Valeo SE (FR) Earnings Call Transcript & Summary

Welcome to the Valeo Q3 Sales Conference Call. I now hand over to Mr. Christophe Perillat, CEO of Valeo. Sir, please go ahead.

Thank you, and good evening, everyone. Thank you very much for attending the call. Today, I'm joined by Robert Charvier, our CFO; Francois Marion, who is Group Communications Senior VP; and Thierry Lacorre, Investor Relations VP. The call will last 45 minutes sharp, including 15 minutes of presentation and 30 minutes of Q&A. So let me start. In Q3, our sales rose by 33% compared to the third quarter of '21. I think it shows a strong growth and it demonstrates once again the relevance of our positioning and our growth potential. Like-for-like, OE sales grew by 24%. And on a pro forma basis, it means after adjusting the Q3 '21 figures for the high-voltage business, formerly known as Valeo Siemens eAutomotive, like-for-like growth comes out at 26%. You remember that during the presentation on February 25 of our strategic plan that I called to move-up, I told you about 2 points. Point #1, the acceleration in electrification and point #2, the acceleration in ADAS. Well, our high-voltage sales are up 61% over the quarter, and our ADAS growth is strong at 53% and with growth in Europe, in China and in North America. So we walk the talk. And on top of that, we have one more time, a very good momentum in aftermarket sales. Now looking towards the end of the year, we saw an acceleration in our business in September versus July and August, and we see in Q4 the same trend as in September. Therefore, with this in mind and despite the electronic component crisis and the impact of the estimated increase in energy prices, we remain confident that we will achieve our '22 guidance. Using the slide show that you have received, I propose that you go on Page 4 to look at the highlights of the last quarter. You know already that Valeo Siemens was integrated within our Powertrain Systems Business Group, that was July 4. We are very pleased with the integration, which places Valeo among the leaders in high-voltage electric powertrain systems at the exact time when the electrification is accelerating. On July 12, at the [ Eurobike ] show, we presented our new 48V electric assistance solution for electric bikes with already 20 customers. The technology places Valeo at the very center of new solutions being developed for urban mobility. The production of this new solution, which is called Cyclee began in October. In October, we also announced record order intake with 2 contracts for our thermal systems dedicated to EV, a new order for Stellantis with a new smart heat pump and a major order with a leading Japan automaker under which we will supply the air conditioning unit and the front-end cooling module for EV. Including these 2 orders, we have secured more than EUR 4 billion for thermal systems for EV since the beginning of the year, and this accounts for more than 70% of the business group's order intake for thermal. So as I said, we are accelerating in electrification. We are as well in the last few days signed 2 important partnerships, one with TotalEnergies on the development of an innovative way of cooling EV batteries using quite new and high-performance fluid. And also, we signed a partnership, which is very promising with SRG, which is a company with which we will develop external lighting from fascias that will change the face of the coming EV. Proposed now we go to Page 5. I -- just a summary of where we are on the integration into the Powertrain Systems Business Group of Valeo Siemens. You remember that this subject has been very much debated since it was created -- since the company was created in 2016. Now we're bearing the fruits, EUR 1 billion of sales in '22. And in 6 years, we have built a key player in electric powertrain 8 plants, 1,600 R&D engineers, 2,000 patents, 21 customer brands, currently in production and development and more than 90 models. I present to you during this move-up Investor Day in February that this business is expected to record strong growth between now and 2030, we felt that we increased 4 times. In the shorter-term, the integration of the business is creating EUR 120 million of synergies with the full benefits delivered in 2025. I can tell you we are ahead in this integration plan. Proposed we go now to Slide 6. As I mentioned earlier, our activity accelerated in September. And according to our projections, this trend will continue into Q4. And again, with this in mind and based on the S&P global mobility last estimates of more than 18 million cars in '22 and the current energy prices estimates for the end of the year, we remain confident that we will achieve our '22 guidance. The production volume in Europe according to IHS will be at the bottom of our guidance so will be the sales on a worldwide basis before the significant positive impact of exchange rates, which is a positive impact of 4% over the year. As you remember that the positive effect of exchange rate and sales has no impact on margins. Proposed now we go to Page 8, where you see that in Q3, our sales grew sharply by 33% to EUR 5.3 billion, OE sales rose by 41%. The aftermarket business enjoyed a good momentum with sales growing by 10% and -- and this performance was obviously linked to a favorable basis of comparison. You remember, 2021. Q3 was hurt by the production shutdowns in Malaysia. But more than that, I think it reflects as well the very positive 8% scope effect for the integration of the high-voltage business, which grew sharply and recorded sales of EUR 321 million, and this as well a 6% currency impact due to the depreciation of the euro against the U.S. dollar and the change. Like-for-like OE sales grew by 24%. Page 9 now. Our growth of the quarter benefited from the very sharp growth of the high-voltage business. On a pro forma basis, after adjusting Q3 2021 figures for the high-voltage business, the like-for-like growth was at 26%. And this reflects the strong performance of the high-voltage business, which grew by 69% over the period and increased its sales by EUR 125 million. Page 10 now, we're very happy about our aftermarket business, which we call it group momentum in Q3. On top of the fact that it already grew 18% in Q3 '21 versus Q3 2020. This aftermarket business we like very much and enjoys a strong momentum. Why? Because there's a good service rate, we know [ availability ] is a key success factor because we have expanded our product range and increased our content and as well because we have benefited from price increases. I want to say it's important for all the investors interested in [ ESG ]. We are already remanufacturing over 1 million products per year. Proposed now you go to Page 12, where we can see the growth by region. In Europe, OE sales grew by 29% outperforming the automotive production by 8 points. ADAS and thermal systems were the reasons of this increase. In Asia, OE sales increased by 23%, and this is an underperformance of 7 points. Please have in mind that in 2021 in Q3, we enjoyed an overperformance of 25% is in Japan, 11% in South Korea and 50% in India. In China, we have very good news with our ADAS sales scale [indiscernible] and our high-voltage products accelerating as well. And in North America, we have our OE sales growing by 26%, very much linked to ADAS projects and in South America, 9%. Page 13, I want to comment the Comfort & Driving Assistance numbers. It was the most dynamic business growth in Q3, outperforming the auto production by 9%. And this was led by ADAS, ADAS posted like-for-like 53% of growth. The camera business performed very well. Sharp growth in Surround View cameras, sharp growth in front cameras. There was growth of camera in Europe, in North America in China. So 3 are seeing a fantastic growth for this camera business. We have already announced that we have produced more than 100 million Surround View cameras, in our Irish site of Tuam, and we have already produced more than 13 million front cameras total worldwide. This trend that you are seeing in Q3 for ADAS will continue in Q4 because there's even more production start-ups and production ramps up -- ramp-ups in front of us. Page 14 now comes to powertrain. It has underperformed the global production by 1 point, thanks to the integration of our high-voltage business in early July. You remember, we announced during the move-up plan that this business group will benefit over the quarter from the acceleration in the electrification market, 69% growth in OE for this business, which is reflecting the ramp-up of our customers in Europe. We'd like to highlight that at the Mondial Auto Show, we presented the first prototype of technology EESM, which stands for Electrically Excited Synchronous Motor -- that is a new motor free from rare earths that we are codeveloping with Renault. Renault is responsible for the rotor. We are responsible for the [indiscernible]. The [ model ] is making good progress and is already on our test benches. And I already talked about our Cyclee bikes with more than 20 customers. Page 15 now, the Thermal Business Group, which underperformed automotive production by 1 point. We're seeing a performance that has been affected by an unfavorable customer mix in China and the end of the front-end module contract with Japanese automakers that decided to in-source. Since the beginning of the year, we have secured more than EUR 4 billion in orders for EV, including our new smart heat pump. This business that we got already talked about it, one with Stellantis on a smart heat pump and another one with an important and leading European maker. These EV businesses for thermal are 70% of our orders for thermal and will drive the growth of thermal systems in the years to come. Finally, I would like to comment on Page 16 with visibility systems, which has been underperforming by 8 points. They are temporarily affected by unfavorable customer and product mix. And this is something we already talked about. There are disruptions still in the electronic supply chain, and the components used by visibility system are the same that are used on such components as [ ABS ] or the [ regulatory ] component. So when there's a lack of components, the OEM are switching to halogen lamps on their cars to use less chips or to allocate the available chips on [ ABS ]. Just to be highlighted that [indiscernible] informed first orders on the illuminated fascia and illuminated logo, and we've also started production of rear lights based on OLED technology with a premium German automaker. I told you there's going to be more lighting in the front, more lighting in the back, more lighting in the interior, definitely more lighting everywhere. This is the slide I wanted to highlight. And thank you for listening to my comments on our publication, and I will now be very pleased to answer any questions.

[Operator Instructions] First question from Michael Jacks from Bank of America.

My first question is on light vehicle production. Can you please just give us a sense for the October run rate that you're busy seeing at the moment? And how OEM production schedules look into year-end? And then linked to that, it seems that new light vehicle inventories in China have largely been replenished. Are you seeing any signs of your customers slowing down there? Or do you think that's a risk? And then finally, just on the cost of electronic components, specifically semiconductors, is there potentially a tailwind developing there for next year in terms of the pricing, given that you unlikely to use brokers will be required to buy on the spot market to the same extent. And can you please just remind us on the contribution of this cost item to cost of goods sold?

Thank you very much, Mike. So 3 questions. The first question is on the October run rate and whether we see a good volume, good production volume at the end of the year. Just see the IHS numbers, they have been -- they have proved to be quite good, quite reliable in the last month. So if you look at the IHS numbers for October, for November, for December, this is actually what we see. We are seeing -- or we have seen in Q3 an acceleration of our sales in September. This is due to the market, but this is as well due to our start-up production. This is something that I announced to you in H1 in July when I released the H1 sales results. And I told you at that time that you were going to see an acceleration of Valeo sales in Q3 and Q4. And we've been seeing this acceleration picking up in September versus July and August. And when I look at October, we are almost at the end of the month, I see ourselves in line with our expectations. And I see that the call-offs that we are receiving from customers for November and December are according to our expectations. So we are not seeing any downturn on the sales. We're not seeing any cancellation of orders. We're seeing strong demand coming from our customers. We are not seeing any sign of weakness in our production at this time. Second question is on China. We're seeing a very robust production in China. And again here, we're seeing no sign of any kind of weakness of the markets in China. There are currently a few lockdowns going on in China. There are lockdowns in the plants of Valeo as well currently here or there. But I'd have to say that our teams as well as the world ecosystem of automotive in China has learned how to continue to produce cars and produce components when some areas are in lockdown. And this is what we see. We have few lockdowns here or there, but we are not seeing any impact on ourselves. You remember, we saw dramatic impact in April. This is not the case anymore. So today, we're seeing solid sales in China. Your third question is on the cost of electronic components and whether there's a tailwind. Unfortunately, no. I would like to see some tailwind from the electronic component prices. This is not the case. The electronic components have increased significantly in '22 versus '21. We're seeing the same order of magnitude of increase in '23 versus '22. Nevertheless, we had extremely good compensation from our customers on electronic components in '22 versus '21, and we're seeing the same willingness of our customers to contribute in '23 the same way they have contributed in '22, meaning close to 1% for electronic components.

And next question from Philipp Konig from Goldman Sachs.

Yes, I just wanted to come back on the guidance. I think you hinted at the fact that large part of the sales will be supported by FX. I think you said around 4% that doesn't have an impact on the earnings contribution. So is it still fair to say that you are still guiding towards rather the lower end of the operating margin range as previously? Or given that you are seeing better volumes than IHS is upgraded for this year, there's also scope potentially for you to get towards the midpoint of the operating margin guidance? And then my second question is just on the latest order side on the high voltage business. Obviously, there's a strong growth in the sales figures there, but is there also an update on the [ RFQs ] that you're seeing in the market at the moment? Has it changed over the last couple of months? Do you see the market consolidating? Any color there would be appreciated.

Thank you, Philipp, for your questions. Repeat to the first question on the guidance, you have well understood what I wanted to say. The -- you said the volumes are strong. No, the volumes are not strong. If you remember our initial guidance, it was between 79.9 -- or the assumptions we made was between 79.9 million cars and 84-point-something million cars. It happens that it will be 81.8 million cars according to IHS, but with a production in Europe that will be lower at the end of the day and the assumption we took for Europe when we computed the 79.9 million. And of course, the sales of Valeo are still close to 50% in Europe. So I would not consider, I will not say that the volumes are good at this point of time. They are better, but they are not good. And it's reflected in our sales. We had a significant growth in Q3 due to electrification and to ADAS, but we have sales that are close to the lower part of our guidance due to the fact that you need to subtract from the sales that we reported the impact of ForEx. As a consequence, having the volume closed and the sales close to the lower part of the guidance, you are legitimate to think that I'm guiding for the lower part of the key financial numbers. Repeat to the second question on high voltage. I'm not -- in the last 3 months, I have not been asked any more about in-sourcing [indiscernible] a permanent, a permanent question mark from many people. This is not a question anymore. And this is not a question anymore because we are receiving a lot of RFPs, a tremendous number of RFPs. So I'm very happy to share with you that since the acquisition of -- or the announcement of the acquisition by Valeo of the Siemens share and the fact that it has been integrated, we have definitely activated the gas pedal. And when we integrate Valeo Siemens into Valeo, we are enabling the former Valeo Siemens activity to benefit from the hundreds of engineers that was specialized in -- how do you say, high-voltage electronic and as power electronics, so stop looking for the word. It's not high voltage because they are low voltage, but it's power electronic. And it's the same engineers that can actually use or be used to further accelerate in high voltage. So today, we have a combination of Valeo Siemens eAutomotive’ that has become Valeo is much stronger than before. We have activated the gas pedal because we have a few hundreds of engineers that are available right away to convert to high voltage power electronics coming from low voltage power electronics. And we have a technical roadmap that we have much improved, creating a lot of standards. We have 4 standards of motors with 4 different diameters of motors, 3 type of investors, 3 variations of reducers. And with this combination of 4 variations of motor, 3 variations of reducers, 3 variations of investors. We are covering the full market from 60 kilowatts to 350 kilowatts in a very standard manner. So we are becoming stronger and stronger.

Next question from Christoph Laskawi from Deutsche Bank.

Christoph Laskawi from Deutsche. The first one would be on the underperformance is production that we've seen in Q3. You gave plenty of reasons already and part of that should be result with semi availability improving. The question will be, how much of the rest is sticky? Is it really reversing in Q4 already? Or should we expect -- the fact is that have weighed you down rather to reverse in Q1, Q2 next year? And then you elaborated on lower volumes in Europe. Is that having also an effect on working capital and cash for this year? And how do you -- I mean you kept the guidance unchanged so you can offset that through other measures in case it has an effect. And then I know this is a Q3 sales call, but will still try and ask for a couple of comments on '23. Could you remind us on the exposure to wage inflation, energy inflation? And then on cash, does higher rates actually have an impact when it comes to working capital financing. And could you see all of those metrics actually being up next year?

Okay. Thank you, Christoph. Let me try to answer 3 questions. So on electronic components, yes, it's tricky in a certain way. I've always said that it's improving quarter-on-quarter. But it's not yet at the point where the OEMs can produce as many cars as they want. So I continue to say that the institution is gradually improving but still is and will be a constraint in 2023 one way or another. When it comes to the second question on Europe, we are confirming our guidance of EUR 320 million of free cash flow despite some of the headwinds, especially in Europe that I mentioned and you reminded as well. We are confident on being in a position to generate this EUR 320 million of free cash flow in 2022. And related to 2023, you tried, it's a good try. But I will not comment on 2023 before the end of February when we released our numbers because there's, as you know, a lot of uncertainties in 2023. We've not made internally yet all the decisions on exactly what kind of volume we're going to work on and some other aspects. But still, you answered -- you asked a question related to energy and let me answer this question specifically because this, I know already. The volume, I don't know yet. Some of the inflation points, I don't know yet, but energy, we know. And why do we know for energy? Because in February and March 2020, we have decided -- we have seen the energy price at the very bottom of the cycle, and we have decided to extend at that time as many contracts in as many places as possible, benefiting from the low prices that were available at that time. And most of the contracts where it was possible to do it have been extended until the end of 2023. This being said, it means that using the current spot price for the countries where we are -- we don't have this coverage. What I'm seeing for 2020 and even the contracts we have in the countries where we are protected, I'm seeing an impact on our costs in terms of energy in '23 versus '21 of EUR 60 million, EUR 60 million which is around 1/3, 30% of our energy build. It's, of course, much less than what we would have had if we had not made this decision in 2020. And we are, of course, as any additional cost that we're going to face in 2023, we are already asking for compensation through compensation of these costs to our customers, and our customers are open on electronic components. They are open on energy costs as well.

Just 2 brief follow-ups, if I may. The first one would be on the customer mix, [indiscernible] that you made. Are the customers that has dragged you down in Q4 already improving? Or is there a problem at the OEMs, which needs longer fixing? And then just on the cash guidance, is it then fair to assume that you are capping CapEx a bit? Or is that still on the run rate that you've highlighted before?

Okay. I will not comment on customer momentum. Just use the IHS numbers again, they have proved to be reliable in the last month. And you see they are not moving a lot. So if you want to analyze the members by customer, you can really go for that. We have different momentum as far as various concerns depending on the customers, but this is not something we want to disclose here. The second point on CapEx, we're going to achieve our guidance on free cash flow. We're going to do it despite the fact that our working capital will not decrease. It will not decrease. Remember, I hope it was going to decrease in this one, and I said it will not happen because it's not the right time. The supply chain is still extremely disruptive. As I said, I hope it will be done in H2. It's not going to happen in H2. It's not going to happen in H2. And you're even seeing other companies now saying that they will increase their inventory given the supply chain disruptions. So this is a headwind. Our working capital will not decrease. But what we are not going to get from the working capital decrease, we're going to get it from a very strict control of our CapEx and of our R&D expenses. And this is why I'm confident that we're going to achieve at the end of the day, our guidance when it comes to free cash flow. The good news is when this lever of the working capital has not been tapped in '22, it means it remains fully intact for '23.

Next question is from Jose Maria Asumendi from JPMorgan.

A couple of questions, please. And the first one, coming back to the guidance, I'm seeing a strong year-end in terms of volumes. We're seeing how your competitors are able to pass on some price increases in the second half of the year. And they're struggling with the guidance, but to me it looks quite cautious. So I'd love to hear if I'm missing anything in terms of headwinds because I think you should be much more on the upper end of the guidance of range down the lower. Any comments on that, if I'm missing any headwinds, just simply in the light of the strong volumes and the strong pricing power we're seeing on the supplier industry. And the second, is there a number you can share with us in terms of headwinds you had, inefficiencies in 2022 on stop and go, higher freight costs. Just items that is the momentum normalizes next year, we will not have these headwinds anymore next year. If you have a figure, that would be great, please.

Thank you for your questions, Jose Maria. Well, when it comes to 2022, there have been quite a lot of analysts that told us that we will not achieve our guidance for the reason that we are now integrating in our members fully starting July 1 the Valeo Siemens company. So if you remember the conference call in July, I received quite a lot of questions from some people saying, well, how are you going to do it? How are you going to achieve your guidance? Why is there going to be such an increase of profitability between H1 and H2, when at the same time, you are incorporating into your H2 the members of Valeo Siemens? And I tried to explain why we were going to be in a position to do it. So again, I think our guidance is not disappointing. I think that given the fact that there's still some headwinds that the volume are not so strong, that there are still some stop and go freight, exactly what we described, Jose Maria, in inflation as well. And despite the very much success we have in getting compensated by our customers, I think the guidance that we do is a good one, given the fact that it now includes Valeo Siemens under circumstances where the volumes and the sales are not -- are good, but not absolutely fantastic.

Next question from Thomas Besson from Kepler Cheuvreux.

It's Thomas Besson. I have a couple of questions, please, that we'll focus on powertrain. I know that with the volatility in production, the concept of outperformance and underperformance is a bit irrelevant. But I was surprised to see the powertrain was underperforming by 9 points. So I'd like you to give us a bit more flavor on that. And also, if you can give us the organic growth of the high-voltage business. I think you give us the absolute revenue figures at EUR 321 million and the 61% growth rate, but we don't have the organic growth rate. So that's the first question. And the second, would you happy to give us details on the impact of the acquisition on revenues? Could you give us a qualitative comment on the improvement on the earnings contribution, knowing that we have seen in the past that how [indiscernible].

On powertrain? Powertrain?

Yes. Sorry. The second question is on the qualitative comment on the improvement you're seeing with the integration of high voltage because we have seen in the past when it was still a joint venture but higher revenues did not necessarily translate into better profits or higher profits.

Thank you, Thomas. to the first question. I'm not sure fully understood. We thought.

The underperformance of [indiscernible].