Forvia SE (FRVIA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Faurecia Q3 Results 2020 Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Michel Favre. Please go ahead, sir. Over to you.

Thank you. Good morning, ladies and gentlemen. Thank you for attending this conference call. I am with Olivier Durand, our Deputy CFO; Marc Maillet and Anne-Sophie Juegean, our Investor Relations team. I will present our sales figure for the third quarter. The press release was posted this morning at 7:30 Paris time on our website. And the slide show that I am now going to comment is also available on our website. Starting with Page 2. Our sales in the quarter were significantly better than previously expected, at EUR 3.9 billion, supported by improved market conditions. This showed a strong quarter-after-quarter sequential improvement as well as a month-after-month sequential improvement as well with the month of September up 1.2% year-on-year. Q3 sales were strong in China, up 15.4% on an organic basis. By activity, our sales outperformed the market in Seating and Clean Mobility, which represents combined 65% of group sales, while Interiors and Clarion Electronics, which represents combined 35% underperformed the market. I will go back on that. Thanks to this improved environment, but also thanks to the positive effects of all our resilience measures we can upgrade our H2 2020 initial guidance that was given on July 27. I will detail this new guidance at the end of the presentation. Let's start with a review of our Q3 sales on Page 4. As I have mentioned and as illustrated on this slide, our sales in the quarter benefited from a strong sequential improvement with Q3 organic sales down 7% after 19.7% in Q1 and minus 50% in Q2. Drivers were stock rebuilding mainly in North America, a quick recovery of car purchasing by individuals who preferred to take their cars in order to go to work. We can also see on this slide that our Q3 sales improved month after month. And that the month of September, as I mentioned, posted a 1.2% organic growth with respect to last year. Slide 5 shows Q3 sales figures at group level. On a reported basis, our Q3 sales were down 7.4%. Currencies had a negative impact of EUR 135 million, mainly U.S. dollars and Chinese yuan versus euro. Scope effect was positive at EUR 117 million or plus 2.8% with the strong contribution of SAS, EUR 160 million since 1st of February with a negative contribution of EUR 43 million from Clarion. If you remember in Q3 2019, sales took into account 4 months, July to September plus June catch-up, as we had to upgrade Clarion closing process to match the Faurecia's agenda. On an organic basis, sales were down 7% representing an underperformance of 210 basis points compared to worldwide automotive production that dropped year-on-year by 4.9% according to IHS. This included an unfavorable geographic mix, which represented a negative impact of around 40 basis points; and lower tooling sales, which represented an additional negative impact of around 30 basis points. As already mentioned, this evolution in the quarter reflected the underperformance of Interior and Clarion Electronics while Seating and Clean Mobility outperform the market. Let's now start with a review of Q3 sales by activity on Page 6 with Seating and Interiors. Firstly, Seating with sales amounted to EUR 1.5 billion, down 4.5% on a reported basis including a negative currency effect of EUR 34 million or minus 2.1%. Seating organic sales were down 2.3%, outperforming the market by 260 basis points. This outperformance was driven by all 3 of Faurecia's major regions. As from Q3 2020, Seating sales are no longer impacted by the end of production, mainly Daimler, that had a negative impact in the previous quarters. Conversely, significant programs will start as from Q2 2021, main one is Jeep Grand Wagoneer and will boost Seating outperformance as from next year. Secondly, Interiors with sales amounted to EUR 1.170 billion, down 2.4% on a reported basis. It included a negative currency effect of EUR 49 million and the positive contribution from SAS. Interiors organic sales were down 11.6% and representing an underperformance of 670 basis points. Sales in the quarter were strongly penalized by lower tooling sales, down 45% due to delayed program in Europe, North America and China. Excluding this impact, product sales were down 8.5%, underperforming the market by 360 basis points. This underperformance of product sales was only attributable to Europe, impacted by lower content, mainly for Daimler new model and temporary unfavorable product mix with PSA. Now on Page 7, Clean Mobility and Clarion Electronics. Clean mobility sales amounted to EUR 1.023 billion, down 8.2% on a reported basis. It included a negative currency effect of EUR 46 million or minus 4.1%. On an organic basis, Clean Mobility sales were down 4.1%, outperforming the market by 80 basis points. This outperformance was driven by double-digit sales growth in China. Commercial vehicle sales evolution was contrasted, also in line with market regional sales evolution for this segment, with double-digit growth in China and double-digit drop both in Europe and North America. Clarion Electronic sales amounted to EUR 181 million, down 40% on a reported basis including a negative currency effect of EUR 7 million as the negative scope mentioned before for EUR 43 million. Clarion Electronics organic sales were down 23%, significantly underperforming the market. This underperformance was mostly attributable to the unfavorable customer mix of Clarion, highly impacted by the sales decline of its major customer, Nissan. This effect will continue to impact sales in Q4, but will gradually disappear in 2021. We have 12 major start-up of production between the last quarter and the first half 2021. Faurecia Clarion, due to that, is on track to overachieve its order intake target and clearly to, I would say, resume growth in 2021. And when I say growth, it will be a significant growth. Let's now move to the review of group sales by region on Page 8 with Europe and North America. Sales in Europe amounted to EUR 1.728 billion, down 7.9% on a reported basis. It included a negative currency effect of EUR 21 million and this positive scope for EUR 88 million. Organic sales in Europe were down 11.5%, underperforming the market by 380 basis points. This underperformance is mainly due to Interiors and the double-digit drop in sales for Clean Mobility commercial vehicle. And of course, the main driver for that is the tooling drop. We say, in general, mainly start-up of production were delayed and delayed to the last quarter, but mainly to the first half 2021 with a direct consequence on our level of tooling and prototype sales. Sales in North America amounted to EUR 1.1 billion, down 3.3% on a reported basis. The negative currency effect amounted to EUR 37 million and was fully compensated by the positive scope of EUR 37 million. Organic sales in North America were down 3.3% underperforming the market by 380 basis points. This underperformance was attributable to the double-digit drop in sales for Clean Mobility commercial vehicles, and to a lower extent, to lower sales to Nissan and Clarion Electronics. Now on Page 9, Asia and South America. Sales in Asia amounted to EUR 903 million, down 4.2% on a reported basis. It included a negative currency effect of EUR 34 million and a negative scope effect of EUR 9 million. Organic sales in Asia were up 0.4%, strongly outperforming the market by 450 basis points. This strong outperformance was, of course, driven by sales in China with organic sales were up 15.4%, strongly outperforming the market by 850 basis points. This mainly reflected stronger performance of Seating and Clean Mobility in the country with sales to international OEMS, new customers and commercial vehicles. Sales in South America amounted to EUR 106 million, down 42.9% on a reported basis. This included a negative currency effect of EUR 36 million due, of course, to the Brazilian real versus euro and the limited scope of EUR 2 million. Organic sales in South America were down 24.7%, underperforming the market by 330 basis points. It mainly reflected sales drop in Brazil and the gradual exit from Argentina. We closed the Seating plant this summer in Argentina. Now let's move on Page 11 for the H2 guidance. Considering improved market condition as is stated by the better-than-expected recovery of the market, we now expect worldwide automotive production to drop in the mid-single digits in H2. As a reminder, our previous market assumption for H2, as communicated on July 27, was a market down around 15%. Based on this updated market assumption and thanks to the confirmed positive effects of measures deployed to further increase resilience, we can revise upwards our financial targets for H2. Our H2 sales should reach at least EUR 8 billion versus around EUR 7.6 billion expected previously. Our H2 operating margin should reach at least 5.5% of sales versus around 4.5% previously. As for the cash flow, at least EUR 700 million versus around EUR 600 million. This confirm fully the sensitivity I gave you, if you remember, of 1% additional sales, more or less EUR 70-plus million of sales, minimum EUR 15 million of operating margin and the same of cash. So we are totally in line -- on track with all our plans or even better. Let me conclude this presentation with Slide 12. Our sales in the quarter were significantly better than previously expected. Consequently, and also thanks to the positive effect of our resilience measure, we have upgraded our H2 guidance. We are totally on track to achieve the sales, the profitability and the cash ambition for 2022. And I remind you that the main driver will be our EUR 200 million cost-cutting plan for the fixed costs between 2019 and 2022. Finally, a word on the expected spin-off of Faurecia. According to the amendments announced on September 14 by PSA and FCA, the stake of 46% of Faurecia currently held by PSA is to be distributed to all Stellantis shareholders after completion of the merger. As PSA and FCA expect merger completion to take place by the end of Q1 and considering the minimum time period required for the approval process, the spin-off of Faurecia could happen -- should happen in Q2 2021 at the latest. It will contribute to significantly increase and globalize the company's free float, and of course, liquidity. Thank you for your attention. The floor is now yours. Nadia, can you now go to the Q&A session, please?

[Operator Instructions] And your first question comes from the line of Sascha Gommel from Jefferies.

The first one would actually be on your guidance upgrade. I understand that you upgrade the earnings with the drop-through. I was wondering if you can also comment on the cash flow upgrade? I would have thought that when your top line develops a lot better than you expected that you also have more of a working capital inflow. But it seems you only upgraded the free cash flow guidance in line with the earnings upgrade. So was wondering if you can comment on that. That was my first question.

Thank you, Sascha. So it was inside, was the sensitivity. As you know, we have a negative cash flow consumption of working capital at EUR 680 million, if I'm not mistaken, in the first half. We were committed to recover that in the second half and probably the last -- small last part in H1. This was due to the difference between the customer terms and the supplier terms, 25 days. If you remember, our level of inventories was high due to the lockdown because it was difficult to viable-ize the inventory mainly in March and we were doing only a part of it. So we had the advantage, is that in the second half, we are making significant improvement of the inventory. So everything is going on the right way. And what I can tell you is that end of September, a very big part has been already recovered. So it is why we are totally confident that the working capital will represent a very significant cash flow in -- cash in, in second half. And if I can give you, it will be probably more than 70% of the consumption. And when I say 70%, it's a very cautious evaluation. So it is why all the indicators are going the right way.

The second question would actually be on your outperformance in Q4. Do you think it will be on a similar level in that context? Maybe you can also comment on the Interior weakness. Is that something that will continue for the next couple of quarters because the kind of model launches from VW and Daimler remain and the mix at PSA remains as well.

It's a tricky question because what we see is that we have contracted evolution. You know that some car makers have consumed inventories at a quicker pace than others. Some like -- I can mention that the PSA have restarted a little later and have a very active month of September and will probably rebuild some inventories in the last quarter. So all of this means that we will have different drivers of that. So mix will change. What I will say is that we will be very probably, at least due to the tooling, much closer to the trend of the market. But one thing -- we were thinking, to be honest, that the market -- trend of the market was minus 6%. We have seen the figure of IHS. We have still to understand customer per customer why we have this difference of assumption, to be clear. So -- and I think it's the same for you because we are a little surprised by the minus 4%, so we have to understand everything. So clearly, the trend is positive. Interiors is lagging and will continue to lag due to some smaller contents, mainly the S-Class because we have stopped the instrument panel due to the pricing. So we are not in the instrument panel. We are in the center console and door panel, but not in the instrument panel. So we have this small impact. But anyway, we are very confident to resume outperformance in, I will say, 2021.

Understood. And that brings me actually to my last question. Do you have any thoughts on '21 at this point?

With all -- you've seen what is the mood. You're asking me too much. We are making our budget with a very reasonable figure on, I would say, worldwide volume with 76 million recalls, if I'm not mistaken. We want our people to work on cost, to work -- to continue to be very disciplined. And I would like -- sorry, Sascha, but to thank everybody because everybody in this group is on track with the revised budget and with our 2022 plan, which is, I think, very important and we'll continue to deliver.

And your next question comes from the line from Giulio Pescatore from Exane.

The first one would be on the -- if you can elaborate a bit more on the drivers of the underperformance in Interiors. I mean you mentioned like the problems with the S-Class, but is there anything more structural going on there or it's something that is very likely to reverse next year? And then maybe on the efficiencies and the cost measures you have taken, can you maybe explain to us how much of those efficiencies are structural and how much will reverse next year? And the last question on CapEx, can you update us on your plan for CapEx? And how much of the CapEx that you have taken off the guidance this year will be recovered over the next few years?

Thank you, Giulio. Underperformance, Clarion, I have confirmed in the speech that with all the start-up of production, will have a significant growth next year. And our budget is clearly feeding what we have said before, is that we will be close to EUR 1 billion of sales for Clarion next year. So you see the big move that will happen. Big -- of course, big part is due to, as we say, the order intake that we have relaunched, I would say, in '19. Second thing, Seating, we are very positive. We are even surprised, to be honest, by the outperformance of the second half, which is higher than expected. We have very big, I would say, start up of production. Main one is, by far, the Jeep Grand Wagoneer, $350 million on a yearly basis, starting probably between April and May. So this will clearly accelerate the Seating outperformance. Clean Mobility, if I exclude the commercial vehicles, on the light vehicles, we are outperforming. And we have a good figure in Europe. I know that there are always some fear in Europe, but thanks to our strong market share on the hybrid, we have a good figure everywhere on light vehicles. So commercial vehicles, and you know that we'll probably restart. It is an early, I would say, KPI, as you know, to say that group -- world will go back to growth. But of course, there are always some ups and downs. But I think that commercial vehicles will be probably a very good driver for the growth in 2021 for Clean Mobility. The last is Interiors. Interiors will go back to more normal level of toolings. But we have this customer mix issue and customer mix and some content issues, so we are at risk to underperform the market in the last quarter and achieve, as we said, probably lower than the third quarter, and to beat if our budget will be in line with the market for 2021. It is currently our view. But of course, this will be fed by, I will say, more precise assumption for the market, I would say, month after month. Now going to cost efficiency. We have to be cautious because, of course, we are reducing the fixed cost, and we explained that by much more than our work, I would say, recurrent point of view. So we have always and it will be the same when we will disclose the figures, to be very cautious on what is recurrent and what is only the normal measures, including some, I would say downtime, for instance, which are to face this crisis even if, today, we have no more downtime or -- even no more downtime. So what we want to check in the budget is that the resilient fixed cost reduction will be at least EUR 150 million in 2021 respect to 2019. So it is what we have said, what we have actions, what we have restructuring. And so what we will clearly check and deliver in order to secure the EUR 200 million on which we are committed. For CapEx, we reduced a lot this year. It's a fact. That means that I can take a figure of something like around EUR 450 million. A part is due to the fact that we have frozen, even canceled some CapEx of capacity. We don't need capacity today, we have to be clear. We have as well the postponement of programs. This has a temporary, I would say, consequence. So lower CapEx in H2. But of course, this will come back in H1 2021. So my guidance for H1 for 2021 will probably to come back to a level of EUR 550 million. Even slightly more, we have to decide according to our different priorities and projects. But it is a kind of level. So it will -- sorry, to go back to a more normal level. And in our assumption for 2022 onwards, we are back to EUR 600 million, even slightly more. But this is as well according to the big order intake that we are taking. It's that, of course, we will have to fit, sorry, with the right CapEx.

And your next question comes from the line of Thomas Besson from Kepler.

I have 2 questions, please. The first one, is could you come back on the programs postponed, notably in Seating and give us the sequence that you're expecting now? Because if I remember correctly, only 12 months ago, you were expecting Seating to start picking up in Q4 this year. I know you are talking about Q2. But can you remind us the main programs and when you anticipate them to start? That would be the first question. The second is a bit tough, and I apologize for that. You are talking about 8% margin in '22, 5.5-plus in H2. And if I understand correctly, your budget for '21 is broadly 2x H2 2020 in terms of volumes. So how do we bridge 5.5-plus to 8% with only a relatively minimum increase in volumes, Michel?

As usual, you are quite changing, which is normal. Thank you for that. I don't have all the data, but the main postponement was the Jeep Grand Wagoneer. The Jeep Grand Wagoneer initially should have started November. It has been postponed to February and now it is more May. I don't know, I think these figures are public. But clearly, the main reason was the lockdown, but not only. So it was the first one. You know that we have the C-Class Daimler, same platform. Same thing, Daimler postponed some, I will say, new models on that. And it was a significant number of parts. We have Nissan Frontier complete seats, same thing, it was postponed. So it is why sometimes, if you go back to what I had declared in the past, I was a little probably too positive due to the start-up of production of some new businesses. But whatever, I think the figure of Seating is not bad and showing as well that the content that we have, probably we are [ ahead ] by the mix, but the content is, I would say, improving. Now going to your questions about the 5.5%, et cetera. But certainly, you know that, we have, of course, the margin of [ turnover ], the 5.5%. I will not say minimum 5.5%. I think it's obvious. So don't ask me what is the value that we have in our forecast, but of course, it's better than that. The second thing, we have the cost-cutting program. And third, we have, I would say, the expected outperformance, which will help a lot. So we have built all of this. And it is like this that we'll go to the '22. Now if you remember, we have a market, as well, assumption. 2022 is based on 82 million vehicles with respect to 76 million for next year. So it is a significant figure of 8%. And you know that 8% will help a lot. And if you allow me, one contributor must be -- will be Clarion. So I can today, again, confirm and it was presented moreover to the Board yesterday, the Clarion business plan. So we confirm that Clarion is targeting at least 3% of operating margin next year and around 6% in 2022, which will be helped, as you know, by the new, I will say, production.

And your next question comes from the line of Horst Schneider from Bank of America.

It's Horst from Bank of America. Just quickly, as an add-on to Thomas' question. So just want to understand because you say sales at least EUR 8 billion in H2 and at least operating margin of 5% of sales and also the same for cash flow at least EUR 700 million, any upside is more linked then to better sales? Or it is -- it can be also linked to extra cost-cutting and some other items driving the profits? That's number one. On number two, I just want to understand because you do a fairly high level of sales in China. Do you see any signs of market weakness maybe or are there good reasons to assume that the strength of the Chinese market will continue not just in the fourth quarter, but then also in Q1? And I know we have got a very low comp base in H1 in China, but just want to understand what the run rate development is here.

Thank you, Horst. The sensitivity I gave is working very well. So you can -- if you want, you can take the drop-through of 23%, which is the minimum. Second, according to volumes, that's the EUR 70 million, we've seen twice operating margin and cash is working very well. So it's -- and like this, I think I am giving you too much with, yes, reforecast on H2. I cannot be more precise, if I may. But you see why we have today this margin of [ turnover ]. We are today, more cautious and [ tenacious ] on the last quarter. We think that there are the presidential elections. There is this famous Chinese New Year where we don't know what could be the impact to have to -- that it will be 2 weeks late. But what I received from China is not negative. It's the only thing I can tell you. So we have today strong [ EDI ]. We have, I will say, figures, which are showing not the outperformance of the third quarter, but we can -- probably, we are more cautious, but not the magnitude because it was very high. But anyway, an outperformance. So today, we are very positive on China. And after that, I cannot say what could happen, what could be the, I would say, some consequences because we think that the trade war between China and U.S. will continue whatever the result of the U.S. elections because the deficit is too much. So it could disturb. But anyway, the Chinese mood is positive. And what will be very important, what we are expecting, it will be the disclosure of the new 5-year plan. You know that it will be normally late November, early December. And we expect that there will be a big, I would say, part [indiscernible], which is important because, as you know, the group is more and more exposed with [indiscernible]. It is a long-term story. But we are convinced that it will be a very successful story.

Maybe I can squeeze in a last one. You don't expect any change in payment behavior of the OEMS, right? So it's a normal pattern basically that we will have towards the end of the year, right?

If you say major, no major. Of course, we have pressure. We see pressure. I was called 2 months ago to say about -- to get this business, we need to accept a new payment term, I say no and we got the business. So we are not flexible on that. But we see some customers trying to put pressure on that. So it will be a permanent pressure as we are. As you know, you know that, as we are doing with our suppliers. But no major impact for the moment.

And your next question comes from the line of José Asumendi from JPMorgan.

It's Jose, JPMorgan. Very quick, if I can, please. The first one, operating leverage, 2021, how should we think about it versus 2020, please, directionally? Second question, please. Global car production fourth quarter, can you give us -- on a global basis, how do you think about the fourth quarter in terms of production? And then the third item, please, working capital, second half 2020. Where do you stand currently in terms of the reversal in working capital?

Thank you, Jose. Operating leverage, we are making our budget. But our ambition, what we would like to commit to the market is above 20% and probably a figure close to what we are doing currently. And clearly, big part will be fed by some, what we call, hot water. That means products starting at the right margin, that means above 7%, close to 8%. And second, of course, our fixed cost reduction. Production, we are more cautious. IHS is below minus 4%. We think probably it will be more minus 6%. We'll see. That is what we think as the last quarter. So a quarter close to the quarter of last year. And so clearly, the measure, since it's a core program we are making with our teams is to, of course, have the right fall-through with respect to budget, that you have the right fall-through, of course, with respect to the figures of last year. Working capital -- request of working capital. We are, as I said, at least, I will say 70% of EUR 680 million. So something like EUR 500 million reversal.

And your next question comes from the line of Stephen Reitman from Societe Generale.

It's Stephen Reitman, Societe Generale. It's a question really about pricing, pricing pressure and the like. And you mentioned that the Mercedes business that you'd lost on the S-Class, which seems to be a pattern here because, obviously, there was a seating issue as well on the GLE, GLS last year, which didn't end too well, I guess, for Mercedes, but would you say this is just part of the normal kind of pattern of wins and losses? Or do you think there is more pressure coming from the OEMs now on pricing that you are just putting your foot down and being resistant to?

Thank you, Stephen. You know that with customers, we have some up and downs. There were some tension with Daimler in 2013, '14 with some difficulties: operational, repricing, whatever. So the time until 2016 was not positive to get business. And in this context, we have lost some businesses. And it was as well the context of the RFQ for the S-Class because the S-Class was delayed. As you know, probably, we said this several times. We have taken with Daimler some significant businesses in the last 3 years, and the main one is the famous frames of the C-Class and Viano. So we will have a nice growth with Daimler in the next 2 to 3 years. It is what I can mention. So as usual, decisions taken today, for instance, will have mainly an impact in 2 years and more in 3 years', 4 years' time. So it's the life. So we will have with Daimler and BMW, some significant growth in the future as we have today with Tesla. Tesla, we are taking a lot of businesses. And Tesla will have a significant growth between today until 2022. So it's a normal life. We have what is good vision of what is happening, plus or minus. Of course, after that, it depends on the timing and the success of the different products. So the story with Daimler will be positive.

All right. And on the subject of Tesla as well, clearly, they are talking about significant capacity expansions in China, which I presume you're supplying there as well. But production levels are running well below the sort of capacitized levels. How do you deal with that?

Firstly, they have a successful start-up of production, and there, we're ramping up at a quick pace. They are now -- because they have started with some kits coming from U.S., it was our case model, so we were localizing. It is how they can reduce costs, and I think they have made some initiative to reduce price as well. So localizing, there are some bottlenecks. So it is why, currently, there is a small, I will say, production -- sorry, drop of production. Localization is key for them. But I am convinced that they will restart very soon as their big ramp-up. So they have a strong ambition, and we believe that they will achieve the strong ambitions of production. Of course, it will be linked with the success of the models, but we are confident that they will achieve it as well. So for us, Tesla is on a very good way.

And the next question comes from the line of Thomas Besson from Kepler.

I have just a follow-up, Michel, if I may. You have mentioned the positive impact of hybrids on Clean Mobility. Have you made a calculation on the initial impact of electrification on Clean Mobility? Are you able to say, thanks to hybrids and the content we have on Tesla and other EVs, we see actually even a positive effect from the initial stage of electrification to '22 or to '25?

It's too early because what we see is that hybrid [indiscernible] to PSA has taken half of the electrified part of the business, which is very positive for us. It was a little -- and it will be probably a little boosted in the last quarter by the fact that carmakers will have to fulfill their commitment or they will be penalized. So we'll see how the mix could be a little, sorry to use that, distorted by that. So currently, what I can say is that when I take the Clean Mobility Europe for light vehicles, we are evolving like the market, which is, I think, good. And they think the same evolution 2021.

Thank you. And at the moment, we have no more -- any questions. Please continue.

Okay, if we have no more questions, firstly, thank you again for your attendance. And we will participate to some conferences, so we'll have the opportunity to update -- upgrade you with all our figures. What I can tell you is that, of course, the next big, I will say, meeting will be the yearly half disclosure in February. Thank you, and have a good day. Bye-bye.

That does conclude our conference for today. Thank you for participating. You may all disconnect.