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 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Frédéric Sipahi, CEO of Sogefi. Please go ahead, sir.

Thank you. Hello, ladies and gentlemen, and thank you for joining this call. I'd like to start with a quick summary of the first semester. It has been clearly a quite good semester and also second quarter from activity and volume point of view. The automotive market continued to perform quite well, even if still below levels of 2019. As you may have seen in our presentation, we had a strong growth in all geographical areas and also each business lines. We have been able to preserve [all] our margins despite energy prices and inflationary tensions on some commodities. We have also continued to scale on our fixed costs. And at the end, the EBIT is improving both in absolute value and in percentage and in all business units. As you received the presentation in advance, I propose we move to question and answers.

[Operator Instructions] The first question is from Monica Bosio of Intesa Sanpaolo.

I have 2. The first one is on the pricing. According to my calculations, in the second quarter, Sogefi benefited both from positive volumes something in the range of plus 11, if I'm not wrong and [indiscernible] positive pricing. The target for the full year is at mid-single-digit revenue growth. So this would imply more or less a flat second half. I was wondering if you can give us some flavor on the pricing trend and the volumes trend in the second half because it seems that volumes will not grow any longer. And also the pricing might [be] go to 0. So maybe I'm wrong. And in any case, outside from 2023. I would like you share your view on the pricing trend in -- from 2024? And my second question is on the e-mobility quotations in -- or including I've seen that it's still quite high, but there is a decrease in comparison with the first quarter in terms of new awards or new quotations in e-mobility in air and cooling? Just a flavor on this.

Thank you, Monica, for your questions. So yes, your assumption on the split between volume and pricing is right for the first semester. For the second semester, I have been quite, let's say, conservative on the volume trend. Of course, on the pricing trend, I don't intend to reduce the strong discipline that we have for the last 18, 24 months. So no price decrease in the second part of the year. We even consider to continue with some customers on the pricing. But on the volume, I have been very conservative for the second part of the year. In China, we -- EHS is forecasting a market decreasing versus last year, if I remember well, by around 5%. In North America, I have been conservative too because there will be the salary negotiation for the 3 major OEMs in the second part of the year. and it happens each 3 years, and usually, you can have a market impact on that one. And in Europe, I prefer to be conservative again considering a flat market versus semester 2 of 2022 to continue to do my homework on the fixed cost. And if there are good news from a volume point of view, then it will be good news from an EBIT point of view. So for the last 3 years, each time I'm in front of you, I am very conservative on the forecasted trend of volumes in order to be able to continue to do the job on our cost structure, but also because it happened a few years ago, you remember everybody felt that volumes will continue to increase after '19. We had the COVID and at the end, we had not recovered that we had compared to '19 levels. So I prefer to be always conservative on the volumes. Concerning your question on the pricing discipline for '24, it's a little early. We are [out] of '23 and -- no, but your point is fair. It has been -- it has not been easier to do this repricing for the last 24 months. So without knowing what's going to happen next year on raw material and energy for sure, it will be key for us to keep this discipline on the pricing and to not reduce [our selling] prices except, of course, if there is a big, big, big decrease on the material prices next year. So it's a bit too early to speak about '24, but we will our discipline of pricing for next year's also.

So it seems a quite constructive approach. So this means that in 2024, like the raw materials drop in a very strong way. The company is keen to keep discipline in the pricing approach. This means that pricing will not deteriorate. Is it right?

Absolutely. This is our aim. Now there is a big pressure, of course, from our customers because themselves -- they have a strong pressure from the market and Tesla or other newcomers that are pushing the prices. But on our side, this is my way of managing, we want to keep a strong discipline on the pricing. Why? Because for no OEMs, they all have strong results, and we are happy, of course, for them. on all side, we have good profitability. But as you mentioned in your last part of your last question, we also have investments to perform and the transition to continue on the e-mobility. So de facto, it means that our current business should generate enough profitability and cash flows in order to finance this transition. Nevertheless, the way we do it with our customer, of course, sometimes it can be a tough discussion, but we have always been able to keep good relationships with our customers. and at the end, find agreements, deals in order to have the business continuity with prices that we consider are acceptable for Sogefi. So this is the discipline that we will keep in the next years. But of course, we are business man, so we follow the market prices. We check what is [indiscernible]. And then when we can absorb by productivity, we do it and when we believe it's not possible to absorb by internal productivity due to external price increases, then we have constructive discussion with our customers. On the e-mobility quotation, just to be sure, Monica, when you say it decreased. I was not sure to -- it [says] on the page 17.

Yes. I've seen that in the presentation of the first quarter in Air & Cooling, the group had 66% of the awards consisting of e-mobility [ basis ] And if I look at the presentation in the first half, maybe it's just a comparison, I don't know. This rate stands at 47%. So I'm just wondering why.

No, it's because, we have been awarded on quite big businesses on ICE application out of Europe, especially in North America. So the number of areas [indiscernible] awarded are in the pipeline for e-mobility air and cooling has not decreased, but in North America, we still see RFQs and business nomination for ICE application. I guess it may be the last generation that we are quoting right now and on which we are awarded, but we get a renewal for ICE application before Ford and GM with very big figures because de facto, it's high runners. And we also have in the pipeline business quotation again in North America, which tends to, let's say, to decrease the percentage in Air & Coolling in a conjectural way. It's not structural. I would say it comes from a good news rather than a bad news is that in North America, we see still our big customer, the 2 big ones, continuing on ICE application engines and quotation for these programs.

Okay. And [indiscernible] just a follow up, and just [indiscernible] keeping questions. I've seen that the tax rate in the second quarter was rather low, if you can give us any rough indication or confirm on the previous one for the full year.

So I'm really able to answer to all questions except tax and interest. So I'll let [indiscernible] to answer to this question, if you agree Monica.

Okay. So Yes, sure. So second quarter benefited from a one-off item for EUR 1.9 million that will be also disclosed in the interim financial report related to tax ruling in favor of Sogefi. So without this one-off, it would be around 30%, the average tax rate we expect also for the full year 30%, 32% for the full year.

The next question is from Martino de Ambroggi of Equita.

The first question is on the guidance, not the top line, but on profitably because I understand you want to be conservative, but could you qualify a little bit what do you mean for higher than last year profitability because it's clearly higher it was already shown in the first half. Maybe just thinking about the second half, if you can provide what's your current view?

I knew you would ask this question. Yes. Currently, the consensus, I believe, is at 5% EBIT, EUR 80 million. So I'm confident that I will reach -- we will reach accurate this current consensus around 5% of EBIT margin. You are right, we had a very strong start of the year. As I was mentioning before, to Monica, we will continue our discipline on the pricing with customers. We will also continue to optimize our costs, our fixed costs, we have also structural actions that will be finished and completed by the -- during the semester. So in theory, second semester should be okay, too. But right now, I think 5% of EBIT as a consensus and as a target for us is a reasonable one. I think when we will meet in October, I will be able to be more accurate.

Okay. And the second part is still on the guidance because you are guiding for top line up mid-single digit. And this was your assumption the quarter before, assuming a flattish market I understand you are cautious on volumes, but now you are assuming the market up 5% in line with IHS. So what has changed there?

No. We continue to consider a market flat from a volume point of view for the second part of the year, keeping our pricing advanced that we have for the first semester. So basically here, single digits, it could be 5.2 -- sorry, it can be 5 or it can be 7, it can be 8. So we are conservative on the forecast of the turnover for second part of the year, especially in China and also in North America, the trend was very positive in the first part of the year. But I do believe that in October, we can be also more positive than that when we will do the new consensus.

Okay. Also because if we take your 5% guidance in terms of EBITDA for the full year, it means you are assuming 3% in the second half when you got 6.4% in the first half. So frankly, if prices are holding well, volumes will be flattish okay, or maybe minus something, but raw mats are going down. So actually, it's difficult to justify your margin in the second half, which is half of what was in the first half, unless you have significant restructuring costs and probably something more than in the first half? Or maybe I'm missing something.

No, there is nothing special -- very special compared to the first semester. Well, I understand you are focusing on the guidance and it's normal. I think first step maybe should be to acknowledge the good results of the first semester. We delivered an EBIT at EUR 31.7 million, excluding nonrecurring compared to EUR 16 million last year. So yes, it has been a strong first semester. As I mentioned, we will continue with the same discipline in the second part of the year. So in [ indiscernible ] second semester may be better than what we are anticipating in our guidance. But I accept your point. But automotive remains a business full of surprises. So I don't see any bad surprise on Sogefi side, but I prefer to be very, very cautious on the market development. that is. There is nothing special expected for second semester. It's more that I want to continue to focus on reducing the cost, optimizing the margins. And you may be right. At the end, we may come at the end of the year or in October with a better consensus.

Okay. And my last question is on the filtration, focusing on the filtration profitability. In the second quarter, if I do the maths correctly, is 19% plus EBITDA. Is it sustainable or affected by nonrecurring items, maybe aftermarket trend and so on? Could you remind us in filtration what's the portion of the business related to diesel and ICE.

Sure. So yes, filtration business worldwide is roughly 1/3 aftermarket, 1/3 of OES and of 1/3 OEM. If we look in Europe, there will be much more aftermarket and OES and out of Europe, there will be more OEM. So the split of filtration [ say ] is this one. On diesel and gasoline, to be honest, I don't have the accurate figure right now. Let me look at it as soon as I can. But no, there has been no nonrecurring impact in the first semester. The only special thing about filtration compared to [indiscernible] business units. It's what -- let's say, the pricing power is a bit different. We have strong positions in Europe, and we have adapted our prices from the first of January agreeing with our customers with deals built on mutual agreement. When we have been able to have good news on the material cost, we were expecting the increase on our commodities such media and rubber. We had some, but we are fighting also to do internal productivity in order to be able to mitigate that. So is it sustainable, I would say, in '23? Yes, very difficult to [ indiscernible] for '24, '25 because I don't know what will happen with the new material trend. But I don't see reasons why it should not happen again. And on the volume, aftermarket market increase has been slight -- has been lower than on OEM for the first semester. OEM in Europe increased, if I remember well, by 20% on the number of cars. When aftermarket was more around 3% or 4% depending on the countries, but it's stable. [indiscernible] it's 3%, 3%, 3%. So filtration has really changed a lot in the last years. We have a good position with our customers. which help us to have also an adaptive pricing strategy for aftermarket customers, of course, price is important, but we have been able to have these prices also thanks to our very strong delivery results even during COVID, we basically are very close to 98%, 99% of delivery right on time, right on quantity, not with 1 minute delay delivered to our customers. And this is something very, very important for our customers. The availability is there, too. We have been needed inventories for our customers. and of course, from a quality point of view, they don't have that surprise. So when you are able to serve on time with the right product and the right quality, de facto, it helps also on the pricing in aftermarket.

The next question is from Gabriel Gambarova of Banca Akros.

The first one was just to understand if I understood well. In H2, we are assuming almost flattish prices and a positive contribution from lower raw material costs. Am I right?

So the assumption we consider in second semester is to keep the pricing that we have been able to do in the first semester and some identified and spot repricing, not linked to the material but linked to other topics with a few customers. So the incremental repricing on the second part of the year will be lower than what we have achieved in the first part, but we consider we will keep the advantage of the first semester. So this is for the pricing. And then we have been cautious on the volume assumptions. I would say very cautious which explains that at the end our forecast for the top line seems to be so low.

Okay. So sorry, I was wondering if -- I mean, you recovered 4% in terms of pricing in the first half of 2023. Year-over-year, do you expect some more carryover for H2? Is something still left in terms of year-over-year growth in terms of pricing.

Versus second semester of '22?

Yes.

Yes, versus second semester '22, there will be de facto to positive pricing effect. First, thanks to what we achieved in the first semester and second, due to the remaining negotiation of second semester '23.

Okay. And another question. In terms of fixed costs, do you have a target of reduction for H2 in mind?

In H2, what will happen, you remember, we are in the process of closing 1 factory in U.K. So the closure will be finalized by end of August, so in 1 month. So we will have some benefit in the last part of the year, thanks to the closure of this factory, plus we have done actions in the first semester in France in Suspension business unit which will have a positive impact in the second part of the year. So we have done the homework in Europe in the first half of the year. in order to be able to generate already savings in the second part of the year and in order to be able to absorb the inflation on [other] cost or on salary costs.

Okay. And can you spend a quantitative indication for these savings more or less.

Full year, the global -- these actions are roughly $4 million, I would say, on a full year basis. So let's say, EUR 2 million this year, it is acceptable to anticipate it. EUR 2 million this year and EUR 4 million on a full year basis. But in the other end, as I was mentioning, we are facing some increase on other fixed costs, such maintenance costs and so on. I don't know if it will reduce. But in the first semester, we have seen some increase on our maintenance cost, not because we are more -- we had more breakdown, but really linked to the unit price of the spare parts. So on second part of the year, we were really focused in order to do also savings on these parts, which has been really impacted a lot by the inflationary trend.

Okay. Okay. And regarding the suspension business, I saw that there was a interesting recovery in terms of margins. Can you elaborate a little bit more on this? I mean there was -- in Q2, I think the margin was -- sorry, in H1, it was around 6.6% versus 5.4%. So I was wondering if this is going to keep on improving? And what would be the perspective [indiscernible] for 2024 possible.

Yes. Clearly, I will not say, of course, that filtration and Air & Coolling bridge with maximum, but I would say that the room to improve the profitability of the 2 other business lines is becoming a bit more tight. But in suspension, clearly, we have to continue to improve the EBITDA, the EBIT and the profitability of this business line. We have started to change that trend. So we improved by 1 point in 1 year. And for sure, it's a business line, where I'm focusing really in order to improve the profitability or by discussion with the customers when needed and when we think that the right price is not paid or doing our job on the material purchase, the material -- the type of material we are purchasing and doing industrial actions to improve our material consumption and direct labor consumption or by optimizing the footprint which we are currently doing with the closure of the U.K. plant. But for sure, the 6.6%, even if it's improving versus last year cannot be the final target of suspension. And as I anticipated to end of last year, we will continue in suspension in order to improve each quarter, each quarter, each quarter. because it's a business unit where the investments remains very high, and we need to also invest in order to be able to renew our machineries. So yes, we continue on [indiscernible], and it's my absolute priority and it's short, medium and long term.

The next question is from Roland Konen of Value Holdings.

First of all, congrats to very, very good figures. I have also some questions. Maybe I would like to do them one by one. The first one is an additional question on the volume question of filtration. When we look at the whole group, we saw just a light small underperformance, just when looking at the volumes from euro growth of 9% against the market of 11%. When we split the volume growth in OEM business and aftermarket business, maybe the picture is different. Maybe you could elaborate on this topic.

Yes. Yes, it's a good question. You are totally right. Absolutely, in the first semester of '23 compared to first semester of '22, the growth on OES and aftermarket has been lower than the growth on OEM from a market point of view, especially in Europe, where the OEM market was very, very high, 20% versus last year when OES and aftermarket were more around 2% or 3%. So de facto, it has diluted our global figure for the group. The fact that in filtration, we have I would not say an [exporter], I would say, we have a portfolio where almost in Europe, 2/3 are not into the OEM.

[Operator Instructions] The next question is a follow-up from Roland Konen of Value Holdings.