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 First Half 2020 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.

Welcome, and we are here today to talk about the Sogefi first year results. And then according to the agenda, we are going to give you an update on the COVID situation, and then last couple of slides on the perspective 2020. So going directly to Page #3 of the presentation. We go through the highlights of this semester, starting with the revenue. So the volumes overall at Sogefi have been reduced 33.2% on a reported basis, which is equivalent to minus 31.2% at constant exchange rate. You will see later during the presentation that we outperformed the -- in most regions of the market, and I will go through it later on. In the second quarter, which has been a very challenging quarter, Sogefi has been 55.7% down versus 65.5% of the market. Again, a good trend in volumes also in the second quarter, even if the reduced amount is quite important. Going to the EBITDA level, the EBITDA has been EUR 43 million.

EUR 47 million.

EUR 47 million, sorry, equivalent to 9.1% of sales versus 11.1% of the previous year, so a 2% reduction. The reduction has been achieved, thanks to a very effective action on the gross fixed cost, which amounted to EUR 38.8 million versus the same semester of 2019. Now in quarter 1 -- in quarter 2, we have to highlight that the action -- the cost actions are really becoming very effective because in the second quarter, we did EUR 32 million reduction versus EUR 6.8 million in quarter 1. In the same period, we had EUR 7.3 million restructuring costs, higher than last year. Last year has been EUR 4.4 million. And we included EUR 4 million of adverse exchange impacts mainly in North and South America. At EBIT level, we reached minus EUR 18.8 million. We have to remember that in this first semester, we had the write-down amount equivalent to EUR 6.5 million versus EUR 1.9 million of the previous year. The net income has been minus EUR 28.8 million. And on the free cash flow, we have to say that the free cash flow was EUR 70.8 negative million versus minus EUR 3.3 million in the same period of last year. The net debt reached EUR 327 million versus EUR 256.2 million end of 2019, but all the numbers we are going to go through them in the coming slides. So before we highlight the costs on Slide #4, we started in the beginning of March, an emergency plan in order to minimize cash and reduce cost, and the results are according to the action plan we did. On the variable cost, the reduction is in line with the new volumes, and this has been very useful to minimize the impact of manufacture inefficiencies in a very unstable context. The gross fixed costs have been reduced on the semester 27% versus 2019. But we need to highlight that on the second quarter, the reduction with respect to the previous year is 45%, so quite important. Also the investments have been reduced according to the period by 24% compared to 2019. In this reduction, we protected, with a lot of attention, investments on new products and very important ramp up of the new Romanian plant, which is supporting Romanian production. Going to the Slide #5, we see the revenues by geographical area with the performances in most of the regions. As I said, if you see the performance versus market column, Sogefi has been able to be more positive than the market in all the regions. We have to keep in mind anyhow that the mix, the geographical mix on which Sogefi is acting is a little bit less favorable in the overall amount because you remember that I told you that at the full year -- sorry, the first semester, we were around 33% because the China contribution, which is very positive today, is not, in volumes, strong enough to give at sort of the mix level, the right contribution. Going to the next slide, which is showing the businesses unit performances. I would like to highlight that overall revenue is 31.2% at constant exchange rate, as we said. The 3 business units were: Air & Cooling at 29.1% reduction, Filtration 25.7% and Suspensions 38.2%. I have to make a couple of comments on these numbers. Filtration has been better than the others because in the aftermarket business, we have been able to do more volumes. On the other side, if I can comment the best and the worst, Suspensions suffered a little bit more for 2 reasons: one is because they are acting more on countries where the reduction has been unfortunately more important; and then the second is because the stopping period during the lockdown, initial days, has been, unfortunately, longer for Suspensions than for engine components. Going to Slide #7, we see the clients slide. Again, on this slide, I would like to highlight your attention on Daimler and BMW because in the premium German customer arena, so that we improved the sales pretty well on both sides. And this is very key for us because we have many new jobs coming, including the [ newer or better plants ], which are coming from these 2 customers. Go to the next slide, which is Slide #8. We see the EBIT breakdown performance. We lost on the sales volumes, EUR 81.1 million. Half of it, more or less, EUR 38.8 million has been recovered working on fixed cost reduction. There's a slight improvement on the efficiency on variable costs, which is a good sign because even if we were working in a very challenging period, we stop and go. And with very low production rates, we have been able to protect the profitability. And then we had a slightly higher restructuring cost because we started working on costs -- personnel costs where possible. And then we have also a contribution coming from Morocco, mainly, so the new plant, which is under production now for Filtration, because volumes were slightly above the expectation. So going now to the business unit one by one. I would like to start on Slide #9, which is Suspensions. We already talked about the sales volumes on Suspensions, which are down 40.9%. And then as I said, it's been affected by the higher presence in areas where the reduction has been more important like Europe and in the most difficult markets like South America and India. On the other side, I have to highlight that even if the volumes are not important, very high, we had a very good performance in China with plus 22.6% in Q2 because of the new projects launched in the same period of time on this country. At the profitability level, on the right of the slide, we unfortunately have been affected by lower volumes. On the other side, we had a benefit from the material costs, which have been lower. We are talking mainly about [ steel ] in this case. We included, of course, the costs of the new Romania plant, which has been protected, as I said, in order to keep timing and complete the commissioning phase in time of this new development. We had a EUR 15.6 million fixed cost reduction amount, which has been key to minimize the decrease. And last but not least, we have an EBIT margin around 4.7% negative, reflecting higher independence -- incidence of depreciation. Going to Filtration, turning to Slide #10. The revenues are down 28.1% at current exchange rate. Aftermarket has been key like the Morocco new plant revenues, which has been, as I said, better than forecasted. These have been balanced, unfortunately, by the decline in the 2 difficult -- most difficult countries like South America and India. On the profitability level, which is on the right, we had, of course, as I said, a negative impact again for the most critical countries like South America and India. And then we reduced also here a fixed cost of a key amount, which is EUR 13.2 million. These numbers are also including the negative effect of the exchange rate in Brazil equivalent to EUR 2.6 million. Last but not least, we go to Air & Cooling. Air & Cooling performed better because even if the decrease was in the range on the sales of 29.3%, with a decline in mainly Europe and North America, we had a higher EBITDA in Europe and China, balancing the decrease in volumes partially. And then the fixed cost reduction has been of roughly EUR 7 million. Again, China, like what you have seen before in Suspension business, has been able to grow pretty well even in a difficult period like this first semester because we had many key start-up production with new customers. Now I would like to ask Yann Albrand to go to the next slide, which is Slide #12.

Thank you, Mauro. You have on the left-hand side of the channel, Q1 and Q2 in 2020. And you can see that Q2 in terms of sales is not even half of Q1. As explained, the main reason and most important message is that we have been able to flexibilize the variable costs, which is not an easy thing. As you know, the nightmare in industry is when we have to restart the plant. And as you know, we need to outspend this and announce the variable costs, which is not easy to adapt to your level of activity, which takes some time to stabilize. And as you can see in Q1 and Q2, we roughly remain at 70% of cost of sales and variable costs, which is the level we have roughly in H1 2019 with a full volume. So that goes not so easily and was key in delivering the overall results that may be less bad than they could have been. The second significant item, which Mauro referred to, is gross fixed cost reduction. In Q1, we have tried to reduce fixed costs by EUR 6.8 million versus prior year. In Q2, $32 million. What happened? We, at once, used all the schemes, which were in place in the countries in which we operate. There are not always such schemes in countries such as India, Algeria, Latin America and Argentina. When we close plants, we still have to pay the costs. In Italy, we use [Foreign Language]; in France, [Foreign Language]. So we took advantage of these schemes to sharply reduce the gross fixed costs, which allowed us to mitigate part of the adverse volume impact. Below EBITDA, a significant item, which are the write-downs. We paid the full exercise end of June, usually reduce the full month fee at the end of the year. So we have repaid impairment tax with the assumption of reduced volumes, which as you will see that trend, we assume will be lower than [indiscernible]. The impact of this cleanup is on H1, a cost of EUR 6.4 million, of which EUR 5.5 million in Q2, but we estimate that only EUR 1.8 million is directly linked to COVID-19. Below EBIT, financial results end of H1 is in line with prior year. For the ones that probably will have question on the tax rate, we have a positive tax rate, happy to say. We were cautious in assessing what we might recover in future years, and we booked a EUR 1 million deferred tax effect instead of tax charges as in previous years. The last but one line refers to discontinued operations. So it's a difference with prior year. As you know, we mentioned this in prior calls, it's sort of linked to disposal of our plant in 2019. If I now move to Slide 13, free cash flow. Mauro mentioned, we had a significant negative free cash flow of EUR 70.8 million in H1, most of which in Q2. Of course, it links to less activity, but the big impact is linked to working cap. Working cap, as you can see, we have a negative impact of EUR 54 million. What happened? We reduced inventory, but actually, we received less money from our clients than we have to pay to our suppliers, and this makes the bulk of the cash drain in the second quarter of 2020. This is [ entirely just linked ] to the amount of [ factoring ], which you can see at the end of Q2, is at EUR 57.6 million. Usually, we are between EUR 95 million and EUR 100 million plus. We have less sales. So we could sell less to the sector, and therefore, we had a negative impact in Q2. To mitigate this cash drain, we reduced our investments. You don't see it here because we usually do not communicate on budget, but in the first half of the year, we shaved EUR 20 million of tangible investments versus what we have assumed in our budget. And we plan to keep that reduction on a full year basis. So all in all, it is a significant cash drain, EUR 70.8 million of negative free cash flow. But the net -- the cash drain has been contained mainly through good actions on working cap. We have cash, a lot of late payments from our clients and from CapEx containment. If I now move to the cash situation. End of June 2020, the group has financing in excess of its needs in excess of EUR 194 million. When we do our full year projections, we believe the excess at year-end should be similar to the amount I just mentioned. In second half of the year, we have no debt repayments, so in terms of liquidity, no big issue until year-end. The key point is that despite sales when the crisis started and no one knew how it would evolve, all bank covenants were quantitatively met as of June 2020. Nonetheless, considering the uncertainty of markets, we have decided to engage with our standard business partners. So the banks of our pool are working with us at present. We are looking for state-backed financing, both in France and Italy. In Italy, France, people can maybe ask for such loans. In France, we have a similar scheme, which is supported by the French state with the guarantee of [Foreign Language], and we are well advanced in these discussions. And we plan to find around EUR 100 million of medium-term financing, and with a medium term, it's 6 years loan.

That's it, Yann. Thank you, Yann. And we go now to Slide 16, which is the slide following the COVID update and the status area by area. Let's start, as usual, from the most important point, which is the safety of our workforce and employees. We are continuing protecting the people with the safety processes all over the world. We have a lot of travel limitations with quarantine imposed by the people coming from risky zones. Risky zones, as you know, are changing quarantine time, but the processes are staying in place to protect the people. In most of the countries, we have the smart working approach running at a very good level, and we are implementing -- we implemented already the safety means in the offices, in the plant according to the local authorities and our processes. In the lockdown phase, we did a major effort to reshape the production processes plant by plant, as well as location by location, in order to implement the safety rules and to keep the people safe. We started also a couple of months ago to manufacture internally safety masks. In order to have them available now in the plant without risking not to have these very key devices. The good news we have is that today, all the plants in the world are opened with different levels of volumes. In the coming slides, we are going to talk a little bit more about the volumes. China, as I said before, is really running speed at the moment in all the business units. About the actions implemented, probably you remember, during the last call we did at the end of the first quarter, I told you that the Sogefi management was very keen and ready to implement all the actions to manage cash out and cost. I think we did, I believe, the best in this area because we used all the local rules, like Yann said before, to minimize the personnel costs. And we have been able to control and to minimize pretty well investments all over the world without affecting new products and the new development of plants. So we protected the future of the company. About the volumes, so we have a region by region, there is a qualitative Slide in Page 17, where you see that all the plants, as I said, are open. You see where we are using government incentives as usual and where we are using union agreements, suggested in quite efficient encounters where we had no government incentives to make special agreements with the unions in order to protect costs in the lockdown and the reduced volumes period. About the volumes, we have China really running speed there, as you see from the slide. Since we are talking about Asia, unfortunately, India is running, but with limited volumes at the moment. The COVID situation in India, unfortunately, is not resolved and is quite heavy. In Europe, we restarted plants everywhere with a good trend. The volumes are recovering. There is a gradual recovery in the different countries. And then going to North America, the recurring volumes is pretty faster in all the plants. You know that we have plants in Canada, U.S. and Mexico, serving the local customers. In South America, unfortunately, the situation is less positive because both in Brazil and in Argentina, we are currently running, but with limited volumes, maybe in Brazil because there the situation is, again, not solved and quite critical too. So now we jump to the future. The visibility, of course, on the future is not at the moment exciting. So I would like to start from what IHS is saying in Slide #19. You see the different quarters in this slide with the full year forecast on the right side of the slide. As you see, IHS is today saying that there will be a reduction full year in the range of 22%, which is a net reduction. And the area-by-area numbers are -- we have 25% less in Europe, slightly better in North America. South America, unfortunately, as we said before, is the most affected one with minus 32.3%. While in Asia, we have minus 16.1%, of which China is today the best forecast because it is showing a minus 12.8%. This has been the input for us in order, and we go maybe to the last slide, which is Slide #20, to prepare the company to the difficult period, which is now going to start second year half. So for the second year half, you have seen that IHS on the second year half is forecasting a minus 10%. But if you look at the forecast from other market analysts, they had a range which is more between 15% negative and 30%. We have decided on this side, on the second half of the year, to consider a very conservative scenario, which is minus 20% because we have to prepare -- want to prepare the company for the coming years in the best shape possible in order to return to the positive EBIT as fast as possible. And we are expecting to achieve a slightly positive EBITDA, excluding restructuring cost, and the significant lower reduction in the net loss versus H1 2020 and the slightly positive cash flow in the second year half. In this very low visible market for the coming years, we have also launched a very strong plan for the reduction of the fixed cost. The plan has a time span, span from today until end of H1 2021, and will take all the actions feasible to reduce the breakeven of the company in order to be prepared for the coming difficult period. The last couple of points are relevant to financial resources. We have to highlight that end of June 2020, we have enough financial resources in an excess to our current need. In this situation and this market, we are -- and considering also that we have to keep in mind the natural expiration of existing loans, we started a couple of months ago negotiating with our current financial partners to renew loans and to enter into a new leasing term loans for a total value of around EUR 100 million to protect debt of the company. So this to give you a very high-level outlook of 2020. These are last lines of our presentation. Now I think we would like to give you the time to go through some questions. We are ready to start. Thank you.

[Operator Instructions] First question is from Monica Bosio with Intesa Sanpaolo.

I have 3 questions. The first one is on the trend for the second half. You decided to be conservative. You are accounting a minus 20% in the reference market for the second half. I was wondering, did you expect to perform in line with the market or maybe to perform a little better or a little bit worse? Just a flavor on this. And if you can give us some update, if it's possible, on the trend of the revenues in June and maybe in July, if you have, just to check the exit from the first half. And the second question is on the cost reduction. You did a very good job on this side. Can you quantify the expected cost reduction for the second half? And can you give us an idea of the restructuring costs for the full year? I have -- I imagine that on top of the restructuring costs, we have also to add some ForEx losses. So just a flavor, an indication, and if you can quantify the cash impact of the restructuring costs?

So Mauro Fenzi speaking. I'm going to reply to the first question, and then I leave Yann the pass to go to the second. So the first question is on the trend on the second year half. No, we expect, Monica, to perform slightly better also in the second half, to be honest, because we did in the third quarter -- in the second quarter, as you have seen, I think, a good trend that we desire to continue also in the second year half. Then I'll leave you, Yann, the pass to go through the cost reduction second half and restructuring costs.

If I may, and I hope I'm not going to create confusion on the question on the trends of revenues of this market. I wanted to go back to what Mauro explained before. It is strange when we look at Sogefi revenues from the first half to see that, roughly speaking, revenues of Sogefi are totally in line unless there is with rough market sales. And then what we presented to you, we said, we vastly outperformed the market in the first half, okay? It is a mix impact, Monica. As you can see, we roughly are 10% higher in most of the regions. So answering to your question, globally, that it is slightly, I mean, less because it leads to the relative weight of Europe, which is very important for Sogefi, as you know, it's roughly 60% of our revenue. And to the relative rate of China, which is great for Sogefi, and which is new market -- negative trend of gross market in the first half. And what happened in the first half, probably, will be the same in the second half. China had a strong recovery. The market is still growing. We are outperforming the market, but it has a small impact on our revenues because China accounts now roughly 5% of our revenue. So it is -- just to say, it's -- these are numbers, which we look up for restructuring.

By the way, Yann, I'm sorry, just a second because I owe that line to Monica. Monica, you asked before part of the first question, how much -- how is the market in the coming days. You asked about June and July. But it's very different region by region, but if I consider June, of course, according to what Yann said, in China, we were outperforming the market pretty well because we were at the same level of budget in China. But unfortunately, volumes, we do -- are not on the global amount, very important, but it's very positive, we grow. The second -- in the other regions, the June results have been between, I would say, minus 20%, minus 30% according to the different regions.

And overall, in June, we did minus 25% versus prior year to be compared with the global assumption we have taken for the second half, which is at minus 20%. So in terms of cost reduction. Cost reduction should be lower in the second half because we expect a recovery of volumes. And we see to have multiple improvements. Nonetheless, we expect to keep on reducing fixed costs via optimization of the existing schemes, which we have used so far, and which keep on being usable in most European countries. And also because we start seeing the first impact of our structural cost reduction. So all in all, we plan to have a further cost reduction in the second half that might produce something in the region of EUR 420 million reduction of the fixed costs. In terms of restructuring, Monica, you saw that we already booked EUR 7 million in the first half. We are planning to book a far larger amount in the second half. On a full year basis, we plan for the moment to have an exceptional charge of EUR 24 million for the year.

EUR 24 million?

EUR 24 million, of which EUR 7 million in the first half. Your last question, if I'm not mistaken, was on ForEx. ForEx, we believe was tackled in the first half. A lot of our foreign exposure was linked to Latin America. And when we saw the adverse impact, we hedged the contract, and therefore, we believe we should have further lower exposure to our first ForEx in the second half.

Your next question is from Martino De Ambroggi with Equita.

One more question on the cost side. You mentioned fixed cost down EUR 30 million in Q2. But I understand it's not entirely structural. So how much of this EUR 30-plus million will remain going forward? Because something is linked to the temporary ray of programs and so on. So would you -- they will come back as soon as the volumes will go up. This is the first question.

So Martino, thank you for the question. They, as you said, most of the actions taken during the last month have been driven by -- on the personnel cost, I mean, by the implementation of the local agreed rules or with the government or with the local unions. These are rules that are temporary because, as you know, our lasting according to the union agreement. We took last in the what is applicable to the countries rules that are changing, by the way, every week according to the COVID, let me say, development. So we are, let me say, most of the amount you have seen is temporary, let me say, amount that we had using the cost reduction tools we have in place for COVID. Plus, of course, we also reduced, as we said, other cost areas. Of course, we kept if we need to figure the external agent employees and workers, but most of these costs are really relevant to the temporary situation. Yann, do you want to add something?

Yes. If I may, Martino, in the first half, the cost -- regards to cost -- fixed cost reduction versus 2019 was EUR 38.8 million, of which EUR 32 million in Q2. After a certain amount of cause in shifting line, EUR 28 million are personnel related, which means there is another roughly EUR 11 million, which is non-personnel related. To rebound on what Mauro said, in Q2, most of the savings, let's say, are temporary. Let's just say, we reacted fast in order to reduce costs. So a limited amount is structural, and as we go in the second half of the year, a lot more of our actions will be more structural. Just to say, we do expect to have short- to medium-term reduced volumes. As you have seen, our assumptions for H2 is a reduction of 20% of volumes. We don't expect that volumes will pick up in 2021. When we look to the future, we see, if I go down the road, 2025, we still see less volumes in Europe, down roughly 15% versus the pre-COVID situation. And in NAFTA, which is our second region, we see that we not go back to quicker these volumes currently in 2022, 2023. So that's why what we are preparing right now is to lower the present income of the company because we don't think that growth volumes will reappear instantly. And therefore, in the coming months, our cost reduction efforts will be more structure driven.

And then last but not least, I want to add one point, Martino. I was mainly referring to Europe where we had the social tools and the government rules. But to be honest, when we talk about South and North America, the situation, as you know, is quite different. And we took already some actions to lower structurally the cost because, for example, in Brazil, we took the opportunity to reduce the personnel future cost in, let me say, quite key amount in the last quarter. So it's a mix between country and country where we didn't have the social government tools. So we acted already a little bit in advance to lower cost structurally.

Yes. And could you quantify what is the final target in terms of cost cutting measures? And what is the time frame, just very roughly?

The time frame, as I said during the presentation, we have a plan which is ending with a more important phase, the core phase, at the end of the first semester of 2021. About the amount, as we discussed, we are trying to target a reduction compatible with the market reduction of 15%, 20%.