Forvia SE (FRVIA) Earnings Call Transcript & Summary

Good morning. This is the conference operator. Welcome, and thank you for joining today's Forvia Q3 2024 Sales Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Olivier Durand, Group Chief Financial Officer. Please go ahead, sir.

Yes. Good morning, everyone, and welcome to Forvia Q3 Sales Presentation. I'm here in Nanterre with the Investor Relations team and Sandrine Dorin-Blanchard, our Deputy CFO. We will present this morning, of course, results that are largely in line with our communication of late September. Let me start first of all with a short update on the environment. The key elements have not changed. The environment remains challenging, with 2 clear elements: One is the pause of the electrification, and the second is the significant production decline that we see in H2 '24. On the electrification, clearly, this year has been showing a slowdown and even a stop of the electrification in Europe and North America and a slower increase in China. We anticipate that next year, we'll see some evolution more towards a rebound of the electrification in part in Europe on the background of the CAFE regulation with the new threshold that will be applicable for the next 5 years. The dimension of it is still an open question that we will see evolution in the next coming months, and we will come back to this in our annual publication when we will give our guidance of '25. The second element is the production itself. We have clearly a reduction in the second half by around 4% and on the background of the high inventories in North America and several start-up productions that have been delayed from a production standpoint. Those elements were identified in September, they remain valid, and the latest IHS S&P information has not changed anything in this direction. Now let me come back to the news about Forvia itself. First of all, in terms of order intake, we continue to enjoy a strong order intake. The first 9 months have shown EUR 20 billion of orders, and we have been able to obtain those ones on a selective basis, selective in the content, selective in the profitability and selective, in particular, in the need of reduction of the upfront cost, which is a key element in the better conversion in cash of our results and activity. You see that we are clearly in the direction of reaching the EUR 30 billion we anticipate for the year, and you see a little bit key elements about where they come from, a lot come from Asia, a lot from electronics and a lot of premiums. And let me highlight a few key awards of the period. We got our first award with Xiaomi. Xiaomi is one of the key telecom company, entering now the EV and car market, and it's very good that we are able to extend our reach with Chinese OEM also with the latest ones, including it. We got a major award with Volvo in interior for EUR 300 million. And we see a renewal of the commercial activity in Clean Mobility, ultra-low emission and you see some of the elements and the highlights of the period. It clearly shows a sign of the development, the continuation of [ hybrid ] solutions in the context we see on the power trends. It does not mean that there is a renewal of engines, but there is a continuation of the flow, which is encouraging for this key cash flow of the group. Now if I move to the actual sales activity of the quarter, let me first start with the overall picture. We have enjoyed EUR 6.4 billion of revenues. This is an outperformance of 420 basis points compared to the market. And this is happening as follows: Organic growth, minus 0.4% versus a market that was down in the period. And then we have 2 negative effects related to scope and currency. The scope is for the last -- is negative for the last quarter. We sold activity to Cummins on the commercial vehicle spectrum, which was having still revenue, therefore, in the first 9 months of last year. And vice versa, we have the positive of the consolidation of activity in HBBL in Lighting, in particular, with Li Auto in China. And on the currency, this is related to the different evolution of the currencies in the period, not only the major one, but also some secondary ones on which hyperinflation is applicable. So the exact number for the period has been EUR 6.357 billion of revenues. Now if we go business by business, I will start with Seating, which represents 1/3 of our activity. We have strong organic growth of 4.9% in this business. This is driven by the growth in Europe and in North America. So we continue to ramp up and to improve the Seating business. This is even more interesting, given that we had last year still activity on the contracts in [indiscernible] that we transferred in agreement with Stellantis at the end of September of last year. So the comparison is even more favorable. On Interiors, Interiors is also showing strong organic growth, 5.9% basically 10 points of overperformance. This is related to the strong activity in particular in North America and also in Europe. This is also including significant tooling sales in particular related to the new start-up productions that we have, which is contributing to this above the average outperformance this quarter. Clean Mobility. So Clean Mobility is reflecting an underperformance in the period. We have a decline of revenues by minus 10%. Three quarter of this is related to the reduction of activity of Stellantis, which is well known on the back of also the reduction of inventories that the customer is driving, and this is also related to the drop in activity in China related to electrification. So I would say that this level of reduction is more on the high side compared to what we can expect in this business given the electrification evolution. Electronics. Electronics, we have, in fact, some outperformance. And even the slowdown of the electrification has led to a lower activity than we could expect a year ago. You have North America, which is growing with the GM. You have outperformance in Europe, driven by Volkswagen. And you have, however, a negative customer mix in China. We'll come back to China when we look at the regional picture. And last but not least, Lighting and Lifecycle. So Lighting is, in fact, with a growth of 6%, including the consolidation of the HBBL joint venture in China that HELLA has. If you look at it from a pure organic perspective, we record an outperformance even if the growth is minus 1.4%. This is related in particular to the delays in start of production in several places, in particular, China, U.S., mitigating the growth that we have in Europe. Lifecycle, the last activity, a smaller one, but a good cash cow, however. The organic growth is negative in the [indiscernible] period. It's reflecting the specific investment cycle in special original equipment activity, which is currently happening. So there is a timing effect in this growth on this activity. I will now move to the regional picture in Page 9. Europe and North America are driving the market outperformance this quarter. We have a strong one in Europe, a very solid one in Americas. Europe, you have seen that in Seating, in Interior, in Lighting. And Americas, this is on the back also of not only Interiors and Seating, but also Electronics. In Asia, you have 2 different pictures. You have China that is still with, in fact, an underperformance. This is related to the mix of customers that we have and also the delay in start of production in different customers. Let me say, however, that the diversification that we are doing is -- will be paying off and that we confirm that we will have outperformance returning in China by at least 300 basis points in '25. Related to Asia outside China, the organic growth is quite solid at 4.5%, which is an outperformance of around 10 points. And this is delivered by the development in Japan on a more diversified customer base and also entry in other places, including India, which is encouraging for part of the plan we have, which is West to East, which is not only about developing China, but it is just as much to develop the rest of the region, where historically, our presence was limited, but now we have the capacity to expand. So in summary, an outperformance of 420 basis points, which is inside the corridor that we enjoy since the creation of Forvia between 300 and 500 basis points. Now if I shift to expectation, I will start by Page 11. And of course, we confirm all the messages that we passed in the call we had in late September. So first of all, we confirm the guidance we have provided related to '24 in the context of this lower production outlook with EUR 26.8 billion to EUR 27.2 billion of revenues, operating margin between 5.0% and 5.3% of sales, a net cash flow of at least EUR 550 million and the leverage at 2.0 or below by the end of this year. We confirm also that in this context, we accelerate the initiatives we have to improve the performance with impact clearly in '25. We have 3 main activities in this regard. Number 1 is West to East, is to enhance our relationship with Chinese OEMs. It's also to expand outside China and to seize the opportunities of the development of the rest of this region, plus the fact of our growing intimacy with both Chinese and Japanese OEMs. We are already the fifth largest Tier 1 supplier in China, and we will resume outperformance of at least 300 basis points in '25 in that country. On the backup of the ramp-up of the activity with Chery and the growth from the SOP that have been delayed recently. We also continue to expand our activity with Chinese OEM outside China. You know that we have with BYD, a good cooperation starting in Hungary, but we have been also selected now for the second location that BYD has taken in Europe in Turkey. And we continue to enjoy in this region out of double -- sustainable margin in a double-digit range, which is accretive to the group's performance. The second and the third initiative are both in the same direction, which is a reduction of the cost of operating in the business. First of all, EU forwards. We had announced this plan early this year in -- we identified clearly early that there was a need for rationalization of footprint and activity in Europe. And we are able to say that we are not only on track on this plan, but we are able to accelerate compared to the initial expectation. We will have, by the end of next year, more than 50% of the headcount reduction, already done with 5,500 people will have left the group in Europe. We expect a cumulative positive impact of EUR 180 million in the P&L of '25, mostly next year. And we target to have this plan largely executed earlier, i.e., 90% of the account reduction announced by the end of '27, giving us around 1 year advance compared to the initial plan that we had when we announced that in February. The second element is to continue to benefit of synergies of the combination between Forvia and Hella. We are able now to anticipate EUR 400 million of cumulative cost synergies by the end of '25 compared to the starting point. It means that we expect between the 2, around EUR 300 million of cost reductions in the P&L of '25, i.e., a full 1 point of sales of self-help in the context in which we are. Last but not least, of course, our central objective is to reduce the debt and reduce the leverage. The target of 1.5x of leverage, net debt to EBITDA is unchanged. This will be on the back of 2 elements. 1 is the improvement of the conversion in cash flow. And second, the completion of the second disposal program that we launched a year ago. On the first item, the cash flow will improve significantly year-on-year on the back of the improvement of EBITDA given the cost reductions we are working on. And second, by the improvement in CapEx and capitalized R&D that we derived to below EUR 2 billion, which means that not only the cash flow will improve in value, but will also improve on quality because the improvement between this year and next year will not come from working capital, will come for EBITDA, CapEx, R&D capitalization. And of course, the complement to reach the 1.5x leverage will be the completion of the second disposal, on which we are working and in which we have traction on some of the key trials. So in summary, we are in line with the message we passed in September. The Q3 revenues are showing that we are continuing to have outperformance and commercially, we are able to reach the level of order intake, which is in line with our expectation in a selective domain. So we are on track to realize the objective of this year and to get the leverage down to 1.5x next year. On this note, I'm ready for questions you may have this morning.

[Operator Instructions] The question comes from Jose Asumendi of JPMorgan.

A few questions, please. The first element around the outlook for 2025. Can you comment a little bit on your expectations for European production? It sounds like you're expecting production to be down in '25 in Europe. Reading from your press release, North America could be up or -- and China will be offsetting Europe. If you could comment a little bit on those dynamics, please? Second, how do you think about outperformance to [ global car ] production in 2025 as well? And then third, can you comment on the cost savings. How much do you expect on your cost actions, specifically Europe? How much do you expect to book in the second half of 2024 and in 2025?

So on '25, I think the -- on the production, we plan for flat market next year with a bit of growth in China and a bit of decline in Europe. Having said that, I think there is one factor that is an uncertainty, which is what will be the impact of the CAFE regulation. And this -- and we all know that, in fact, it leads to a real difficulty for this market and for the carmakers. How they will implement it and confront it is not fully clear. So what we are doing is using the initiative of cost reduction that we have launched in order to be as agile as possible, as mobile and to get our breakeven points lower so that we can face any element. So that's for the production. On the outperformance since the creation of Forvia, we have been able to reach an outperformance between 300 and 500 basis points. We expect that to continue and this year, we have been able to do this even though the mix has not been so favorable with China being temporary with, in fact, an underperformance, which was not the usual situation. So I think it reinforces the strength of the portfolio. So we anticipate to be with some outperformance next year. We will validate that in the context of our budget exercise, and we will communicate accordingly. But I think we should continue to enjoy our performance next year. On the cost savings, so we have 3 types of cost savings. One is the synergies. So we should enjoy this year EUR 80 million, EUR 90 million of synergy gains in the P&L compared to the year before, and probably at least the same type of value next year. The second is the fact that we have done headcount increase and external cost selectivity, which is giving additional elements. And the third is EU forward, in which in terms of headcount evolution, we have a strong start. We will have more than 2,000 people announced reduction. But of course, in terms of costs, given the timing of execution will be lower. So if we summarize synergies EUR 80 million to EUR 90 million for the year, cost savings of the rest, a few tens of millions and leading forward a few tens of millions. And that's why you will see a much bigger level of cost reduction next year because then the combination of EU forwards in full execution mode plus the continuation of the synergy gain should lead in a combined fashion to around EUR 300 million of cost reduction in the P&L '25 versus '24, i.e., 1 point of the revenues.

Very helpful. And the SOP with BYD in Turkey and in Hungary, is it 2026?

It's not -- so I think the BYD in Hungary, it's between late '25 and '26, Turkey is not completely clear, so far, because Turkey [indiscernible] site has been this summer. The site is in [ Siena ], which is a bit away from part of the suppliers. So the timing is not completely known yet. Now the experience of BYD, surprise us in terms of the speed at which they are completing projects.

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

Perhaps if you can just start with the Moody's rating downgrade last week. What does that mean for you in terms of your cost of borrowing? My second question is given the weaker volume development for the year versus the previous expectation, are you still comfortable that you won't need to rely on higher payables or reverse factoring to any greater extent this year to help reach the cash flow target? And then my final question is just referring specifically to the delays in EV projects that you mentioned at the beginning of the presentation. Do your contracts accommodate compensation for delays in SOPs as well as lower volumes? And just in general terms, how comfortable are you that the contract structures allow for adequate compensation should EV volumes disappoint more significantly in 2025?

Thank you for the questions. So on the downgrade of Moody's. So as we mentioned, Moody's has downgraded us last week. And they did, in fact, 2 evaluations. First evaluation is a downgrade by one notch to Ba3 on Forvia company. And second, they did a bit of what I would call a technical, but a real one on the debt itself for the subordination aspect to be one. We are now in a situation in which our 3 rating agencies have very different ratings on us. It's BB+ on Fitch. It's BB in S&P. Both of them with outlook negative. And then you have Moody's, which is on stable ratings, but at a lower level. We know that Moody's has a very negative sense on the auto industry, but it is what it is. What we have seen, since the announcement Thursday morning, is that actually the net fluctuation in spread has been fairly limited. In fact, I think on Friday night, it was around 10 basis points. So for the time being, we don't -- we do not see a direct consequence of this, but it's clear that this is an item that has to be watched in particular because you have investors that may be with restrictions on investment in the B1 rating note, that can be also a restriction in new issuance. Now let me highlight one thing in this context. We -- thanks to the refinancing we did in the first half, we have no mature -- no significant maturities, '24, '25. So I would say the direct impact that this is limited. It's unfortunate, but it is limited. The other point I would like to make is on the notes and the comments made by Moody's. You will see that the first element in side is related to the context and not related to the financial structure of Forvia, but the downgrade is a reality that we have to face. It reinforce, in fact, the central objective and the central motivation we have, which is to reduce the debt of this company. On your second question, we have communicated clearly that the reverse factoring will go down. This was compared to last year, and I confirm this, and I would like also to say that this is not contributing to performance in terms of cash flow in the recent period. On contract and compensation for delays and reduction of volume. Most of the contracts we have do not have per se a guarantee of volume. So if there are delays or if there is a lack of success of a given car, there is not a mechanical compensation. Having said that, 2 things are done. One is that the upfront cost, in particular, the R&D are renegotiated, so that they can be offset even with lower volume. And second, we negotiate all other elements inside the contract in order to have maximum indirect compensation. And there are many things that can be done because inside the activity, you have always favors or accommodations that are provided by suppliers. Now what we do is that all those accommodations and between favors have to be paid and have to be paid at a substantial value. So we do compensation, sometimes direct, sometimes also a bit indirect. Related to '25, I think your question is, in particular for Europe. In case the CAFE regulation is leading to fluctuation volatility on the motorization that -- of the cars that will be sold next year. We are ready on 2 aspects. One is on the cost because anyway, we need to get our cost down, it's just reinforcing the need. And second one, we will use any leverage we have in order to ensure that in case something is happening without learning, we are able to be compensated for the loss it can bring. So we are totally aware of the uncertainty that can happen. I think we have now experienced volatility in this business, and we are much more ready than the pre-COVID shortages to face this type of situation.

The next question is from Thomas Besson of Kepler Cheuvreux.

I have a couple of questions here, please. I mean in the third quarter, your best businesses in best regions underperformed quite substantially. What are you assuming over the coming quarters and in 2025? Are you going to get any better support from these better businesses in regions? Or should we expect that to continue? Second, is there any update on your message on disposals? Do you still expect most of these to take place in 2025 and the cash inflows to be in the second half of 2025? And lastly, could you remind us what you assume in terms of 2024 CapEx and capitalized R&D. I understood your message about 2025 combined below EUR 2 billion. And do you see any short-term risk from potential social action in Germany if it were to happen?

Thomas, can you repeat your first question? I'm not sure I understood.

My first question is, do you expect a headwind or a tailwind from your regional and business mix in 2025, knowing that in the second half, it's a clear headwind.