Forvia SE (FRVIA) Earnings Call Transcript & Summary

Welcome to our H1 and 2022 results presentation. Before introducing the agenda of this meeting, I would like to introduce Olivier Durand, who is our new CFO, replacing Michel Favre, who is today the CEO of HELLA. Maybe, Olivier, if you want to say a few words.

Happy to. Thank you Patrick. So Olivier Durand, the new CFO of FORVIA group and Faurecia since July 1 replacing Michel. I have been in Faurecia for the last 5 years, 4 years as Deputy CFO and the last year, managing the operations in electronics Faurecia Clarion Electronics business group based in Japan. Before Faurecia, 25 years of working experience in -- mainly in financial role with the last position being the CEO and the CFO of Alcatel-Lucent, post acquisition by Nokia before squeeze-out. So familiar with minority shareholders protection.

Thank you, Olivier. So the summary, I will start with the key highlights of the first half. Olivier will then take over to present the H1 results and the 2022 guidance, and I will conclude the meeting with our way forward. Starting with the H1 2022 key highlights. So we were in a heightened inflationary context in H1 with low volumes, low volumes related to the crisis in Ukraine, which started in February and generated some supply chain disruptions, mainly in Europe. But also the COVID-related restrictions in China, 2 months lockdown in the second quarter. And this is especially in Changchun, where FAW is located and in Shanghai. So 2 very important automotive hubs in China. And not to forget it, we continue to have issues with the semiconductor shortages. We had stop and goes in the U.S. and in Europe mainly. The inflation is also an issue. It's still very high, and especially on the raw materials in the first half. We had significant price increases. And we also have to face the price increases, which will last in the second half on the energy costs. In this context, we gave ourselves 4 priorities: deleveraging the group, integrating and executing synergies with HELLA, enhancing resilience and reducing the breakeven point, and optimizing cash versus growth. In other words, to be selective our order intake taking into account a new equation of strategy. When we look at the main highlights, we closed in January 31 the deal of the acquisition of HELLA. To just remind you, we signed the deal the 14th of August in 2021. So all of that was rapid, quick. We also had our 100 days recently in June, so it's not a long period of time even if it looks like we are working together for now and very long time. We acquired 82% and not 100%, which means a total amount of EUR 5.4 billion. And what is remaining to be refinanced is 1.7% post capital increase. The creation of FORVIA, the combination of Faurecia and HELLA, in terms of operations and in terms of our teams with the consolidation started the 1st of February of this year. We made the capital increase of EUR 705 million in June successfully, which is contributing to the refinancing without increasing the debt, and the integration and implementation is perfectly on track. And I will give you some figures later on to consolidate, to put facts around it. We had a very solid order intake of exceeding, in fact, in EUR 15 billion H1 and which is perfectly aligned with our 3 strategic levers of growth. It allowed us first to the market in some key technologies, and I will describe also in a little bit more detail these technologies in which we want to grow. Our ESG conviction, I think, materialized even further during this period of time with the SBTi validated net-zero target for 2045. It's the first automotive company achieving it. It's the first French company achieving it out of about 20 companies worldwide. We also have implemented our Sustainable Material division with some strategic partnerships. It's very clear that here, a powerful ecosystem is needed, and we have implemented our action plan for energy resilience, and I will give you some figures about this also. So now about the H1 key figures. First, our sales at EUR 11.6 billion, up 49.3% on a reported basis, including 5 months of HELLA, and plus 9% on an organic basis. The corresponding outperformance, organic outperformance was at plus 960 basis points, this Faurecia stand-alone, out of which 790 basis points were related purely to volumes, plus 520 basis points related to inflation and pass-through and minus 350 basis points related to our regional mix. Operating margin at 3.7%, mainly reflecting a strong inflation, which mechanical impact is at about 100 basis points. So the performance would be at 4.7%, and expressing the volatility in OEM programs, which we call the Stop & Gos and the 2 months lockdown in China. We achieved a positive net cash flow of EUR 102 million. Back to the order intake exceeding EUR 15 billion in H1 with the profitability level and also the strategic alignment with our group ambition. So Electronics represented EUR 5 billion, 33% of our order intake. It includes Clarion electronics. China represented EUR 4.1 billion, 27%. EVs, battery electric vehicles and fuel cell electric vehicles, represented EUR 4.7 billion, 31%. And finally, the most attractive segments, the premium segments and the SUVs, represented EUR 8.7 billion, 58%, which allowed us to have a content per vehicle at a record level in H1. This very good result is also allowing us to be much more selective in the second half, again, to find the best equation between growth and cash upfronts. Our 3 strategic lever for growth: electrification and energy management, safe and automated driving, digital and sustainable cockpit experiences. A few highlights related to that. About battery electric vehicles, we got our first orders for Coolant Control Hub, which allows us or which allows OEMs to distribute calories like it is needed. So not only to cool, but also to eat up some of the components of the full chain. On FCEV, I will be back. But just to remind you that we are covering 75% of the value chain, and that we have won some significant orders. We also made a partnership with Air Liquide for liquid storage for heavy mobility. We entered with first orders into the container storage and transportation systems, which is not an automotive business, but which is a significant market, at about the size of the mobility storage, which I think is very important. And on the stack side, we made -- we achieved between Symbio and Schaeffler what I believe it is an very significant joint venture for bipolar plates. I think we have the best partner possible for these very complex elements. On safe and automated driving, we were very successful with our last generation of 77 gigahertz radars. We got new OEMS, especially in China, for e-mirrors. And also, our portfolio of x-by-wire solutions progressed significantly. These are very complex algorithms and softwares using fail operational systems, which means full redundancies, including sensors. And we got our first order for brake pedals-by-wire, which again is very important for the automated driving solutions. Not to forget in safe and automated driving, there's a significant new trend, which is very large lighting front panels, which are including the [indiscernible], but which are also including AAS and BEV has no need for a grill in the front of the car, some possibilities to message, to have animations, lighting animations for information to the external world and which is now -- which is increasing the complexity and integrating the headlamps. On the digital cockpit, we enhanced our coverage with Faurecia Aptoide, which is an app store, with more than 3 million vehicles now equipped and with 2 new significant programs with German OEMs. We also have achieved significant innovations and orders on the interior lighting and all the signatures, the lighting signatures of the vehicles and finally we made a partnership with Veolia, which is authorizing us to achieve at least 30% of recycled polypore materials in our interiors very soon in 2025. About hydrogen. The major achievements in H1 '22 is probably the achievement of EUR 500 million, it's even more than EUR 500 million lifetime sales in order intake, and this mainly with Stellantis on the stacks, so this is related to Symbio. And with HYVIA, so with [indiscernible] for the tanks. I think that these 2 are very important with SOPs, which are in the next 2 years. So I think this is materializing the transfer from a project base to an industrial manufacturing base. We also won 2 pilot projects for heavy-duty trucks with MAN in Germany and with CEC in California. We worked on high-capacity hydrogen storage systems for refilling stations. These are all the containers I spoke about. And this is the Zero Emission Valley. We also had a fuel cell stack system and joint venture, I spoke about that. It's named in INNOPLATE. About our conviction to the climate change. So we communicated already that for 2025, we would be at CO2 neutral for Scope 1 and 2. In 2030, our target is to reduce by 45% Scope 1, 2 and 3, in fact, Scope 3, having achieved neutrality for Scope 1 and 2. And in 2045, I said it, we will be neutral including Scope 3, and this is the SBTi net zero. What are we speaking here about? It's this curve. So maybe 2045 seems far away. It is not. We have an intermediate, which is tomorrow, which is 2030. And it's very -- when you think about generations of vehicle, you do not have a lot of generations of vehicles. So you have to implement immediately these new architectures with new materials. What is important and what is allowing us to achieve this net zero is what we are doing on the materials side. We will combine recycled materials with bio-sourced materials, which will allow us to have CO2 negative formulations. And these capture of CO2 is part of the recipe to allow us to be at net zero. And I think that this is very important. What is also legitimating us in this field is that if you increase through these complex formulations, the viability on the material side, you need to be able to compensate it on the process side. And what we are doing, we are doing formulations which are related to some processes and applications for the automotive industry mainly. In order to capture the value, you need to be quick and to have the right parameter in terms of feedstock. So this is why we, in the moment, are negotiating with different partners, the capacity for the group in the next future to have access to significant volumes on recycled materials and bio-sourced materials. We will have more than 400 engineers in 2025, which is again tomorrow, working on these new materials. And our target is to achieve more than EUR 2 billion of sales, including material sales to the outside world, not only related to our needs in 2030. What type of materials are we considering? We are considering compounds, we're considering foils, and we are considering carbon fibers. We are owning the patents of force and consortium project, which is happening in France, but we have some other interesting projects in America related to the same approach. I also would like to speak about what we are doing on metal, on steel. We have an agreement for green steel with SSAB to develop ultra-low CO2 seat structures mainly. And we participated to the creation of GravitHy, which is on the direct reduction iron process and which is a new intermediate step in the production of steel, very interesting. It happens in the North of France and which will guarantee volumes to FORVIA. About energy efficiency. I think that this one is particularly important when you look at the inflations. When you look at what we did in the frame of Scope 1 and Scope 2, we are able -- we will be able, taking as a reference 2019, in 2023 to save 22% of our electricity consumption. Considering these, you see that 6% of this consumption will be related to some investments. The other one is simply reducing our consumption. Of course, it works with some materials, with some new procedures we have put in place and which are working very well. To this, we add a self-production of about 7%. It means 1 million square meters of solar panels on all our sites. If I add up, so the 7%, of course, is not for free, but it is not working on the inflation mechanisms of the electricity you buy on the market. So the saving in 2023 related to this is close to EUR 40 million, and this will allow us this significant inflation. We are hedged. We are partially hedged in 2023. But without this, we will be impacted significantly at that time. A few words about HELLA and its integration. We achieved already EUR 600 million lifetime sales of revenue synergies, especially in Europe and in China. We have identified around 200 synergy opportunities, which are in the process to be executed. And clearly, our cost synergies and optimization announced above EUR 250 million in 2025 are on track. We will go one step further down this road, and we will work mainly on further synergy projects related to electronics to our information systems to cybersecurity and to digital transformation. We are aligning our standardization approach across all systems and tools and I should say, operations, manufacturing around the group. On the right-hand side, you see the -- some figures about surveys we do on a quarterly basis. It's pulse. It's under the responsibility of BCG. And it's interesting because BCG has a pretty large data bank and is capable to give us some benchmark information. And you see about, and this is happening with about 4,000 to 5,000 HELLA employees in the management area. You see that there is a very strong willingness above 88%, readiness above 83% and assessment of ability to do it, which is also high, above 75%. These 3, when I listen to BCG, are above their benchmarks. What I also would like to remind you is that the legal form of HELLA, the GmbH & Co. KGaA, which is an commended company with our 82% stake, are allowing us to achieve the synergies we have identified. We have for them defined the legal frame in order to guarantee the protection of the minority shareholders, but this is working. And I think that with this, we go to the second part, which are on the H1 2022 results. Up to you now.

Thank you, Patrick. So first of all, a presentation of the market itself. Patrick was mentioning Stop & Go and the COVID restriction in China, and this is really the main factor of the period. Overall, the production has been flattish year-on-year at a low level of EUR 37 million. But I think even more important than the absolute is the way it has happened, Europe has been heavily affected, in particular at the beginning of the semester by the Stop & Go, which is impacting in particular our just-in-time side of the activities. China, 2 months of lockdown in particular, April. The government has done a lot of things to help the industry alleviate the COVID restriction, which allowed translation of a catch-up in June, which is behind what we see at the end of the day, China being flattish on Q2 and overall plus 5.8%. But we are heavily in Europe. So of course, the mix, regionally speaking, has been negative for us in H1. This is what was behind the 350 basis points mentioned by Patrick earlier on. Now in terms of quality of the activity. Clearly, inflation and Stop & Go, and this chart is trying to show some color on those 2 factors. So on the Faurecia organic scope, gross impact of inflation, EUR 500 million. Raw material, energy, transportation, a bit in wages. We have been able to offset EUR 400 million of this EUR 500 million, 80% recovery. The contractual pass-through on raw materials, in particular, on metal are quite good. There is a time lag, of course, and you will see more of it in H2. And also the negotiation with customers have been happening with a time lag as well, which means that the level of impact has been more important in H1 than what we would anticipate for H2. So net impact on the operating margin, 100 basis points on the operating margin given those elements. On the Stop & Go and COVID, this chart is trying to show what happened to us during this period. We are showing the number of days that have been lost or partially lost due to COVID restriction in China, our stop-and-go decision by the supply chain, our customers. And you see big level in Europe, particularly in March. And of course, the severe level given the lockdowns in the main city, Shanghai, Changchun in April alleviating. The good news to be confirmed over H2 is that you see those curves are going down at the end of the semester, which is an encouraging sign that we will have to follow up in the second half. So to give details on the revenues. So the EUR 11.6 billion reported plus 49.3%. This includes 5 months of consolidation of HELLA from February 1. On an organic basis, i.e., excluding scope, excluding ForEx, plus 9%. The market was down 0.6%. So we have an outperformance of 960 basis points. This 960 basis points, 3 factors: the regional mix negative that I mentioned, given the reduction of Europe due to Stop & Go, and the war in Ukraine at the beginning of the year, the inflation, the inflation pass-through and the volume, excluding regional mix of 790 basis points, a good outperformance for the company. On the operating margin, we can say that we had a resilient operating margin despite all those headwinds and at 3.7% with an improvement Q2 versus Q1. If we look at the bar chart at the bottom, the first 4 columns are talking about impact. On an organic basis, i.e., Faurecia, and we are reflecting the HELLA contribution in the fifth one at EUR 130 million, i.e., 4.7% of sales. So war in Ukraine, COVID in China, a negative impact of EUR 122 million, which is the combination of the volume and the Stop & Go. Our specific issue Michigan Seating program, EUR 45 million. This EUR 45 million is EUR 30 million on operational issues and I would say sharply down from H2 2021, but still a burden on the results and EUR 50 million related on Stop & Go of this specific one. The net cost of inflation of minus EUR 100 million, I mentioned before, resilience action is mitigating part of the impact related to China lockdowns and the war of Ukraine in consequence. You see that inside those elements, they are also indication of the progress to expect in H2, in particular, on Michigan extra costs and on the net cost of inflation. I will come back to this in my H2 full year presentation. If I go by business group, starting with seating. Seating has been particularly impacted by Stop & Go and inflation aspect, not only in the Michigan program, but also quite a lot in Europe. Just-in-time business is, of course, heavily impacted by Stop & Go decision in the last minute. Also, we should say that we have issues in terms of execution, flexibilization of the cost, and we are working on this one so that H2 is better than what we are affecting here. On interiors, an overall performance that I would say, good. If you take into account the dilutive effect of inflation, you see that this is the main driver between the 4.9% of H1 last year and the 3.6% of H1 '22. So overall, it means operational improvement in many of the domain and a good level of inflation pass-through knowing that inflation pass-through in plastic is less indexed than in steel. So I would say, a good evolution interior. And it means that with the operational improvement that are done, H2 will have a good evolution. Clean Mobility, an important evolution of the profitability. This is related, of course, to Stop & Go. This is, of course, related to the lockdown in China, but it means also that in China, we are heavily in Shanghai, in Changchun, which were the main cities and agglomerations that were impacted by lockdown, plus the choice of OEMs between BEV and ICE cars in the context of lockdown. You see that we had a drop of revenues in China of 11.9%. This is a significant contribution of the current level of margin, given that we have a good regional margin in China in Clean Mobility. Clarion Electronics, my business group. So EUR 11 million of operating loss. Semiconductors playing a big part, not only in terms of shortages, but also in terms of prices. We have been affected also by the weight of the lockdowns in China. Clarion Electronics is, first of all, an Asian business and the supply chain is heavy in China, not only for us, but also for the semiconductor companies. It has limited the growth that we were conking out by 2/3, and it has also -- the timing of the repricing has been a bit delayed, knowing that Japanese companies are starting their fiscal year April 1. So some of the improvement will be leading clearly to a positive operating margin in H2. Showing HELLA contributions. So HELLA is EUR 2.789 billion of sales over the first 5 months, February to end of June, EUR 130 million in operating income contribution, 4.7%. This is reflecting also that HELLA has been impacted by the same factors as Faurecia supply chain bottleneck, also inflation and partial recovery of the cost in pass-through. For your information, HELLA has reported their preliminary fiscal year '21, '22 results last week on July 20. You know that their fiscal year is currently 1st of June to end of May of a given year, and they will report their full presentation, in fact, on August 18, giving additional information. One thing I would like to highlight about HELLA is that HELLA is also recording outperformance on a full fiscal year basis. The recorded, in fact, negative, minus 2.4% in revenues, organic excluding ForEx, compared to minus 9% market. Why 9%, is because, in fact, when you take the fiscal year, there was heavy H2 of last year and no recuperation of the lockdown days of China in the months of June. So also a positive outperformance in HELLA of more than 660 basis points. If I move to regions. So in the region's numbers, you have for H1 '22, the FORVIA picture, i.e., Faurecia, plus the 5 months of HELLA in all the regions. Europe, this is the place, as I mentioned, for Seating in which you have heavy impact of the Stop & Go. You see that, in fact, in terms of volume, activity has been down, if it excludes the pass-through in the revenues. And also, this is where, as I mentioned, seating operational issues and flexibilization to improve for the second half. North America, 26% of the revenues. The main topic in H1 has been related to the Michigan Program in the period. Asia, a fairly resilient operating margin, 9.1% in the region on the back of a good result in China. Considering the 2 months COVID lockdown in many cities and the disruption of activity, I would say this is a positive evolution taking into account the inflation/dilution effect, and you see that the evolution of margin in the context is quite good. And this is encouraging for the second half and the following quarters. Rest of the world, only 4% of the revenues. This is only South Africa and South America. 6.3% in operating income. This is an acceptable performance when you take into account the evolution year-on-year restated of a tax recovery in Brazil that we had of EUR 13 million, meaning that the H1 '21 was more 8.5% operating margin. Now if I -- if I move to present the detail of the income statement, starting with the operating margin. In complement to the comments before, I would like to highlight the change in the shape of our P&L that the FORVIA scope is representing. HELLA has a better gross margin than the historic Faurecia, which is reflecting the content in technology. It's reflecting the good position in many products that HELLA is bringing to FORVIA. The second is the level of R&D that we have in the new company, EUR 1 billion per semester in gross R&D. You see the power of the company that we are creating. The third element I would like to highlight is the level of capitalization. We have a lower level of capitalization in the 54% range versus 70% before. This is good. It means better conversion in cash, a better cash generation for the new company for the same operating margin. And the last item is the sale -- is the SG&A. The SG&A, of course, currently at higher than historical level. This is confirming the potential for synergies as part of the combination. Now if we move to the net income, we are registering in fact a net loss group share of minus EUR 296 million in H1. 2/3 of those are related on the one side to integration and financial cost related to the acquisition of HELLA and EUR 87 million to one-off charges related to the downsizing in Russia. We are -- we have closed most -- we have stopped most of the plants in Russia. We have -- we are complying with all the regulations and sanctions that are applicable on Russia, given the war in Ukraine, and we have taken into account the consequence in restructuring and other cost, receivables, inventories being stranded. If you look line by line, let me highlight a few of them. Amortization of goodwill is EUR 95 million. This is in fact the consequence of the acquisition of HELLA with 5 months of amortization of this goodwill. So you can consider going forward around EUR 100 million per semester. Restructuring, EUR 155 million. So first of all, is about Russia, as I mentioned. But it's also given the context we are taking restructuring measures elsewhere to ensure the reduction and the optimization of the breakeven point. And the last element is on interest expense. You see the high level of EUR 292 million. This is not only related to the financial related to the acquisition of HELLA, but also impact on our ForEx hedges given the heavy fluctuation the U.S. dollar in the period. So less recurrent, if I can say going forward. On the net cash flow, so we have registered a positive net cash flow of EUR 102 million in the 6 months, I think, it is for me, the best indication of resilience. This has been achieved on the back on the EBITDA of EUR 1.3 billion. It has been also with flat working capital. We have, in fact, peaked in inventories at the end of April, and we start to decrease from then, and this is one of the key focus area of the second half. We have also EUR 234 million of factoring. We have now the receivable factoring program in application throughout the FORVIA, which allowed to mitigate some of the headwinds that -- and time lag on inflation management that we had in the first half. Evolution of the net debt. So we have a net debt at EUR 8.4 billion at the end of June. This is reflecting, of course, the acquisition of HELLA. So HELLA acquisition is EUR 4.9 billion in cash after inclusion of the participation of the family to the capital of Faurecia. This is after the EUR 690 million net proceeds from the capital increase that we have been successfully doing early June, and this is integrating the debt that remained in HELLA of EUR 516 million. We are at a 3.1x net debt level at the end of June. No covenant to be tested, thanks to the renegotiation with the banks that was done in April. So we -- and we are targeting to be at 3 at the end of the year. More details on the refinancing. So Patrick was mentioning that EUR 1.7 billion remains to be financed. We have done 2/3 already inclusive of the capital increase done early June. We have additional debt instruments that we are looking at, the first one being for EUR 300 million coming very soon. And the complement is related to our EUR 1 billion asset divestment program that is underway. Our commitment is to complete and cash in this program by the end of '23, and I think the first operation will happen this year. We have in the EUR 1.7 billion remaining, the most of it is EUR 1.6 billion is the bridge to bond, which is -- and we have headroom until August 23. Complementing this some on liquidity and debt. So strong liquidity at the end of June. The EUR 6.1 billion is EUR 4.2 billion in available cash, combined Faurecia and HELLA. And this is including the 2 facilities not used at all of EUR 1.5 billion and EUR 0.45 billion senior credit facility, respectively, Faurecia and HELLA. On the debt profile, you see in '23 the bridge to bond in yellow. This is the main factor. After other ones are more limited until '27. Two key elements to highlight inside this maturity profile. Current cost of debt below 2.8%. And second, 2/3 of our interest rates are fixed, the main variable one being the bridge to bond. We have maintained credit rating with the 3 agencies. First acquisition. If I move now to the guidance, what is happening for the rest of the year. We will confirm our guidance, and I will explain why. Number one, we are prudent on the volume. We are considering a volume of cars of 74 million vehicles for the year, i.e., in H2, equivalent to H1. This is below IHS, but we remain prudent given what we have seen in the past period. The second is that this page is trying to highlight evolution H1, H2. And compared to the 3.7% that we had in operating margin in H1, 3 key factors to take into account. Number one, improvement of seating operations, starting with the Michigan Seating program. You see that we were at EUR 100 million loss at H2 '21. We are down to EUR 30 million in H1 '22. So you see the curve and this curve should be close to breakeven in H2. The second is related to inflation management. We had an impact of around 100 basis points in H1, given the time lag of some of the indexation measures and the full impact of some of the repricing that have happened. We have a reduction of this one by a 50 points reduction by half. And the last one is operating leverage on volumes and improved cost flexibilization in some of the activities, FCM and seating in particular. If you take those 3 into account, you are getting to 5.3% in H2 and you are getting to the middle of the range for the year between 4% and 5%. I would say that evolution within this will depend a little bit on the volume. If the volume is above EUR 74 million, you understand that we will be more on the high side of the range. On the net cash flow, we are prudent in this element. And we have decided to take a reserve safety stock of EUR 100 million in order to secure supply in Europe or alternative source given the risk of energy shortages this winter in Europe. So this EUR 100 million normally, we will have done this in H1 '23. We advanced this so that we protect our operation and our activities. We have created a crisis committee to tackle this, to monitor the situation and the first order will start at the end of this month. In terms of the rest of the cash flow, we will monitor the situation in all aspects. We will improve the operational discipline, and we will launch a program that I call managed by the cash. Some initiative existed and exist today in Faurecia and HELLA convert to cash to take the one of Faurecia. We will combine those ones. We will take the best practices, and we will make sure to embark this from the quotation to the collection, i.e., inclusive of order selectivity. As Patrick was highlighting, the impact of this will be progressive, but this is clearly key so that we generate cash on a going-forward basis in a structural manner. So this is -- so we are anticipating 3x the net debt-to-EBITDA level. This is considering the evolution of operation that I mentioned before. We have a first operation in our divestment program that is ongoing. If it were to materialize in cash depending on the antitrust, that could help, in fact, this factor. We have clearly the commitment to deleverage this company through this program in managed to -- managed by the cash and divestment. So this is allowing us to confirm the guidance. So EUR 23 billion to EUR 24 billion in revenues, 4.5% in operating margin and net cash flow at breakeven, taking into account the EUR 100 million that we are putting aside. One comment to make on the level of revenues. We have kept the same guidance, i.e. We have kept a U.S. dollar to euro at 1.13. It's clearly below what is currently happening. If the U.S. dollar would remain, roughly speaking, at parity, you can consider EUR 0.5 billion in revenues on top of what we are showing here, which will not change, in fact, the other parameters that we are mentioning. Just -- so that we are clear on the referential and we are not underestimating the potential in the company. Patrick?

Thank you, Olivier. So in a nutshell what happened in the first half, more than EUR 15 billion of order intake perfectly aligned with our strategic priorities. We are the first automotive company and the first French company having achieved through STBi, the net-zero target. We also have -- we will have -- sorry, 100% of our sites worldwide at the end of this year being assessed from a biodiversity point of view, and we will be able, until the end of the year to define our action plans side by side. We are the first to the market, we will be. We have decarbonized steel production in Europe through GravitHy and through our Scandinavian contracts. We have launched 135 programs in the first half without any issue. And I think that this is important. And of course, we are continuing to work on partnerships in order to reinforce our ecosystem. What is our new normal environment. So clearly, what we have to take into account are climate change. This is a big parameter. It means that we will have some climate-related events, which might perturbate our operations, the global automotive economy and the material flows. We are working here on new materials. We are working here on new architectures for products. We are working on energy saving, and all our activities are now clearly focused on the CO2 targets. We are also seeing a more regionalized world with some decoupling, especially in the electronics and in the software fields, which we have to take into account. We are coming from a planned world to an event-driven world. What does it mean? It means that you need to have a clear target and midterm target and you have to stick to it. But the way to go there to be much more dynamic than it was the case before. So some of our management tools are becoming obsolete. They are no more working. We spoke about the metaverse in order to have a sophisticated simulation tools for our management, which we are considering and which we will apply in the months to come. Technology. We are living in a technology-driven world. It's very important to invest in innovation, but not any kind of innovation, innovation that matter to people. And I think that this is very important. We have to integrate in our business model and marketing responsibility. Inflation for a while, we see it we have to get adjusted to this new financial environment. We are doing it. Our target is to have pass-through inflation which started in the second half of 2020, including '23, at the end of '23. So we have a delay. We are in a B2B business, not in a B2C business, but we will make this happen. And clearly, because of the significant growth we have in front of us, we have to work on attractiveness in order to be able to have the talents to interest the talents, which are needed to feed our growth. On each of these 6 elements, we have action plans. So we have made an status. We have collected all the data available in order to try to understand what is this new environment, and we have decided on action plans in order to mitigate the impacts. This is clearly related to the 4 priorities I spoke about at the beginning of the presentation. We want to deleverage the group as quickly as possible. This is why we maintain the 1x net debt-to-EBITDA in 2025. This is also why we have increased our targets in terms of the disposals, sorry. We are working on an accelerated way on the integration and the execution of synergies and it is possible related to the legal form of HELLA. We are enhancing resilience, and we spoke about our cash program, which is now deployed in all the departments of our group on the HELLA side as much as on the Faurecia side. We are working on lowering the breakeven point because of the uncertainty, which is becoming part of the new normal. And we are considering optimizing cash versus growth. We will be more selective in the second half, but we are considering to go one step further down this road of 2023. So this was in a brief how we see this first half, how we see the second half. And now we are open to your questions.

Pierre Quemener, Stifel. I would have 3 questions, 2 on free cash flow and 1 on goodwill from the HELLA deal. The free cash flow trends back in August last year were very aggressive and ambitious going forward for the deleveraging. When do you think you might be back on the track of generating above EUR 1 billion in free cash flow? Is 2023 too early? Or is it still on the table? First question. Second one on factoring. Strong tailwind in first half. Any further tailwind expected in the second half from the HELLA integration? And last, on the goodwill from the HELLA deal. Could you please elaborate on the absolute amount was in excess of EUR 4 billion for 100%, if I remember correctly? Do you see any risk of depreciation looming on that one?

Olivier, you take the questions.

Free cash flow of EUR 23 million. We will come back during the Investor Day with the profile of evolution of cash flow. But clearly, the objective of next year is a sizable level up to about EUR 1 billion that we will see. But a sizable level, that's very clear. On the factoring, we have increased the factoring to EUR 1.3 billion total. This represents a bit more than 5% of our sales. So still a low level. However, the forecast that I'm showing you do not include any increase of factoring in the second half, and this is not the intent. On the goodwill, I think it's more -- specifically, it's more a EUR 2.7 billion, excluding the specific assets. We do not anticipate any impairment of goodwill of a company that we just acquired.

You remember on the factoring that we for Faurecia capped it at EUR 1 billion. Our new cap with HELLA together is EUR 1.3 billion. .

Tom Besson. I also have 3 questions, please. I think the first is in [indiscernible] today and it's I think related, your Seating operating performance versus Interior is surprisingly weak and your North American operating performance is very weak when we take into account the organic growth. Can you maybe give us more details on what you've mentioned about some of the Stop & Go or execution issues in Seating to help us understanding why it that way? Because when we add back the Michigan, we still get to a weak figure for both North America and Seating, and I guess it's connected. Second question, you've mentioned the EUR 282 million of net interest charge is not normal for [indiscernible]. Hopefully, effectively, that's good. Can you give us an idea of where we should land in the normal year, say, in 2023 excluding the possible benefits of any disposal? And thirdly, you've decided to stay very cautious on production, and I agree visibility is still low. Has it improved in any way with June and the trends you see in July? Or do you believe you're probably overly cautious maybe with flat sequential production? Or do you think it's really the right management approach? And can you make comments by region and your degree of confidence on production if there is a greater degree somewhere?

I take the first and the last. You take the second one. About Seating and North America. So Seating, first of all, is our activity, which is mostly impacted by just-in-time businesses for which we have 2 issues: the wages, it's an added value business, and the Stop & Gos. And on the Stop & Gos, there's nothing you can do when you have contractually and capacity to deliver. And this is a big problem, and it cost us a fortune in terms of Stop & Go. When I take more specifically North America. When you -- when we think about Highland Parks or WS and Stellantis business, we said last year that we would have still EUR 30 million of execution issues in this first half. We stick to it. But we have a problem with the Stop & Go. We are committed to 110,000 vehicles where we see that we are below 80,000 vehicles during the full semester. So we are negotiating with Stellantis in the moment, I will have a meeting tomorrow, in order to make it clear that we cannot stay at the 110,000, but we have to readjust us on the 80,000 so that we can flex all our costs and that we can also adjust the PPAs, so the depreciation of CapEx and R&D, to this new amount of this new volume, which is a real volume. What we will also do in the second half is to transfer some components to Mexico in order to support the activity in an environment where people turnover is very high. And wages in America have inflated very much, especially in the Michigan area. So that we feel confident that we will be able, from a pure execution point of view, achieved a breakeven situation as planned and that we have to find a solution together with Stellantis to deal with the Stop & Go, better said with a new adjustment to the volumes. We also have an issue with the integration level. We are less integrated in America than our competitors. So this is reducing, in fact, our content per vehicle on the complete seat activities. There are possibilities in North America, which is to consider partnering with minority players. In other words, now you make a joint venture with a minority representative, who will take the majority of the joint venture, which allows you to deconsolidate the business and you keep the volumes on the components, okay? So we are in the process to deal with this because effectively, on the [indiscernible] businesses, there is a new structure change we have to consider. When you look at Seating globally, we are smaller than the big ones. So we are #3 on the complete seats. So it means that we should be less impacted by this. The last one is related to June and July. So we see an improvement in June and July, especially in China. The last figure I received during the weekend about China is showing that China is in July at the level of June, which is an interesting recovery. When we look forward, what do we see? We believe that in Europe, we might have some gas supply restrictions, and we are working on this. We are trying to protect us through additional inventories, safety stocks, but alternative supplies on an international basis. We might have social tensions in Europe in the second half. And we might have potentially a recession of the economy in the second half. In North America, it's more the recession, which might be an issue, and the cost of money. In China, we still have the risk of Omicron, and we have currently new lockdowns in the Chengdu area, for example. So it's not over. So the risk is persistent and at least until October, it will remain in October. We will have an important session to the Communist Party in China and maybe the policy might be adjusted to the context. Semiconductors, we will still have shortages on semiconductors. And I said it before, even if we see a slight improvement, we will have restrictions until the of 2023. And cost of money will not help. Cost of money plus inflation for the consumers might become an issue. And we might see some impact, sorry, on the demand. This said, I do believe that we are prudent with our EUR 37 million in the second half. And this is okay. We are managing on this level. If we have more volumes, we will, of course, benefit from that.

And to answer the second question. You can consider that there is around EUR 40 million of nonrecurring inside the financial expense related to foreign exchange swap and hedges. So EUR 240 million is more recurrent one. And going forward, that will decrease with a repayment of some of the debt, knowing that on our interest rates, the vast majority is fixed, but step by step.

On phone, do we have questions, Marc? We don't have them on the screen so far?

All right. Thank you. We'll now take the questions from the audio participants. We will take the first question from Christoph Laskawi of Deutsche Bank.

The first one on HELLA and accounting. You've highlighted that HELLA has a lower capitalization share of R&D, and it seems that there has been no change since you consolidated it. Is it fair to assume that going forward, you will stick to that type of accounting or should we assume an uptick in capitalization of R&D? So that's my first. Then on the free cash flow in H2. If we consider the improving earnings and the overall, hopefully, a bit more stable situation in H2, could you just give a comment again on why it should be negative outside of or breakeven outside of the EUR 100 million additional stock that you want to secure? Is it just other working capital or higher CapEx rate? That will be much appreciated. And then in the end, on the Michigan Program you have. It will require a bit on breakeven in H2. That is, I guess, not including the Stop & Gos, right? So if the Stop & Gos continue to be a problem, then the plant will likely have a negative in period H2.

Okay. So here again, I'll take the first one. The last one, Olivier. So about R&D and amortization. So you know that we were in a clear trends to reduce our depreciation of R&D -- our capitalization of R&D. HELLA is, in fact, allowing us to accelerate this reduced capitalization, and we will, of course, stick to this. We will even continue to reduce our part, so the Faurecia part in terms of capitalization. . On H2, you are right. We are considering to be at breakeven in the second half. This is not considering the Stop & Go. But I'm -- I believe strongly that we will find a way with Stellantis because our requests are perfectly legitimate and we have to solve this issue. We cannot continue to have a significant gap between EDIs and call-offs on a day-to-day basis. So I'm confident that we will solve this issue in the few weeks to come.

And related to free cash flow H2 question. I agree that we are prudent with maintaining only the breakeven. We want to make sure, first of all, to have the reserve for the safety stock. And depending upon the way the H2 is shaping in terms of Stop & Go and so on, the cash impact can be different. If you have a lot of Stop & Go in the middle of the semester, inventory will be impacted and so on. So -- but I agree with you. This is prudent, and this is not my personal objective.

Maybe back to give you some confidence about Highland Park. Our H1 exit point is very close to our convergence curve. So it means that we have considerably improved our costs during the first half, which is making us confident that we will be able to make the remaining part of the convergence. Also what I said about transferring components to Mexico. This will really have a significant impact next year and a relative impact in the second half.

We'll now take our next question from Tom Narayan of RBC.

It's Tom Narayan, RBC. And an answer from you, Olivier. The first one has to do with the inventory building that you are doing in anticipation of potential energy rationing. So what level of global auto production would this satisfy? You're calling for EUR 74 million for the full year. What if this drops to EUR 72 million? Would that be sufficient? And then secondly, on the divestitures. Just curious as to how this relates to overall strategy? Is it more to do with liquidity concerns? Or are these businesses you've always been planning on and exiting? And just in the context of the markets that we're entering. Is it a good idea to be divesting assets now where you may not be getting the best pricing? And then just as a follow-up to divestitures. Does the net cash flow at breakeven guidance include divestitures?

[indiscernible] the inventory, Olivier. What is our fear? Our fear is that during the winter period, the next winter period and probably not in this year, but to the beginning of next year in February, we might have some restrictions in supplies. But these restrictions of supplies will only last for a few weeks. So we do not have to cover in a very long period of time with volumes. But we are buying some glass, for example, we are buying some components which are produced with a high energy intensity. So we need to protect ourselves. So this is why we are building safety stocks. And if we believe that it might be an issue for a little bit longer. We are considering alternative sourcing outside of Europe. So this is also why we believe that with the EUR 100 million we have considered, we are well -- we will be able to protect us very well. It's not as we are an intensive company in energy consumption. We spoke about this. We are buying about EUR 20 million of gas per year and about EUR 100 million, EUR 110 million, this is Faurecia, sorry. And EUR 100 million, EUR 110 million of electricity. And when you look at HELLA, it's proportionally about the same ratios. So we are not considering this as being a longer issue. We might after get prepared for the next winter period, which might be even more difficult from an energy supply, but we are, first of all, dealing with what we have in front of us. The divestments, what I would like to say is that we are considering the complexity of the company. We will be with, including the impact of the divestments, in any case above EUR 30 billion of sales in 2025. So we have scanned and full portfolio, and we have identified some activities, which are not strategic, with which we will not be able to achieve a leading position globally, #1, #2 or #3 at least, okay? And we have identified more than what we have communicated because, of course, if the economic equation, if the divestment interest from a financial point would not materialize, we would consider other options we have. So this is why here, again, we feel confident with the EUR 1 billion, we are not speaking about more than EUR 1 billion despite the options we have because we want to secure the EUR 1 billion with good conditions.

And on your last question about disposal. There is no disposal proceeds in the net cash flow. And so the breakeven is excluding any impact of this. And on the net debt, the 3 is actually not considering cash proceeds from any disposal. I'm hoping that we can have one, but it depends -- it will depend on signature and antitrust. So it's not considering and it will improve this number if it happens by the end of the year.

Do you want that we take 1 question on the live? Go ahead.

Go ahead. Go ahead if we have one.

No, please go ahead if you have still questions on the phone.

We will now take our next question from Jose of JPMorgan.

I'm Jose from JPMorgan. Two questions, please. Can you talk, please, about the level of competitive SG&A as a percentage of sales do you like to pursue in the next 2 years? Second, can you talk about the drivers to improve the profitability of Clarion? Three, when it comes to free cash flow, should we think about 2023 as a similar year to 2016 where you managed to delever the balance sheet substantially, thanks to a mid-cycle margin generation for the company, plus asset disposals? Would that be a fair comparison maybe '23 versus 2016? And then final one -- sorry, for all the questions. Just a final one. Patrick, how do you think about the remaining stack in HELLA? And do you want to control 100% of the assets?

About the SG&A, and I'll let you take over. Olivier? So we believe that the right target is below 4.5% or closer to 4% than to the 4.5%, which was our level of SG&As. We have in the SG&As also our program management, some of our program management activities. And we believe that here, we can significantly improve the situation. So this is the target we have. I'm taking also immediately the last one, and; then I'll let you, Olivier. About the stack, it is very clear that at the time is not favorable to buy out the remaining shares we have setup and legal setup, which is allowing us to run operations in the way we would like, protecting, of course, the minority interests, but we are able to manage the main synergies. And we will see in the second step, what the possibilities will be, but this would request a significant improvement of the market conditions. And I said it before, our main priority is deleveraging the group, not to add debt to the group.

So Patrick, I agree with you on the target of 4% on SG&A. I think this is what we should achieve. And this is what is in line with the synergy aspects of the combination. On the profitability for Clarion Electronics. Clearly, we have an organization that is not geared for less -- for around EUR 1 billion in revenue. The growth this year is 1/3 of what was planned not because we are lacking orders, but because the bottlenecks of the lack of semiconductors. So progressively, maybe not so much in H2. But progressively, it will happen. The second is on the cost structure. The cost structure was, in fact, still with a significant level in high cost. This is now resolved. The restructuring action have been done. We are setting up strong R&D centers in India, in China. So in India, we have now a center of 300 people. In China, we are opening a new one in autonomous driving in Wuhan. So we are doing the part. And the last one is R&D intensity compared to level of activity. It's about standardization. And here, the combination with HELLA and particularly HELLA Electronics is accelerating the move to standard of R&D, modular R&D so that you don't rebuild every time you have a new contract. So those are the key factors in fact to do the turnaround of Faurecia Clarion Electronics. On cash flow profile '23. Comparison to 2016, pre-COVID Faurecia, difficult to do. What I can say is that we have the element to ensure that working capital being at hold, so increase of revenues has no impact on the cash flow. On CapEx, we have potential of synergies. You saw some of the numbers is showing clearly capacity to do it. And the third is about what Patrick mentioned, order selectivity and ratio of new orders versus additional CapEx, additional R&D. Those factors combined will improve the number on top of volume and the repricing.

I would like to say one additional word about electronics. It's the manufacturing setup. We are optimizing our manufacturing footprint. And if I take, as an example, China, we were at 5.5 plants, smaller one. And we will move at the beginning of 2023 to 3 plants, while then having 2 big plants, one in Shanghai belonging to HELLA or in the HELLA perimeter, and one in the South of China belonging to the Clarion perimeter. This will change completely the setup. And it's also the case in Europe with our plant in Hungary. The last point I would like also to share with you is that one of the key characteristics of HELLA's Electronics is that they take a significant order and based on this order and the next one, they design the platform while in many cases, and it was also the case of Clarion, we started [indiscernible] work on a platform, which is always difficult, but because when you are confronted to the reality of a vehicle program, to stick to your standard is complex. So the approach of HELLA is, from my point of view, much more efficient. And HELLA, in order to do this, has a software house with the standards with all the rules, which are needed, which we do not have to reinvent. In fact, we are just taking over these assets and these know-hows. Any other question on the phone?

Yes, we'll now take our last question from Giulio of BNP Paribas Exane.

The first one is on inflation. You're guiding for a net impact in H2 lower than H1, which I guess implies about 80% coverage with compensation. Is that component within that level that refer to H1? So is there a one-off component rated to H1? Or should we think that above 80% is a sustainable level going forward? And then on the order intake. Can you give us an idea of how much of the EUR 4.7 billion of orders on EVs were linked to battery and thermal management solutions and maybe also the average level of content you see on EVs compared to ICEs, maybe on a normalized mix level?

Okay. So inflation, H1 versus H2, we have about the same level of inflation in H2 versus H1. But we might not have the same mix in inflation, if I may say so. I think that on the materials side, we will have less because we are contracted on a longer basis, but also because we see some of the raw materials going down, but we might have some additional inflation on especially the wages and maybe also on some transportation. So it will not be exactly the same thing. It will be with a different mix. But here, again, I think that in our assumptions, we might have been a little bit prudent. But related to the current uncertainty, I think it makes sense.

On the ratio of coverage, we anticipate a better ratio of coverage, more 90% than 80%. And the reason on the raw materials. And the reason is related to the time lag that I mentioned on the indexation clause. Many raw materials have increased a lot, but they are plateauing since May. So let's say the lag effect will be not there in H2.

I'm sorry, but about the order intake, I have not understood. Could you please rephrase your question?

Sure. It's -- it refers to the EUR 4.7 billion of orders on EVs. I was wondering how much of that is linked to battery and thermal management solutions. And also I wanted to know if you could give us an idea of the level of content you see on EVs compared to ICE?

So its very clear that on the EVs, we have a significant higher content on the electronic and software side, about 35% foreign vehicle versus 17% to 18% for an ICE vehicle, and we are following this. When we speak about EUR 4.7 billion, in fact, we are speaking not only about pure products, which are related to the management of the batteries or the electric powertrain. We are also speaking about pure electric vehicle, vehicles in which we have other contents, which are not directly related to electric vehicles. But what I spoke about the content per vehicle, the content per vehicle has significantly increased during this year more than 20%.

More on the guidance. Can you give us an idea of the operating leverage that we should expect on any higher revenue if the market does indeed grow more in line with what the franchise expect rather than what you expect. I think in the past you said 20%, but can you maybe confirm that?

I'm speaking under your control. 1 million vehicles are corresponding in terms of sales at around EUR 270 million, EUR 280 million, and the fall-through of this is about EUR 30 million, something like that.

Yes. And I think if you take 12% to 15%, you are -- given the aspect of a lag in inflation coverage, I think is a prudent one. If it can be better, of course, this is -- this will be good. .

We have a question here on the screen, which is asking us what is the longterm operating margin target better than before 2020? So we stick to our target for 2025, which is above 8.5%. There is no change on this. This is, of course, related to the new mix and collaboration with HELLA together. It's FORVIA.

So the rationale is different historical of profitability of the 2 companies, plus close to 1 point of synergies.

And the other question is asked by Reuters. Can you update us on planned closures and asset sales within the company? No, we can't. We committed to the EUR 1 billion. I said it before. We have options, but we want to stick to the EUR 1 billion with the right conditions. The next one is related -- is a similar question. Can you update on the divestment program and on potential ongoing discussions taking place with buyers? If we say that we want to have it closed, cashed in, in 2023, and when you take into account the antitrust regulations, it's easy to understand that to stick to this timing we have started and the different divestment processes. Is the Stop & Go phenomenon improving in Q3? You've seen -- I think you've seen the graph Olivier has shown. So yes, it was improving in June. It looks like it's kept in July, but I do not have more information than that. So we do not have visibility of what is happening. The belief that we will no more have shortages related to semiconductors is wrong. We -- because the content per vehicle has related to the actual mix of vehicle we have has significantly increased. Before the crisis, before 2020, the automotive industry represented about an even a little bit less than 4% of the world consumption of semiconductors. We are currently above 7%. So we have doubled in a very short period of time the content per vehicle on semiconductors. And this is related to the specific focus on battery electric vehicles and on hybrid vehicles. Just to -- I'm telling you this because we have to be careful. We are improving. We have capacity, which are starting. But on the same time, we have a level of demand which is increasing. So to close maybe this session. I would like to inform you about, first of all, the Capital Market Day, which will happen on November 3, and which will be followed the day after November 4 by our Sustainability Day, where we will present to you in many more details what we are doing on the ESG subjects. What I also would like to inform you is that we will be present at the CES 2023 and that we will be very happy to see you there and to have the opportunity to present to you all our common innovations, FORVIA innovations. With this, thank you very much, and hope to see you soon after the break. Thank you very much.