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 First Quarter 2025 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Olivier Proust, CFO of Sogefi. Please go ahead, sir.

Hi, everybody. Thanks a lot for attending this meeting for the first quarter of Sogefi. As usual, I will make a quick introduction, and we will directly jump to the Q&A. So I think that the most important for us is that in the first quarter of 2025, despite a lower market -- the weakness in the operating market with a revenue decline of 2.7% compared to '24. Sogefi has been able to overperform. The operating results are in line with those of the first quarter '24 and net income from the continuing operations is higher. EBITDA equal to EUR 33.8 million, in line with the first quarter of '24 with an EBITDA margin up 13.2%, better than last year. EBIT stable at EUR 15.1 million with an EBIT margin at 5.9% of revenue compared to 5.6% last year, so better than last year. And net profit of operating activities amounted to EUR 9.8 million compared to EUR 5.6 million in the first quarter of '24, thanks to partly the lower financial expense due to the fact that we reduced our debt to nearly 0. The free cash flow from the ongoing operations is positive at EUR 13.7 million, lower than last year. We were at EUR 29.2 million. But last year, we had recorded in the first part of '24, a huge cash in from Filtration business unit that we sold. It was due to the balance of the intercompany with this business unit. We also had in '25 higher CapEx due to new product. But the EUR 13.7 million is in line with what we are expecting for '25. Then our net debt at March 31 is at EUR 44 million. including IFRS 16, EUR 0.8 if we exclude IFRS 16, so that's why I was saying nearly 0 compared to EUR 55 million at the end of December '24 and EUR 235 million at the end of March '24. It was, of course, prior to the Filtration in disposal and the distribution of the ordinary and extraordinary dividends in '24. So that's for the business. Now I guess that the main question mark is the impact of tariffs. With regards to the direct impact for Sogefi. As we wrote in our press release, the group, especially the Air and Cooling business unit achieved sales of EUR 214 million in '24 in the USMCA region, selling components manufactured in Canada and Mexico, mainly to General Motors, Ford and Stellantis, of which 55% were destined to -- for customers' production plant in Canada and Mexico and 45% imported by customers in the United States. It is estimated that about 70% of the revenue from the components exported to the U.S. are related to the USMCA compliance products and thus, based on current forecast, not subjected to tariffs. Sogefi does not directly export to the United States as its customers does and does not manufacture in the United States, and is therefore, not subject to import tariffs on material and components. So we do not expect with the current situation, significant direct impact from the new tariffs in the short term. Of course, we don't know how this will evolve, but the current situation is a slight, even not exposure to a direct impact to tariffs. However, in terms of indirect impact, the main question mark is how the American market will evolve in terms of car distribution. It is reasonable to expect that the tariffs as they are defined today, will imply an increase of the price of the cars locally. Therefore, the potential slowdown of the market is possible. We just don't know what will be the outlook. For the time being, we haven't seen any projection of a slowdown of the market. So with the current situation, the current expectation of the market, we are in a position to not modify our guidance. So that means a slight reduction in sales and the ability to maintain our projection despite the slight exposure to -- a slight direct exposure. So we maintain our guidance. Of course, if the -- we have to face a huge drop in the U.S. market, this could evolve. But Sogefi has been confronted in the past already to such up and down in the market, and we know how to react if this happened. But from the current situation, we are confident enough to -- for maintaining our guidance. Okay. That's it. Maybe we can now jump to the Q&A.

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

I hope you can hear me well.

Loud and clear.

Perfect. I have a few questions. The first one is a general one. Should the worldwide car production fall further on the back of a slowdown of the demand in the U.S.A.? What are the actions that Sogefi can put in place to face further deterioration of the market? This is the first one. The second one is on Suspensions that marked a progression, some progression in margins. Can you just give us an indication for 2025 in terms of margins for this division? The third is on the raw material side. If I'm not wrong, Sogefi purchased its raw material from U.S.A. for its plant in Canada and Mexico. Should we expect any impact from the duties on this side? And the very final one is on the tax rate, that seems to me quite low in the first quarter. Do you have a projection for the full year?

Monica, so regarding the actions in terms of slowdown of the market, well, we know how to deal with it, and there is a large bench of actions that we can put in place. We can reorganize our plan. We can reduce the number of ships. We can reduce the number of temps. We can reallocate production amongst our plants. We are exploring all the possibility. And we -- you will agree that we demonstrated in the past our ability to do so. So we are flexible enough to adapt our footprint, our workforce to this kind of situation if we have to face a huge drop in the market.

Just a follow-up on this Olivier, I'm assuming roughly EUR 5 million of restructuring charges for this year. Is it fair? Or do you think it could be a little bit higher?

Well, it depends completely on the magnitude of the adjustment, Monica.

I understand.

If we have to do what we call [indiscernible] in France or [indiscernible] in Italy, the cost will be limited. If we have to do some more important restructuring, well, the cost could increase, as you can understand, I cannot answer to this question. But shall we -- I will make a very personal remark. Shall we really expect a crisis for many months? Shall we expect that the U.S. will accept to enter in a very long period of time with a very high price on the cars and inflation and et cetera, et cetera? Maybe not. Some people are saying that the crisis could be, let's say, limited in terms of timing. So we will have to adapt in any case. With regards to the Suspension, so we will continue to improve the margin of Suspension. We have several projects which are running currently. So we already improved the profitability, and we will continue to improve it. Of course, if there is a major slowdown in the market, the profitability of Suspension could remain the same because you know that the more you have -- the more the activity is, the better it is for improving the profitability. But we are on track to improve the profitability of Suspension with the current market protection. With regards to raw material, as said, in the U.S., you know that there is a specific rules with regards to the USMCA. So with the current situation, the raw material bought in the U.S. falls into the USMCA rules. So that means that there is tariff exemptions as far as more than 75% of the product. The raw material inside the product are coming from the USMCA region, i.e., U.S., Mexico and Canada. So we could be -- if you are impacted -- if you are directly impacted by tariffs on raw material in this region is if you import product from outside of this region and if you exceed the 75% ratio of USMCA components. So for the time being, as far as we know because some of the product inside our products are coming from suppliers, which are themselves outsourcing their product, their sub product. As far as we know, and we made some inquiries, we are not highly exposed. We are slightly exposed. It's manageable. With regards to tax, Bea, can you please give us a quick outlook on the tax rates for '25?

Yes. For '25, I would say we will be around 30% full year.

The next question is from Martino De Ambroggi, Equita.

The first question is on the operating leverage, specifically in NAFTA region. So just to understand what could be the consequence on the operating profit in case of declining sales in the U.S.? Number two is on the free cash flow because I remember the EUR 15 million guidance for the full year. I noticed Q1 was mainly driven by higher factoring and lower CapEx. So just to double check if the EUR 15 million is confirmed and what is the CapEx implied in this guidance and the factoring roughly underlying this guidance? And the third is on the customers' reaction in the sense, I clearly understand you have a very limited direct impact from U.S. tariffs. We will see what will be the final outcome. But I suppose customers will ask for sharing the additional costs due to tariffs. So just to have your comment on this.

So with regards to the cash flow. We maintain our guidance for '25. We are -- yes, we are roughly at EUR 14 million on the first quarter. It's -- we have in front of us some CapEx for the Air and Cooling business to be done by the end of the year. Yes, the factoring is a little bit higher. So reducing the factoring and including some extra CapEx on Air and Cooling by the end of the year, we maintain our guidance for EUR 15 million cash for '25. With regards to the impact on a slowdown of the market in Canada -- sorry, in the U.S., my answer would be the same than the one to Monica for Suspension, depends on the magnitude of the drop. The good thing in the NAFTA region is that you can be much more flexible than in Europe in terms of workforce for -- it takes -- you have more flexibility to adapt your cost locally. So we can react quickly, giving an impact, well, you have our margin, you can project the margin on potential sales drop. Difficult to answer precisely to your question, sorry. The only thing that I can say is that in the past, we have been able to absorb the high headwinds. Sorry, quite impossible to be more precise. It really depends on the magnitude of the drop. As said, we do not believe in a long crisis. We think that we can face a drop of the market, but not for a long period of time. I'm not sure that the U.S. citizens will accept to enter in a recession due to the tariff crisis.

Customers asking for sharing costs.

Well, customers are always asking for sharing costs. We have to maintain our margin. We have been able during the crisis of the raw material to maintain our margin despite the request of the customer. It will be the same. They need our products. We cannot -- I remind you that we are not selling commodities. We are selling products developed with them during at least 2 years before the launch of the final car -- before the launch of the car. We will adopt the same policy we have to maintain our margin. So there is no reason to share this extra cost due to tariffs. They need our products in their car. We did it in the past when we had to face the increase on the energy and raw material, our policy on tariffs would be exactly the same. And as said, in the U.S., so the main region for the time being, the USMCA deal really limit the impact on the tariffs for this region. The car produced in the USMCA region with components coming from the USMCA region up to 75% are not exposed to the tariffs. So...

That's clear. Very, very last on the EBIT bridge that you presented on Slide #7. There is a block of EUR 3 million for Argentina, which is the biggest one. Could you elaborate on what is the expectation for the full year of this in your guidance?

Do you have some information regarding the hyperinflation in Argentina in '25?

Absolutely not. But just to understand in your guidance, what is implied?

Well, we do not foresee a big improvement in Argentina include -- coming from the improvement of the hyperinflation. So if it comes, it will be above our guidance. We do not bet on an improvement in Argentina. That's for sure. In the current situation, we are doing very well there. We have in South America, a very good team, who is really managing very well the up and downs with the currency. So from a pure industrial point of view, we are overperforming. Well, if the situation in Argentina -- the economical situation of Argentina is continuing to improve, it will be cherry on the cake.

Okay. So this EUR 3 million at the beginning of the year when you provided the guidance, so were not included. So this is on top, but the EUR 3 million, if they remain so for the full year.

Yes.

The next question is from Andrea Todeschini, Banca Akros.

Just a quick follow-up on the Suspension division. I was wondering if you could give us a little update on the heavy-duty situation. And given the slowdown that we've seen in the last couple of quarters, if you're seeing a sort of normalization in the situation or if we should expect the same trend to keep going? And then second question regarding capacity utilization, especially in Romania. How is it looking right now? And if there will be ever any plans to move additional production capacity over there and aiming for some extra cost savings?

So with regards to heavy-duty, we do not foresee an improvement of the market in the coming months. So we will deal with the current situation. That's for sure. With regards to Romania, we are performing there better and better. You know that in the past, we faced there some industrial issues. But let's say that most of them are behind us. So yes, Romania is an option for rationalization in Suspension. You can understand that I cannot explain on this. So -- but yes, Romania.

[Operator Instructions] The next question is a follow-up from Monica Bosio, Intesa Sanpaolo.

Yes. Just a final question on China. Looking at your turnover on China, can you remind me what is the weight of the revenues generated with the local Chinese players?

The weight of the local Chinese player...

Slide 6 of the presentation is around...

That's at the group level. Okay. I take China...

China is China. For the time being, we -- the sales with the Chinese player are in China.

Yes. So the 6% is on China. The 6% at the group level is on China.

Yes. For the time being, there is no Chinese customer established in Europe or even more in NAFTA, of course.

Monica, the information is Slide 6 is not 6% is more than 12%.

Yes.

[Operator Instructions] Mr. Proust, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.

Well, thank you very much and happy to have further discussion in the coming months. This market is very interesting. Everything is moving every day, and that's the funny part of the game. Thanks a lot.

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