Valeo SE (FR) Earnings Call Transcript & Summary

Welcome to the Valeo H1 2020 Results Conference Call. I now hand over to Mr. Jacques Aschenbroich, Chairman and CEO of Valeo. Sir, please go ahead.

Good evening for all of you. I'm here with Thierry Lacorre, our Investor Relations and with Robert Charvier, our CFO. So as you can imagine, the shock of the COVID-19 has hit the whole automotive industry, probably the whole economy in general and Valeo in particular. But before going into the figures, the positive part and the negative part of what we have lived through during those last 5 months, I would like to speak about the trend of the automotive market. All the study, all the survey we are doing in different parts of the world, of course, in France and Germany, all Western European countries, what we do in China or North America, show very clearly that the automotive is considered as the safest way to travel. And going more in detail, lots of people that were not used to use a car are now coming back to using car, even for the younger generation. And that is obviously extremely important. Long-term topic, we have to make sure that it's not only kind of a bubble, but it's in-depth in the market. But on top of that, 75% of people consider that using car is better than using mass transportation, train or planes or subway. So that shows how much the automotive will rebound after COVID-19. But on top of that, you have seen that most of the plan that has been put in place in France or in Germany or in Spain are kind of a green deal, all the measures that have been taken -- are taken, provided that the car will be more environmental friendly with a focus on electrification, BEV or plug-in hybrid or mild hybrid, which is obviously the strategy we have had and a confirmation of our strategy, and I'll come back to that later. That is the first topic. What are the trends of the market post COVID. The second topic is, and I'll come back later on. Since the appearance of COVID in China end of January, we have put in place a very strict health protocol. That health protocol has been started, of course, in China and has been rolled out overall in all outlooks. You have seen in the last few weeks that the virus is still transmitting, it is not over. And we'll stay with that protocol as long as the virus is still there. You have seen what happens in North America, in the U.S. or in Mexico, you have seen what happens in Brazil or India. You have seen what happens in Hong Kong, even though we have no activity in Hong Kong or in Australia, even though we have no activity in Australia or in some European countries where the Barcelona area has been locked down again or in Morocco. And we'll put that in place, we'll stay with that protocol, like I said, as long as the virus fly, despite the cost. The impact of the health protocol is around 10% of our direct and indirect labor cost. So it's equivalent of close to 0.8% to 1% of margin. And we assumed that decision. We take our responsibility, and we don't want to take risk with our people and risk with disturbing the automotive supply chain. So that is something which is extremely important. Then you have seen that we have put in place very quickly, and we have spoken about that in the call in April, very quickly, some cost reduction program in place, which allowed us to save EUR 570 million, which is a big part of our cost compared to the material purchase. And we have saved -- additional measures to save cash, EUR 633 million, including dividend reduction, including inventory reduction and including the CapEx reduction. So you have seen we have reacted extremely quickly to take into consideration the actual situation of the automotive market. I'll cover that, and Robert will come back on that. We have recognized and recorded EUR 622 million of one-off charges, which are mainly linked to COVID-19 and that is something that we'll come back on later. And then I'll come back on the cash consumption and what we expect in the second half of the year being very cautious to recover in terms of cash in the second part of the year. So that is what I wanted to say as an introduction. And if you agree, we'll go to the Page 3, where you see that the COVID-19 validates our strategy and it validate our strategy because of all the market trends. The car has a role to play, like I said, the green deal is a backbone of the recovery. The cars in ensuring passenger health and safety. And the smart mobility, you remember maybe that in our Investor Day on the 10th of December, we spoke about that smart mobility where our technology, especially the 48-volt, but also the ADAS allow us to enter, and we have -- and you'll see we have some orders. Going into the Page 5. That is a slide that we have shown in the 10th of December. We have developed those 12 technology platform. And like I told you, at that time, the peak of the spending is over and we see that you have it on the right-hand of the slide, the additional increase of content per car. If we look at -- and normally, we don't speak about specific product, but when we look at our forecast in H2 for 2 of our product line, the 48-volt, the sales should be multiplied by 3 compared to H2 last year. And concerning the front camera, it should be up more than 50%. So you see the story we have on 48-volt and front camera is in line with our expectation. If you go to Page 6, you see that not only we speak about 48-volt, but our customers speak about it. On the right-hand side, the Golf 8 with positive comments of Volkswagen. And on the left-hand side the positive comments on -- of Daimler. And in the low part of the slide, the Citroën Ami, which is powered with our 48-volt technology, is the first car being powered full electric with our 48-volt technology. And in the middle, you see our President that went to our plant in North of France, the plant at Etaples, to announce the French contribution of the impact or relaunch plan for the automotive industry in France. On the next page, you have 2 orders that we have, 1 with Honda, which is the first time we sell front camera in ADAS with level 2, and it's only with our camera. We spoke about that on the 10th of December. We can replace the existing camera and the existing radar from competitors with a full level 2 of ADAS system. And in the right-hand side, the driver monitoring system, health and monitoring system that we have sold to a premium Chinese car. On the Page 8, pardon, you have a different market that we have sold our 48-volt technology, Citroën Ami, the 3 wheelers, we spoke about that. One electrified joint that will be SOP-ed in Q4 this year. And some targets we are having, some orders we are having for some other 3-wheelers or other 2-wheelers. So you see all that's already spoke about not only being focused on OEM, but being focused on smart mobility is something that takes traction. On the Page 9, you know that the sustainability is at the heart of our DNA. We have been recognized by RobecoSAM, Corporate Knights, MSCI, ISS ESG. On top of what we have achieved and you have seen on the left-hand side that 93% of our turnover is linked to safer and greener mobility. But on top of that, we are working hard for a long-term carbon neutrality program that we are going to disclose as early as next year. But I don't believe in long-term neutrality carbon program, if it is not supported by short-term action. And you'll see at the same time what we do in the next 5 years and what we want to do in the long term to have a neutrality program. In the health protection, I'll come back very quickly on that. It's worldwide mandatory. It's ensuring the maximum protection for all employees. It has been audited that not only it is the responsibility of our plant manager to put in place or be responsible in the R&D centers or head offices, but it's audited to be sure that is respected by the management and by the -- each individual. And we do it, as I said, as long as the virus is flying, despite the cost of around 10% of direct labor productivity. On top of that, we are responsible for the community we are in. You'll probably remember that in a consortium we provided 10,000 ventilators. We have given 80,000 FFP2, FFP3 masks to hospital. And we are producing some masks in some of our plants to donate them to the local community. What is extremely important in a turbulent world than the one we have been crossing is, of course, our liquidity position. If you go Page 14, you'll remember that at the end of last year, we had EUR 1.3 billion of undrawn credit line. We have been able to negotiate, and Robert had negotiated with our partners, the banking partners EUR 1 billion additional of credit line. We have not drawn any one of those credit lines. We have no debt falling until June next year. The average debt maturity is 3.4 years. And if we look at our headroom for the covenants, it's -- we have adequate headroom. And at the end of June, maybe Robert will answer some of your questions. We had EUR 2.1 billion in cash or cash equivalents. So if you look at the next page, you see the evolution of our leverage. And it's clear that because of the crisis between the end of 2019 and 2020, the leverage went up from 1.3 to 2.7. You'll see when we speak about the guidance, we have a goal, and it's a minimum, we'll generate at least EUR 400 million free cash flow for the second half of the year, which will allow us with EBITDA corresponding to what we are going to achieve to stabilize or to reduce, that is our goal, to reduce our covenant. And I'll come back to that later on. On Page 16, you see the maturity. You see the cash and cash equivalents, plus the undrawn credit line on the left-hand side, with a sum of both is EUR 4.4 billion. And you see on the right-hand side, the evolution and we have worked a lot in the last few years to have a kind of even reimbursement date of our existing debts. What has been important, and you'll remember, we have spoken a lot about that is our outperformance. I recognize that early 2018, we went down to a low level, and we have spoken about that several times, explaining the reason why we came down to that low level. And I told you several times that our order book and what we had in the order book made me extremely confident that the growth story of Valeo was not only not over, but that we had the potential to grow significantly more than the market. Even in that second quarter of 2020, you see that we have a strong outperformance in each one of the regions, 7 points in Europe, 12 points in China, 6 points in Asia, excluding China, 10 points in South America and only 1 point in the U.S. One major program we are on, which is [indiscernible] from Chevrolet, GM should have started in the second quarter. And of course, because of COVID-19 has been postponed and is on ramp-up now. So we are absolutely confident to carry on outperforming the market. And if you look at that with a more perspective on Page -- on the next page, on Page 19, you see that in the last half years, H1 2019, H2 2019, H1 2020. In Europe, we have outperformed the market 3 points, 9 points, 9 points. In China, minus 3 points, plus 11 points, plus 15 points in the second quarter this year. In Asia, excluding China, minus 1 point, H1 2019, 0 points in the second half of last year, 6 points in the first half of this year. And the U.S. I've already spoke about that, 9 points in H1 2019, 10 points in H2 2019 and 4 points in the first half of this year. If you were to take South America, the outperformance would be 6 points in H1 2019, 16 points in H2 2019 and 16 points in H1 2020. And if we take worldwide, you have the figures, 4 points in H1 2019, 8 points in H2 2019 and H1 2020 6 points. So you see the -- we told you at the first -- beginning of the year that we are extremely confident that we would outperform the market at least 5 points, and we have the confirmation of that statement. If you go page 20, you see that all our business groups outperformed the market, CDA and Powertrain, being the one outperforming the most with 11 points for Comfort & Driving Assistance, and 8 points for Powertrain, then Visibility. The Thermal Business Group is lower. And you'll remember, we said that starting in 2021, the Thermal Business Group should start accelerating. Now if we look at the way the market has recovered from the COVID-19, we have already spoken several times about that. China has a strong recovery since March. And since May, we are above -- turnover above last year. North America has been later than expected, the start of production has been in end of May, but it's quicker than we had expected. And you probably know that most of our customers have canceled their summer vacation. Europe has restarted in time, middle May, but has a more gradual recovery. Korea and Japan are very much impacted. Those markets are export-driven and they have been impacted by the reduction of export market at the time of the COVID-19. We have the impression that both markets are step-by-step increasing. And Brazil and India have a very, very, very slow recovery. The order intake, EUR 5.6 billion, new order intake. You might find that figure low, which is true. But you have to consider that most of the request for quotation has been suspended since the second half of March this year. So we'll see what happens. We have a potential of quasi-normal order intake for the second half of the year. But we'll have to look at in details whether or not our customers are really giving the -- those order intake or are postponing some of them. It's too early to answer that question. Page 23, we have a strong action plan to limit the COVID-19 impact and the outbreak. If you go directly to the Page 26, that the figure I've shown you earlier is EUR 570 million cost reduction we have had. And in the following page, Page 27, you have the description. We have had EUR 248 million of cost savings for direct and indirect labor, including the reduction of 12,000 employees during those 6 months of the year. We have reduced our development effort, EUR 196 million. We have reduced our production overhead, EUR 97 million and some other additional cost savings were EUR 29 million. And most of it, obviously, 90% of it happened during Q2. Now if we look at what it means in terms of variabilization of our cost, which is the reduction of operating costs, excluding material consumption, divided by the loss of sales contribution after material contribution. That is really what we have an impact on, and it has been impact of 58%. That means we have reduced 58% of the cost we had access to. In terms of R&D, I already mentioned that figure and you have it, Page 29. It's a reduction of EUR 196 million of development expenses. You have to know that during that period, our customers have stopped also their own development expenses, and we had no way else than doing the same. You remember, we spoke about April what could be our target in terms of drop-through, which is excluding one-off charges and capitalized development expenditure impact. We told you that our target was 25%, that is exactly what we have achieved in Q2. And for the whole H1, we have reached 28%. Concerning additional measures saving cash, the reduction of dividends. We have already disclosed it. We have reduced our dividend from EUR 1.25 down to EUR 0.20, which makes a saving of EUR 249 million. We have reduced our gross inventory for the value of EUR 243 million and reduced our CapEx, EUR 141 million. Concerning Valeo Siemens, we are totally in line. You'll remember that we told you the losses expected this year should be lower than in 2019. And that is looking at what we have achieved in H2 -- in H1 and the forecast for H2, we should be in line with that. And for the first half of the year, we are totally in line with our expectation. Concerning the one-off charges, we have recognized EUR 622 million, which are most of them linked to COVID-19 for a value of EUR 622 million. Maybe Robert, you could explain the details of this impairment test.

Yes, of course. In fact, we consider that the COVID crisis will generate a significant change in the automotive environment, not only in 2020 but in the forthcoming years. So we have decided to perform a thorough review, a thorough analysis of the value of our assets based on scenarios, which are providing for a significantly lower production volumes during the next 5 years. And as a result, we have recorded one-off charges of EUR 622 million. And if you go to Page 34. You can see that first, as a result of the in-depth review of the value of the asset, we have decided to write down almost all the assets, the industrial assets we have in Brazil. During the last years, we have made losses in this country. And we consider that the future of the automotive industry in this country will remain very, very difficult in terms of volumes. And this is the reason why we have decided to write down a significant part of the industrial assets we have in this country. In addition, we have decided to write off 100% of the residual assets that we have in Valeo and which are related to engine -- to diesel engines or to the manufacturing of components, which are equipping diesel engines. I think it was, in fact, necessary, we know that the volumes are dropping. And so we just decided to write down those assets. And in addition, we have performed evaluation of the assets related to the Top Column Module activity. You know that we announced in October last year that we made the decision to get out of this business. The revision of the volumes for the forthcoming years are showing that the value of this activity will decrease, and we have acknowledged this decrease of the value through the impairment of the assets of this activity. We have also performed a thorough review of the capitalized cost related to the projects, which are set to go into production between now and when -- during the next 24 months. And we have also recorded some loss of values related to those intangible assets. Just because we have taken into account lower volumes or in some cases, we are even taking into account the volumes -- the new volumes which have been provided to us by our customers. So all in all, you can see that the split of the EUR 622 million is the following: we have reduced the values of operating assets by EUR 392 million; we have also made a thorough assessment of all the operational risk; and we have recorded a total amount of EUR 109 million, knowing that, for instance, within this amount, we have around EUR 30 million, which are related to onerous contract. Top Column Module, I have already mentioned this factor. We have recorded a one-off charge of EUR 53 million. We have decided by the same time to stop -- we had a start-up. We have several start-ups, but among those start-ups, there is one start-up that we have decided to discontinue. So we have decided to write off the value of this start-up, of this investment in our balance sheet. And finally, when we review the deferred tax assets, we have decided to impair some deferred tax assets for EUR 37 million, which are located in France and in Romania. So all in all, we consider that around 90% of the one-off charges that have been reported at the end of H1 are linked related -- or related to the COVID-19 crisis. Once again, we consider that the world -- the automotive world after the COVID crisis will not be the automotive world we were expecting at the end of last year or just before the beginning of this crisis. Page 35. You can see the bridge between the operating margin of 2019 and the operating margin, we are publishing for -- we are reporting for 2020. So you can see that starting from the EUR 514 million of operating margin last year. We consider that the drop-through related to the COVID-19, so I mean the impact of the loss of sales after taking into account the impact, the positive impact of the cost reduction measures that we have implemented during the semester represent a loss of EUR 764 million. The effect -- the impact of the capitalization and amortization of R&D, which are indicators, which are by nature -- which are fixed represent a negative impact compared to last year of minus EUR 133 million. In fact, the level of amortization has increased in line with what we disclosed during our capital market debt. By the same time, due to the fact that we have frozen a lot of projects -- a lot of development during the semester, the level of capitalization was lower. And the impact of the one-off charges, which directly impacted -- which have directly impacted the operating margin of H1 2020 represents minus EUR 457 million. For the sake of -- in order to avoid any misunderstanding. If you read the financial statements, you can see in the note to the financial statement that the accrual for warranty risk have significantly increased. So we have disclosed this information. But what you have to keep in mind is that this increase is balanced by a receivable we have vis-à-vis our insurance companies of amount which is very -- slightly lower, but very similar to the increase of the warranty risk. So it has been dealt with totally outside the one-off, it has nothing to do with the one-off. But I wanted to make it very, very clear. We have an increase of the accruals for warranty, but by the same time, and the impact in the P&L is not very significant. We have recognized receivable vis-à-vis the insurance company, which, in fact, is ensuring this -- the related record. If we go Page 36, so you can see that the level of net loss before taking into account the EUR 622 million of one-off charge is EUR 593 million, with a significant impact, of course, of the loss of sales related to the COVID-19 crisis. In terms of EBITDA, the EBITDA margin before the impact of one-off charge represents 5.8% of our sales of EUR 409 million.

Maybe, Robert, I can go for the cash, if you allow me?

Yes, yes, of course.

If you go to the Page 37 you see that, obviously, we have consumed cash in the first half of the year. But the EBITDA was low, of course, EUR 202 million. You'll remember in the previous page that excluding one-off, the EBITDA would have been EUR 409 million, which is 5.8% of sales, and I'll come back to that in the guidance. But what is extremely important is that in the second line of the Page 37 we have consumed EUR 574 million of working capital compared to the generation of EUR 230 million working capital last year. You'll remember, we have a negative working capital company. That means if you have a negative working capital company, when you grow, you don't need to finance your working capital during the growth. But I always warn you that in case we would have a drop in our sales, then we'd consume cash. That is exactly what has happened in the first half of the year. So it's unpleasant because we consumed EUR 1 billion, a little bit more than EUR 1 billion of cash. But obviously, that will be part of the guidance, when we grow again. And if we take the assumption of IHS for the second half of the year. Once we grow again, we will recover a big part of that working capital, and you'll see that in the guidance. The rest is a change of provision or any kind of restructuring cost payments for lease liability and so on, which are marginal. What is extremely important is that quasi-60% of our generation of our -- loss of cash, consumption of cash is due to the working capital. So if you go for the outlook, we frankly hesitated whether or not we should give, now that we know that some of our competitors didn't. We think by respect to you and our shareholders, we needed to give the outlook what the second half of the year should be, being extremely cautious in our figures. And of course, it implies that the IHS figures are true. And it implies that there is no second wave of COVID-19 or that there is any kind of negative impact on production supply chain or market evolution. So provided that wouldn't happen. You don't know, I don't know. We would, we should and we will continuing outperforming the market. We have seen the figures in the last quarters. I'm extremely confident that we should carry on outperforming the market in each region. The restructuring, we have to transform now some cost savings, which has been the reaction to the COVID to structural cost reduction in order that we structurally reduce our cost basis. And we think we need between EUR 50 million and EUR 100 million to accelerate that structural reduction in costs. The EBITDA should be around 10% of sales. You remember, excluding one-off, it has been 5.8% of sales in a very, very difficult market condition. So I'm confident that we should achieve an EBITDA around 10% of sales. And again, I'm extremely cautious in terms of free cash flow, we should exceed EUR 400 million free cash flow. The -- it will, of course, all depend on the structure of the recovering of the sales in the second half of the year. But I'm very, very confident we should generate more than EUR 400 million. And once again, the Valeo Siemens is totally in line with our expectation and the impact on the second -- on our period, that means the net loss of Valeo Siemens is exactly in line with our expectations. So you see the outlook for the second half of the year show a clear rebounds on both our EBITDA and our cash generation. Those figures, and you've seen comparing the EUR 400 million compared with EUR 570 million of working capital for the first half of the year is cautious. But at that stage of the COVID-19, I prefer being cautious. So that's what we wanted to highlight. I really want to thank all our people. They did a tremendous job. It seems easy to save EUR 570 million. You know what has been done with some countries kind of [indiscernible] partial time in France or similar nation in different European countries, but it has been a very difficult measures in the U.S., for example, with the furlough, which has a tremendous impact on the salary of our people, and they did a fantastic job to save the cost, the EUR 570 million. They did a fantastic cost (sic) [ job ] to reduce the inventory. They did a fantastic job to reduce the CapEx, and the team is really to thank a lot for what they have achieved in the first half of the year. So thank you. And of course, Robert and myself are ready to answer any of your questions if you have any.

[Operator Instructions] The first question would be from Tom Narayan from RBC.

Tom Narayan, RBC. The first question on working capital, the use of cash amount there. Just wondering if you could give some color on what drove that perhaps between inventories, receivables and payables? And then my second question, the EUR 570 million cost savings, which I think you said 90% of it was implemented in Q2. How much of that comes back in Q3 or in H2?

So for the first question, it's a very good question. You have seen that we have reduced our inventory. If we have to look at receivable and payable, the difference is, Robert, EUR 600 million and -- EUR 690 million.

EUR 690 million. So there is a huge impact of the variation of receivables and payables. And of course, it will depend on the speed of the recovery during the second half of the year. But we consider that this situation will, in fact, has started to reverse because we are currently at a sales trend which is much higher than what we observed during Q2. So we consider that this trend will reverse. And this is the reason why, first, we will be free cash flow positive during the second half of the year. We are guiding for free cash flow generation above EUR 400 million, but it is clear that if the recovery accelerates, we could generate more than EUR 400 million of free cash flow. Just by the mechanical impact due to the reversal of the working capital.

The second question concerning the EUR 570 million of cost saving. It has been directly a variabilization of our cost. We have most of our people stopped, the drop of production in April was around 80%, around 50% in May and around 20-few percent in June. So we had to react extremely quickly in terms of variabilization of our cost. So a part of it and the 12,000 people that have reduced, they probably won't come back in the second half of the year. Now our work is to carry on variabilizing of our cost in the second half of the year. So a part will come back, but not all of it. That is the work we are having.

Next question from Thomas Besson from Kepler Cheuvreux.

It's Thomas Besson, Kepler Cheuvreux. I'll stick with 2 topics as well. Firstly, I'd like to come back on the organic growth momentum in Q2 and what you see for H2? And I don't know if I missed it, but I didn't see the details of the order intake this time around. Usually, it's -- yes, with region, innovation, share of joint venture. So that's the first question. And second ...

I don't understand your question. Can you repeat your question?

I would like -- sorry, Jacques, I'll repeat it.

Order intake -- I'm sorry.

So on the organic growth momentum for Q2 and H2, try to understand a bit better. So the effect of the geographic mix and so on. And also, I didn't find the details of the order intake. I don't know if it's because this time around, you don't put it because of the situation or because it's somewhere else. But usually, you provide the regions, the share of innovation, the share of the joint venture. So that's the first question on top line. And second ...

That is the first question. So it's 2 questions already.

Well I tried to stick with one, but it's difficult. We always want to know more. So do you want me to ask the other one or I stop there?

Yes, you can ask the other one. Yes.

Okay. Sorry for that. So the other topic I wanted to address is on the one-offs, basically, can you explain, again, I think, Robert addressed that a bit during the presentation. What have been the assumptions you've taken now for these impairments? Have you completely changed the scenario that -- I think you've completely changed the scenario for the next 5 years. But for the 2024 to the future, are you reconciling that with the plan you presented in December? Or is it something completely different? So basically, I'd just like to understand how it works to get to these one-offs that you've taken in the first half?

For the first question, the order intake, it has no meaning to speak about the order intake and the split between region and -- because it's not significative. So we prefer not to speak about that. We'll do it, of course, for the whole year when it'd be a much more relevant figure. For the growth, the only guidance we gave is that we should grow more than 5% globally for the outperformance of more than 5%. That's what we will achieve. We should carry on having good momentum in each one of the regions at that stage. And what we see for the beginning of the semester is in line with that. Concerning the one-off, before Robert goes into the details, it is an obligation we had from the IMF to do a real impairment test, in-depth impairment test. So we have worked with scenario. It doesn't mean that will be the scenario that we'll give you when we have a better view on what is going to happen. It is a scenario that we are working on for the sake of the impairment test. So don't take it as our new forecast of the long term. It's a scenario that we have taken. It's a scenario that we have been speaking with our auditors. And that is only scenario. So once again, it's not our long-term view of the market and the best we could do to do our impairment test. Robert?

And in terms of scenarios. So you asked for a kind of reconciliation with the assumptions we made when we presented our long-term objectives during our Capital Market Day. In fact, what you have to keep in mind is that year-by-year, we have taken into account a drop of volumes, which is around 10%. It depends on some years. In '21, it's higher than 10%. At the end of -- by the end of '24, it's slightly below 10%. But all in all, we can consider that we have taken into account a decrease during year after year of around 10%. Once again, sometimes it's higher than 10%, sometimes it's slightly lower than 10%. And what is very important is that on top of that, when we had -- and especially for the review of the value of our capitalized R&D capitalized cost, we have also taken into account the last figures we have received from our customers. And so in some case, the decrease can be higher than the 10%. So this is the reason why I wanted to be precise on this topic. I do believe that we made in evaluation -- we performed the evaluation using assumptions, which are, I would say, cautiously realistic.

And again, Thomas, don't consider it as a long-term view of the market. It's only done for the sake of the impairment test.

So we have difficulties to have a precise view on H2. So my view on the '24, '25 is as good as any and...

I agree with your statement.

Next question from Kai Mueller from Bank of America.

The first one really to sort of come back a little bit on these write-downs. Can you just split out exactly -- you obviously touched on these operating assets. But where do we have the EUR 197 million in impairments on your R&D? Is that sitting in those EUR 392 million of operating assets write-down? That's the first one. And what is the big delta between the operating assets impairment and the net income impairments? Is that just the items that flow below the line, for example, for your investment in the start-ups, et cetera? And the second point really on the outperformance. You talked just now, obviously, that you want to do those 500 basis points. But if you think about longer term, is that also your target? And maybe in regard of that, can you give us a bit of color what you think your drop-through will be on any of the growth that is coming through in the second half and also next year because you showed us, obviously, for H1, and you communicated what Q2 would be at Q1. Can you give us a bit of color how you think about it in the second half? And maybe on an operating basis rather than EBITDA.

For the first question in the Market Day on 10th of December, we told you that we are extremely confident that we outperformed the market 5 months a year. Despite the turbulence that we have seen today, we demonstrated we are able to do it. There is no reason why we shouldn't do it in H2 this year. And I'm very confident with the order intake we are having. So we are now to reconciliate the order intake with the market conditions and for the time being, it's too early. The outperformance in the market, we should confirm what we said at the 10th of December, and we said at the beginning of the year, that's certainly no doubt about that. And we gave only the flavor of 2 of our product lines that we have developed in the recent years, the 48-volt and I mentioned the fact that the sales in H2 should be tripled compared to what in H2 last year, but it is a raising market. And for the front camera is 50% more. And that confirms the order intake we gave you that we had in 48-volt, that was EUR 7.5 billion. And the sale that we should have in 2022 was EUR 1.1 billion. What we see in the market is, despite the market condition, exactly in line with that. And for CDA, where we had something around EUR 11 billion of order intake, and we expected the sales to -- for ADAS, pardon, not CDA for ADAS, sales going up from EUR 2 billion to EUR 3.2 billion, as far as I remember. What we see now is confirming those assumptions. So I feel very, very comfortable concerning the outperformance of the market especially in those 2 product lines, but overall. And you have seen that with the different business segments and business group where we are growing. So I feel very, very comfortable with that. The second part concerning the impairment test?

This impairment test consisted of way we have accounted for the impairment test. I have to admit, Kai, that unfortunately, it is just driven by this year IFRS accounting principles. I have to admit that it's a bit complicated because different lines of the P&L have been impacted by the one-off. What you have to keep in mind is the fact that, and this is -- the fact is that during the last years -- during the last 10 years, each time we had to impair an asset related to the impairment test performed for -- at the level of treasury generating unit, the impairment was recorded in other income and expense. So it was not taken into account directly in the operating margin. So when we take into account, for instance, the Brazil assets or when we take into account the assets of Top Column Module or the assets of 2 other treasury generating units, it has been accounted for in other income and expenses. But at the same time, when we have decided to impair the assets related to diesel -- to the manufacturing of components for diesel engine, it has been accounted for in the operating margin because it was not performed through -- the test was not performed according to the -- in accordance with the impairment test of CGU. And we have the same impact for all the operational -- some of the operational liabilities. I have, for instance, mentioned some onerous contracts, which have been recognized for a total amount of around EUR 30 million. Those EUR 30 million have been recorded for into the operating margin. Of course, the investment in start-ups have been recorded on the line joint with venture and associates, and the impairment of the deferred tax assets are recorded on the line tax.

Okay. And then on the operating leverage for the second half?

If we think not in operating leverage, but in variabilization of the cost, we have the same goal to variabilize at least 50% of the cost in the second half of the year. We achieved 58% in the first half of the year, should be higher than the 50% in the second half of the year.

This is the objective, yes, now.

And that's the basis on which you say you want to at least achieve a 10% EBITDA margin. Is that correct?

Yes. Yes.

Yes. Yes.

And again, we try to be -- it's a big advantage to give an outlook at that time of the year with our market conditions. We try to be cautious.

Next question from José Asumendi from JPMorgan.

José here. Just -- I'll stick to 2 questions. The first one on the number of workers, the 12,000. Did you take full benefit of the workforce reduction in the first half? Or are there any benefits coming in the second half of the year? Or -- and/or do you plan to do more workforce reduction in the second half of the year? That's the first question. And second question, Siemens, Valeo, what is the roadmap to hit breakeven there? Can you just give us some simple maybe roadmap as to top line growth or second half revenue growth versus first half, just a few parameters to understand when does the business hit breakeven?

It's easy for Siemens, Valeo, you just take what we said on the 10th of December, and we wouldn't change one line compared to that. It's totally on track. So, therefore, we wouldn't change anything. For the 12,000 people, the notion of temporary people in France, Germany, Eastern Europe or North America is very, very different. So it is something that has been done along the quarter. And we'll have a part of the benefit -- additional benefit in the second half of the year. The rule, and you have seen that we have put some -- between EUR 50 million and EUR 100 million in restructuring costs for the second half of the year. Now we have to go to much more structural cost reduction in all parts of indirect labor in R&D expenses in order to take into consideration the evolution of the market. And that will be all what we need to do in the second half of the year and in the next year. So a part of the 12,000 benefit will come in the second half of the year. That's what I remember.

How much will it be in first half? Yes. Was it maybe a quarter or so without the 12,000 that you saw the benefit in the first half? Or how much did you benefit from the 12,000 or maybe half of that, maybe?

First, we really took the benefit of those reduction of temporary workers during Q2, in Q2, in fact. In -- we started to decrease the number of temporary workers in Q1, but the majority of the benefit is related to Q2.

And in the next few quarters, so forth.

And of course, in the next quarters, but the question was concerning H1.

Next question from Gabriel Adler from Citigroup.

It's Gabriel from Citigroup. My first question is on the production outlook, given your pretty interesting comments at the beginning of the presentation about increased demand for cars as a form of mobility as a result of the crisis. Do you think that the IHS expectation is...

The -- it's -- we cannot hear very much, it's terrible. So I don't understand what you say. Can you try to be closer to your mic or...

Is that clear?

No, we don't hear anything.

Now -- can you hear me now?

Yes, it is better. It is better.

Okay. Sorry about that. I wanted to understand, given your comments around increased demand for cars as a form of mobility in a response to the crisis. What do you think of the IHS expectations of minus 10% in the second half, which your guidance is based on, could perhaps be too cautious? Or do you think this level of demand is already reflecting additional demand for cars as a result of the virus? And then my second question is just on the write-down gap. I just wanted to know whether you were providing a level of D&A savings you expect as a result of the asset write-downs. Any guidance on that?

For the first question, I will take what Thomas said earlier, it's difficult to know what will happen. Today, it's the best thermometer we are having at the IHS. What we see for July and assuming outperformance should be aligned with that, so that's the reason why we took IHS figures at that stage. In reality, you know that CPCA doesn't do any forecast for China. And IHS has not been very good in China in the last few years. So the Chinese figure might be different from IHS, maybe better. That is the first one. The second question?

Was relating to depreciation and amortization. Am I correct?

Not to the right -- the one-off impact on the...

So short time, the impact of the one-off will not be that significant. Of course, we will have to -- we will benefit from a lower depreciation related to the impairment of Brazil and the other CGU, which has been impaired. So you can consider that we could save, I would say, around -- between -- around EUR 20 million per semester, EUR 20 million, EUR 25 million per semester as of the beginning of H1.

H2.

Of H2, sorry.

It will be higher next year.

And it would be, of course, higher next year. And especially when the projects -- the R&D project will enter into production because we have impaired the value of some of those projects. So the level of depreciation, of course, will no longer be depreciated, but don't forget that between now and the date of the start of production. Whereas in the past we were capitalizing those costs, we will not be able to capitalize the cost between now and the start of production. So I don't expect in H2 a significant impact in terms of depreciation coming from the R&D, which has been impaired. And concerning the other assets, which will be between EUR 20 million and EUR 25 million, which is significant, but will not change the -- it's not a game changer. And in fact, it will -- of course, it will benefit to the operating margin. But once again, this is -- we intend, of course, to improve the profitability of the company. And we don't rely on the decrease of the D&A relative to the impairment.

It will be more next year than this year?

Of course, yes, yes.

Next question from Henning Cosman from HSBC.

Thanks for the statement about the depreciation as well because I suppose it implies still a very negative adjusted EBIT result excluding joint ventures for the full year. And I wanted to talk about that, if you don't mind, again, in the context, just conceptually, of that drop-through operating leverage going forward? Because I'm aware you haven't collected consensus this time. But even if I were to imply or apply 25% operating leverage in the recovery, it seems it's taking you until beyond 2025 to return to previous absolute peak profitability. So I just -- I was just wondering if you could discuss that again in the context of those structural cost savings and if it's indeed possible to achieve drop-through operating leverage in the magnitude of 25%. So that's the first question, please. And the second question is on the order intake. I know we have discussed in the past that you're netting the order intake for cancellations. And I was just hoping to understand if you're treating these adjusted client budget for lower target production volumes, if you're treating that as cancellations. And as such, your EUR 5 billion order intake number is net of such adjustments or how we need to think about that?

I can answer the second question. At that time, it's impossible to net from market evolution, our operating income. In the past, we have only netted from pure cancellation of our customers. Therefore, we never netted from market assumptions in the past. What we'll have to do in the future is according to -- but that cannot be done today -- according to the market condition, what will be the evolution of our turnover. What I don't agree is your statement that the forecasted profitability should be reached only in 2025. I won't give any figures at that stage. But you have a lot of things to take into consideration. First, all the technology platform that we have put in place will have a huge impact on our R&D expenses, and that was obviously forecasted. The second is you don't know, I don't know what will be the level of order intakes in the years to come. We don't know and you don't know what will be the policy of our customers concerning the lifetime of their existing models and the lifetime of future models. You don't know and I don't know how much of the existing products will be reused for the next platform. So we have a lot of uncertainties today. I'm pretty sure that we can reach what we have given for the Market Day. You remember, we had given a flavor what could be 2022. So 2022 is tomorrow, we'll have to review that. But I don't agree with the fact that we could come back to normal profit returns in 2025. That is not possible. That is not true.

So just to clarify, the EUR 1.5 billion absolute adjusted EBIT excluding joint ventures, that would be far too late to only reachieve that in 2025, yes?

The EUR 1.5 billion?

No, EUR 1.448 billion, I believe, was your adjusted EBIT level in 2017, excluding joint ventures.

What we said, and you remember, you criticized us because we said 15% EBITDA, the 15% EBITDA will be reached much before 2025.