Forvia SE (FRVIA) Earnings Call Transcript & Summary

Welcome to our H1 2023 results presentation. Olivier and I will guide you through the results of 2023 and some highlights and of course, the guidance. The highlights, the growth first, a very strong sales growth of 21.3% and organic growth of 18.6% and an outperformance of 740 basis points. Maybe 2 elements to add to this. With a U.S.-based BEV OEM, we increased our sales by 73%. With BYD in the same period, we increased our sales by 78%. These 2 customers are now representing about 10% of our global sales. We also improved the operating margin from 3.5% to 5%. Here, I have to say that we could have done better. We have not taken into account for EUR 30 million customer offers. We have them estimated not at the right level and which we have delayed for their conclusion in the second half. This EUR 30 million are representing 20 basis points. We achieved a solid net cash flow with EUR 172 million, 1.3% of sales, and we deleveraged further the company from 3.1x net debt to adjusted EBITDA in June 30, 2022, to end of June 2023. On track with the priorities we have set and our Power25 Plan. First, we were successful with in selective growth driven by innovation and sustainability, we achieved more than 15 billion order intake with an average profitability, which is above Power25 objectives. Here, I also would like to name 2 mega orders, one for seating with a total lifetime sales of EUR 1.9 billion and another one for lighting with a lifetime sale level of 1.8 billion. And as I said before, we continue to grow with BYD with a very significant order intake amount. Cost management and enhanced profitability effective management of inflation. We will speak a little bit more about this, but we are on track to achieve 87% of compensation. We have also accelerated cost synergies with HELLA. You remember, we announced that we would P&L-wise achieve 40% of our 2025 target of more than EUR 300 million, EUR 120 million. We are already above, and we gave us a new target for the end of the year at EUR 150 million. We accelerated deleveraging and debt management. The disposal program, all cash proceeds are expected by the end of Q3. And I have a piece of good news. Our Symbio deal, the takeover of 1/3 of the shares by Stellantis was closed this morning just before this meeting. We will also speak about the active debt management in terms of gross debt. We have reduced them by an excess of EUR 500 million, and I'm sure Olivier, you will be back on these elements. Now when we look at our order intake, the EUR 15 billion with a high profitability, how is this amount splitted, 3.2 billion are corresponding to electronics. It's 21% of the full amount, 25% at EUR 3.8 billion in China, 7.5 billion, about 50% on battery electric vehicles and fuel cell electric vehicles, and 54% on premium vehicles and SUVs, more than EUR 8 billion. So this allows us, again, to be above our profitability target. And I have also to say that we have achieved a much lower upfront level related to this EUR 15 billion than what we budgeted. In fact, we are 30% below what we consider. Focus on electronics and just here and snatch about some of our products and on which we have one significant shares. The first one is the latest generation of remote tuner. It's best-in-class digital and analog radio reception with a compact design using a software-defined radio tuner. Then you have the steering sensors, which are absolutely key for all power steering solutions. So it's a technology to enable these and which are contributing also to our steer-by-wire systems. And lastly, the high-voltage battery management system which is ensuring the safe and reliable functioning of lithium-ion batteries. Here, again, we got our first project in the U.S. Accelerating on hydrogen. We are perfectly on track. We announced that we target EUR 33 billion of sales in 2030. This is most probably a level we will have to upgrade in the months to come. So we accelerated, we have the entry of Stellantis in Symbio's capital I just spoke about. It's a very important point because it will allow us to grow in America. We believe that the American market with the large SUVs and the light trucks have the best use cases for this and significant volumes and we think that this is a very short-term, the next development we will have to deal with. We will also start deliveries of Type 4 hydrogen tanks, which are in order the cylinder 700-bar tanks from Allenjoie plant in France. It's the first of its kind facility in Europe and in North America with a capacity of 100,000 tanks per year. We got significant awards from a Tier 1 OEM in hydrogen storage systems very recently, which again, is putting us perfectly on track with our plans. Scope 1 and 2 CO2 emissions reduction path. On this slide, you see the light blue reduction curve. This is what SBTI is requesting from companies to stick to the 1.5 degrees. You see that we have significantly below as our target in 2025 is to achieve minus 80%. And this is what is corresponding to our 2025 neutrality on scope 1 and 2. Now when we look at what we achieved in 2022, we were significantly below this target. We will again hear win about 1 year on 2023 versus our red curve. So what we have to understand is that this first part is mainly related to energy savings. And the second part between '24 and '25 will be more related to PPAs and contracts. About these PPAs and these contracts. So we have achieved through 2 significant contracts in Sweden, but on 2 different wind farms, as 70% of capacity, which is about 650-gigawatt hour. The last one we had, we won is at about 400 gigawatt hour. And this you see is putting us on a very safe side on this PPA of this renewable energy, we are needing in Europe. So it's something which is very concrete and which is again perfectly aligned with the targets we have. Now a word about the collaboration with HELLA, which further intensified in the last time. The sales synergies is ramping up. I just told you that we will be above what we decided as being the target for 2023, we will now look for EUR 150 million. And we can already say that the EUR 300 million will be achieved and most probably improved. We created for HELLA services, which is a consolidation of IT systems and indirect purchasing very recently, which will allow to further boost these synergies. We made a joint management meeting. We had 400 people in severe in June, which was important to make sure that we are perfectly aligned, which is the case. And we are rolling out the new FORVIA values, which we defined in common with the teams. About this synergies, you have on the left-hand side the delta between H1 2022 and H1 2023. So you see that we have increased these level by EUR 53 million. On the right-hand side, we have the target we proposed for 2023. I just said that this is no more our objective. Our objective today is EUR 150 million for this year. Strong execution on top priorities to deleverage the company. So I think that the gross debt reduction of 559 million in H1 2023 is an important step. All the 3 transactions are finalizing the EUR 1 billion of disposal program have received clearance and will be closed shortly. They will be closed by the latest at the end of the third quarter. This will allow us to further reduce our net debt to adjusted EBITDA ratio. At the end of June, we were at 2.4x, 2.4x is close to 45% of the reduction towards the 1.5x we indicated for 2025. So I think we are on track, and you will see we have revised the guidance accordingly, now targeting 2x to 2.2x at year-end 2023. Olivier, the results?

Thank you, Patrick. So I will zoom in, in more details on the H1 results, starting with the revenues, as mentioned by Patrick, strong growth of our revenues in H1, 21.3% to EUR 13.6 billion. This is on an organic basis, excluding the scope effect, which is the 1 month of HELLA. We consolidated from February 1, '22 last year. So we have 6 months this year, 5 months last year and excluding also the Forex impact with the slight devaluation of U.S. dollar and renminbi compared to last year. We have an organic growth of 18.6% versus an automotive production that has improved in the period by 11.2%, and the outperformance of 740 basis points that Patrick mentioned at the beginning of this call. The 740 basis points, it's inside, you have a bit of inflation. The overall inflation is lower than what we have seen in the past. You have much less on the raw material, but you have vice versa, labor and energy. So this is only 110 basis points. And then you have the mix clearly because Europe has recovered from the difficulties caused by the start of the Ukraine and a pure volume base of 430 basis points of our performance, a solid start of the year. Now if I move on to the operating margin, we have improved by 150 basis points compared to last year to 5%. This is, in fact, stable versus H2 '22 on a similar level of revenue. This is on the back year-on-year of the increase in volume, the increase of the mix. You have seen that the electrification is benefiting from us in many respects. And inside, you have, as mentioned by Patrick, a little bit of a negative effect on the inflation given the tension on the negotiation and also that we wanted to make sure that the deals we are taking are, in fact, balanced and ensure profitability not only today but also in the future. The synergies and the evolution on the seating program in Michigan are also contributing to the improvement. So synergy is EUR 53 million year-on-year for H1 only. And on seating, 2 things to mention. The seating program in Michigan, we have agreed with Stellantis on the ends of the just-in-time part by the end of September. And we will, in fact, only keep the metal part and the covers and trim on the back of our good footprint in Mexico, mainly Monterrey. However, in H1, we still had losses, much less than the last year, and this is the improvement of EUR 20 million. We had losses of around EUR 30 million in absolute in H1. So this is part of the improvement. And what is important is that you will be able to see in the future an end of the drag that it has represented on our results in the past couple of years. Now if I move by region first, in terms of showing the detail of our performance and evolution. The H1 is showing the beginning of a rebalancing of our performance between regions. China, Asia continue to be strong and solid, and if I may, even more than last year. Strong performance, we see that, in fact, we had 25% reported increase in Asia, 27.8% on an organic base. So a strong performance and strong profitability, we are above 10% in the region and driven clearly by China. So a solid and continued base expanding on the back of the development of the activity, including with Chinese OEM, among others, of course, BYD. But we see that improvement in Americas. Americas has improved in the period by 270 basis points. Of course, the reduction of the situation in the Michigan contract that I mentioned before is contributing. But beyond that, South America is at a good level and also North America is improving its operation and its performance in the period, which is an encouraging trend. Remains Europe here, EMS, Europe plus the limited activity we have in South Africa, you see improvement in the profitability, but to a lower extent. This is on the back of inflation recovery, not in full. And second, some difficulties on some launches in interiors, which are temporary that are in Eastern Europe that have impacted a little bit the size of the improvement in EMEA for H1. If I move to business groups. So this is the picture of our 6 business groups. You see that we have, in fact, an outperformance in all of them, including Clean mobility even with the development of the electrification. You see also that all of them have improved profitability year-on-year. If I go to the different ones, so seating strong growth, stronger performance and improvement by 150 basis points year-on-year, part of it is, of course, Michigan. There is also the improvement of some operation. Clearly, still a lot of work to do, but this is an encouraging progress. On interiors, we have an improvement of the profitability by 90 basis points. And I want to make sure that the reference is taken correctly. We are applying IFRS 5 in all those numbers. So this is applicable in the totality. This is impacting interiors. SIS was inside this segment. So the comparable number have been revised accordingly. And this is what is reflected when you see 2.9% in H1 '22 in terms of profitability and 3.8 for H1 '23. The profitability has improved. However, a bit of limitation on the back of the issues I mentioned in Eastern Europe that have been temporary, but have been a drag a little bit at the beginning of the semester. Clean Mobility, improvement of the profitability with, in fact, continued investment in hydrogen and a very strong base managed for cash on the ULE side of the house. On electronics, you have, in fact, the strong growth. You have, however, a more limited improvement of the profitability by only 20 basis points from 4.2% to 4.3%. This is, first of all, with HELLA Electronics, which is the biggest part of Electronics segment, strong profitability there, improvement by 60 basis points and, in fact, the profitability above 7 for the electronics part. For [indiscernible] Electronics more limited growth and also some specific logistics and remaining shortage difficulties at the beginning of the semester, which led to a loss inside the period. Those logistics and shortages are largely behind us since, in fact, mid-April. But on the profitability of H1, it has been an impact of EUR 15 million of pure cost. Lighting, you see clearly that the turnaround is well-engaged on different fronts. The order intake has been strong. The conversion in revenue is starting to be clearly visible with the innovation, with the large presence in the new innovative field. Increase of revenues by 24.9% on an organic basis and an improvement in profitability by 410 basis points to close to 5%, 5% being in fact, the reference that we have inside the Investor Day that we had back in November, in which we were saying 5% is our goal for '25, not the ultimate potential of lighting, and you see this number are encouraging in this direction. And finally, Life Cycle Solutions. This is representing a more limited activity, but it's still on a full-year basis above EUR 1 billion. Solid activities, solid profitability, solid cash conversion and also the pass-through of inflation has been effective, and this is explaining our Life Cycle Solution is returning more to the 13% that they have enjoyed in the past and improving 230 basis points year-on-year. If I now move to the profitability, the full P&L, first of all, up to the operating margin. So I want to highlight that this, of course, represents the evolution, including an additional month of HELLA. And therefore, it increased all the value, including the cost. I will come back to this. So you see that the gross margin has improved by 120 basis points. This is reflecting, in fact, the improvement of the mix even in the context of the dilution effect that we know with the inflation. On the R&D, if I take into account the additional month of HELLA, in fact, we are at a similar level than last year, in gross R&D. And related to SG&A, we have the additional month of HELLA that is explaining part of the increase, but we have also some specific one-offs in the first half. Let me be clear on this, both the R&D cost and the SG&A will go down in the second half in absolute term. And this is part of our fixed cost action and synergy action. You will see the result of this and you will see the contribution to this in our H2 results. On the net income, we are returning to green. We are returning to positive with EUR 28 million and we have also a P&L now that has no exceptional effect, whether positive or negative, which is a good thing and which is also allowing all of us to see what is necessary in terms of operating margin to register a net income positive. If I go into the detail of this, the amortization of goodwill is higher than last year. This is the additional month of HELLA. The restructuring level is more normalized. Last year, we had significant impact including the decision to get out of Russia. The interest expense at EUR 306 million. I want to highlight the content of this, the net charge of the debt and the interest that we have on our bank account is EUR 240 million for the first half. And then we have EUR 66 million, which are related to hyperinflation charges which are related also to revaluation mark-to-market of our virtual PPA. We have taken a conservative charge of EUR 16 million on this to ensure no surprise going forward. On the income tax, we have an increase, which is normal with the increase of profitability, both in operating income, but also on the other line of the net income. Going forward, you can expect that the increase of income tax will be a marginal 20% on the additional increase of profit because, in fact, with more balanced profitability between regions, the income tax charge will be more normalized than what you have seen last year. The net income from discontinued the line, plus EUR 18 million, reflect the net income of SAS as a consequence of the implementation of IFRS 5. The net results of SAS are booked on one line and which is the EUR 18 million that you see here. And the last 9 is minority interest. They are increasing, which means that, in fact, in particular, HELLA results, net income is increasing and therefore, also minority interest associated. If I move on to cash flow. So on the cash flow, 2 items to mention first is that we have a EUR 100 million net reclass positive on factoring. We were doing factoring with SAS in the past. We have stopped that as a consequence of the sale, and we are doing it in the rest of the group. So this is inside this number. But vice versa, we have a negative of EUR 69 million related to a withholding tax, the extra dividend from HELLA to Faurecia has, of course, a withholding tax associated. This EUR 69 million will come back in '24 after review and audit by the German authorities and the confirmation of the likelihood of this is that you did not see any charge in the net income in the previous page. As validated with our external auditors as part of the closing of H1. Now inside the performance of this increase in net cash flow year-on-year from EUR 155 million to EUR 172 million. We have the strength and the increase in the EBITDA, increasing by 27% year-on-year, including the additional month of HELLA and increasing by 50 basis points to 11.8%. You see also the reduction of CapEx even with the additional month of HELLA that has contributed to this evolution, which is a good sign for what we are doing in the program managed by cash. And the last item I need to mention, which is more a reclassification. We had, in fact, one of our customers that was changing their information system. And as a consequence, there was a timing issue that they had on their payments. And what we did is that we did a bit of factoring to offset that for EUR 35 million which is, in fact, part of what you see in the line factoring. In a normal situation, this 35 will have appeared in change in working capital, which will have -- make it also more comparable to H1 of last year. And the last comment I want to make factoring, we committed EUR 1.3 billion last year. We had this timing because of this change of system for our customer, we will come back to EUR 1.3 billion at the end of the year. Of course, the evolution of the cash flow has led to the evolution of the EBITDA has led to a further decrease of our leverage to 2.4. We are showing here 2 numbers. The 2.4 is pre-IFRS impact, i.e., the economical because the proceeds of SAS are coming shortly, but they were not yet in H1, you should do it after IFRS 5 at the present situation, you have to take out the EBITDA, but you don't have yet the proceed, and that's why there is this 2.5. So this difference, in fact, will disappear at the end of the year with the proceeds of SAS that are coming shortly. On the evolution of net debt, you see a slight negative of 124. This is strictly related to 2 items. One is the withholding tax impact of 69 that I mentioned just before. And the other one is that as part of the dividend paid by HELLA to its shareholders, EUR 60 million was, of course, given to the minority shareholders of HELLA, and this is part of the 75 negative that you see in the second line of this table. That's, of course, in fact, increasing the net debt. Now Patrick mentioned earlier on that we were quite active on our debt management in H1. And indeed, we were on 3 fronts. First of all, we have extended the maturity of our credit facility by 1 year with an option of an additional year up to 28, therefore. So we have, in fact, a liquidity of EUR 5.5 billion, EUR 3.5 billion in available cash and EUR 2 billion in credit facility from both FORVIA and HELLA. The second thing is that we reduced the gross debt in total by EUR 559 million in the period. And the third is that, as you can see, graphically, we have also extended the maturity of different facilities which is leading to a situation in which we have almost nothing to reimburse for the end of the year, a lower amount in '24 and we will be concentrating in the second half of a further reduction in the gross debt with the proceeds of the disposal as well as the further extension of the maturity profile, especially related to after '25. And on this note on the debt, I give the floor to Patrick on the full-year guidance.

Thank you, Olivier. So let us start with the volume assumptions. So you have the 2022 volumes, which guided us to the 82 million vehicles, and you have the 2023 with the last Standard & Poor July forecast and what we took into account. So the main difference between the 86.7 and the 86 we have considered is maybe some opportunities we want to keep in China. So Standard & Poor's is forecasting 14 million vehicles in China. We are considering EUR 13.4 million vehicles in China. So we would see, but this can only be a positive if these volumes would materialize. It is also a little bit specific this year is that in the second half of 2022, the market made 43 million vehicles, which is the volumes we had in the first half and which are the volumes we are considering in the second half of 2023. So we have to remember that the second half of last year was very strong. Very strong because of the backlogs and the inventories, which had to be renewed in the U.S. and also because of an improvement on semiconductor supply offer. This is continuing to happen. So today, we have a much better situation on the semiconductor side. And I think we still have some backlogs in the second half, at least covering the third quarter and we would see and the fourth quarter might be a little bit more related to the demand. But this is good news. And considering what we had as a forecast, for the year, the main difference is related to the first half with these 43 million, we did not expect. Now when we look at what does it mean for the operating margin. So we see here that we will have versus the first half of this year and mix and ForEx improvement. Of course, we will have an increase related to the inflation pass-through. It's pretty normal to have the conclusions of our pass-through negotiations more in the second quarter than in the first quarter. So the carry forward is providing insignificant difference between the 2 semesters. The synergies, we spoke about that. We have achieved a very good level, and we will further now add our new objective. The seating program in Michigan, which will stop the complete C to JIT program will stop at the end of the third quarter. We will keep and metal production in Monterrey in Mexico and also all the covers in Puebla in Mexico. So this, of course, will have a positive impact, and we have a slight scope effect, which is negative. The inflation management, I spoke about this. We are considering that we are perfectly able to achieve the 87% we had in mind. It's also clear that on some of these inflations, especially the wages, we have to increase our own productivity to cover these elements. I think we have to take into account 1.0 to 1.5 in excess of the average we had before the crisis and which we have to cover. We do this with more automation. We do this with more digital tools, and this is an ongoing successful process. Michigan, I think I said all what is important for you to understand is that the deliveries from Monterrey for the metal part have started. We are completely inside this new setup. And also, of course, the covers from Puebla. So we are now just closing progressively and until end of September, this element, which will provide us sustainable situation for WS for the parameter, we will keep. The deleveraging, so we know we are at 2.4% like-to-like, if you want, compared to 3.1x and Olivier just explained. Again, the good news about [indiscernible], the EUR 150 million, which were closed this morning. And I do confirm that on the 2 other disposals we have announced the closing. So all the antitrust and this type of considerations are positively behind us so that we can tell you that they will be closed before or until and the third quarter. We also, because of this, decided to adjust our guidance on the net debt to adjusted EBITDA to 2 to 2.2. It was 2 to 2.4 previously. This is the new guidance. So sales, EUR 26.5 billion to EUR 27.5 billion. This is now based of around 86 million vehicles. Previously, we were at 25.2 to 26.2. Operating margin, we revised up here also. We were at 5 to 6. The new guidance is 5.2 to 6.2 of sales. The net cash flow was not changed, but it is obvious that the absolute figure will follow the improvement on sales and on operating margin. This is the minimum. The net debt to adjusted EBITDA has been also revised and improved from 2x to 2.2x was 2x to 2.4x. The takeaway is the main takeaways about this first half and maybe I can also tell you a few words about the second half. So the sustainable growth and solid cash generation this was achieved in a persistent inflationary environment, and we believe that this will last. So we had a growth of above 21%, you saw it, and an outperformance of 740 basis points, which I think is a good performance. The strong order intake with a very high profitability and a low upfront, this is related, I think, to the attractiveness of our innovation projects. We could have done more. We are selective on the order intake. We have set for each of our business groups, 3 criterias which are defining the interest of an order, the sales level, the operating margin and the upfront, and we have thresholds for all these criteria. Synergies from combination from 120 to 150 P&L impact in 2023. Here, it works very well with the HELLA teams. So no issue. Deleveraging is well underway. We spoke about this in large. I just remind you that the gross debt was reduced during H1 by EUR 556 million. The guidance, we have revised it. We have revised it because of the good news related on the volumes, clearly, but also because we are progressing on the execution. We are progressing on the CO2 plans. So the momentum is positive and it will provide a significant improvement in the second half. So thank you very much for your attention on this presentation. We are now opening the Q&A session. Sorry, I forgot this last slide, but I'm also used to confirm it at each of our meetings, we are still perfectly on track on the 2025 targets, which I remind you, aware with sales above EUR 30 billion and operating margin above 7%. This, by the way, is what we call Power25. Net cash flow at 4% of sales and a net debt to adjusted EBITDA below 1.5%. The deleveraging of the company very clearly stays our first priority. So you will probably notice that all of this was calculated based on a volume assumption of 88 million. So we will wait until the end of the year to see if the EUR 86 million are confirmed, we will wait until we will have a clear picture for 2024. And if the market is confirming and positive evolution, we will also have to deal with it on these targets. Now the Q&A.

[Operator Instructions] We have a first question from Mr. Besson from Kepler.

I have a few questions, please. Firstly, could you update us on your plans on potential further disposals? You had mentioned the past you go for that if you have an appropriate offer given the developments you've shown in H1 a new outlook for H2, do you think it's still necessary? And is it unchanged? Or have you made up your mind on what you're going to do? Second question, lighting margins were striking. Last year, there was a funny element supporting profitability. Could you confirm that the [indiscernible] you've achieved in H1 is completely, please? Thirdly, could you explain the profitability of Faurecia Electronics implied by the level of HELLA Electronics? So it seems to be still very challenging. Is there any improvements in the head? Or do you need to further cut costs or do something in that business, which has been already substantially addressed by thought? And finally, I'd like to give us, if it's possible, more details on the Michigan agreement. Are you going to have any losses still in Q3 before you finally exit [indiscernible]? Are you getting any financial compensation or new orders from Stellantis to compensate for the accumulated losses, which I think amount for more than EUR 150 million? What effectively the deal there?

Thank you very much for your questions. And about the disposal. So we have achieved EUR 1 billion of disposals we have announced. We repeatedly said that this is not the end of the story. We have identified other assets, which we believe are not a strategic for us. We are active. So we are working on these nonstrategic assets and we will dispose them, but we refuse to take a new target because we want to do this in the best possible conditions, yes? But potential, I can tell you is significant and will further contribute to the deleveraging of the company. Lighting margin, the lighting margin improvement is coming from 2 main elements, and I will let you, Olivier, speak about how clean the results are. So on one hand, the cell activity on the order intake, but also the transformation of this business. Lighting is becoming more and more an electronic business. And I think that the characteristics are moving. On top of that, we have new products like the Phygital Shields, which are taking the full front end or back end and which are very complex parts, which are reducing competition and are allowing to have better conditions. The other point which we are doing with high pressure is we are massifying our footprints. We are specializing the footprint, we are automating and digitalizing this footprint. And I think that we see the first elements of that. But here, we have a lot of potential, which we will execute in the months to come. Is it clean?

So regarding Lighting. So we mentioned last year that there were elements related to the opening balance sheet accounting, you still have a bit of this. So we can say that there is around 1 point that is related to this. And I think this is why I'm mentioning that we are on the road to our '25 objective in Lighting, which is 5% in '25. The fact that we have already this number today, is encouraging. The '25 will be an economical, but it's true that the Lighting progress in a way is faster than what we could have imagined and this is a positive element.

About FCE, our client electronic versus the HELLA Electronic. So we were penalized, as Olivier mentioned it by special transports, which were related to some supply issues with semiconductors. So we organize this transport to make sure that we will not stop or penalize our customers. So this is over. And the plan is clearly to be positive on the full year on FCE. But that's not enough. We want to have an FCE at least at 6% operating margin after having executed the plan. What is the plan? The plan is, first, and product portfolio streamlining, and we are working on this, which might contribute to some divestments. The footprint reduction and optimization with the launch of a new state-of-the-art plant in China in Shanshan, it is happening in the moment, and it will be officially running and opened at the end of this year. We reduced our footprint from 8 to 6 plants which will allow us to increase our sales per square meter from EUR 6.7 thousand to EUR 9.3 thousand this until 2025. R&D, we are also reducing the number of sites we have. We have an R&D, which is too much geographically split. We will go for more than 70% in low-cost countries and our R&D costs will drop from 22% today to 12% in 2025. We will also consider clearly all and AI or the artificial intelligent possibilities and tools. And finally, we will look at our IVI and HMI activity in China for the global, for the worldwide needs because it's, I think, here in China where we see the market leadership ship evolving at the highest speed. And we are, in the moment, also discussing with a few partners especially related to SoCs, which will allow us to improve this situation. Final compensation, which what...

The Michigan agreement. So we were having last year, a significant restructuring charge related to this. This is not the case anymore. So the consequence of the deal have been fully taken into account. The Highland Park site will not be used anymore. And we take the consequence even on the social front, and this is already taken in our financial results. And in terms of remaining activity, you still have 3 months, we had a loss of EUR 30 million in the first half. I would say that for the Q3, we expect and we have countered on EUR 10 million to EUR 15 million of related to those last 3 months. And then the [indiscernible] activity of Michigan, done, and this is a close file.

It's an amicable agreement we have with Stellantis, which is considering all the possibilities to achieve the right compensation. I'm saying it again, after having closed our [indiscernible] business, the remaining part is perfectly sustainable.

We have another question from Mr. Pescatore of BNP Paribas Exane.

The first one on the guidance, there is quite a big gap between the lower end and the higher end of the range on the margin, especially given that we have only 6 months ago at the end of the year. Can you maybe help us explain what will make the difference between you reaching the lower end versus the higher end of the guidance and which part of the range do you feel more comfortable with at the moment? Then the second question on free cash flow. Given the strong volume performance, especially in the last couple of months of the second quarter, I would have expected maybe a slightly better to cash flow generation. You have highlighted a one-off effect, but maybe can you help us explain if there has been any other effects of the working capital level that prevented a higher cash generation in each one? And then maybe lastly on the financial expenses front. Can you maybe give us an idea of what we should expect in terms of interest and financial expenses both at the P&L and the cash flow statement for the full year?

Thank you for your question. So on these 3 points. Indeed, we have kept a range fairly large. First of all, is a range very large because of the range in revenues, if I may. So we have updated our expectation given the evolution of volume, given the first half and given the traction and the order intake. There is still a little bit of volatility and potentially an opportunity in China that is not fully captured. So this is one in 1 aspect. The second is the guidance of HELLA remains quite large and is part of profitability. So we are embarking this one. And let me say that the third one is on the inflation recovery for which there can be a bit of volatility. Having said that, of course, if we are presenting you range in revenues in operating margin or in leverage. It means that what we are, in fact, expecting is today to be in the middle of the range. And we, in fact, our options to do better than that. On the net cash flow, we had a first half that was, I would say, encouraging, we are giving you a floor with the 1.5x. And you may remember that last year, we had also a floor. So our objective is clearly to do better than this. But we are showing you the minimum that we expect for the year in whatever consideration of the range that we have presented to you in terms of volume. So we are talking about a guarantee and the base.

And I think that in absolute figures with the sales increase and with the margin increase, the net cash flow will follow.

On the financial expenses. So from a P&L standpoint, you have the charge of the debt per se. And you have also the other factors I mentioned, including hyperinflation and a few other costs. So on the P&L, you can expect EUR 550 million to EUR 600 million. Now on the cash flow, it is less than that. And this is more in the EUR 500 million range in pure cash out of financial expense, the financial cost. As you see, we are, in fact, focused on this point. We are reducing the growth debt because of the cost of interest. We will have in the second half process of the disposal. We will make sure to make the right balance between the profile of the debt that you have seen and the reduction of the gross debt in order to start having a reduction progressively of the financial cost. Every time we replace an old debt by new debt, we have an aspect of a change of interest rates. This is getting better. The term loan that we had in the first half, we have been able to renew it at the same condition as the previous one. So we start to see a better profile, but we are very focused on the aspect of financial cost.

And sorry, just to go back on the guidance point. I mean at the higher end of the range. In H2, you would effectively already be at the 2025 targets. Is that...

That's a fair calculation, yes. That's a fair calculation. That will be on a fairly solid level of revenue also because it will mean also that we will be on the high side of the range in revenues.

Okay. So then the rest of the synergies and the cost of phasing out all of that is incremental to EBITDA?

The high side of the range means high side of the revenues, it means solid compensation of the inflation, and it means also fast execution of our synergy and fixed cost improvements.

Okay. So we could expect an update on this target maybe next year?

Can you repeat your question? I'm not so sure.

No, we could then expect an update on the 2025 target perhaps next year?

This is something that we will look at. It's clear that the volume of EUR 86 million this year is encouraging, if anything, compared to the EUR 88 million that is the reference of '25.

The current Standard & Poor's forecast for this year is closer to EUR 90 million, for 2025, yes. So we will need to make sure that we have a confirmation of all of this. And again, as I said, we will see what finally the volumes in '23 will be and what we can expect in '24.

We now have a question from Mr. Jacks of Bank of America.

Michael Jacks from Bank of America. First question is probably for Olivier related to funding. How cost-effective are you factoring programs in relation to your other sources of funding at the moment? And might this change next year in line with your plan deleveraging? And maybe more specifically, can you expect that ratings agencies could upgrade your rating? And what do you believe the specific threshold for that would be? And then my second question for Patrick related to operating leverage. This is still run rating at quite a low level relative to your history. How would you frame or quantify the reliability of customer [indiscernible] at the end of the second quarter as compared to the average that you experienced in the first half of the year? And to put that into some context as compared to 2022 and pre-COVID levels? And how much of the margin gap your 2025 target? Could you possibly attribute to this?

So thank you for your question. On the first one on the factoring. So clearly, the factoring was and remains with better conditions than standard debt. So it's 2 to 3 points difference. And we have stable factoring agreement. And the portfolio that is inside is stable as well. Could there be a -- I mean, I hope that interest rate at some point of time will go down. But I think for the time being, we have to take what exists. It has improved for us compared to a year ago and clearly, but the environment is still on higher interest rates, including the evolution of the Fed even yesterday. So all our plants and in particular, our midterm Power25 plants are based on interest rates as they stand today on the market. The upgrade of the rating. So as you know, we are today in negative watch with the rating agencies. We are seeing them. And I think the first question for them will be on the back of the results we are doing. And I would say the good progress on our deleveraging and good visibility on this progress with the disposal plan being executed, what it can be. So let's wait for this first and I can't tell what is the outcome. What I can say is that we are executing what we said and we have an environment that everything being equal is less volatile, less adverse than before with only one exception, but this one is a very important one, which is inflation and which we are tackling in a strong fashion.

Versus H1 2022. The sales delta is about EUR 2 billion, and this EUR 2 billion generated EUR 280 million of operating income, which means a fall-through of close to 14%. So this now has to be also understood with a few items, is the compensation of inflation, which are always late in the semester. So we will benefit in the second half of the carryforward effect. We have the 30 billion we spoke about, which we have delayed to the second half. We have WS and I hope that we will do better than the EUR 15 million, we should. We have FCE with a significant one-off in the first half versus the plan and FCE will be positive on the full year. We have ForEx gap. We don't know what will be the ForEx situation in the second half. But all that will or should improve the second half. And we should have closed the first half at 5.2% without this EUR 30 million, we did not consider good enough to be integrated in our results. Now what I would like also you to understand is that we accumulated, we have calculated an inflation, which is around 7.6% to 7.8%, which is providing a dilutive mechanical effect of 1.2 points of operating margin, so you have to consider this. The target we have also internally is to achieve at the end of this year and variable margin, which will be at the same percentage level than the one we had in 2019. So it means that the compensation of the inflation is not only achieved through price increases, but is also achieved through productivities and productivities we have to increase the level we have to increase year after year. So I think that gives you the context and the information to I hope I convince you that we will further improve our situation. But again, being in the current context that around 14% of our [indiscernible] is not very far from what we announced in the past years. So if I take now the 1 million of additional volumes or 1 million cars are corresponding to EUR 250 million, EUR 350 million of additional sales depending really on the mix. And we are now between 30% and 15% of fall-through versus the 15% we announced previously. Anything you want to add?

Yes. Thanks for that great detail. So maybe just alluding more to what Giulio's question was as well. So you wouldn't specifically attribute anything to call or volatility or cancellations from customers? I'm just trying to gauge whether there's some potential additional upside due to the factors that you just laid out at a moment ago.

And maybe just midterm 1 element to add. So you have a dilutive effect of 1.2%. And vice versa, you have a synergy effect in our case, which is at least at the same level, the 300 million for 30 billion. And that's why 25% say above 7% but our ultimate objective is more 8% because, in fact, we consider that with the size, with, in fact, the synergies offsetting the dilution effect of the inflation, that's the level that we are able to reach as a global company ultimately.

The 8% were the target we gave us before the crisis. We are still going for these 8%, but we also have to understand that if the things are not changing drastically, these 8% are closer to 9% previous considerations. I don't know if this is answering your question, but we have a very positive momentum on lighting. We spoke about that. We have a momentum, which is also interesting on Seating and on Interior. And these improvements are in our hands. They are related to our footprint, how we are dealing with, again, specializing our plans. So it's very much related to cost reductions, which I believe are perfectly feasible. Maybe it's an element we have already discussed. But the cell activity is allowing us to improve the profitability of our dashboard. And we said it, it is already above our Power25 target. And I see that this will continue and not only in terms of EBIT margin, but also in terms of reduced upfronts. And that's very interesting. On the electronics side, I also would like to say that the demand is above the offer. And here, again, the selectivity possibility is significant. And this will improve the profitability of our segments.

Our next question comes from Mr. Quemener of Stifel. We will move on in the meantime to the next question by Mr. Bhagwani of Citi.

I have just a few follow-ups. So maybe first one, just coming back on the margin guidance. if I understood it correctly, is the sales is at the upper end of the guidance. If sales such [indiscernible] the upper end given that -- comes at 5% growth as expected. And it can also end up in the upper end of the margin guidance. It is fair to say that Faurecia could also be at the upper end of the range instead of to the mid-range? Or is there any other for Faurecia HELLA specific nuances we should be aware about? That's my first question. And I'll just follow up to the next, if that's okay.

Okay. Thank you. So first of all, HELLA has communicated that they are in the middle of the range of their guidance, both in revenues and in profitability for the year. And if we are presenting you an upgrade of our guidance, you can expect that our reference is in the middle of the range as today. There is still possibilities to do better volume and speed of cost reduction execution. But if we are showing you a range, we are showing you with, in fact, an expectation that the base is the middle of the range. I will not present something with an upgrade, with an evolution in which we are automatically on the high side of the range, just to avoid any misunderstanding.

That's very helpful. So actually the floor is more of a middle-of-the-range? It can [indiscernible] that is the middle of the range and [indiscernible] of 5 percentage points.

Yes. And let me repeat. The range, sales and operating margin, HELLA and Forvia, are in fact, towards the middle of the range. And on the cash flow, we are giving a guidance above 1.5x. So it means that, in fact, it's a floor, it's a base with expectation to do at least this level.

That's very helpful. And maybe on the SG&A and R&D, can these more go down [indiscernible], sequentially?

So what you have seen is that on the R&D, in fact, you have an increase, which is related to the gross R&D, which is related to the additional month of HELLA's in a more comparable basis, we are pretty flat. And on the SG&A, the 1 month is explaining 50% of the increase, but the other 50% are for part of it, one of what I mentioned early on, and I want to confirm and reiterate is that those absolute value will go down in the second half. There are actions that have been launched, we had overruns in R&D on specific projects that are now more in control. And on the SG&A, the actions that we have taken will convert in results, including in not only the synergies, but other ones. So the absolute number will be lower in both of these cases, H2 versus H1 by 3% to 5%, if I want to be specific.

On R&D, we have kicked off new projects to boost cost reductions, taking into account or is using on a much more efficient way, new AI possibilities. So we have now launched pilots in the different business groups, and we expect here to have a significant reduction of our costs in the period to come and certainly until 2025.