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

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the Sogefi Q1 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Frédéric Sipahi of Sogefi, Chief Executive Officer. Please go ahead, sir.

Thank you, madam. Hello and thank you for joining this call. I think you all

One moment, please. We will reconnect Mr. Sipahi. [Technical Difficulty]

Sorry. I think you all received the presentation about Q1 results. So as you may have seen, we have done the job one more time. So I propose we move directly to question-and-answers. Thank you.

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

I hope you can hear me. I have 3 questions. The first one is on your performance in Europe. I've seen from the press that in Europe, in the first quarter, Sogefi revenues were down by 8.5% against a market which was down by 5.9%. I was wondering if you can elaborate a bit more on the underperformance versus the market. The second question is on the pricing outlook. How do you see the pricing evolution across the year? And should we expect some deterioration in the coming quarters? This is related also to the EBIT margin evolution. I was wondering if we can expect in the coming quarters a progression in the EBIT margin similar to the first quarter which was very sound. And the third and last question is on the factoring. What is the factoring? If you can give us an indication on the factoring by year-end.

Thank you for your questions. So yes, Europe on this quarter is slightly below, especially on suspension, due to the portfolio of customer we have in this business unit, which is mainly focused on Stellantis, Renault and Daimler. So -- and basically these 3 customers have not performed very well, compared to last year, this -- in this quarter. I'm going to take the data, but if I remember well, Daimler had a drop of almost 11% versus last year, Stellantis almost 10% and Renault also in this range. And so the portfolio of suspension is very focused on these 3 customers. For Air and Cooling, the trend is very different because Air and Cooling Europe is close to 0 compared to last year, thanks to BMW and new customers, such EV customers, that have been able to compensate the drop on Stellantis, Renault and Daimler. So this was about the question on European market. I don't know if I was clear, Monica, or if you...

No, very clear, crystal clear. I imagine that was due to the 3 customers in the suspension business...

Okay, yes, yes, these 3 one suffered a lot during this quarter. Concerning the pricing, basically: So on the first quarter, we have been able to keep our selling price roughly flat versus Q1 of last year. I would also say roughly flat versus the exit point of 2023 selling price, when we have been able to generate savings on purchasing and energy prices, which also explain the improvements in our profitability. My approach and my forecast and my strategy for the next quarters basically will be to continue to fight to keep our selling prices at least flat, doing some smart repricing when needed but not general repricing as we have done in the last 2 years; and continuing to fight to get savings from raw material, taking [ profit of the drop ] on the raw material prices or also the fact that we are now including new suppliers on our portfolio. So basically this is our pricing strategy for this year, which means that -- in theory, our profitability to remain close to the one that we had in Q1 or maybe slightly better but not doubling or increasing by 5 points. And concerning the EBIT trend, well, the EBIT was not too bad, I will say, for this quarter.

Not at all.

It's 5.5%, excluding the nonrecurring. I have to admit that this 5.5% is more the result of all the actions that we implemented in '23 generating carryover in '24 rather than actions of Q1 generating improvement in '24. So the actions that we implemented in Q1 '24 will start to pay off from Q2, Q3 and Q4. So I don't say we will double this 5.5%, but we will fight to keep it at least at this level, continuing to improving it slightly quarter after quarter. And then concerning the factoring. I think your question was kind of forecast from -- for the end of the year, right?

Yes, correct.

So I will say, with Filtration, we would have done roughly EUR 100 million factoring, as usual. Without Filtration, it would be, Beatrice, Olivier, correct me if I'm wrong, around EUR 60 million. So it will be EUR 60 million without Filtration. And I just want to highlight also the fact that we have done less factoring in Q1 '24 versus Q1 '23 by choice. Basically it's not because we were missing turnover or invoice or whatever. It's really a decision that we have taken with Olivier and Beatrice in order to optimize our financial costs. And as you have seen, our free cash flow generation was good, so we decided to factorize EUR 20 million less in Q1. It's a company decision. Comparable, it would have been EUR 50 million free cash flow generated in Q1 '24 versus EUR 40 million in '23. So about the factoring, it's a company decision to optimize our cost, to factorize less. We factorize when we need, of course. We push when we need, but I do prefer to generate as much as possible free cash flow coming from the business. And then of course, when we do that, it is required for the factoring, but when we can optimize and factorize less, we'll do it.

[Operator Instructions] The next question comes from Martino De Ambroggi of Equita.

My focus is on the suspensions, if you could split what are the main changes in terms of improvement in profitability. So I suppose the main contribution is from Mexico, just to understand, focusing only on Suspensions, the 300 bps of improvement, if it comes from shutdown of the plants you announced last year; or as you mentioned, raw materials, energy cost decline. Just to have a rough idea. And always on suspension: What is the expectation for Suspensions stand-alone margin in '24? And what is the maximum level achievable for this division, in your view? The second is on the capital allocation. Considering the new financial structure, what is the CapEx plan over the next 2 to 3 years for the new perimeter? If you are thinking about eventual M&A deals for acquisitions, well, the dividend policy, I suppose, will maintain at least what distributed for '23 results. So just a rough idea what is your new capital allocation policy.

Martino, thank you for your question. Well, about suspension improvement, if you compare to Q1 of last year, it's kind of mixed. So yes, we had the benefit of the profitability, variable profitability, thanks to lower material and energy prices. Basically it helped by roughly 3.5% the profitability in percentage, the material plus energy. So it's roughly 1.5% of the turnover savings in energy and 1.5% in material. As you pointed out, we have done the job from sale point of view. So with some carryover benefits in '24, including the closure of the U.K. facility but also good improvement in our Oradea facility. So if we summarize compared to last year, between the material, energy and industrial actions, our variable profitability improved by [ 4% ] of the turnover. We were roughly at 24%. We are at 28% this year of variable cost margin. Then as you may have noticed, our turnover decreased by roughly EUR 10 million. We have been able to keep the fixed costs fixed, unfortunately, so -- when we should have been able to decrease them in order to absorb the decrease of activity, but we still have some inflationary pressures on our fixed costs. And the saving actions we have generated helped us to maintain our fixed costs. Clearly, in the next quarter, we'll have to focus to improve our percentage of fixed cost and if the activity continue to be low. So that's basically the equation of the improvement versus last year. It's more on the [ top of the cleanup ], so the variable cost, rather than the fixed cost. Also we have almost all facilities now generating money and been in the black, which was not the case until 3 years ago. We have improved the efficiency in Oradea Romanian facility, which has been launched 3 years ago and which was burning a lot of money in the last 3 years. There has been a really good improvement there both from an operational and financial point of view, so clearly this will contribute a lot also in the next quarters. Concerning the full year forecasts. Well, it's a bit difficult to give a clear indication on the forecasts of the full year. We reached almost 10% EBITDA. I would say that, thanks to the carryover of the action of last year, our continuous effort on the pricing, plus Oradea turnaround, we should continue to improve this profitability slowly but surely to reach an EBITDA exit point around 11%, I would say. The full potential of this business unit is not known yet because -- I think it will be known once we will have totally improved the situation in our Romanian facility. It's a business also that is very linked to the load of our facilities, so it's very CapEx intensive. And machineries are very big. So if your facilities are loaded higher than 65%, you generate money. If it's lower, then you've got an issue, so the big question mark will be on the activity in Europe for [ H2 ]; and the load of European factories -- West European factories, especially in France. If the activity continued to decrease, of course, we will have to check if structural actions are required or not in Western Europe in order to continue to improve profitability. The last question, I think, is a bit more tricky, Martino, so I'm just an industrial guy. I answer to the industrial questions. This one, I will ask the help of Olivier and Beatrice, but to answer to your question: It's a bit too early to answer to the new Sogefi without Filtration. And of course, we cannot answer to the question if we plan to do merger and acquisitions in one direction or another, but we are a very pragmatic management. We have a very pragmatic management. The market of automotive is changing very quickly both on the EV side but also consolidation side. We will maintain a pragmatic approach. If opportunities are high, the good news is that now will be in the situation to address that. With a very low debt amount in our balance sheet, with improved profitability in suspension, with Air and Cooling continuing to grow, for sure, we'll be in a better position than 3 years ago to address these opportunities if they are worth it. I know you were very specific, Martino. Maybe if you don't mind, can you just repeat the question, the last question?

No, it was all inclusive, so the capital allocation including CapEx, well, CapEx -- the CapEx plan could be extrapolated. And if I may, just a follow-up on the capital allocation and your last answer. Should we take into account that if opportunity arises both for acquisition and for divestiture, or just in one way?

Well, divestiture, it's not totally on me to answer, but I think we have done the job. Basically we have dis-invested the factory which were losing money in the Air and Cooling; in Filtration; and in suspension last year, with Mexico, so I don't see any strategic or divestiture to be done in the coming 24 months. And concerning big divestiture, we don't have that as a plan as for today. Concerning an acquisition. It's where we will need to be very pragmatic. As I was saying, the market is growing very fast. If opportunity arise, we are in the position to address them. I don't say we are planning to do it today, because we are all focused on closing the deal of Filtration, but I say at least we'll be in a position to address that, but the market is also very tricky because EV technology is not mature yet. So to do an acquisition on EV technology, it needs to be waterproof from a technology point of view. And doing consolidation move in ICE, it needs to be a strong business model. It means the costs of acquiring externally should be really lower than consolidating internally with the business acquisition on ICE or gaining market share. So it's not an obvious move to do an acquisition in the current market, according to me, in all businesses.

Okay. And on CapEx plan...

CapEx plan. I think -- I hope I will have a lot of money to spend in Air and Cooling. Olivier will be a bit upset, but me, I will be very happy because it would mean that we are continuing to acquire a lot of new businesses on EV or hybrid. In the last weeks and months, the discussion with our customers is refocusing a lot on EV -- hybrid application, which for Sogefi is very good because it means selling both ICE products or legacy products plus EV product, if I call -- can call them like that. And in Air and Cooling, it can go very, very quickly because, if we acquire a business today, CapEx expenditure is immediate, I would say, 3 months after. And I really hope that, in the coming weeks or months, we'll be able to spend a lot of CapEx in Air and Cooling. So to answer to your question: Strategically it's continue to spend CapEx, maybe more CapEx than last years, on Air and Cooling to finance the growth. On suspension, we would have -- we have capacity. We have enough capacity installed, so I don't see CapEx increasing on suspension. If CapEx increased, it would be in Air and Cooling because new business, new process or new capacity required.

The next question comes from Gabriele Gambarova of Banca Akros.

Again on CapEx, if I may. Is it possible to have a more, let's say, quantitative indication, rough indication, how much could you invest on -- let's say, on average? And then if I may, an indication of the free cash flow. I mean the Q1 was very strong, so I wonder if you could, let's say, tell me more broadly. For 2024, what is your expectation with the new perimeter? And the third one is on the European market from your standpoint. I mean we saw that mass market producers Stellantis, Renault and so on [ the Ford ], peaked early in Q1. So was curious to understand what is your, let's say, view on the market with -- for the coming months. There is also, of course, the aspect of the Chinese imports, so any -- let's say any comments from you would be very interesting, I guess.

Thank you, Gabriele. Let me start by the market, if you agree. Well, the market has been low, yes, for the big OEMs, generalist OEMs, if I can call them, especially Stellantis and Renault. Daimler is a bit a different case. It's I will say it's the new models that are still struggling to generate a lot of sales. For sure, when we discuss with our customers, they'll kind of -- anxiety about the European market. Remember it was always my position to be ultra cautious on the European market because financial situation of the -- of Europe, higher interest rates, kind of negative bashing on automotive in the big capitals of Europe, so -- and technological uncertainty. EV has been pushed a lot then at bit less. ICE was [indiscernible], but now it's normal [ circularity. Consumers are a bit ] afraid about acquiring an EV car and not being able to sell it, a few years after, due to the [indiscernible] or whatever. So yes, European market is a bit cloudy right now. Will it continue to decrease more than what happened in the first quarter? I don't think so, basically. Or maybe a few points, but I don't see again a new big decrease of 10% because, at one point, customers will mitigate the volumes with a different pricing approach. And we can start to see the first spikes. I think Tesla will -- decided again to decrease the price of these cars. So I guess there will be a kind of pricing approach from the OEMs in order to limit the volume decrease, which is good, in one hand, because it means volumes will maybe stop decreasing or remain stable, but on the other hand, it will increase pressure on the pricing with the suppliers. But it's something we are ready for. Basically we always -- we knew that this year will be a challenging year with our customers about pricing discussions and also volume discussions because -- you can imagine that, when we have a big drop, there are some discussions with our customers about that. So my view on the European market. It will remain, in Q2, in the same trend as Q1. So with a decrease compared to last year, around 5%, 6%, I will say, compared to last year, with generalist OEMs suffering more than the others. And yes, Chinese, at one point, will arrive. They have started the exports. At one point, there will be factories in Europe, and at one point, they will start to sell cars. I don't see that as bad news. It's even the opposite. We have very strong relationship with the major Chinese OEMs for a decade in China, so if they are in Europe, we will continue this good relationship. I'm thinking to big OEMs such BYD [indiscernible], of course, [ GME ] even if it's a bit different. So let's see. I see more the Chinese OEM arriving in Europe as an opportunity for European markets to be a bit more rationale from a pricing point of view and for us to continue to diversify our customer bases in Europe. So this is my answer, Gabriele, about the market. I don't know if I was clear or if you need more information about that one.

No, no. It was perfect.

On the cash, yes, cash was good Q1. I have to admit that I'm quite happy that it was good also because of business cash, if I can say, generation. Also, cash of suspension, the trend has reversed a lot versus last quarter -- last year, sorry, also because, it has been mentioned, Mexico is no more here. But also thanks to the actions of the team. You know our ambition in suspension is [ not to no more -- ] just not burn cash means [ be aggressive then ] from a cash point of view but, at one point, to generate cash. So still a lot of efforts to do in order to generate what I will consider an acceptable cash, but at least the cash burning of suspension has been stopped in this quarter [ and really putting us to ] continue to generate good cash, steady cash, so it makes me very confident for the future of Sogefi, knowing that now suspension is not consuming cash anymore. And Air and Cooling cash, this part of the efforts required for R&D and so on, is continuing to generate steady cash. Concerning the CapEx allocation, we will just ask, to Beatrice and Olivier, if you have the amount of '23, please, by business units.

It is around 70 million without Filtration in '23.

70 million, Bea, 7-0.

Yes...

It's only the tangible CapEx, Gabriele. So I don't know if your question include also the intangible...

No. Sorry, Frédéric. It includes also intangible. 70 million...

Sorry. That's my fault. It is the intangible, what -- the R&D. So I don't know if your question was a [ dual-bar ] approach or only on the tangible CapEx, but basically the 70 million of last year were half and half between the two, between suspension and Air and Cooling. I would say that Air and Cooling this year is more around 40 million rather than 35 million. And suspension consumed less, 30 million rather than 35 million, which again will be the same CapEx allocation for '24 but with more CapEx for Air and Cooling and less for suspension, which makes sense because in suspension we also had CapEx for the Romanian factory still last year. And my feeling is that, in '25, this trend may continue with Air and Cooling growing to 45 million and suspension going to 25 million. Of course, if new business are acquired, big businesses, we will have the strike force to increase the 70 million to 80 million, 90 million or 100 million, which will be a very good opportunity for us, but right now in Europe, I mean, I'm continuing to be very careful in my CapEx allocation even when it's EV because volumes remains a bit uncertain in Europe. So before spending a lot of amount, a lot of CapEx, we do risk analysis to be sure that we won't have a bad surprise in 2 years.

Okay. If I understood well, 70 million is all inclusive...

Yes. It's also the intangible, what we call the intangible...

The next question is from Roland Könen of Value Holding.

First of all, congrats to the figures. My question goes to the Filtration business. Could you please give us an update on the selling process? First question. Second question, do you see some higher restructuring costs there on the holding level after the selling process is ended? And the third question on this topic would be could you give us amount of the nonrecurring cost in Filtration in the first quarter. And how much do we expect till the end of the selling process?

Roland, thank you for your questions. Well, Filtration selling process, everything is going as planned very smoothly, both with unions in France. You remember there is a process to respect in France; and also with all the regulation that we have to fulfill, such antitrust, in a few countries. So everything has been going as planned in a very smooth way, so I don't see any potential issues concerning the closing of this deal. Am I answering to your question, Roland, on that one? Do you want more precise information?

No, no. It's fine.

It's under control and everything is going very smoothly. Higher restricting costs than, yes, last year is I would say no because, in the last years, I have been a bit active on this field. There will be some spot optimizations, but I will not call out any restructuring because we have anticipated already some actions in order to be as lean as possible from end of last year. So no, I don't see a huge amount of restructuring in '24 that could imbalance the cash generation of the year on [ the old meaning of central cost ]. Of course, if volumes drops, then I will have a different approach concerning the footprint in West Europe or maybe possibly on central cost but, in current situation, nothing too big to imbalance the cash generation. On the last question, Roland, sorry. I've not been able to catch everything. Can you repeat it?

Yes. You're talking about some nonrecurring costs in Filtration because of the transaction. This was the explanation for the decrease of the net result of this business line, so could you please give us a rough indication of these costs in Filtration, what you have booked in the first quarter?

All right. Sorry. On that one, I have not been able to catch the question. Beatrice, Olivier...

He would like to know the costs related to the deal...

To the deal, yes, I think.

Yes, yes...

Okay, we can say that the costs relating to the deal are already accrued in March '24 in a range of 4 million, more or less.

Yes, okay...

But not impressive.

Yes, absolutely. And do you expect much, much more costs there? Or...

No.

Yes, okay.

No.

No, no, no. We booked the big part of the costs we will have for this deal.

The next question comes from Alexandre Raverdy of Kepler.

Two very quick questions, please; the first one, on the tax rate. I think it was 41% in Q1, a bit higher than what I had in mind, so if you could please give us some indication on the full year level. And very quickly, on free cash flow for the full year. So effectively a very strong start to the year. I think, Frédéric, you have not really answered the question of Gabriele, who was asking more granularity on the free cash for the full year. So we have the CapEx. Then we can do the math, but is there any reason why free cash flow for the full year should not be above EUR 30 million?

I'll start by the last one. And then I will let Beatrice and Olivier answer on the tax rate. So yes, first quarter has been strong. You know my approach. I'm always very cautious. There are 4 quarters in 1 year. Automotive is always full of surprises during the year. Q2 volumes are uncertain in Europe. Q3, there is North America elections. And Q4, I don't know yet, but I'm sure there will be something there to worry about. So we cannot do a multiplication by 4 about our cash of Q1 and say, okay, it will be EUR 30 million multiplied by 4. You know that we usually generate good cash in the first quarter. This year, we have smoothed a bit the cash generation of Q1 using less factoring, I would say, which -- us creating a kind of buffer for the next quarters, if we wish to use it. I don't see any reason to have a lower cash flow than last year or a bad cash flow this year. Plus I prefer to be cautious, until the mid of the year, about that because things can go -- it can go very quickly, the decrease in Europe or North America issue with election. And then something can be [ overconsumed ]. The good news is that we have a good advance in Q1. It's much better than generating lower free cash flow in Q1 and then having to catch up in the next 3 quarters, so we will continue to be ultra aggressive on our cash generation, on inventory level, payment terms [indiscernible] with more customers. And in theory, the cash generation should continue to be good versus last year. So I know I'm not totally answering your question, and I'm sorry for that, but I push really a lot in Q1 in order to have an advance to manage rather than being late and have to catch up. So cash should be good. Now the amount remains to be precise in the next quarters, Alexandre, if you agree. On the tax rate, here, Bea, I will let you address. It's kind of deferred tax issue or something like that [ on some countries ].

Yes, yes. I think, one, there was nonrecurring items, negative nonrecurring items, for around 0.7 million. And for total year, we can estimate an average tax rate in a range of 50%, 55%, more or less.

[Operator Instructions] Mr. Sipahi, there are no more questions registered, sir.

Thank you, madam. Thank you, everybody, for your attendance and your question. I know it was a bit early, so thank you very much for your attendance. Have a nice day. And speak to you very soon. Thank you. Have a nice day. Bye.

Bye. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.