Forvia SE (FRVIA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Faurecia 2021 Guidance Adjustment Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michel Favre. Please go ahead.

Thank you very much. Good morning, ladies and gentlemen. Thank you for attending this conference call. I am as usual with our Investor Relations team, Marc and Mathieu. And we have organized this conference call in order to comment on the press release that we issued this morning at 7 a.m. Paris Time, and that is also available on our website. Then we will answer all your questions. This press release was issued to announce an adjustment of our 2021 guidance. This is the second adjustment this year, which is completely unusual in the recent history of Faurecia, and we do apologize for this announcement. I insist, we do apologize for that. As indicated in the press release, it is caused by 3 main factors: the latest forecast for automotive production in Europe, which has been restated, further revised downwards; the costs generated by the multipurpose cost decided by our customers; and difficult to compensate and cost regulation, I can say, is getting more and more difficult to offset this impact. We have met -- we met operational issues in launching a new testing program in Michigan that was already flagged in our Q3 sales release, but the latest estimate of one-off costs related to the difficulties in our 2021 accounts is higher than initially expected. Let me quickly comment on these 3 factors. Firstly, as regards to volumes in Europe, as indicated in the press release, IHS Markit revised by circa 1 million units or minus 13% is forecast for European production in H2 between September and November. It was reduced by 700,000 in October and further 300,000 in November. Now European production in H2 2021 should be 6.8 million units versus 9.6 million units in H2 2020 or if you prefer, down 30%. These downward revisions are all the most important for Faurecia as Europe represents 50% -- 45% of our sales, and the 2 most affected customers are Volkswagen and Stellantis, which are our 2 main customers in Europe and worldwide. We now expect our set in Europe in H2 to be down in the region by circa 20%. Consequently, we have revised our sales for the group of circa EUR 15.5 billion to between EUR 15 billion and EUR 15.5 billion to take into consideration the latest automotive production forecast. Secondly, as regards to stop-and-gos. We continuously experience multiple and virulent stop-and-gos decided by our customers, and that strongly impacted our operational efficiency. In September the actual number of plant closures made by our OEMs during the month was multiplied by 2.8x in Europe, by 6.5x in North America versus the number announced at the beginning of the month. In October, these figures were circa 2.5x. In November so far, you see that these figures continue to improve. In December, there is still uncertainty about OEM year end closure, mainly for the third week of December. We are not sure that the last announcement of the COVID will improve the situation. In that context, it is impossible to fully compensate all the other costs related to the stop-and-gos and last-minute changes. We speak of circa EUR 20 million. Cost stabilization to adapt to such a low period disruption that could not be anticipated as it's finished. We have to work at a reduced capacity that we cannot plan or anticipate when we have our people at full capacity. Thirdly, as regard the fitting program in the U.S.. Since we started this program, which is an important launch with 2 plants, we faced major difficulties related to workforce in terms of qualified people and turnover. As you know, this region, the transition is a difficult one in terms of recruitment with high and growing early rates and all these concerns were heightened by the COVID-related context. Turnover reached 10% per week at its peak. Stable and qualified managers were difficult to recruit in the region in the country. We confirm that this issue will be fixed by the end of this year. Solutions are including recruiting qualified labor people from other plants and other U.S. implement areas; recruiting technicians and engineers even in Europe, which is now possible since borders have reopened and we hope that the COVID will not threaten this; implementing alternative production capabilities. Nevertheless, we face all kind of difficulties on labor cost, including the use of temporary replacement people or recruit some subcontractors under production non quality. All these other costs have recently been reviewed, and our estimated impact on operating income for Q4 '21 is much above what was initially expected. We are adding in our forecast the circa EUR 50 million. Lastly, let me add that at Faurecia Group level, we shortly appoint an EVP in charge of North America who have the same responsibility as our EVP in charge of China and will be fully responsible for all our P&L for the region. As a consequence of these 3 elements, our operating margin is revised from 6% to 6.2% over September guidance to circa 5.5% now. This includes the impact of lower sales with a fall-through of circa 25%, which, as you know, is our usual metrics. This also includes all the other costs related to the erratic top line goals we had to undergo. Lastly, this includes a new estimate of the other cost related to the Michigan plant. Commercially, we succeeded in offsetting most of the [indiscernible]. Of, as you can see, we have to be cautious. We'll not come as first time to you. Our net cash flow for the year is now expected at more than EUR 300 million versus the circa EUR 500 million in our September guidance. Of course, it mainly reflects the drop in operating income, as in EBITDA, but we have 2 other impacts. One is about inventories that could not be fully optimized as the context of the multiple interactive stop-and-gos that I have already mentioned. I speak here of something like EUR 80 million of cash impact for the end of the year due to this level of stocks. So one is the impact of the lower sales for the last 3 months of September, October and November that mechanically reduces the cash collection at December 31 and as threatening as well the level of factoring of receivables at the end of December. We are doing all we can to mitigate these impacts. And as you know, we have strictly reduced CapEx outflow. That will be below EUR 500 million this year. Of course, this guidance assume no major lockdown in automotive region before the end of this year and no expected closure of production plants by our customers. We have integrated the most likely scenario of circa 71 million units produced in the world in 2021, in line with IHS Markit latest forecast. The figures that unfortunately is the same as the one in 2020. I want to make clear that we made this guidance as conservative as possible, as I mentioned before, to give you the most reliable update of our 2021 performance. As regards to 2022, of course, it's not the right timing to disclose any guidance for next year. We'll do that as every year on February 21 when we release our 2021 results. This guidance will be a guidance for Faurecia's standalone as it will be impossible for different results to give any 2022 guidance for the consolidated Faurecia and Hella combination. It will be done as soon as possible, probably in April. What we indicated in today's press release is that our current assumption is that worldwide automotive production should rebound by around 10% next year to circa 79 million vehicles. We expect production to be broadly flat year-on-year in H1. A shortage of semi components should persist during this period. And it should grow by strong double digits year-on-year in H2. After 2 difficult years for the industry, volume growth will help resuming our profitable growth and cash generation trajectory. We'll continue to post strong organic sales of performance and we will significantly improve profitability and cash generation. And we keep committed to strictly control our leverage ratio. We confirm our objective to be at or below twice at year-end 2022. That will include, of course, the impact of the acquisition of Hella and to return to 1.5 or below at year end 2023, in line with what it is on October -- August, sorry, focus, when the acquisition was announced. Thank you for your attention. And now it's time to answer to your questions. Operator, can you launch the Q&A process?

[Operator Instructions] Your first question comes from the line of Thomas Besson of Kepler.

I'd like to concentrate on your third issue because I think the first and second issues are clear and I think industry linked. Correct me if I'm wrong. Could you remind us what exactly this greenfield is related to? You said 2 plants. Could you say the programs, either 1 program, several programs? And is it just the beginning of the ramp-up for that? Or are they -- do you have more orders coming in '22 or '23? And how can you be sure that you'll have a circumvent the issue by year-end?

Very good question. Thank you, Thomas. So when we speak of 2 plants, it is the same program as Jeep and Grand Waqoneer. Two plants because we have 1 plant of complete seat and one plant which is making the trends. So metal plant making the second row and the third row, which are individual seats. So it is really 2 plants and 2 different processes. So here I have mentioned 2 plants. And somewhere, the biggest difficulty at one time was a metal plant with a lot of scraps. After that, now it's more of the complete seat where we have to continue the ramp paper. So it is 2, I would say, different lens. The ramp-up, which, if you remember, was postponed because usually it was forecasted. And this was a problem that this program should have started in H2 2020. So there was different postponements. And different as well, I will say, things because this program was stopped in June in order that the customer will have [indiscernible] whatever. Today, early October, 200, I will say, cars per day, currently upgraded to 250, 300. Normally at the end of the year, it will be close to 400. And I will say the customer forecast a further step up for the summer, not confirmed, but it could happen because it is a very flagship car. So the story is clearly how to fix you, that means to recruit the people, to train the people, to make the people loyal, to eliminate all the variabilities or reduce the variabilities and of course, to secure the ramp-up. So we have made some good steps forward. We have still had to secure, have to ramp-up and between, I will say, 250 to 450, I would say, end of December. How we think that we are securing? We have recruited a lot of people. We have sent a lot of people. We hope that the people will be try to stay for the non-American. As you have understood, a lot of people are coming from the different plants, including Europe. So it is a way to be sure that we'll have the right people to address the problem. Until mid-October, it was impossible to send anybody to the States, which was -- I don't want to look for -- I would say, excuse for the problem. But until mid-October, it was impossible for the group to support this U.S. activity.

Okay. Can I do 2 follow-up, please, Michel. Usually, frames are done more in low-cost countries and next to the plant. So why in this case have you decided to do the frames next to the other plants? And second, is there going to be another client or program for these 2 factories?

I think I can say that it was a mistake. It was due to the Trump, I will say, decision about tax. So to avoid, I would say, taxation, et cetera. We think that it was a mistake and it was -- what I can say today? So frames have the vocation to be made in Mexico. And we are currently building a new plant in Monterey for frames in Mexico.

The next question comes from the line of Tom Narayan of RBC.

Could you -- I know you probably can't quantify each of the 3 factors or maybe you can. There are a lot of numbers in there. But just curious in terms of the 3 factors in terms of order of magnitude of their impact on operating income margin, the guidance change, which are -- have the biggest impact and the smallest impact? And any kind of order of magnitude there. And then just to confirm, it sounds like, as Thomas was saying, the first 2 are just macro stuff that everybody is impacted by the auto production and the stop-and-go. And then Seating, you're saying this is going to be resolved by year-end. But any visibility on those first 2 kind of market forces as far as how long they could persist? Or is it just a function of macro COVID OEM decision-making that we can't really predict?

Thank you for your question. It's not an easy one to because you're very right, we decided to make this profit warning late Thursday. Why late Thursday? Because I have the forecast. We have a weekly forecast. And I was seeing the different risk factors. And unfortunately, we have only risk. What I will mention as figures is not sure. We are speaking of risk. Risk on the sales, no comments. You understand we are -- on one side, we have good and positive trend in November. CDIs are good. But on the other side, what our logistic guys say, we have no clues that we will not have some early closure in the first week of December. So what can we do and what can we anticipate? Things are doing better. That is what I want to mention. We have risk on all the part because, of course, we are, I will say, trading and so we cannot be sure that things will be as smooth as we would like. Many respect to this new COVID situation. We have big, as you know, customer discussion. We don't stop and go, et cetera, on inflation. So everything is not ultimate. So we have the risk, again tailored risk in this, I will say, guidance because -- but at least the announcement of the variant was not to help us. And on opportunities -- you understood my answer?

Yes. Yes.

So we have a Board, which was convocated on Friday not for that -- to be clear, not for that. So we have a choice to make with Patrick, and we decided with respect to the other risk factor to make this public warning because we consider that we cannot take too high risk and to say something mid-December, if I insist things will happen. So sayings that what we have seen till now is more or less EUR 200 million on sales, EUR 50 million of profit. On Highland Park EUR 20 million additional, which means that we will be over EUR 60 million, I will say with respect to our budget. And here, we have a big uncertainty with negotiation with our customer for the penalties. Last, I will say, but at least, the stop-and-go, as I mentioned, is minimum EUR 20 million and very difficult and to be compensated by customers. So what we are doing currently, we are adjusting our capacity to 80% of the volume. And when volumes will be back, we'll have a nice negotiation because with customer. Sorry to say that, but at one moment, it's contractual. So big factor of risk. Difficult to say what we will be able to compensate or not compensate. So sorry for that. That is why we are going to you. And I apologize again. For the big trend, semiconductors, no commitment from the suppliers currently. As you know, we are buying directly. They have a limited view. Why? Because, as they say, the market -- the car automotive market will double next year. You understand why. And all the industries are doing the same. So there, volumes is what they can, I will say, forecast. They have no help from the customers. They are ramping up CapEx, that's true. And this is why currently we see a better trend. We see even some restocking in some industries and consumer electronics. We see some, I will say, restructuring probably in China. So we can be more positive, but it's not clear when we will see the real impact for automotive. So it is why we prefer to say that there will be 2 quarters still at the level of the last one. And probably the second half will be much better due to the big extension of capacity on one hand and probably as well to the optimization of the use of semiconductors by the different customers. So it is our view. My conviction is that demand is there. Inventories are very low. Probably if I listen some consultants who are speaking of 4 million to 5 million cars missing. And on top of that, you have the waiting time. If it is true that waiting time is increased by some months -- I insist on some months, 1 month is minimum 6 million cars. So we can say that before to -- going back to a normal level, I will say, of production, 10 million must be clean. So which is why no problem on the demand side. So a clear problem remains the availability of components, semiconductor, et cetera. And as you have understood, we will be cautious for the first half, much more optimistic on the second half.

I see. If I could just do a quick follow-up. Just to confirm, did you say on the U.S. greenfield Seating program that there may be a penalty that you would have to pay? Was that -- did I hear that right? Or did I just not hear that right -- to the OEM?

We have made some incomplete. So we -- I don't think that the customers have lost cash because they have stopped different times. So they have not lost cash. But we have made some incomplete. And so you know that every time you make an incomplete, you have some penalties, contractual. So it is something that we have to negotiate because it normally is not a price of a lost car, but the price of an incomplete, which means some hours work lost by the customer. It is not at all the same value. But of course, this is a part of the uncertainty.

[Operator Instructions] Your next question comes from the line of Christoph Laskawi of Deutsche Bank.

It's Christoph from Deutsche. Most of the stuffs have actually been asked, so it's more a follow-up on the comment that you made on the uncertainty on week 3 in December. Would you see that mostly for the 2 customers you already mentioned in your remarks? And then second question would be, do you fear a delayed start in January as well? Or is that currently not really a concern that you have?

Thank you, Christoph. That 2 questions, some customers are closing earlier. And some customers, mainly the German, are restarting later. So it's normal in Germany that the 1st week of January is not work. It's not something new. And this will very probably happen this year again. January is one of the lowest month of the year due to that. So this -- I will not comment by customer. We said today we are seeing, I will say, EDIs coming back to very normal level. The topic was it was the same in September, so I don't want to be too much optimistic. Probably the semiconductor crisis is smoothing, but it is too early to be positive on that. And second, we don't know what are the decisions of customers. So I insist, this is risk, not more than a risk.

Sure. Understood. I was also more referring to the late start versus the usual bits that you know from the customers being well aware that, especially in Southern Germany, the plants start very late. But it doesn't seem to be a discussion that you have currently.

No, we're sorry for that. We have no discussion with customers. We are informed by them. Usually, we were informed with 2 months' notice -- 2 weeks’ notice. We have seen in September, October 1-day notice. Even in 1Q that I was mentioning, it was 1-hour notice. So we are -- I will say puzzled by the difficulty of our customers to forecast and to run the production. This was the first time -- it is the first time in the industry that we are seeing this combination of complete loss, I will say, of control and big viability. And second, you have a big drop of production and a big inflation raw material. Usually, it was the opposite. So today, we have -- we say we are, as our piece, penalized by everything. It is why 2021 is a very special year. What I would like to mention is that with minus 20%, which was a kind of breakeven in the past for Faurecia, we are still able to make, I would say, a reasonable -- I will say, profitability. so this is showing as well the biggest step for what we have done. Again, I apologize for this correction because we should have been probably more conservative late September.

Your next question comes from the line of Edoardo Spina of HSBC.

I have a couple question. The first is about how these disruptions in light vehicle production are affecting the integration with Hella? And in particular, on the microchips bottlenecks, is there a specific impact that you are seeing for Clarion and Hella Electronics integration? But secondly, on the CapEx and working capital, of course, you have specific synergies on that. Due to the changes in the investment plans, do you foresee changes to the synergies on the free cash flow side? And very finally, on the -- is there a silver lining in the situation? The profit warning is affecting the auto suppliers. Some people would assume that the share price of the auto supplies may suffer as a consequence. Is that something that you can see as a positive in one way because I wanted to ask if we are still interested in taking higher share in Hella?

Thank you, Edoardo. As you know, we are still in the [indiscernible] so, I cannot comment Hella. Basically I don't know more. I have no new information about the trend of sales and the profitability, whatever. Sorry for that. But I am restricted until the closing. Second, about your questions about integration. What we are doing is to prepare the integration, to prepare the organization, to prepare -- to work on the synergies. So of course, this has no impact because as we have said, we are working on the synergies on the basis of our, we say, business plan mainly 2023. On CapEx side, of course, we are cutting CapEx. But if I take, and I am convinced moreover, 2023, we'll have very big volumes. So we need to be prepared any way to these volumes. So we have to get CapEx. But we have to be smart. Same thing for the cost. So my conviction is that we will face next year the same situation as last year. That means in 1-month plus 20%, basically in December, plus 20% in volumes. It could be a first step in 2023. So we have to be prepared on one side to be as in as possible, but to be prepared to make, I will say this, a big ramp-up of production. For the share price, Hella is done. We've made a tender offer. We have today a 79.5%. So we have, I will say, some shots. We have bought the rest. So we say it's done -- for ourselves, I don't know what the market will react. But of course, it is normal reaction. I cannot comment on the reaction with respect to Faurecia. The only thing I can tell you is that we are working. And we will, I will say, significantly improve our figures next year and the year after.

Okay. So a very, very quick follow-up on this Hella point. I just want to ask if you can share with us whether you could buy more shares in Hella if you wanted to at the moment? And I know that you don't have to say whether you will. But if you can share whether could or you can?

I can buy shares. But we say I'm restricted because if I buy shares above 60, I have to pay everybody above 60. So clearly, I am restricted. So we -- no use to do it.

Your next question comes from Martino de Ambroggi from Equita.

The first is a follow-up on the free cash flow guidance because you mentioned CapEx are going to be reduced. But what's the amount? At the same time, you said we cannot slow down too much because we need to be prepared for the recovery of the market. So if you can -- I don't know if you can elaborate something on next year guidance on this year. And in your initial remarks, you mentioned something about factoring. Sorry, but I missed it. So just to understand if it's always at the same level, so it's not impacting the free cash flow. And the second question is, I clearly understand that you do not provide any guidance for next year. But if I take the second half of this year, you are generating a return on sales of roughly 4.5%, let's say, 5%. And if you project a similar market volumes for first half next year, should we take this range as a, let's say, indication for the first half next year, expecting a recovery in the second half? Or maybe there is something different?

Thank you, Martino. The first question, sorry, it was?

CapEx.

Yes, CapEx. We are in the second part of November, so of course, we cannot adjust a lot the CapEx. It was already done. We are adjusting the final EUR 10 million. But I will say, anyway, the fact that we will be below 500, where I was giving at the beginning of the year, our figure much higher is, I will say, progressive restrictions we have put on CapEx. Next year, we'll be probably at 550, not more respect to the context, and we will accelerate in 2023. For the second one, which was -- sorry, Martin?

Factoring.

Yes, yes. We say it's a little provocative, Martin, because we have a big, I will say, shot with Highland Park. Of course -- sorry, I have such difficulties to breath -- but Highland Park, the cost is something like 100 basis point on the second half. So we hope to have limited almost a big part of it. So it is why I expect from Highland Park a significant improvement.

On factoring, sorry, I missed...

Sorry?

On factoring that I missed your initial remarks on factoring.

No, factoring, it was a risk. That means that respect to December, et cetera, we do know that we have EUR 1 billion of factor receivables. If November is Okay. And if December is lower than expected, I will have, of course, less -- lower factoring. And this will have an impact as well on the cash flow. So it was -- it is a further risk. My problem is I have one risk currently. I have no opportunities with respect to this current situation. So I have factored this risk in my guidance.

Your final question comes from the line of Michael Foundoukidis of ODDO.

Michel, a couple of questions. First one on the city issues. You said -- you just said to Martino that you would expect a significant improvement next year. Any chance you would quantify a bit the headwind that we should have in mind for next year, if there's any?

No, no, you're going right, Michael. So of course, things will not change completely the night of the 31st of December. It's an expression that I like to use because everything in the industry is always how you built, I would say, improvement profitability, et cetera. So we will be still in a loss in the first quarter. Second quarter will be normally breakeven. And second half, opposite. As a full year stay positive. It is our budget and what we expect as an improvement. So I will not completely eliminate the EUR 60 million plus between H2 this year and H1, I will say, next year. But clearly, a big part, a very big part should be eliminated. So this will contribute to, I don't know, 60, 70 basis point improvement from one semester to another.

Okay. And then more largely, do you see any other red flag or any risk in the next 12, 18 months regarding the SOPs on launch, would be in the U.S. or elsewhere at Faurecia?

A big launch like this one, no, because this one was 2 new activities in a -- it is not, which is not I would say. So as a big risk, we have not identified. The main risk we have identified is a number, the big number of start-up of production in Clarion. We're knowing that the parties are today with -- that the truth, no big impact. And second part will be in the first half. So it is here this, I will say react to Clarion that we will have the major, I will say, challenges. And if I continue on this side, probably in electronics, both in Hella -- and here, I can comment because Hella, you know that they will almost double the electronic activity, same thing for Clarion. So it is in the electronic field that we will have the biggest challenge on the SOP, due to the numerous, I will say, projects and key projects that we will launch.

Okay. And one last one regarding 2022 and even I understand that you will not give a guidance, but what should we assume in terms of operating leverage? Is it normal or given the inflation headwinds that you may have, which would be higher than usual, we should take into account a lower operating leverage than usual operation?

I can notice on the inflation. Probably the inflation will be over 50 basis points. And you -- on one side to the past or material, you know that we are passing through more than 80%, but a small part is remaining. We have some inflation on transport, energy. Difficult to pass through with customers. On the other hand, what I see is only good news is that still the prices ending. Prices are coming back. So if it is confirmed, this will give us, I will say, some fresh air. So I don't want to anticipate too much, but I will say that inflation will have an impact. So I should prefer that you will take, I would say, fall through of 15%, 1-5.

Thank you. There are no further questions coming through on the line, sir. Please continue.

Firstly, thank you. And again, I apologize. We have though and we see normally no opportunity to meet except some conference, and so the next rendezvous is the full year results in February. Thank you, and have a good day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.