OPmobility SE (OPM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Quarter 1 2021 Plastic Omnium Conference Call. I would like now to hand over to Adeline Mickeler, EVP, Corporate Head, Finance and Member of the Executive Committee. Madam, please go ahead.

Thank you, and good morning to you all. Plastic Omnium delivered in Q1 2021 a solid performance in both fragmented and volatile market. Fragmented, because the automotive production grew 79% in China and decreased 4.0 -- 0.4%, sorry, in the rest of the world. Volatile, because it began to be affected by supply chain disruption, mainly semiconductor issues. In that environment, our sales were solid with an increase on a like-for-like basis on 4.8%. We delivered an outperformance of 4 points in Europe; 22% in Asia, outside China; and a strong growth in China of 79%. We have growth drivers, especially through our nice positioning on premium brands and an increasing positioning on electric vehicles. This positioning on electric vehicles has been reinforced in Q1 2021 with significant orders in that field. I will comment further on in the presentation. In Q1 2021, we also continued to deploy our long-term strategy based on 3 pillars, operational excellence with the deployment of our Omega transformation program. And we can say today that our operating performance is improving. Innovation, second pillar, with the launch of EKPO, gives you with ElringKlinger in the fuel cell business in the hydrogen field. And third pillar, sustainability restructured our ESG program to be able to reach carbon neutrality by 2050. In Q1 2021 and for the rest of the year, we are managing the company with cautious assumptions for the automotive production, mainly a 5% discount on IHS assumption that lead us to carefully manage our cost and that drive us to confirm today our 2021 guidance, which is a strong growth for Plastic Omnium, an operating margin around 6% and a free cash flow above EUR 220 million. And we can tell you today also that our H1 results that will be released on July 21 will reflect that trajectory. On Slide 2, if we zoom on the evolution of the automotive production, again, Q1 an increase of 13.6% for the automotive production, driven by China. 2.3 million vehicles are produced above Q1 2020 levels, and this increase is mainly -- only driven by China. If I now look 2 years ahead, comparing Q1 2021 automotive production with Q1 2019, you can see that the recovery is still slow outside China. China is, today, the only country having recovered its precrisis level. Out of the 2.6 million decrease of vehicles produced in the world, we still lack 1.1 million vehicles in Europe, 600,000 in North America and 600,000 in Asia, excluding China. In that slow recovery, Plastic Omnium showed strong resilience in its sales. As you can see here, sales between Q1 2019 and Q1 2021 only decreased by 3.5%. So 3.5% decrease for Plastic Omnium compared to 11.6% for the automotive production over the same period. Strong resilience with 2 countries to be highlighted in that performance. First, Germany. Germany, as you will probably remember, is our fourth country in terms of sales, representing 17% of the total. And in Germany, in Q1 of 2021. We are back to Q1 2019 levels. Second, China. In China, which is 10% of our total sales, we are up 13% to Q1 2019 levels. Slide 3. If I now go deeper into the analysis of Q1 2021. First, our economic sales amounted to EUR 2,000,000,157 affected by negative exchange rate of EUR 78 million, mainly due to the depreciation of the U.S. dollar against the euro. On a like-for-like basis, our economic sales grew 4.8%. We experienced a growth in our 2 businesses, Plastic Omnium Industries, plus 2.1%; and as announced, you see a strong growth of Plastic Omnium Modules at 12.5%. Revenue from joint ventures that you see at EUR 172 million for Q1 2021 are mainly related to the production of exterior parts in China through our JV 50-50 with Yanfeng, which is #1 in the Chinese market and the JV we have in South Korea in the front-end module business. Those 2 JVs contributed, respectively, 70% for YFPO and 30% for the South Korean JV, 2 of total sales, which increased on a like-for-like basis by 65% on the period, benefiting from a strong comparison basis in China and in South Korea. Excluding from -- excluding those joint ventures, our consolidated sales amounted almost to EUR 2 billion, an increase of 1.5% on a like-for-like basis. Some additional colors on those figures. First thing, the month of March was particularly strong in the quarter, stronger than what we experienced in Q1 2019 and quite comparable to the level of sales we have end of 2019. Second, when I look in terms of customers, this growth we had was driven by our premium OEMs, which represent 40% of our total sales. And we had in Q1 a nice growth, especially with Audi, with Porsche and Daimler on electric vehicles. Slide 4, by geography now, starting with Europe. And Europe is 56% of our total sales. In Europe, we outperformed 4 points, the automotive production, declining 1.1%. This outperformance is mainly driven by Germany. In Germany, the automotive production declined 8.5%, and we grew 17%. This growth is driven our positioning on new easy platforms at Volkswagen. This is, for instance, the ID3 and ID4 at Audi. We are positioned on the Q4 e-tron, which was launched a few days ago by Audi and also on the Porsche Taycan. And we have also significant sales on the Daimler S-Class. That again pushed our sales in Germany in Q1 and will continue to do so in the coming quarters. In North America, our sales represent 24% of the total. In Q1 2020, we had a significant billing of 2 links of roughly EUR 50 million that we didn't have in Q1 2021. Restated from this tooling effect, our sales are increasing at the same pace as the automotive production. It is to be noticed that, thanks to the launches we will have in Q2 for Lucid and for GM in Mexico, we will compensate what we have lost, EUR 50 million in tooling Q2 2021. China experienced a strong growth in line with the 79% increase of the market. Our growth here is driven by market share gains in our bumper and fuel system business as well as the progressive ramp-up of the 3 new assembly facilities for our module business for Tesla, for Volkswagen and for Daimler. And the last, Asia, 7% of our total sales, a very strong outperformance of 22 points to the automotive production, which is driven by South Korea and strong successes with Hyundai, and our first operations in Malaysia for [indiscernible]. On Slide 5, if I now try to highlight our commercial successes in Q1, which reinforced our positioning on the electric vehicles. You know that we generated 5% of our total sales in 2020 with electric vehicles. And the objective is to grow this percent to 17% of our total sales by 2025. And what we gained in Q1 2021 paved the way to the 17% by 2020. We gained new electric contracts with Ford and Volkswagen in Germany, with Audi in China, with GM and a pure electric player in the U.S. In the first quarter 2021, we also reinforced the growth potential of our fuel system business, thanks to the substitution -- the continuous substitution of metal to plastic. We have won a significant order with Mitsubishi, becoming the preferred supplier of plastic fuel system for this customer, which is transforming its portfolio from metal to plastic. Slide 6. We also, as announced, launched our JV, EKPO with ElringKlinger. This is a 40% Plastic Omnium, 60% ElringKlinger JV in the fuel cell business to position Plastic Omnium as a leader in the hydrogen world by 2030. We have now a complete offer in the hydrogen business with the storage, this is a business we own 100%; with the fuel cell, the JV with EKPO; and the integrated hydrogen system, this is also a business we own 100%. Our commercial activity was very, very intense in Q1, and I'm very happy to announce that we will have some very good news to announce in the coming weeks in that field. Slide 7. Now looking ahead of the evolution of the automotive production. OEMs continue to shut down some production lines on -- or some sites due to supply chain disruptions and particularly on semiconductor. We are not directly affected by those shortage, but we are obviously managing the situation very carefully on a daily basis in our 135 plants. It's the reason why we have reinforced the flexibility of our plant. I remind you that we usually have a 20% temporary percentage of worker of -- 20% temporary workers in the plant, sorry, to flex as much as we can. We also reinforce our cost reduction and transformation program. Again, our operating performance in that context is improving, and we continue to manage the company in the quarters to come with very conservative assumption and with this continuous 5% decrease -- discount on the volumes. So assumption base for 2021 automotive production is still 77 million cars produced. In that context, we are very happy and confident to confirm our 2021 guidance, this strong growth in sales, with operating margin of 6% of sales, which is comparable to what we experienced in 2019, and the free cash flow of more than EUR 220 million that we generated in 2019. And in that trajectory of continuous improvement for Plastic Omnium, H1 results will reflect again the improvement in we are expecting. We are now done with this presentation, and Philippine and I will be very happy to answer to your questions.

[Operator Instructions] The first question comes from Thomas Besson from [Audio Gap].

It's Thomas. I have a few questions, please. First, Adeline, can you confirm what you mean with trajectory? Your H2 '20 margins was already at 5.7%. You're aiming for 6% for the year. So should we assume that H1 is above H2 '20 or it's just thinking more versus the previous year as an indication? So just to make things clear. Should I ask my other questions? Or do you want to answer?

I will answer, Thomas, this one first, if you want. You're right to remind that our operating margin in H2 2020 amounted to 5.7% of our total sales, but the objective we have for the full year 2021 is 6%. So the trajectory we mentioned for H1 result is between 5.7% and 6%.

Okay. It's very clear.

We are on this way. And again, the improvement of operating performance are already visible in our account.

Clear. Second question, can you give a figure for the geographic mix on your consolidated revenues, please? Because we already visibly see the delta between your economic sales and consolidated sales. But the total negative mix for the quarter, do you have a figure? Was it north of 10% for the quarter?

Again, I mentioned that the difference between our economic and consolidated sales are 2 JVs. We have one in China and the other one in South Korea. So basically, the outperformance we generated in Europe is roughly the same between economic and consolidated. The main difference comes from Asia and especially China. In China, we are a little bit above the automotive production, thanks to a less favorable mix for our fuel system business. The good news is that we continue to gain market share in fuel system. So the volumes are increasing, but the mix is a little bit deteriorating. And in Asia as well, outside of China, we have a strong outperformance in our consolidated sales because we also operate in South Korea, in Thailand, in India in our 100% owned businesses.

Okay. Last one for me, please. You stressed the strength of March versus the first 2 months of the quarter. Do you expect that to continue in Q2 or the opposite? Do you believe that semi shortages are going to be disturbed in Q2 and the production measure for me a bit more balanced H2, H1 than a normal year?

It's quite difficult to say because the situation, as you probably understood, is quite volatile and difficult to foresee. Saying that, today, in the forecast we have, we expect Q2 to be above Q1.

The next question comes from Pierre-Yves Quemener from Stifel.

Pierre-Yves, Stifel. I would have 2 questions. One short term and medium term regarding your NAFTA business. You have underperformed in the first quarter for identified reasons of different phasing of tooling invoice. But is it still fair to assume that growth should be subdued in NAFTA over the next 2 years until your new gains kicks in, in terms of production and growth could resume only in 2023? That would be the first question. And more short term into the second quarter, how do you see China for you in the second quarter? If you have some indication, it would be very helpful.

Regarding your first question, Pierre-Yves, it's true. And that's what we've been saying for some months now that after a strong phase of investment in North America with 5 new plants being invested, the ramp-up phase of those plants is now complete, and you have to assume growth for Plastic Omnium roughly in line with the evolution of the automotive production. As you also noticed, we have recently gained new significant orders in the region that should boost again our growth and accelerate our outperformance in the region from 2023 and onwards. Regarding your second question on Q2 and China, in a market which is expected to be flat in China in Q2, we will accelerate our outperformance to the market of -- we expect around 5 points. So again, we will have outperformance in China for Q2 and for the rest of the year.

Okay. Very clear. If I may squeeze one last question regarding the Greer situation in the U.S. Is it in line with the recovery of the profitability there? Or is it -- do you feel further, I would say, headwind with the semi shortage?

Very, very in line. We are very happy with the recovery of this plant, which is performing, I would say, at least on the expectation from the beginning of the year. So yes, we fully confirm that Greer will be breakeven in 2021 at least.

The next question comes from Akshat Kacker from JPMorgan.

Akshat from JPMorgan. Three from my side, please. The first one, coming back to your financial year guidance and the trajectory between the first half and the second half. What we can read from other suppliers is that the year started off very well with very solid first quarter margins. Can you share some details on drivers for better profitability in the second half versus first half for you? Because you just mentioned, in the first half, you expect somewhere in the range of 5.7% to 6%. That's the first question. The second one is a quick clarification on tier banks, the business that you have won with Mitsubishi. When do you start delivering that? And the third one is on your 2025 BEV target. You mentioned 17% of sales, which is an aggressive revenue target in 2025. Can you also share your internal assumptions for percentage of operating profit by 2025? And if you could also share your bumpers market share on BEV versus ICE, please?

Okay. Regarding the trajectory, I would say that, again, we've taken a conservative assumption for the full year for the evolution of the automotive production and again, these 77 million cars, which is our management assumption in 2021. In that respect, I can tell you that we are fully in line with our budget in Q1, meaning, again, that our operational performance is improving. This will be also the case in Q2, leading us again to tell you a little bit more on how we see on our H1 results. We've taken this conservative assumption for the full year, and today, we confirm again this 2021 guidance in a market, which is still uncertain and volatile. Regarding your question on Mitsubishi, it's really a good news for us because that in the fuel system business, we expect market share growth from the 22% we have today to 25% by 2025. This will made in new geographies, South Asia, for instance, and with the substitution from metal to plastic. And in that respect, of course, the Mitsubishi contract is a good one and probably the beginning of a nice story because, as you understood, we began the preferred partner for Mitsubishi in this transition from metal to plastic with contract, which will ramp up from 2022. Regarding your question on our exposure on electric vehicles. You remember, again, this is a strong growth driver for Plastic Omnium in the years to come. Electric vehicles will represent 40% of the growth we expect from today to 2025. And the recent successes, we had again paved the way to this 17%. I don't have the exposure for the intelligent exterior system in that field. But again, it reinforced the growth potential of Plastic Omnium in the electrified world.

Just a quick follow-up on the first question, again, on the margins in first half versus the second half. As you said, you have taken conservative volume assumptions, especially on the end market in terms of 77 million units. What that would imply is that first half and second half volumes are roughly the same. So can you remind us the main drivers in you to expect a higher margin in the second half versus first half?

We -- 2 or 3 items to answer your question, Akshat. First, again, we continue to manage the cost very carefully and to flex as much as we can to face the stop and start we are currently facing for some of our customers. Second, we are engaged of -- in a rationalization program to save EUR 40 million by the end of 2022, half of it in 2021 from the closure of 3 plants. One of them being closed in Q1 2021. This is the German [indiscernible] plant for the fuel system business, and 2 are to follow in 2022 in Argentina and in Spain. We are also cocooning some paint lines and reducing some development capacity, mostly in Germany. So this is cost-saving program. Again, the second part of the saving and the improvement of the operating margin, we expect in 2021. And the third part of it is the transformation program through Omega, EUR 200 million expected in terms of cost reduction by 2022 as well. EUR 100 million being achieved in 2021 and the second part of it in 2022. So again, we flex and we continue to reduce the breakeven point of the company and the cost structure, and we are fully on track on that.

[Operator Instructions] The next question comes from Mike Foundoukidis from ODDO BHF.

Yes, Michael. Two questions remaining on my side. First one regarding the flexibility. Could you give us some more color on the impact of the stoppage on your earnings? And are you able to fully absorb it? Thanks to your increasing efforts on flexibility, you said that you are in line with budget in Q1 that you would probably be also in line with Q2. So are you able to fully absorb that, thanks to compensation and thanks to your efforts? Does it have a significant impact? That's the first question.

We -- again, we are as agile and as reactive as we can, being helped again by the conservative assumptions we have taken from the beginning of the year. So we were fully prepared to that. And on a daily basis, we flex to face again the impact of the stop and start we have with some of our customers around the world. So I won't be too specific on the impact we have. What is to be retained from the way we manage the cost today is that we confirm the guidance, and we are a little bit more specific on our H1 results. So yes, this is absorbed by the flexibility and by the cost reduction as far as we can see today, the impact for Q2.

Okay. Maybe...

Maybe differently, if I may.

Yes, yes.

Again, we are in line with our budgeted assumption, for instance, in Q1 in terms of profitability.

Okay. Maybe the second one, a bit more long term on your fuel cell business. You said that you're now all set and that you're seeing an increased number of coal for tender. So when should we expect to see some order wins? Is it something that we might see in the coming months? Or is it more back-end loaded this year at best?

In the coming weeks.

Weeks. Okay, even better.

We have no more question. Adeline Mickeler, you have the floor for the conclusion.

So thank you for the attendance to the call. You understood that we are very confident in a difficult environment, which is a little bit uneasy to foresee for us because we are not responsible of the volatility of the market, and we are indirectly affected by the shortage. But we are prepared from the beginning of the year to face that. We are reinforcing our cost reduction program. We will benefit that, for sure, for Q2 on a more favorable geographical mix that will boost our sales. So very happy again to -- and confident to confirm our 2021 guidance and to give a little bit of favorable flavor as well for H1 results. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.