Sogefi S.p.A. (SGF) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Sogefi Full Year 2019 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Mauro Fenzi, CEO of Sogefi. Please go ahead, sir.

So Mauro Fenzi speaking. It's the first time with you. I'm talking about Sogefi 2019 results. But before going on with presenting the last year results, I would like to spend just a few minutes presenting myself to you because I think it makes sense. So I spent the first 15 years of my career working for the aerospace business first for 10 years and then, 5 years later, on the oil and gas side. During the oil and gas period, I have been in Japan for a couple of years, working with the most important oil and gas [ 2 years ] like Mitsubishi and Kawasaki. Then I come back, and I started working for FCA Group in 2001, entering into Comau. In Comau, I covered many different roles, including business unit management, project management roles. And from 2009, I went to live in Detroit after the Chrysler acquisition, following Mr. [indiscernible], implementing the integration principles in the area. I spent 3 years of my career in Detroit from 2009, 2012. But then when I come back in 2013, I took the Comau Chief Executive Officer role [indiscernible] last year in December period. So now I'm here to talk about Sogefi results. I apologize, by the way, for the late start, but there's been a technical issue on the files. So I will cover slide by slide. Hopefully, you have the presentation with you. Starting with Slide #3, which is covering the main numbers for the year. So at revenue side, last year good revenue year with EUR 1,519.2 million revenues, volumes. That compared to 2018 that has been EUR 1,570 million, is down 3.3% on a reported basis and 2.2% on constant exchange rate. You will see later on in the presentation that, by the way, with respect to the market trends, the company is better. On EBITDA, we closed the year at EUR 174.3 million against last year, EUR 179.9 million. So 11.5% of sales, in line with previous years. And we are confirming the Q4 year-on-year and 2019 quarterly improvement. But we see later on these numbers, EBIT being at EUR 39.6 million, which is 2.6% of sales on the year. And we have to highlight that in this number, we have been negatively affected by EUR 10.6 million of noncash asset write-downs that was EUR 5.3 million in the previous year. During last year, we, Sogefi, did also activities to cover the start-up costs in Morocco and Romania with the new plants we are launching. The net income is at EUR 3.2 million, and the positive free cash flow is a positive of EUR 4 million, EUR 3.9 million versus EUR 14.2 million last year. The net debt at the end of the slide, you can see that is now at EUR 256.2 million versus EUR 260.5 million at end of 2018. So if you change the slide and we go to Slide #4, here, you see the revenues by geo area. And on the left, you see the Q4-on-Q4, and on the right side, you see the full year. So there are a couple of areas to highlight. If you follow me on the table, on the total line, first of all, we see that going from the left to the right, the quarter-to-quarter numbers are reported change, minus 3.5% from '19 to '18; with the constant exchange rate, we jumped up at minus 2.2%, are negative numbers. But on the other side, considering the market trend, which is, in the same period of time, minus 5.4%, we are overperforming the market by 321 basis points. On the right side, you see the full year. And the full year is again showing the -- at reported change, minus 3.3%, which is, at constant exchange, minus 2.2%. Again, you see the same trend, that the market is down roughly 6%, with 359 basis points better. I would say that Europe has been key for Sogefi to achieve these numbers, and you know how Europe is important for the group. And if you go to the right, discussing the full year, we have also to remember that we have been affected by the strike at GM U.S. for a certain period of time. In the next slide, so Slide #5, you see the revenue by business unit. Again, same report as from the left, quarter-to-quarter; on the right, the full year. On the quarter-to-quarter, we can see again that on the Air & Cooling business, we are, at constant exchange rate, minus 3.7%, Filtration is a positive of roughly 8%, 7.7%, and Suspension is down 10% on the quarter. While if you go to the right, you see that Air & Cooling is down 3.5% at exchange -- constant exchange rate, while Filtration is up more or less 3%, and Suspension is down 5.6%. Going to the Slide #6, you see the 2018, 2019 customer portfolio. As you see, the top 4 are at -- roughly at 10% share in -- on volumes with Renault/Nissan, PSA, Ford and the FCA/CNH Group. And then GM, Daimler, Volkswagen/Audi, Toyota and BMW are slightly below this value. The portfolio of customer is quite in line with the good portfolio, and our presence on some customers like BMW is improving. Then going to Slide #7, you see a very level graph reporting the EBIT performance from 2018 on the left to 2019 on the right side. In 2018, and maybe Yann can be more precise than me, there has been a claim on Dayco that could have affected the profitability with EUR 6.6 million. But if we go from '18 with own, we see that the volume's affected in a negative way of EUR 14.5 million, while the company reacted pretty well on the efficiency on variable costs side with EUR 6.5 million and also recorded pretty well the fixed costs with EUR 8.6 million. Going on from left to right, you see D&A and others for a negative amount of EUR 7.1 million. Plus, as you know, we are ramping up the 2 plants of Morocco and Romania for a near cost of roughly EUR 5 million, so EUR 4.8 million, reporting then the EBIT 2019 adjusted at EUR 43.9 million. On top of it, then we had write-downs, EUR 4.3 million. And the EBIT reported '19 is going to EUR 39.6 million. Now we listen to Yann who knows better than me in 2019 performance, the Slide #8.

Thank you, Mauro. So after, if you could please start in Q1 of last year with an EBITDA of 10.6%, you can see it recovered quite steadily in Q2 to Q4. Now in Q4, we closed the year at 11.8% of EBITDA, whilst in the same period of the previous year, we only achieved 9.7% despite higher sales. So the performance of Q4 2019 with sales, EUR 40 million below that of the previous year, are quite good actually. In terms of EBIT, you may have seen that Q4 was hit, as mentioned by Mauro, by a number of write-offs. Hence, the 0.6% EBIT that compares with 1.1%. These -- excluding these write-downs, which are non-recurring, you can see that in Q4, we achieved a 2.9% EBIT, while in Q4 of the previous year, with sales higher than this year, we only achieved 1.5%. Therefore, a year of improvement nonetheless.

Thank you very much, Yann. I have decided to give you, in the coming slides, a better view on the businesses. So if you go to Slide #9, you see the Suspension trend in sales and EBIT, sales on the left, EBIT on the right. The sales of Suspension went from EUR 600 million in 2018 to EUR 550 million in '19. So there is an 8.8% negative on volumes. But we have to highlight that in Europe, the gap is minus 6.5%, so less. About the EBIT, we have to remember that in 2009, the Romania, for their plant, was indeed a start-up phase, so affected -- added in the cost of the business unit, but Romania is very key for the future. Romania, if we exclude Romania from the EBIT side, you should see the 2.1% in 2018 against 1.9% in 2019. EMEA is improving quite well the profitability exercise in Suspension, while unfortunately, we see LATAM and China a margin decrease. On Suspension, the cost of raw material is very important. So if you jump to Slide #10, we decided to show the indicative steel price evolution for '17, '18 and '19. In the last period of time, I talk about '19, that the steel price, as you see, reduced after a peak in end of 2018. And this affected also the Suspension profit and loss. Going to Filtration, which is Slide 11. You see that Filtration improved the sales volume from EUR 537 million to EUR 546 million. So there is a growth of 1.7%, which is roughly 3% at constant exchange. So it suggests that we've been successful in growing the Filtration business almost everywhere with the exception of North America. On the right, you see the profitability. That's unfortunately softer, the EBIT in 2019. We went from 4.5% to 2.9%. But again, we have to highlight that EMEA, like for Suspension, is improving profitability pretty well in Filtration following the plan and that EBIT, again without the Morocco start-up cost, should be at 4.2% against 4.5% last year. Slide 12, you see the Air & Cooling business unit. This business is almost flat on volumes, 2018 and 2019, with a 1.7% difference. But we have to again highlight that Europe, so EMEA, is up 5% on the last year, on the previous year. And unfortunately, we have to highlight that in North America, we have been affected, as mentioned before, by the GM strike last year. On the profitability improving, it is improving the profit, the EBIT from 5.2% to 5.7%. And again, the main area of improvement we are talking about is EMEA.

So going back to full P&L on Page 13. Just a reminder, 2018 and '19 are comparable. That's to say, as mentioned by Mauro earlier on, we've taken out from 2018 the EUR 6.6 million advantage coming from the settlement of the claims in order to be comparable, and '19 and '18 are presented both with IFRS 16 in order to be consistent. So EBIT, as you have seen, stands at EUR 39.6 million, a reduction -- I'd say, improvement of the financial results on the year, EUR 23.8 million versus EUR 27.5 million a year before. What remains significant is income tax. Income tax is EUR 13.7 million versus a pretax of EUR 15.9 million. So we are not where we wish to be with an 86% tax rate, which is amazing. And as mentioned in previous meetings, this stems from the fact that we have new plants on which we have taken a prudent stand. That's to say until they become profitable, we are not going to book deferred tax assets. And there are other areas, especially in Latin America, where we'll be very cautious not to book deferred tax assets due to the uncertainty of their possible recovery. In the years forward, we'll try to improve this. I know the question will come, that we are shifting to, let's say, for a 50% tax rate in 3 years from now because we still have -- we'll have the start-up costs of the new plants in the coming years. And as I said, until they become profitable, we are not going to book deferred tax assets. Minority interest, comparable to the previous year. So all in all, after the write-downs, which we mentioned before, the net income of operating activities is a loss of EUR 0.8 million, which fortunately is more than offset by the profit coming from the disposal of the Fraize plant, which was a EUR 4 million net profit. So all in all, a EUR 3.2 million net income for the group. If we move to Slide 14, the free cash flow. As discussed in previous meetings, in '18 and '19, we had some one-offs. In '18, in terms of cash, recall the acquisition of the 30% minority share of our Italian -- Indian subsidiary. In 2018, we cashed EUR 5.1 million from the settlement of our Dayco claim, of which we paid EUR 1.8 million in 2019. And in terms of cash, once the Fraize plant disposal is netted EUR 4 million in net result in cash, this brought EUR 7.2 million of fresh cash. Going down the tab, working cap saw minus EUR 2.1 million versus EUR 5.9 million in previous year. We must highlight that we have been certainly collecting some receivables. But a lot of carmakers probably are struggling with their cash and certainly are deferring payments. So we have more deferred payments than in the previous year, and this is something we'll be working on in 2020 in order to make it right. In terms of tangible CapEx, EUR 60 million versus EUR 58 million in the previous year, of which EUR 9.5 million for the new plants. The new plant is mainly Romania. Romania accounts for roughly EUR 8 million of that amount, and this will keep on in 2020 because in 2020, we're still going to have around EUR 30 million of CapEx from Romania. Intangible and IFRS 15. IFRS 15, I'll remind you, tooling. So less intangible and tooling by EUR 7 million than in the previous year. So all in all, net free cash flow without IFRS 16 of EUR 9.3 million versus EUR 3 million in the previous year. IFRS 16, I'll just remind you, is the booking of the debt and cost regarding the leasing arrangements we committed to. So to get a more constant view, taking out the one-offs, which started with us to say the acquisition of the Indian subsidiary, the Dayco claims and the windfall coming from the disposal of our plant in Fraize, the free cash flow for the year stands at EUR 3.9 million versus EUR 14.2 million a year before, as a result of which the net financial position, without IFRS 16 again, stands at EUR 256 million versus EUR 260 million a year before. Factoring from [indiscernible] is below the target, so you can make your calculation. And you will see that we have not pushed on factoring because factoring increased at EUR 94 million end 2019 versus it was EUR 5 million higher the year before. If we move to Slide 15, I suppose we don't have time to comment with you. As such, we made a press release. As you know, in December, we completed a private placement of EUR 75 million, which was a nonconvertible bond. The bond is unsecured, it has a fixed coupon of 3%, and it will mature in November '25. The purpose of the bond was to extend the maturity of our debt, something we are working on. So we are safe until 2021 and now working on extending the line beyond 2021 in order to secure the long-term financing of the group.

Thank you very much, Yann. And now we go to the future. So if you go to Slide 17, we talk a little bit about market evolution. In this slide, we reported the last IHS forecast of February, of this month. As you can see, probably due to the coronavirus in place in this period of time, which is affecting mainly China, you see China dropping in Q1 roughly 28% and Europe with a minus 6% on Q1, too. The forecasts are considering this Q1 as 1 difficult quarter then to be recovered in the other 3 because globally in the year is forecasted at minus 2%, as you see in the slide. If you move to the next slide, which is 18, you can see how Sogefi is covering the map with the revenues. And this will be also important later on in case of questions that we get for sure. Europe for Sogefi is representing really 60% of the sales, strong positioning in the area, while, as you see, the car production is only accounted for 24%. In North America, Sogefi is at plan. In Asia Pacific, there is a total amount of 20%, but if we talk about China, Sogefi now is covering 5% of the revenue on China. South America is a good market for the company. We are at 11% against car production at 4%. It's the first time I think we show you or we give you some information about Romania, which is in Slide 19. It's a new plant, as we said before, is under ramping-up phase, will be a plant covering Suspension business. It's very key for the future because of cost. There is a timing which is considering start-up production to be considered in 2021 with some impairment steps. We got important orders from German premium OEMs to ramp up the plant. And in the plant, that project is important not only because of the location and the cost but also because of the size because we are talking about 30,000 square meters, and the plant capacity is to be roughly 250 people working at full capacity. So now a quick outlook on the 2020 year. As we have seen from the slide before, in Europe, which is very key for Sogefi, there will be the decline, which is in the range of 1.4%. And forecast is the first quarter will be a little bit more challenging, as we have said before, by the way, not only in Europe but mainly in China. It is also true that the 5% we have in China is not putting Sogefi under a very huge risk in this moment of time. On the contract portfolio, we expect to be on sales substantially in line with 2019 and going on with the performance which will be slightly better than the market. On the profitability side, we want to continue protecting the profitability in Europe, as you have seen from the previous slides, which is the major market for us. Suspension business will be key in this respect in Europe to recover and to improve profitability. But we are also forecasting a good recovery, of course, in North America, mainly thanks to their including the business where we don't have very key customer contracts. As I said, because I covered in the previous slide, Romania is going to continue the ramping up during the year, we have to calculate that Romania is going to start contributing to the business from 2022. And of course, we have to close this presentation saying, mainly these days, that coronavirus for the time being is not considered even if, as I said, our portion of sales on China at the moment are in the range of 5%, so I'm not very critical in this respect. I am at the end of the presentation. So now I will be glad to reply to questions with the help of Yann and Stefano.

[Operator Instructions] The first question is from Monica Bosio with Banca IMI.

The first one is on the guidance on the revenue that should be flat or a little above the market. But I'm just wondering if you can better qualify the assumption that you have behind the markets. What do you mean that total global car production is likely declining? To me, it seems that the main provider, IHS, are calling for minus of 0.5%, minus 1%, but the perception is that at the end of the year, given also the coronavirus, the car production might be much worse than this. And also for Europe, you are calling for a minus 1.4%. I'm just wondering if this guidance is including the coronavirus or not or if you do not believe that this guidance in terms of car production might reveal too optimistic. The second question is on the profitability side. You have improved in the last quarter of the year. You have told us that you are going to defend the margins in Europe, the recovery in North America. At the end of the day, can you give us an indication -- a rough indication of profitability by year-end just to quantify? And if you can quantify the potential ramp-up costs related to Morocco and Romania, should we expect further ramp-up costs that could depress the profitability by year-end?

Yes. So if I reply to the 2 questions, first of all, I'll start with the first one, which is around the volumes. As I said, we are not covering coronavirus at the moment in the numbers. Why? Because first of all, the evolution of this very key element is unfortunately in front of us, and it's very difficult to predict really the proliferation of the event and the footprint affected. But second is because Sogefi on the Chinese side and so on, I talked about the local-to-local.

Yes, I know that.

But we have only 2 plants, and the revenues are quite limited. Today, the 2 plants are, by the way, opened. We don't have all the workers inside, but we have, as today, more than 50% of the workers already in place. So up to now, let me say, there will be some impact that would be [ altering in the present ]. On the overall economy and the overall market, it is clear that the visibility we have today due to the coronavirus is very limited. But on the other side, the portfolio of the orders and customers we have for 2020 is quite safe. And with these numbers, we have also protected a little bit with some efficiencies planned and a possible reduction of volumes, which would be reasonable hopefully and not out of the, let me say, range. About profitability, we are planning to continue or to protect the profitability we have in Europe because it's the core market for Sogefi. So again, without covering coronavirus, we expect to slightly improve the profitability company level with respect to 2019.

Slight improvement?

Yes. Then you asked 2 new plants, which are Romania and Morocco. So, Yann, you can add a couple of points.

So Morocco business plant, we have in some slides, you might forecast, refer to them first and find them.

I'm sorry, but I can't hear you well.

Okay. Morocco was a loss of EUR 6.5 million in 2019 and Romania, EUR 1 million. So all together, EUR 7.5 million of start-up costs. Whilst in 2018, we only have Morocco had a loss of EUR 2.7 million. Hence, the EUR 4.8 million total computation, which was mentioned by slide -- Mauro in the bridge we presented to you. And next year, Romania should weigh more because of the importance of pace. And so the EBIT we are suggesting should be in the region of EUR 4 million for next year.

EUR 5 million or EUR 4 million?

EUR 4 million.

Okay. Sorry, but the line is really disturbed. Just a quick follow-up. So you are not including coronavirus, but I'm just -- I'm just asking if your assumption on the global car production are not including the coronavirus as well. Is it correct? The minus 1.4% in Europe is not including the coronavirus. Is it correct?

If you refer to Slide 17.

No, to Slide 20. To the first bullet in the 2020 outlook. So the sector sources are expecting 2020 global car production to decline slightly, with Europe at minus 1.4%. This guidance from sector services are not including the coronavirus impact on the automotive sector?

No, it's not an impact.

No.

The next question is from Martino de Ambroggi with Equita.

Mr. Fenzi, you arrived a few months ago. So 3 general questions instead of being specific on the results. The first is on the restructuring activity because for several years, so every year, had EUR 10 million, EUR 12 million of restructuring costs. Are you planning to accelerate this kind of activity or will we continue to see, every year, some initiative, maybe with the same magnitude? The second is PSA, PS -- FCA are going to be merged, well known, but this will generate a client with more than 20% of your sales. So what is your feeling on what's happening, knowing that they want to put pressure on prices for all what is purchasing for them? And the third, you have 3 different businesses. In the past, there were rumors. I'm not asking you if in your mandate, there is the possibility to show the mandatory -- the obligation to sell something or making merger. But what is your idea on the potential M&A?

So let me say that first of all, I asked to the shareholder to have a period of 2, 3 months, really from today to prepare a road map for the future because I just started, and we have to be fast, but we have also to be professional. And to be honest, learning from the company how it works and how the market is growing. Even if the market I know pretty well because I was working in the same market before. About restructuring, I will define about the plan or a different plan in this coming period. So we'll be more precise in the next time we talk. On the FCA-PSA question, I have to be very careful because I come from FCA until 2 months ago. I was really within the group. The first check has been suggested, by the way, on this respect, it seems to be very positive because we are covering on both sides, a good market share. And I think the product portfolio harmonization without Sogefi from this standpoint, to be a better supplier for the joint group. Of course, the pressure on prices will come and we need to react. But from the portfolio standpoint, I see Sogefi well placed in this game. About the 3 different business units. Again, I have to apologize for the reply, but I will take the coming months to understand and to take some actions or to prepare a better plan. What is very key for me, for the time being, is to improve the value of the company because this is very urgent. And for me, it is the first priority I have, including cash. The 3 business units are improving in some areas of the profitability. And I think I have to be sure that this road map is really covered -- is covering all the geographical areas and is covering, I would say, the scenario we have just discussed. But again, my first task is to make Sogefi, I would say, to be more value to the shareholders and to improve profitability.

Okay. Two quantitative questions for Yann. Sorry, but I missed your indication of tax rate. Was it 50% for this year and going forward because of the start-up costs? Or I missed something?

So I know it's a question of great interest to the analysts. We have not been good in previous years because we have a very high tax rate, which is up to 6% in 2019. We are going to keep on having start-up costs in the new plant, especially in Romania. So as I explained before, until Romania gets on breakeven, we are not going to accrue different tax effects. So that's the reason why the tax rate will remain higher than rubles. We also have areas in less. And I'm not going to hide, Latin America is struggling at present. And this is going to keep going for a while until this exits. And therefore, what we are shipping for is the tax rate roughly of 50% in 2021. So there should be an improvement in 2020. We are shipping for roughly 50% in 2021. And then if the plan happens as we have made it, we should reach something in the region of 30% in the following year.

Okay. And just your target in terms of financial costs?

Target in terms of financial costs is to keep on reducing them. The main items to reducing would be to restart generating cash in the coming years.

The next question is from Alexandre Raverdy with Kepler Cheuvreux.