Forvia SE (FRVIA) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining today's FORVIA Investor call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Patrick Koller, Group Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to this call. I'm sitting here in Nanterre with Olivier Durand, our CFO. I would like to start with what triggered our meeting of today, which is the continued downward revision of our H2 2024 production outlook. You see that we have lost versus last year about 2 million vehicles and maybe this might increase until the end of this year. This gap is concentrated in the second half. We had to deal with the slowdown of electrification in Europe and in North America. We have to take into account a new risk of labor disruptions in Europe and in North America. We also had to face high inventories in North America, triggering production slowdowns and even shutdowns. We had significant delays of vehicle launches. They cumulated corresponded to a loss of EUR 250 million of sales for us in 2024. We had a limited growth and mix change in China. And finally, we also were hit by a ForEx impact of about EUR 150 million. When you look forward, uncertainty is still there with the North America and the U.S. elections, geopolitical tensions, conflicts, and regional economies and their dynamics. Since July, when we confirmed that at the lower end of our guidance, 2 main items did not materialize. The first one is that we believe that ICE volumes would compensate the slowdown of battery electric vehicles. And the second point, we forecasted that the European industry would prepare the CAFE '25 regulation with additional volumes, BEV volumes and plug-in hybrid volumes, to be produced until the end of the year and delivered at the beginning of 2025. Can we go to the next slide. All of this forced us to revise our guidance with sales now between EUR 26.8 billion and EUR 27.2 billion, an operating margin of 5% to 5.3% of sales, and net cash flow above or equal EUR 550 million, and a net debt-to-adjusted EBITDA equal or below 2.0x. I would like here to add that on the operating margin, we have included caution about potential risk of write-offs due to volume adjustments of some customer programs. All this is pushing us to accelerate our initiatives to improve the performances in 2025. All needed programs to improve our profitability were launched already in 2024. So they can and will be accelerated to better impact 2025. If I start with West to East. China and Chinese OEMs might be seen as a threat by some non-Chinese OEMs. For us, it is clearly a needed opportunity. Why? Because Chinese OEMs have one technology and cost leadership of electrification and electric and electronic architectures. Because China and the rest of Asia are the only growing market. To give you a reminder about that, 24 million vehicles in 2019, 29 million vehicles in 2024; while between 2019 and 2024, the market stayed flat at 88 million vehicles. The Chinese OEMs are growing even faster. Their market share in China in 2019 was 38%. In 2024, they reached 61%. And we, with them, our sales percentage made with Chinese OEMs was 37% in 2019, 59% in 2024 for the Faurecia perimeter. HELLA has some growth potential, and we will support HELLA to converge to the same level. FORVIA is the fifth largest supplier in China, if you exclude pneumatics and batteries. In the top 20, you count 9 Chinese Tier 1s, out of which 4 are subsidiaries of Chinese OEMs. Out of the 5 independent Tier 1s, 2 are really in competition with FORVIA. FORVIA is a strong partner of the Chinese OEMs, and we have demonstrated competitiveness in China through our lasting profitable growth. We expect an outperformance in 2025 of at least 300 basis points. EU-FORWARD. We clearly identified the need to adjust our capacity to the new structural variants in Europe. We went down from 21 million, including Russia, to about 16 million in 2024. And I think that this is probably the structural level we can expect in the years to come. The calibration of our cost reduction is confirmed. We do not need to do more, but we need to accelerate it. And the results we already have achieved in 2024 are clearly making it possible. At the end of 2025, 5,500 people will have left the group, which is including 1,000 people related to attrition. The positive impact is expected above EUR 180 million in 2025 P&L. This, with restructuring costs kept at initial level. We accelerate globally the program, which was initially planned to last until 2028. At the end of 2027, we will have been able to achieve more than 90% of the global cost reduction. Synergies with HELLA. We are able to announce an increase of the synergies from EUR 350 million to EUR 400 million cumulated in 2025. This means, for the year '25 versus '24, an increase of about EUR 120 million, EUR 130 million. This, through new initiatives, mainly in the purchasing area and in operations. In summary, the deleveraging key target we have of achieving a net debt-to-EBITDA below 1.5x is kept, and we will do our best efforts to make it happen with some disposals. If I come back to the 2025 drivers, sales, operating margin, and net cash flow, and also the net debt reduction. Today, it's our working assumption. We assume stable global automotive production in 2025 versus 2024, with growth in Asia offset by some decline in Europe. We confirm our ambition to outperform worldwide automotive production in 2025, driven by an outperformance of more than 300 basis points in China. Let me here tell you that even our revised guidance for 2024 includes an outperformance of about 300 basis points. Operating margin and net cash flow. FORVIA confirms its ambition to significantly improve operating margin in 2025 through EU-FORWARD to generate EUR 180 million savings, cumulative synergies to reach EUR 400 million by end of 2025. These 2 lines cumulated are corresponding to about 1 point of margin, focus on operational execution efficiency and risk mitigation with suppliers and customers. And to increase net cash flow in value and enhance its quality, around EUR 300 million will come from working capital driven by further inventory reductions. And we will work on a significant reduction of CapEx and capitalized R&D to a combined amount capped below EUR 2 billion in 2025. The net debt reduction will come from an enhanced net cash flow generation and the finalization of the second disposal program. The net debt-to-adjusted EBITDA ratio is confirmed below 1.5x. This was, in a nutshell, the announcements we had to make today. And we are now, Olivier and I, open to answer your questions.

[Operator Instructions] The first question comes from Thomas Besson of Kepler Cheuvreux.

I have 2 questions, please. The first one is about the disposal plan. We've seen you move relatively quick and move into a second plan very quickly as well. But there hasn't been any update over the last few months. Could you update us on that front and detail whether you have potentially a plan B that may include a bigger disposal or a more, let's say, quicker way to reduce your debt or achieve the EUR 700 million, EUR 800 million proceeds you're still targeting should the situation in end markets continue to be as sticky as it is? That's the first question. I have a second question. I'll ask afterwards, please.

Okay. So about disposals, we have several projects ongoing, which cumulated are significantly above the EUR 750 million, which are remaining to be achieved for the EUR 1 billion. So I don't know if we could call it a plan B, but certainly in the spirit of what you were questioning.

Okay. Can you maybe be more specific in terms of the time line? Could we expect something to be announced before year-end? Or should we expect the news on that front to be more 2025 development and the proceeds to, therefore, come more in the second half of '25 than over the next 6 months?

Olivier. In terms of cash proceeds, we expect this to be more second half of next year, taking into account carve-outs and antitrust. And in terms of timing of announcement, we are working to make it happen as quickly as possible, but in good condition. So I'm not committing on timing, but I reiterate the point of Patrick that we have several projects, so that the pipeline that we have is largely in excess of the EUR 750 million that we committed in the completion of the second plan.

I have an unrelated question, if I may. Patrick, can you remind us where you stand in terms of the succession plan for you? Is that possible? I think it's a topic for a lot of industry executives over the coming months, but it would be helpful as well if you could discuss your own succession plan, please.

So it's the responsibility, as you know, of the Board of Directors. You know my age. I believe that 10 years as CEO is a good period of time that allows you to make the transformations you decided and to see the results of these transformations. I'm pretty sure that the Board of Directors is working on the succession plan.

[Operator Instructions] The next question comes from Christoph Laskawi of Deutsche Bank.

Just coming back to the Interior development. I think you sounded relatively optimistic basically with the last call. Now it sounds a bit more downbeat. Could you just give us a bit of a background what happened to the recovery? Is it just volumes or anything else? And then could you comment on the business units outside of HELLA, because they elaborated on that last night, which are mostly impacted by the market deterioration?

Within Interiors, we have a significant number of launches, I said it before, but we have a second wave of launches in the second half with some volume viability. So we have significantly improved versus the first half. We have put behind us the difficulties we had in Mexico, but a year with a significant amount of launches is always a difficult year for the Interior business. So we are a little bit slower than I've expected, and we are working intensively to correct this situation. But again, the current one, the situation of Interiors in the second half is much, much better than the situation we had in the first half. About HELLA, Olivier, do you want to answer?

On HELLA, so yesterday evening, as you have seen, HELLA has done also an update on their guidance and expectation for '24. This is largely related to the volumes. In particular, you have the slowdown, let's say, the [ stallment ] of electrification in Europe, North America is impacting HELLA, as well as the fact that German carmakers and customers have, in fact, a slowdown in their position in China. So those are the main elements. And the other part of the communication of HELLA yesterday evening is, of course, that the acceleration of initiatives that Patrick mentioned this morning are applicable throughout FORVIA. And of course, HELLA is embarked on this and was commenting on those elements. You can expect acceleration in those domains coming from the different activities, including HELLA. This is true on all the cost measures. Synergies, the majority of the synergies are actually benefiting HELLA. And in terms of the cost measure, EU-FORWARD in particular. And last but not least, the development in China, the opportunity in terms of penetration of Chinese OEM is particularly true in HELLA and is part of what was mentioned about returning to our performance in China next year.

Sorry, if I misphrased. I was basically wondering about the non-HELLA part of the business, so seating, et cetera. If you could comment on that. Is there a difference in the impact? Interior, we just had a comment on. But on the rest of the business, is there a difference in the magnitude of the impact of the volumes, or across the board relatively similar?

So let's say, on the ex-Faurecia business group, if you see the comment, the slowdown in revenue is impacting Interior related to timing of some start of production, and to a minor extent, timing of [indiscernible] more revenues in association. This is the main one. And the second factor is on Clean Mobility. The mix of customer means that the gains are mitigated by -- the gain from slowdown of electrification is mitigated by the mix of customer. You know that our #1 customer is Volkswagen, #2 Stellantis. Last is, this year, we have clearly the mix of customer in China means that we don't have outperformance in China this year. This will -- given what we have taken in terms of diversification in the past quarters, the start of Chery activity in the second half, you will see a return to the outperformance in the country. In particular, on the ex-Faurecia side, when we say 300 basis points for the aggregate for the year is actually 400% on the ex-Faurecia domain.

The next question comes from Michael Jacks of Bank of America.

I just have 2. First one, you mentioned an acceleration of the restructuring plan. Does that mean that you're going to increase the restructuring charge in P&L this year in 2024? Could you please give us an update on that? And number two, could you just please give us an updated view on what you expect for finance costs in the income statement and cash flow statement for '24 and '25?

So I will start with the first question, and Olivier will take the second one. We clearly mentioned that the acceleration is at equal level of restructuring costs. So in fact, the mix of our action has changed. And this is why we can go to 5,800 announcement at the end of 2025 with a P&L saving which is confirmed at EUR 270 million at equal level of restructuring costs as announced at the beginning of this year.

Sorry, if I may just clarify my question. It's not whether or not you were going to increase the restructuring expenses in total. It was whether you were going to bring some forward into 2024 that might otherwise have been booked in 2025? Sorry about that.

So between '24 and '25, there can be some marginal impact in the P&L. But on the aggregate '24-'25, no. And as you mentioned, on the total project of EU-FORWARD, we are in the envelope that we defined. The objective is clearly to accelerate. That's why we are mentioning that 90% or more than 90% will be done 1 year before the end of the project, manifesting the acceleration. As we mentioned from the start of this project, it's not a fixed one. We go case by case. We execute side by side, and we have the capacity to move and adjust along the way given the evolution of activity. So nothing substantial between '24 and '25, and in total, no change.

The restructuring cost -- I'm saying it again, the restructuring cost cumulated '24 plus '25 are exactly the ones that we have announced. This is what is planned today while accelerating the effectiveness of the plan.

On your second question related to financial cost, I will focus on the cash out. So this year, we should have a number around the same level as last year. This is related to 2 opposite elements. We have reduced and we are reducing the debt on one side. On the other side, we did quite a lot of refinancing operation in the first half with one-off costs associated. In terms of next year, depending on the evolution of actual rates for us, we expect a decrease of EUR 50 million, EUR 70 million year-on-year on the financial cost in terms of cash out.

[Operator Instructions] The next question comes from George Galliers of Goldman Sachs.

The first question I had was just with respect to U.S. inventories that you referenced. As we think about this, not just through the second half of this year, but also for next year, was that comment specific to a particularly large customer of yours? Or are you broadly concerned about U.S. inventories at an industry level? The second question I had was just with respect to the structure of the balance sheet. Obviously, you have the disposal program underway, and there may be some organic opportunity to deleverage. But have you also had conversations around the potential merits of an equity raise? And if yes, can you give any insights into the puts and takes of those conversations at this point?

Again, I'll take the first one. You take the second one, Olivier. So only in the U.S., you have detailed information about vehicle inventories. And when you look at the list of the carmakers in America, you will see that the 3 Americans, Stellantis, Ford, and GM have high inventories; Stellantis having the highest inventory, above 90 days. And this is the average. Now when you dig in, you see that on some vehicles, inventories are as high as about 150 days. So to answer the question, yes, one has more inventory and is willing and has communicated his word to reduce that.

Regarding the second point, there is no intention and no need for an equity raise. We have no significant maturity due before June '26, further to all the actions that we have taken in the past quarters. And on top, you have seen that we have diversified our source of financing heavily. We return massively on Schuldschein business. So the answer, frankly speaking, is no.

I think it's important that we underline this. We do it systematically. It's very clear that we have no plan whatsoever to increase [indiscernible]. I think we do not have any more questions. So I would like to thank you for your attention. And we will probably see each other again in October for the communication of our quarter 3 results. Thank you very much. Have a good day.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.