MAHLE Metal Leve S.A. (LEVE3) Earnings Call Transcript & Summary

Yes. Thank you very much. We are delighted to welcome you to our investor update call. Unfortunately, we had a couple of minutes ago, a power breakdown here in Stuttgart's [ Canstatt ]. And we are just dialed in also via a mobile. So please excuse some technical difficulties, and we will try to make the call as regular as possible. And it would be great if at the end of the presentation, you just could raise your questions via phone rather than online because we might not be able to see it due to the missing power connection. My colleagues and I will present the final annual results of 2020 to you. Already within our recent COVID-19 impact call in February, we roughly outlined the robust development during the pandemic year. Before I start with the presentation, please let us express our hope that you are all doing well and made it through the past year without harm. After our presentation, we'll be happy to any -- to answer any of your questions, as I said, via phone, please. Please, let me start with the recent news. Dr. Jörg Stratmann resigned as CEO at the end of March 2021. I've taken over his duties as Chairman of the management board on an interim basis. In addition, Jumana Al-Sibai joined the management board on April 1. She is responsible for thermal management, our largest business unit. Based on current IHS outlook, the global market downturn for light vehicles and medium and heavy-duty commercial vehicles is at minus 15.7% for the full year 2020. As already mentioned in our recent call, production volumes dropped sharply in all regions due to COVID-19. Nevertheless, according to IHS, global production of passenger cars is expected to recover strongly in 2021. MAHLE robustly navigated through 2020 by taking agile and consistent action. Overall, we displayed a high degree of resilience. Nevertheless, our group results for 2020 were significantly burdened by pandemic effects. Our sales reduced by 19%, and high restructuring costs had a significant impact on EBITDA, resulting in a margin of 4.4%. Our R&D ratio remains at a high level of 6.6%. Given the net loss of EUR 434 million and substantial negative exchange rate effects, MAHLE Group's equity decreased to EUR 2.1 billion. This resulted in an equity ratio of 25.8%, which is below our defined minimum threshold of 33%. Our clear intention to build up a higher ratio by retaining earnings again. On the other hand, we managed to generate strong operating cash flow, easily covering our cash requirements for investments. As a result, we reduced our net debt by more than EUR 400 million. Due to weaker EBITDA, the net debt-to-EBITDA ratio rose slightly to 2.1%. The leverage thus exceeded the 2.0% threshold of our financial policy. However, we are planning to return to a ratio below this level in 2021. According to our market analysis, the share of battery electric vehicles, fuel cells and hybrid engine solutions will increase significantly, specifically from 8% today to 26% in 2025 and to 56% in 2035. With our dual strategy, we will concentrate on exploiting further CO2 saving potentials for the intelligent internal combustion engine. We aim to ensure the highest possible level of competitiveness in terms of quality and cost. At the same time, we are consistently expanding the product portfolio with innovative solutions for future mobility. In general, the internal combustion engine and the fuel cell are the most climate-friendly options for heavy-duty long-haul trucks. Hybrids perform well for medium loads and distances, and battery electric vehicles are especially suitable for local traffic with low loads. MAHLE delivers products for all these use cases. Electrified 2-wheelers and e-bikes are also playing increasingly important role in private transport, and we are full system provider in these fields too. Those MAHLE business segments not dependent on light vehicle combustion engines already account for approximately 60% of group sales. By 2030, this figure is expected to be around 75%. To achieve this, we invest heavily in R&D. In 2020, we invested in 2 new global electronics and mechatronics development centers in Germany and China. Another recent highlight was the introduction of a new test bench for e-power trains in Germany. This high-end equipment is an absolute rarity in Europe. And we will continue on this path in 2021. For example, we are building a test center for traction batteries in Northampton. Our R&D activities are accelerating our transformation as a leading system supplier in e-mobility. MAHLE's battery system solutions enable ultra-high power charging of electric vehicles, which allow us to recharge up to 500 kilometers of driving range in only 15 minutes. This excellent result is made possible by our recently developed immersion cooling system. The battery system integrates our expertise in power electronics, thermal management and housing. As a consequence of this ultra fast charging capability, range becomes less important, and therefore, batteries can become even smaller, making electric vehicles cheaper, lighter, and more resource efficient. On the right side, you can see another exciting innovation, our magnet free high-voltage traction motor. It can be manufactured without the use of any rare earth elements. Moreover, it's practically wear-free. This brings me to the second important future priority of MAHLE in addition to the battery systems, hydrogen. We see the use of hydrogen as key when it comes to shaping carbon-neutral mobility, especially for long distance holding. In the first step, we can enable hydrogen combustion in conventional engines by means of our ice products. This requires only a few technical modifications. Especially for commercial vehicles, these hydrogen engines will help and accelerate the transition to the second stage fuel cell technology. MAHLE has more than a decade of experience with fuel cells. We have set up a test facility for fuel cells and hydrogen-powered engines in Stuttgart just a few weeks ago. By partnering with Ballard since September 2020, MAHLE is helping this drive of the future breakthrough. Our goal is to develop and industrialize high-value components and modules for fuel cell system for heavy commercial vehicles. And with this, I would like to hand over to Jan Thiele for more details on the financials.

Yes. Thank you very much, Mr. Frick, and good morning from my side as well. MAHLE Group's organic sales performance in the financial year 2020 was in line with the global automotive market development. The decline in MAHLE's organic business amounted to 16.7%. Sales, however, were especially robust in electronics and mechatronics as well as in the aftermarket business unit. In addition, MAHLE Group sales were further burdened by unfavorable currency translation effects of EUR 318 million. Viewed on a monthly basis, sales in April marked the lowest point. During the subsequent ramp-up phase, MAHLE's global sales reached levels of up to 90% of the budgeted volume by July. From October 2020 onwards, we saw a further recovery in our markets, and we're able to reach around 95% of budgeted group sales. In the first quarter of 2021, MAHLE outperformed its budgeted figures by 16% despite negative FX effects. Our internal measures to improve liquidity demonstrated our resilience and good crisis management. Net debt steadily decreased since July. Loose net debt at year-end 2020 resulted in an improvement of EUR 415 million compared to year-end 2019 and has decreased even further by the end of March 2021. Let me now give you some more insight into our earnings development. The main factor for the decrease in EBIT was a fall in sales due to COVID-19. This decline is visible in the volume effect. In addition, our 2020 financials were burdened by transformation costs of EUR 347 million, substantially reducing our earnings. The bridge only shows EUR 185 million as there were also EUR 162 million of restructuring costs booked in 2019. At this point, I would like to mention that EBIT pre-restructuring for 2020 would be EUR 155 million or 1.6%. We took every possible step to reduce the impact on profitability and our liquidity status. For example, we rapidly adapted our cost structure in line with the falling demand. You can see that MAHLE managed to further improve costs by EUR 482 million in the areas of productivity, production performance and personnel costs. Where possible, we took advantage of government programs for short time work. MAHLE loose proved its high degree of flexibility and strong resilience, and we will continue to adjust our cost structures in line with the market conditions and trends. The following slide shows the results of our past and current restructuring measures. In line with the overall transformation of the industry, we have reduced our workforce by about 9% since 2018. In 2020, we closed 3 plants in Europe and announced the closure of 2 more plants in Germany. Moreover, in September 2020, we announced a global restructuring program. We are planning to reduce our global headcount, mainly in Western Europe and North America, by approximately 7,600 over the coming years. The implementation of this program already started in 2020. We are confident that these restructuring measures will help strengthen our future performance. Despite lower sales volumes, we generated strong operating cash flow in 2020. Compared to last year, it increased significantly from EUR 415 million to EUR 877 million. MAHLE demonstrated both stringent and successful working capital management. For example, by improving our payment terms, trade payables increased by EUR 152 million. Strong cuts in CapEx were made in all areas with the exception of our future-oriented business, mainly electronics. However, CapEx already returned to pre-crisis levels in Q4 2020 as the market recovered. M&A-related cash flows were driven by a further 5% acquisition of MAHLE Behr Gmbh & Co. KG and the acquisition of the remaining 50% stake in Behr Hella Service. As of 31st of December 2020, our cash position stood at around EUR 764 million and was significantly better than at year-end 2019 with EUR 429 million. Thanks to agile and strong crisis management, including comprehensive cost-cutting measures, the group's financial position remains stable overall. I would now like to hand over to my colleague, Ralph Josephs.

Thank you, Jan, and welcome, everybody. I would like to explain how MAHLE plans to finance the transformation Michael Frick just outlined. As you can see on this chart, MAHLE's maturities until the end of 2020 amount to EUR 1 billion and mainly consist of the repayment of corporate bonds. By 2024, we will have another EUR 500 million of maturing debt. The upcoming maturities are well covered by pre-credit lines from syndicated loan facilities and our cash position. Unutilized credit lines together with the cash amounted to available liquidity of around EUR 3.3 billion at the end of December 2020. Nevertheless, we plan to refinance the upcoming maturities over the next 2 years, mainly by issuing new corporate bonds and, respectively, cancel the undrawn EUR 500 million RCF, the COVID bridge financing. By taking this step, MAHLE will gain further financial flexibility in order to manage the upcoming challenges in the automotive industry over the coming years. About 1 month ago, MAHLE published its inaugural rating. Moody's rated MAHLE with BA1 and stable outlook. The rating agency not only recognized our solid liquidity profile and conservative financial policy, but also our market position as well as our diversified customer base and strategic alignment. We, therefore, consider ourselves well positioned with regard to our peers and strengthened in our access to the international financial markets. As a company owned by a charitable foundation, sustainability is in our DNA. In order to verify our performance in this respect, MAHLE initiated an ESG rating by EcoVadis. Our significantly reduced tendency on internal combustion engines and strong position in the e-mobility sector were the main drivers for the very good results in the environmental block of the sustainability rating. In 2020, we set a CO2 reduction target for MAHLE Group. By 2040, we aim to be carbon-neutral in terms of all direct CO2 emissions and those associated with purchased energy. In Germany, we will reach this goal already in 2021. Dedicated responsibilities and overarching management of all ESG measures have been implemented. Overall, MAHLE was awarded a silver medal by EcoVadis. As a result, MAHLE's ranked among the best 21% of its industry. In conclusion, I would like to say that we are confident that MAHLE's leading position in all relevant product categories combined with a strong financial position and future-oriented business model means that we are well placed to shape the current transformation in the industry. Thank you very much for your attention. We would now like to start the Q&A session. And as we said, we would ask you to raise questions by phone.