Piaggio & C. SpA (PIA) Earnings Call Transcript & Summary

Thank you very much for taking your time today to follow this conference call on the first half of 2020 financial results. Joining me today are Mr. Roberto Colaninno, Piaggio Chairman and Chief Executive Officer; and Mrs. Alessandra Simonotto, Piaggio Group Chief Financial Officer; and myself. All readable materials are available in the Investor Relations website -- Piaggio Group website. And I remind you that at the end of the presentation, we will be available to answer the questions you may have. Before starting the call, as usual, I need to remind you that during today's conference call, we may use forward-looking statements that are based on Piaggio's current expectations and projections about future events. By their nature, forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to be materially different. Finally, I remind you that the press has been invited to participate in this conference call in a listen-only mode. And now I would like to hand over the conference call to Mr. Roberto Colaninno.

Good afternoon to everybody. I want to give you a general view of the -- a global view of Piaggio Group today. As usual, our zone is #1 is EMEA, #2 is India, then we have the southeast of Asia and the America. Starting from EMEA. The situation in EMEA is, today, a surprise because the order that we received from July and what the order that we anticipate for August, and we believe something is a good information about September is extraordinary good. Just to make a close comparison from the third quarter EMEA sales compared to the third quarter of last year, we see that based on July already order received and some, that is, let's say, penetration on August and then September, we can say that our sales growing up more than 20%, 25%, related to the last year same quarter. Let's say, Southeast Asia started from Vietnam, Thailand, Indonesia and some other countries, that we have a good situation not as so much big as EMEA, but let's say, we find that the confirmation from Vietnam market and big growing on Thailand and Indonesia and a good going from the other country of ASEAN Federation. What big surprise is from China, where we sell today a big number of Vespa every month with a fantastic margin. I'm expecting that naturally, by percentage, there's an enormous grown up that is not related with the number. The number is 10,000 every month -- every day. Every day? No?

No. Every month or every quarter.

China is about the quantity of -- is over 10,000 Vespa every month that we imported from Vietnam. Then we get the United States that is a little bit higher than last year, then they confirmed the big successful of Vespa and Aprilia motorcycle. The big problem is India, where we have a situation that is very confused. I want to confirm that, primarily, our plant is open and is not involved on the lockdown strategy of the governments of New Delhi. But the New Delhi don't have the same -- take the same decision from the country. So we go that state by state, the situation of lockdown is different and change in a short time. This means that our dealer in India today is open by 60%. And it's difficult to see what happens in the near future because, number one, depends from the virus expected. And then what is the decision of New Delhi about the lockdown. The best information that we get from the moment is that the area of Baramati remains open and probably the government will reduce the lockdown strategy. But frankly speaking, it's nothing sure about that. So outside of India, that anyway, I confirmed that the plant is open, and we produce every day what is confirmed by the order that we receive from Indian market, but also from a country where India make its export and some is -- only is -- export is mainly to the Africa country and some countries of Middle East. Even the supplier position of India market is not a problem for us, because they are -- where the supplier is open is exactly is -- where they are our supplier. Outside this, I think the reaction of Piaggio, after the virus time, is very remarkable. And on top of this is the cash flow that is going very well in the second quarter. And even in the third quarter, we believe that we can go up from the cash position. From the supplier point of view, we don't have any problems. Even our stock is down, and is down because primarily, we wanted to control the cash flow in order to allow us to be able to have positive cash by the end of the year. By the end of the year, we can say that our forecast -- our best forecast for the end of the year is that naturally, we'll not be as last year, but we'll be much, much better than the first and the second quarter. Naturally, it all depends from the virus flow, and what is the decision of the different governments regarding this question. But we see, again, very positive from EMEA that the quantity is coming from all the country in Europe, especially Germany, France, Spain, Holland, Austria and even Italia going up and give us some surprise in the quantity of sales development. In terms of products, we are completely in line with the new products. We confirm the new Aprilia 650 that will be launched before the end of this year. We confirm the new scooters. We confirm the new other models that we are in the process to develop during this year. Even the new portal is in line with our time, and we think that the sales beginning on early January and February next year. All the technical development is in line with our plan. We don't see any problems on any particular problem on the quality side, and we received a very good decision and a very good position from the customer and the market. All this, I'm expecting that by the end of the year, pending the virus situation, the market will be in line with the market of the end of last year, so in some country better, especially in Germany, in France, in Holland and Italy too. We expect -- we hope that India take different decision and make the lockdown more easy to manage. I'm expected that Southeast Asia will confirm, and some time, grow up their demand, especially from Indonesia and Thailand. And surprise to me, this is confirmed for the rest of the year, the reaction of the Chinese market to the Vespa scooter.

Perfect. Thank you very much. Now I would like to hand over the call to Mrs. Alessandra Simonotto to comment on the slide that we have published on the website. Mrs. Alessandra, you can go in.

Good afternoon to everybody. As usual, I'll start the call with Page 3 of the presentation you have received on key financial metrics. To explain better what happens in this month, we have focused the analysis, giving you a view on first and second quarter highlights. As you can see, in terms of sales, our performance has been deepened it in the second quarter by lockdown measures and production outages, partially mitigated by heightened cost containment action consistent with targets provided to all of you in Q1. About cash and net debt. In Q2, we were able to revert back to positive the cash dynamics with working capital reaping the benefit of the strategic decision of increasing inventories of material and components in Q1. Last but not least, in the second quarter, we have worked and secured additional undrawn committed credit lines of around EUR 90 million, lifting gross cash close to EUR 400 million. On the following page, Page 4, we have summarized our industry's key demand trends. About EMEA and the Americas, overall two-wheelers demand were still down year-to-date, but encouraging signals clearly emerged with demand bouncing back strongly once lockdown had been lifted. European two-wheelers rebounded strongly after April bottom, posting strong sequential acceleration in most of the group's core markets, across product and displacement segments, notably Germany and The Netherlands ended the semester with demand already on the rise versus prior year. And in any case, during the month of June, we have seen a growth against June 2019, more or less of 30%. About U.S. U.S. posted the classical V-shape trend, with volumes soaring at 30% in May-June, leading the overall demand above the prior year. About the Asia Pacific. Asia Pacific posted diverging trends, just like Mr. Colaninno said before. ASEAN 5 countries negative demand trend accelerated across the semester, driven by the spread of lockdown measures. Vietnam kept being the most resilient, also reflecting the lower impact of COVID-19, whereas Indonesia and the Philippines have been hit the most with demand plummeting above 30%. In stark contrast, the trend of the other key reference countries, with scooters in China ending up mid-single digits in the semester and Taiwan confirming robust double-digit growth. About India, demand plunged across segment, was hit hard by persistent lockdown measures. Let's move to Page 5 to have an in-depth analysis of trends by business. As said before, performance strongly hit by COVID-19 effects, but strong positive uptake in Western countries and APAC at the end of semester shed a positive light on the remaining part of the year. About two-wheelers. EMEA and Americas, volumes and revenues dragged down by lockdown, although the trend reversed strongly since mid-May, boding extremely well for the remaining part of the year. Germany was the outright best country, ending with volumes and revenues already above prior year. About two-wheelers in Asia Pacific. We can see a resilient performance against widespread lockdown measures, mainly underpinned by surging and sequentially stronger results of China and South Korea. About two-wheelers, India. Volumes and revenues plummeted as stringent lockdown measures persisted. About CV. CV EMEA and Americas seen a lockdown effect, partially mitigated by positive product mix effect. About CV India. We can see volume -- and better volumes and revenues plummeted, dragged down by lingering lockdown measures exacerbated by drop in export markets. Let's move now to Page 6 to look at the breakdown of the performance by product. As you can notice, COVID-19 has negatively affected all product segments. Prices held up well despite the adverse economic scenario. The scooters revenue decline mitigated by positive price effect. In this scenario, the recovery trend in Western countries is quite important, confirming that demand for scooters was already underpinned by the need to shift from public transport to individual and affordable commuting solution to keep social distancing. In this context, Medley has kept on posting double-digit revenue growth across the semester, testifying the success of the new version launched at the end of 2019. About Vespa, I should like to underline the results on the Chinese market, where Vespa accelerated across the semester, leading volumes and revenues of around 70% above prior year. Looking at motorbike, where all brands hit by market lockdown and production outages. I would like to highlight Moto Guzzi V85TT that was able to limit the degrowth in the second quarter. Let's move now to Page 7 to have a look at the EBITDA bridge. EBITDA has been dragged down by the sharp drop of volume and revenues due to the lockdown and outage measures. But strong containment action announced in Q4 started yielding results, more than offsetting gross margin dilutive effect and partially mitigated top line decline. Tight grip on SG&A will continue in the remaining part of the year, without affecting key projects. I will skip now Page 8 that summarize the figure just discussed to move directly to Page 9 to have an in-depth analysis of cash flow, net debt and liquidity. As we've seen on Page 3, cash flow posted positive dynamic across the semester with EUR 20 million uptick in Q2, mainly stemming from a strong improvement in working capital with inventories trending down consistently with the effective strategy adopted in Q1 and receivable lowering, benefiting from the boost of two-wheeler sales in Western countries between end of May and June, laying the foundation for stronger positive generation in the next quarters. Capital expenditure remained broadly in line with last year as focus on new projects to nurture future growth remained immune from COVID-19 effect. As a result of the trends just described, net debt decrease of EUR 20 million from Q1 to EUR 528.5 million.

Thank you. Okay. Now we are ready to answer the question you may have. So Gwen?

[Operator Instructions] The first question comes from Emanuele Gallazzi with Equita.

I have a couple of questions. And the first one is on the Indian market. You just discussed a little bit about the trends in this market. We saw a drop in volumes due to the lockdown, and the recovery seems to be slow even due to the very challenging environment. But can you give us an idea of the current situation and the trend in July? Because it seems that there is another slowdown in the market, both for commercial vehicles and two-wheelers. And on the price/mix in India, in the first half, the price hikes were confirmed. I was wondering if -- given the situation of the market, do you expect some pressure on the second half? And still on the price/mix, if you can give us your expectation about the price/mix in Europe in the second part of the year.

Emanuele, Raffaele speaking. Okay. So as the CEO said before, in July, in India, the situation is a bit difficult. So you can imagine to have decline in volumes for two-wheelers and light commercial vehicles. And the month-on-month trend stabilized probably. So the decline should be in line with the decline now that you have the data of June. Concerning the price gap that we have seen in the first half of the year, yes, from that price, we remain the same or even higher in the second part. You know that the price hike is linked in India just to the introduction of Bharat VI engine. Going forward, for Europe, the price -- the average selling price in the second half, if I understood well your question, will be more or less in -- or the price will remain more or less the same that we had in the first part of the year. So if you look well at the slide, you will see that there has been a slight increase in prices in Europe in H1. We keep the absolute level also in H2. As the CEO said, we are expecting on the country a strong positive trend above all in Q3 in EMEA.

Just a very quick follow-up on capitalized R&D. If you can quantify it in the second quarter.

In the fiscal quarter, you mean?

Yes. We're in the first half.

Yes, yes, yes. So yes, you -- okay. I'll give you the number now. Yes, capitalized R&D has been pretty much in line with last year -- in the second quarter, you mean. And -- yes, so you have essentially EUR 11 million of capitalized R&D in the second quarter. 7 -- sorry, EUR 8 million for capitalized R&D, yes.

EUR 8 million?

EUR 8 million compared to EUR 9 million in the first quarter. So the difference is negligible.

The next question comes from Monica Bosio with Intesa Sanpaolo.

My first question is just to check to be sure that I have understood well. Did you say that in the third quarter of the year, European revenues or European orders of Piaggio are up by 20%, 25% versus the third quarter of 2019? And just in relation with this, can you give us any indication on the scooter and two-wheel market in Europe for July as a market? And what do you expect for the second half of the year? My second question is on China. I remember that during the last conference call, Mr. Colaninno has indicated, maybe I'm wrong, a target for China of Vespa of 10,000 units. Is it still valid? Did I understand well? And the very last question is on the tax rate. In the first half of the year, the tax rate was 40%. I remember that the previous guidance was 42.5%. Would you confirm this?

Okay. I can confirm you about order and what we expected order that we have already received for the month of July and the order that partially received for the month of August and what we predicted to receive on the month of September. And I confirm to you that based on the order received on July and the predicted order for August, we expected that July, August and September for the European EMEA market will be up by 20%, 25% on the number of last year. Now on sales, it all depends for the mix of products. And then I cannot confirm that even the sales will be -- go up by 20%, 25%, because this is not dependent primarily for the mix of products that we receive. Anyway, until now, the mix is in line with the mix that usually we have for this period of the year. Number two, in China, I confirm that the sales in China from Vespa is more than what we give you -- what I anticipate you in February or March on the last March, I believe. And there, we expected that the sales in China will be on the -- this year, on 2020, much higher than the sales of '19. Number two, you asked something about India?

It was tax rate, if I remember well?

Okay. About the tax rate, I can confirm to all of you that the tax rate for 2020 will be 40% as of now, and we don't see any change in the third or fourth quarter. I can't -- and this is what we apply in the third quarter and also at the end of the year, unless something will change from a low point of view.

Okay. So it's 40%?

Monica, if I remember well, you asked also something concerning the market trend in Europe?

Yes, the market. Yes.

Yes. So these are market data, not our data. First of all, keep in mind that last year, the market in July in Europe grew around 16%. And you know that July is the most important month of the year with an average weight of 13%, 14% on total demand. So this is the background. A very tough comparison base. Notwithstanding that, according to our first data, the market with the first 3 weeks of July is going up in the main countries in Europe, around 30%, between 25% and 30%. So this is the trend. You have some countries around 15%, other countries close to 50%. The icing on the cake is the fact that we are gaining market share across the board. In some cases, such as Italy, significantly, okay? So in this way, I think I gave you a 360 degrees picture of what's happening in Europe.

Next question comes from Niccolò Storer with Kepler.

I have 3 questions. The first one on your gross profit. If you can elaborate on the 200 basis point year-on-year drop in the half, which are the drivers behind that? Second one on cost between gross profit and EBITDA. I see that basically in the second quarter you managed to reduce these costs by around EUR 20 million, EUR 21 million to be precise. And so I was wondering where these savings are coming from? And which portion of that could be, in a way, repeatable in the third or in the fourth quarter? Very last question, a clarification on India. Did I understand well, Raffaele, you said that July is down in line with June? Is it right?

Yes, for India, yes, more or less, the decline will be in line with June. More or less, yes. I can confirm that. So in the region almost 45% maybe. Maybe I'll just wait for some figures at the beginning of August. Hold on 1 second.

Okay. Mr. Storer, about the difference in the gross margin. As you can understand, the lockdown costs are matching, for the most part, on the standard and gross margin cost. So the gross margin slowed down for, more or less, what you can see in the slide for this -- for which -- this is only a COVID-19 effect, not completely covered by saving also on that kind of our P&L. And about OpEx and the cost reduction, we were able to put in place in the second quarter. I can say to all of you that we are working to maintain a consistent saving on the cash OpEx, but we can't assure that we will be able to do the same effort also in the third and the fourth quarter as part of this expenses are related on sales. So if some sales growth, also some part of this cost growth. In any case, we are working -- all the company, all the group is working to maintain, as lower as possible, all the cash OpEx for all the year.