppliers, the main risk is financing to be clear. So we have renegotiated with banks to be sure that banks will be able to give, I would say, the restructuring if the supplier ask for it. So this will be the easiest way for suppliers to be financed in case of struggling. So we think and we we continue to manage that. We think that on the Forexia basis, we have limited risk. I mean, there a very limited risk. I cannot speak for carmakers. Of course, some carmakers have identified as well some difficulties, but I cannot speak for them. The moment Understood. For the moment, what has been the restart. If or the first time I have restarted or the model for this have restarted. So we don't see for the moment the struggling, in the chain, probably carmakers have made what is necessary, some advanced payments, etcetera, to secure that. Understood. Given the situation that you've mentioned in the different geographies, maybe you maybe 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 the basis of 91,000,000 cars production worldwide 2017. Last year was 85. This year, according to our view, will be between sixty two and sixty four. Next year, we are making our assumption on the basis of '72, '20 '20 '2 probably '82. So we recover the 2018 figures only in 2023. So I am speaking of unfortunately of low utilization rate for Faurecia, we are making our homework and with some additional restructuring. But unfortunately, we speak of something like 60%, means that many plants I have at least one shift reserve to make additional production. So this problem of capacity in the automotive sector is a reality. So we need chemicals will probably have to close some plants and I can assure you that we will do our homework on this. We are actually yes, the restructuring plan. So as a guidance, I can tell you that instead of EUR 100,000,000 of restructuring this year, we've more than doubled this figure in twenty twenty twenty twenty five. Understood. And 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 seems 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 have and we will be talking to you on that in July. 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 equipments. We have stopped a lot of the major part of the contracting. We have no consultants. We are using downtime subsidized by governments, etcetera. But 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 product lines, we have made some restructurings, we have implemented SAP, etcetera. So this more or less, I would say we will make something like EUR 500,000,000 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 and the risk and structural will be increased. So I have given you a first figure for the structural. You can anticipate that it will be much more in the second half. And of course, this will continue to be amplified next year because we are increasing the restructuring program. So our target is to reduce of course the breakeven 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 87,000,000 vehicles. We want to repeat the guidance, but with a lower volume and probably 5% lower worldwide volumes. So it is our ambition, it is on this side we are working. Now if you allow me, I will be more precise probably in July on these topics. Understood. And maybe to stay on this topic, you've mentioned that actually thanks to the measures that you've implemented, you've been able to reduce the pass through the volume pass through to 25%, thanks to all the cost savings temporary and the sustainable one that you are implementing. As we move well, first, are you confirming this figure? And as we move into H2, you will have less volume pressure for sure, but some of these temporary measures will actually fade away and disappear. So could you maybe go through what kind of volume pass through that would imply for first H1, but also going into H2? Thank you for the question. Firstly, the pass through, which we just called pass through, I don't know which is the right word in English, but I think your expression. We have a margin of variable cost of 27%. So to make only 25% means a lot of improvements and a lot of flex and cost cutting of the fixed cost, which is which was, sorry, last year 19% of our sales. So I confirm the 25% that's full for the first half. Our target is of course, because we'll have an impact on the second half and because probably June, the first quarter at least will be lower than normal quarter due to Europe and we see for the last quarter. I confirm that we will do better in the second quarter. Okay. So maybe closer to a 1520% kind of level would be an achievable level you think going into H2? We have to fine tune our budget. So you cannot commit today to 20%. But anyway, 20% is the target that we have inside on the additional volumes. So when I speak of figures going back to €72,000,000 80 2 million euros we are clearly targeting a pass through, as you say, of 15% to 20% increase of margin on this additional figure. Understood. And in the Q1 sales call, think you mentioned that the cash burn for the H1 could be reaching close to €1,000,000,000 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? And also what kind of expectation you have going into the second part of the year with working capital recovering, notably with June benefiting 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 as of the this close of the first quarter, I was thinking to EUR 3,000,000,000 of sales drop or loss as you want and due to the COVID. Now we are more at EUR 3,300,000,000.0 because Europe is a smooth recovery. So on this basis of EUR 3,300,000,000.0, we shall direct impact on the factoring. So we think on the factoring of receivables, we should drop probably to EUR 600,000,000. We are more today thinking to EUR 1,200,000,000.0. So 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 twenty days difference. Second, which is EUR 700,000,000 and second, which is drop of factoring. Taking our assumption, we will recover normally major part of total part of the working capital lag. We will recover a big part of the factoring. It depends on the cost of sales of last quarter. So this EUR 1,100,000,000.0 normally will be recovered in the second half. What will impact my cash in the second half would be mainly the lack of EBITDA, mainly the lack of EBITDA of the second quarter, which will impact my cash flow of the first quarter. And you have always, as you know, a lag of this kind of impact. So altogether, I will say my guidance will be to add as a net cash flow burden. So EUR 1,200,000,000.0 in the first half, probably full year EUR 500 to 600,000,000 negative. It is my view today of what will happen to Faurecia. So 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 and D, mainly the growth R and D, which means R and D activation by something like at least EUR 100,000,000 and an increase of restructuring cash out of minimum EUR 75,000,000. And if I'm looking beyond 2020, notably the drop of CapEx you're mentioning here and the drop notably on the parts, does that mean that we could have a catch up next year on some of those aspects and that would offset 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? Clearly, on the working capital, normally we'd have cleaned the situation by the end of the year. So I don't expect big impact next year. We will have a growth next year normally, So we know the growth effectively, if I take my DT2, would be more 100% with respect to the last quarter. So no big impact of the working capital. We'll have rebuilt a sizable EBITDA next year. We will continue to reduce CapEx because with this kind of volumes, of course, we don't need capacity. So CapEx will be limited for the EUR 500,000,000, we optimize the R and D. So my target today is not a still a guidance, but I hope it will be because of guidance, will be to reach EUR 500,000,000 net cash flow, which was, if you remember, our tax record. And which is important because I think cash generation in this kind of period is key. Margin wise, on this date of EUR82 million, we should be able to restore an operating margin between 6% to 7%. Already in 2021? Yes. Understood. And maybe can you go through a bit the perimeter effect that you are seeing this year notably Clarion SS? That was supposed to provide some support on your margin improvements for the year. So 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. So unfortunately, and then in Europe and many of us again. So SAS has been clearly impacted by the lockdown. We are today restarting a sales with a very good activity for Tesla. I can mention that Tesla is meeting its plan in China, which is good for us. And next next year, it will be dropped. We have a huge exposure as interiors and compete for Tesla. Clarion, of course, is impacted by Asia and on top of that by Nissan. So Clarion is significantly impacted. So I think with respect to the guidance, perimeter will be more five fifty million, five or six hundred million, think, something like that for the full year. So much less, unfortunately, than expected with a contribution, which will be normally slightly positive, which is not bad, in fact, 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 as the number of product lines. So we are further going in-depth in the cost base. We are as well, we have a big plan to reduce the electronic cost. So 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-nineteen. I was wondering if you could elaborate a bit on if you think there will be a lasting impact from the COVID-nineteen on how you or the supply chain works, how you and your clients work together? Or how you plan for project developments going forward? How you think it was a temporary effect on your activity and there won't be many change in how the industry works beyond that? I think it depends on the customers, but I think that integration between the industry has improved. Digital tools have improved. So communication was key in this period, but it has worked. And clearly, there was a need for everybody to modify. So to reduce the number of suppliers to interface. Starting with, not only. I see it's in my conviction. So the tendency, 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 of financial, etcetera, it will be a fantastic opportunity to reduce the complexity of the models, power trend, options, whatever. And we will have and we have some suggestions to make with the customers. They need to make savings and we can propose some savings. So 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 next future. Understood. And 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 being well, becoming attractive targets for you or for some of your peers? And if there is accelerated consolidations, will Faurecia be part of it in the near future? Firstly, consolidation will happen. I think it was lower. It is the lowest in the last three and every crisis is accelerating this trend. So it will happen. Second question, will we buy or not some companies? Today we are focused to restore, our business. The level of steps have been increased, we'll be at a level, I would say leverage above two. So we say it's not my priority. And I think in a way it's not a short term. I would say, short term is twenty twenty concern. If I take this story, we were participating to consolidation, but under the request of customers, which is a clear asset, we made it three acquisitions after the crisis of two thousand and nine driven by customers. So if it would happen, it would be probably the same case. And the picture was it was a very low price at that time. I can give an instance, we were buying Clastal, the exterior, I would say, payer under the request of a very famous German carmaker and for a price close to zero. And we are reselling that in 2014, '20 '15 to Pepsi Comium with a nice price. So it could be very accretive, but anyway to be seen and 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. So maybe you can have some closing remarks with regard to the current trends that you're seeing in case someone is asking me another question for you. And 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 rebuilding of our social figures and clearly to be able to confirm all our guidance for 2022 In the period where if I take the previous, I would say, of crisis, clearly, probably the sector will take advantage from 2021 onwards on the 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. So stay around. So Michel, thanks again for this, and everybody have a nice day. Thank you. Thank you very much. See you soon. Bye bye.