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 Half 2026 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Michele Cavigioli, Head of Finance. Please go ahead, sir.

Good morning, everybody, and welcome to this conference call for the presentation of the first semester results of Sogefi. I will follow the presentation and then leave space for Q&A at the end. On Page 3, I will skip the highlights as I will discuss in more detail later. I only mention the sale of the Precision Springs unit which we announced a few months ago. We have now come close to the closing of the transaction, which is expected to happen at the end of July. As a reminder, Precision Springs is a noncore unit within the Suspension division as it produces small springs that are not for the use in automotive, mainly for other applications, so no synergies with the rest of the group. It had EUR 28 million revenues and EUR 3.8 million EBITDA last year, 3 plants. And we are going to close for an Enterprise Value of approximately EUR 21 million. The numbers that we will discuss are all treated under IFRS 5 and excluding the Precision Springs unit and the guidance will also be referred to the same perimeter. On Page 4, we have the performance in terms of sales. In total, the market was down 1% in the first half. And Sogefi had a constant exchange rate performance of 0.4% and a reported change of revenues of minus 0.5%. At constant exchange rate, performance was very positive in Europe thanks mainly to Air and Cooling [indiscernible] in a market which was slightly down. North America, almost the same or stable, slightly down as the market. In South America, market was up 6%, although this includes not only Argentina, and Brazil, but all the countries in South America. You see we have calculated the constant exchange rate variation of minus 6%. As mentioned in the previous calls, this is calculated by not only the effect of the exchange rate variation, but also of Argentina hyperinflation. Otherwise, devaluation would produce very distorted numbers. As in principle, of course, the currency should evaluate by the percentage, which is close in the medium term to the rate of inflation when we are in hyperinflation situation. In this semester, however, inflation accumulated and devaluation was not matching that rate of inflation. So this minus 0.6% is very little significant. Also taking into account that the revenues of the local companies are not 100% in local currency or at least the contracts are not index to local currency for the whole, which means that even if there is inflation, not always the prices at which we sell are linked to the local currency. So to give you a better feeling what has happened in South America, I can mention that the volumes in South America were flat. So volumes are measured in tons of steel. In Suspension, it's quite easy to measure volumes because you just measure the weight of the product, and it's a pretty good indicator. And we were flat in South America, a bit higher than 0 in Argentina, a bit lower in Brazil. But the best way to compare here is a flat performance of Sogefi versus a market which is plus 5.8%. In China, market was down mainly due to domestic demand, although exports were strong and growing, but there was a weakness in local demand after many years of [indiscernible]. We were even more penalized by a few programs which had to start this year and were delayed by the customers in short notice. So that's why we have [indiscernible] well. In India, a very strong performance both in terms of the market and Sogefi. If we go to Page 5, you can see the same performance for the 2 divisions. Suspensions was minus 2% constant FX with Europe flat, decline in China and South America, we just talked about it. India very positive. While Air and Cooling was positive, plus 3.5% on constant FX, thanks to a very, very good performance in Europe, thanks to the start of production of new project, which brings the comparison to last year to almost plus 15%. North America, stable and decrease in China, similar number as for Suspension. In terms of customers, Page 6, you can see that there is, as you probably know, a recovery with Stellantis in the market. This is good for us as Stellantis is our main customers. German premium OEMs were suffering this year. We had good performance also from Renault Nissan, weak from Ford, then Heavy Duty is showing some -- also some recovery. Finally, both from a sales point of view and as we see -- as we'll see starting to recover also in terms of margin. Page 7, you can see the bridge of EBIT performance versus first semester last year. EBIT adjusted in 2025 was EUR 34.8 million, 7% of sales. We had positive impact from volumes. Positive impact from the change in the margin -- the first margin, profit before fixed expenses. Flat net fixed costs. Restructuring was not different from 1 year to the other. A bit more D&A due to the investments that we are making, especially in Air and Cooling for the development of new projects, and a little bit of exchange difference, which brings the 2026 EBIT adjusted to 7.5% of sales. So a nice improvements both in absolute and relative terms. I will discuss the P&L a bit more in detail on the next page, on Page 8. You see contribution margin has increased 29.5% to 30%. We have been effective this semester in managing a squeeze between pricing and the purchasing cost. As you know, pricing normally includes a decrease over the life of the project, which is contractualized. So maintaining stable pricing means achieving some negotiation results as well as purchasing which, of course, is influenced by the evolution of the raw materials but also from the purchasing actions. Overall, we had an almost neutral squeeze plus some efficiency gain, which brings contribution margin from 29.5% to 30.2% and also a little bit of mix here in this improvement, especially in Heavy Duty. Fixed costs almost stable. EBITDA adjusted improving from 14.3% to 15%. And the nonrecurring items this year, we have EUR 4.3 million. The main item is the warranty payment or it is a provision with one large customer, which is mid-single-digit million value on the [ ICE ] product, which we have -- for which we have reached an agreement with the OEM, and we have also made a claim to the insurance company. So this is the net value that we expect. This brings EBITDA reported to EUR 69.5 million, improving in terms of percentage. EBIT and EBIT adjusted are also improving versus last year. EBIT we just saw in the previous page. Financial interest lower than last year as we are progressively decreasing debt and cash interest are now in the range of EUR 2.8 million. And income tax, a little bit higher due to some one-off related to previous period for a value of approximately EUR 1 million. And then we have minorities and income from discontinued operations, which is, of course, Precision Springs that I mentioned before. So group net income is the same as last year. And on the next page, free cash flow. We have a similar performance in terms of funds provided by operations, a bit more working capital absorption, but we have used less factoring this year. So this explains most of the difference. CapEx a bit lower than first semester, but it's just due to phasing as the overall capital expenditure for the year is projected to be almost stable. And which brings free cash flow to EUR 13 million versus EUR 10.9 million last year and net debt, excluding IFRS 16, down from EUR 19 million to EUR 8 million without still having cash in the disposal of Precision Springs which will further improve this net financial position by EUR 21 million, as we said, which would bring our net debt to actually net cash position. On Page 10, we have Suspensions, we have already largely talked about sales, Argentina. I can only mention that in Passenger Cars, we have now a start of a recovery in Heavy Duty. We are in the process of developing not only Heavy Duty customers, but also defense and railways. New customer acquisition, new project acquisition was quite positive this semester includes our new project in those two area. As we mentioned, very strong performance in India and South America, we [ had what ] happened. EBITDA in the adjusted, in the Suspension division, was up in terms of margins and in terms of numbers, thanks to the contribution of the contribution margin and to a little bit of mix evolution, especially in Heavy Duty. Fixed cost is stable and marginally decreasing, thanks to the ongoing actions that we are implementing in Europe. As you know, we are in the process of closing the Douai plant in France. This is one of the historical plant -- one of the major plants historically for Suspension. It has become a bit inefficient over time because of the local situation, because of old technologies. So we decided to close it, and move the production to other plants, which are now more efficient in the Oradea plant but also other European plants. So the process of closure is progressing. We are expecting to close all the production by October this year. We have already started moving to a few lines to other plants. All the employees will therefore leave by the end of October and the closing activities will be over by the end of the year. So the actual improvement in the P&L, the [ reduction ] in fixed cost will be appreciating in 2027, and we expect to have a mid-single-digit benefit from this going forward. In Air and Cooling, performance, sales performance, as we've seen was very positive, especially in Europe, thanks to new projects with the German OEMs. And the recovery of Stellantis, which is a major customer in Europe, which had very good results this semester. EBITDA adjusted was slightly up, but we are talking about a very high margin for many years now and still some growth in absolute terms. On Page 12, just to comment on the debt maturity. We have plenty of committed facilities. We're not really using a lot of debt. We will soon be cash positive. So all our facilities are revolving facilities that we can use only to the extent necessary in order to minimize the interest cost. I would stop here. Now, actually, let's go to -- with the guidance on Page 17. We are updating our guidance versus the one that we communicated in February this year. At that time, we communicated a low mid-single-digit revenue decline for 2026. We are now upgrading the guidance to low single digits, taking into account the good performance of the first semester, acknowledging that there will be a more challenging second semester potentially in terms of sales, but also in terms of margin. So far, we have not experienced a lot of squeeze, as I said before, as we have seen the raw material indexes increase, but indexation has a 6-month lag in our contract, both on the purchase side and on the sales side, which means that so far, we did not have to incorporate indexes -- the new value of indexes, which are rising into the equation. That will start in the second semester. So we'll have to negotiate with the suppliers and customers to contain decrease of raw materials and try to transfer as much as possible to the same price. As you know, we have same prices which are partially indexed and for the rest, we have to negotiate every time with the customers. In the past, we've be successful to do that. This does not mean that it's difficult task. So we are a bit more cautious. So we would like to confirm the EBIT margin substantially in line with last year, although it was better than last year in first semester. As we said, we are forecasting a more turbulent second semester. So we have to be a bit more prudent. I would stop here, and leave it to your questions.

[Operator Instructions] The first question is from Martino de Ambroggi, Equita.

The first question is on the warranty costs because the line was not perfect, let's say. So just to understand, what was the correct amount was entirely in the second quarter? Was it for Suspensions or Air and Cooling? Just to have a clarification on this subject. The second is on the last comment, you did, Michele. Second half, much lower. I understand the challenging environment, but is significantly lower the second half implied in your guidance. Could you clarify what are the main reasons considering that sales are not so weak to justify such a compression in profitability? And the last one is on the capital allocation policy because following the Precision Spring disposal, as you mentioned, ex IFRS 16, you have a net cash position. So is it changing your dividend buyback, M&A CapEx policy following the financial structure was already enough strong. So shouldn't dramatically change. But now you are cash positive. So just to have an idea.

Okay. In terms of warranty cost, this was a single event, we call campaign by one of our major customers. It was in the Air and Cooling division. That happened in the over -- the course of this semester, but the negotiation was mainly in the second semester as the full cost from the customer was made explicit and the request was made. So the amount that we have provisions so far not paid is mid-single-digit million -- sorry, low single-digit million. This is the net of what we are supposed to pay to the customer at the end of the negotiation and the insurance recovery. So this should close the issue with this net payment. In terms of the second half, we are expecting better sales than what we had expected in February. So this is the improvement. In terms of margin, we are better than last year, so better than the guidance we gave in the first semester. We, of course, we will try to maintain this overperformance versus the previous year, but we anticipate that's going to be much more challenging than in the first semester because we are going to have all the product cost increases in the second half, energy and materials. So we already see the indexes. The indexes have already started to raise plastic, aluminum, steel, all of them. And typically, when this happens, we start fighting with the suppliers and customers. And as you know, in the long run, we are usually able to reestablish the correct value of the marginality. But in the meantime, it's not easy to give for granted that margins will stay there. It could be that there is a misalignment for 1 or 2 quarters, while we negotiate on the 2 sides. So that's why we prefer to be cautious on the EBIT percentage improvement versus last year. In terms of capital allocation, yes, of course, now the capital structure is stronger than ever. The Board of Directors yesterday did not take any resolution on dividend policy or any other form of distribution. So for the time being, this is going to reduce net debt and until further notice, we should consider it as such.

Okay. And again, on the warranty, is it a single customer issue? Or is it something that could also involve any other customer?

The warranty that we're talking about was related to one single product. So it was not -- I mean, every product for every customer is completely different from one another. There are no products that go to multiple customers. So this one was specific to one customer.

The next question is from Monica Bosio, Intesa Sanpaolo.

The first 2 are a housekeeping question. On the back of the warranties accounted in the second quarter, can you please just update what could be the overall one-off for the full year 2026? And the second, housekeeping question is on the capital gain on the Precision Springs disposal that will be accounted in the third quarter. Maybe I missed. If you can highlight what could be the capital gain to be accounted in the third quarter? The third question is more strategic. I was wondering if following the sale of the Precision Springs, which were not a core business, would you see as reasonable for the group to evaluate the sale of some other small noncore businesses? And then if I may, I can squeeze another one. It's on the underperformance in China. Can you please give us a flavor on the delay of the start of production that caused this underperformance. I was wondering if this start of production were related to contracts with Western car players or with Chinese players? Any insights could be helpful.