Valeo SE (FR) Earnings Call Transcript & Summary

Good evening to all, and thank you for joining the presentation of our 2022 annual results. My presentation will last 20 minutes and be followed by a Q&A session for another 40 minutes. I will handle the Q&A session together with Valeo's CFO, Robert Charvier, Almost exactly 1 year ago, we presented our move-up strategic plan and our financial outlook for the period 2022 to 2025. Today, I come to show you that we are delivering on the commitment we made last year for 2022. They are in my presentation today, 4 main points that demonstrate that we deliver. We have achieved the 2022 guidance in a very challenging environment. Our growth is driven by the acceleration of ADAS and high-voltage electrification. Third, we recorded a very high level of new profitable orders at EUR 32.6 billion with very strategic orders and acceleration in electrification and ADAS. And finally, we show a 2023 guidance in line with our move-up plan, which means a significant improvement compared to 2022 after restatement of the full impact of the high-voltage business. So now let's look at these results in more detail. As I said, 2022 guidance is achieved. We did it in a very challenging environment, a runaway inflation, a continued shortage of electronic components, a low level of automotive production and of course, the consequences of the lockdown in China and the war in Ukraine. Our turnover, which exceeded the symbolic EUR 20 billion marked for the first time, reached the higher end of the range that we had set. EBITDA reached 12% and the operating margin 3.2%, the low end of our target range. Our free cash flow now was EUR 388 million, exceeding expectations, which were EUR 320 million. And we achieved a good operational performance. Once again, we delivered to all our customers despite the shortage of electronic components. Despite a low level of car production, our total sales reached just above EUR 20 billion. This represents a 16% reported growth and 9% like-for-like. Reported OEM sales growth reached 18%, and we had another very good year in the aftermarket with 9% growth like-for-like. Our order intake jumped by 48% at EUR 32.6 billion. And let me share with you 3 key characteristics of our 2022 order intake. Point number one, it's a highly profitable order intake. We are applying a very strict discipline in getting new orders, and these orders are taken at a margin that is significantly above the one targeted in 2025 in our move-up plan, leading to further improvement of our profitability beyond 2025. Second point, regarding orders relating to electrification, 2/3 of the orders of powertrain and 2/3 of the orders of thermal are related to high-voltage electrified vehicles. And regarding high voltage powertrain, those orders concern both existing and new customers, existing and new regions such as North America as well as a fair share of new technologies, such as 800-volt silicon carbide. Third point, our orders in ADAS represent 3x our ADAS OEM sales in 2022, including strategic contracts on large domain controllers on software and LiDAR. Now let's come to our 2023 guidance. It's made including uncertainty regarding automotive production. We input a growth of the global production from 0% to 3.3%, which is the S&P forecast and an assumption of a net inflation as well as our own cost reduction measures. In this table, we call adjusted the reintegration of our high-voltage business as of Jan 1, 2022, a kind of pro forma basis. Now given these uncertainties, here is our guidance for 2023. Solid growth with sales between EUR 22 million and EUR 23 billion and operating margin of between 3.2% and 4% with a significant improvement on a pro forma basis of our profitability of 0.8 points to 1.6 points compared to 2022, and EBITDA between 11.5% and 12.3%, also an improvement and a free cash flow of over EUR 320 million also in significant improvement versus a pro forma 2022 of EUR 205 million. As in 2022, there will be a significant improvement in our financial performance in the second half of 2023 compared to the first half of 2023. This guidance is in line with our move-up trajectory. As you know, sustainable growth is at the center of our strategy, our group is supported by strong governance as we committed the roles of Chairman of the Board and CEO are now separated. Gilles Michel is our newly appointed Chairman of the Board. Valeo's Board of Directors is marked by its strong independence and the diversity of its members. We're also transforming the group to drastically reduce its carbon footprint year-after-year and contribute to carbon neutrality. In 2022, our greenhouse gas reduction results are better than the annual emissions targets of our CAP 50 program and trajectory. We are regularly recognized as a benchmark player in most of the ESG indices. Now let's go into the details of our performance by region. We are outperforming global automotive production by 3 percentage points on a like-for-like basis. On an adjusted basis and as a reminder, if you include the growth of our high-voltage business, this growth shows an outperformance of 5 points, which is fully in line with our mover plan. And this outperformance is across all our operating regions to various degrees. Our outperformance reached 11 points in Europe, Three points in North America, 17 points in South America and 1 point in Asia as well as in China. And you can note that China now represents 17% of our OEM sales. In this same conference at the end of Q3, I shared with you my expectations of an acceleration of our growth in Q4 2022. And as you see here, our outperformance accelerated significantly, reaching 19 points on an adjusted basis. And please have a look at the acceleration in ADAS plus 45% and in powertrain high voltage, plus 76%. Let's look now at the performance of each of our business groups. Sales of our comfort and Driving Assistance Systems business group increased by 18% on a like-for-like basis. This represents an outperformance of 11 points compared to the automotive market. And this outperformance was driven by ADAS for which sales increased by 29% like-for-like. 2022 was marked by numerous starts of production, strong growth in Europe, in China, in North America, highly driven by cameras. In particular, for front cameras, we are on the course to become #1 partner of Mobileye in 2024. Sales of our Powertrain Systems business group now, they increased by 12% like-for-like, including high-voltage, -- this is 5 points above the market. The high-voltage business already represents more than EUR 1 billion of OE sales, it's 32% growth like-for-like. The year was marked by key starts of production and market share gains in North America, major wins with existing and new customers on all the high-voltage Powertrain technologies, including 800-volt silicon carbide and in all the production regions. And we have the industrialization of the Valeo cycle, our new e-bike assistance system for which we already have 25 customers. The integration of our former JV Valeo Siemens was a major event for us starting July 2022. This integration is fully in line, fully in line with our plan in terms of order intake, in terms of growth, in terms of product road map, synergies. And this is important, the loss reduction that we planned in the Powertrain high-voltage business. The Thermal Systems business group now, it increased itself by 12% like-for-like and outperformed by 5 points. In particular, we accelerated our sales in Europe for electrified cars and in China as well, both with German and Chinese customers 2/3 of the orders in 2022 concerned e-thermal systems for electric cars. Our visibility business increased by 5% like-for-like, underperforming the market by 2 points. This temporary underperformance is essentially due to the shortage of electronic components that led to an unfavorable product mix, more halogens, less LED headlamps. As the shortage improves, this business group outperformed by 6 points in Q4 2022. And it will keep improving in 2023, supported by many more starts of production compared to 2022. This business is going to benefit from added value in a very sophisticated LED pixelation and new opportunities with the extension of lighting to many surfaces such as illuminated [growth] and logo or light surfaces, remember, lighting everywhere. Our aftermarket business enjoyed a strong growth all throughout the year with a total of 9.9% like-for-like and also reported after a record like-for-like growth of plus 22% in 2021. This growth is the conjunction of the aging global fleet of cars, increased market share, increased scope of business as well as price increases. The group's EBITDA reached 12% of turnover, in line with the guidance in a very challenging environment. 3 business groups contributed to the growth of our EBITDA in [Valeo]. The EBITDA of our Comfort & Driving Assistance business group increased EUR 84 million. It's the highest in terms of EBITDA margin at 15.8%, taking advantage of ADAS acceleration. The EBITDA of Powertrain grew EUR 53 million to reach 10.9%, which was impacted in H2 as planned by the Valeo Siemens automotive integration. The profitability of powertrain is as planned, and this is so important. The improvement of the former [VACA] is as planned, and this is so important. Our visibility business EBITDA reached 13.1%, almost in line with last year. And the business group, which delivered lower EBITDA in values, thermal. The EBITDA of our Thermal Systems business group is 7.3%. This particular business group had several headwinds. One is the unexpected low volume of some key contracts they had in Europe. And another one is due to the fact that our contracts are indexed on the LME price of aluminum while our costs are based on LME plus a premium that reflects the additional cost of our suppliers in terms of energy for transportation, for instance. And this premium cost has largely diverged from LME. In terms of profitability, we achieved the guidance despite multiple headwinds throughout the year at the top of which inflation. Our operating margin reached 3.2% of sales, in line with our guidance. Our gross margin reached 17.2% of sales, down by 40 basis points. In 2022, we continued our efforts to bring down our net R&D cost to 6.5% of sales by 2025. That was a move-up commitment. And actually, we reached 6.8% in 2022, demonstrating the efficiency of our standard and of our platform approach. The IFRS impact is limited to plus 0.4 points, which confirms the quality of our earnings. The JV and associates amounted to EUR 115 million, which takes into account EUR 82 million of losses related to the Valeo Siemens automotive joint venture in H1 '22 and plus EUR 181 million positive income due to the revaluation to fair value of our 50% equity interest in Valeo Siemens automotive before the full takeover in H2. As you can see now here, our gross margin is impacted positively by plus 0.5 points volume effect and plus 1.1 point effect from the product mix. The gross margin is, however, negatively impacted by the net minus 0.9 point impact of inflation on our material costs. And it's in line with the guidance of around EUR 200 million of non-compensated -- it's negatively impacted as well by minus 0.3 point net impact of salary or inflation in line with the guidance of EUR 60 million I indicated before. We have minus 0.4 point as well due to operational efficiency and synergies and after deduction of the dilution effect due to price increase. And the perimeter effect following the integration of Valeo Siemens Automotive in H2, which has a minus 0.4 point impact on the gross margin. Now here, you can see the bridge of the operating margin, the minus 0.4 points effect on the gross margin, minus 0.6 points effect on R&D expenditures and plus 0.2 points effect of the efficiency plan of our operating margin. The group net income amounts to EUR 230 million. And as I just said, it includes a positive one-off of EUR 181 million related to VSEA shares revaluation. It also includes a negative EUR 43 million one-off impairment charge linked to full write-downs of our assets related to Russia. The cost of debt increased to EUR 131 million in the context of rising interest rates and the refinancing of Valeo Siemens eAutomotive debt. In 2022, we generated a free cash flow above the guidance, one of the ways in which we have achieved this through strict control of tangible investments. We have managed to keep them at a rate of 5.2% of our sales, well below the 5.5% targeted in move-up for 2022. So our free cash flow reached EUR 388 million, in particular, it results from the contribution of EBITDA, it also results from a slight positive working capital contribution of EUR 99 million. Our inventory level remains high to secure deliveries to customers in the context of the shortage of semiconductors. This situation is temporary and will be reversed with the gradual normalization of supply chains. It also results from the strict control, as I said before, our CapEx. Obviously, it's to a net to debt of EUR 4 billion, the peak of the debt already integrated into our mover plant following the integration of VSEA. This number is fully in line with move-up. Our mover plan priority is deveraging. Our leverage ratio is 1.67 in line with move-up and far below the covenant level. We confirm our priority on deleveraging. As you remember during the presentation of our mover plan, I set the objective of disposing of nonstrategic assets worth around EUR 500 million by 2025. At the end of 2022, we have already signed 3 transactions for a total value of EUR 80 million. Several other operations are currently under consideration and in advanced discussions for a total value of around EUR 120 million and other disposals for a total value of EUR 300 million are identified with the timing that will depend on market conditions in order to maximize the proceeds. Valeo will submit to the vote of its shareholders at the next Annual General Meeting, an increase in the dividend to EUR 0.38 per share, which is 9% more than 2021. So the progressive increase of the dividend per share continues. Now before opening the Q&A session, I just would like to conclude by reminding you that in 2022, we've been able to keep up the guidance in the very difficult context that we are all aware of. And also, we have accelerated in ADAS and in electrification, fueling our growth and our order intake. In 2023, we will show a strong improvement of our profitability and our cash compared to adjusted 2022 data. And you will see as well a further acceleration of Valeo in Etrification ADAS, which will continue to fuel our strong growth. Well, thank you very much for your attention. Robert and I are now available to answer your questions. Thank you.

[Operator Instructions] And we'll first hear from Giulio Pescatore of BNPP Exane.

The first one on the guidance. Your guidance was so conservative in 2022 that you managed to reach it and not even at the lower end, but by the war in Ukraine and the whole consequent impact of inflation, which I think is a very good result. But looking ahead, is it fair to assume that you have taken a [indiscernible] stance on your targets for 2023. Is this an all-weather guidance. So any comments on that would be much appreciated. And then I have a follow-up on ADAS, please.

Well, thank you for your question. I don't know whether it was conservative in 2022. At the end of the day, we achieved to deliver the guidance. But we were, of course, aware and well aware of the uncertainties that were in this automotive industry in 2022, we were aware of the inflation. We were aware, of course, of the risk of lockdowns in some places of the world. We were aware that the production was going to be constrained by a shortage of semiconductors. So given these uncertainties, we decided to size to put a guidance that we could achieve in 2022. And we have achieved the guidance in 2022, and I want to thank again the extremely strong commitment of all the teams of Valeo to show -- to demonstrate resilience and at the end of the day, deliver all aspects of the guidance. Now in 2023, looking into 2023, there are uncertainties. There are uncertainties when it comes to the global production. Is it going to be 82 million cars? Is it going to be 85 million cars as S&P forecast. There are uncertainties relative to inflation. There are multiple uncertainties where when we look at the situation in 2022, we believe that the guidance that we are showing to you today is well adjusted given the uncertainties and the headwinds that the auto industry continues to face.

Very clear. The second one on ADAS. So Mercedes announced last night that they are -- they will be switching to Luminar line of sensors starting from 2024. I think you are supplying to Mercerdes before your previous generation of SCALA 2 technology. What do you think made a difference here for Luminar. And I know you already have a contract of the [lines] and we cannot assume that you're going to win every business. But are you comfortable with your position or your competitive positioning in ADAS? And how -- what is making a difference for carmakers that a [indiscernible] critical component.

So first of all, on ADAS, globally speaking, we have an extremely strong momentum, and this momentum is demonstrated by our growth in 2022 that was 29%, but is demonstrated as well by the order intake that we had in 2022 at 3x our sales. So in terms of ADAS, the momentum is extremely high at value. And I think we have a very strong leadership when it comes to ADAS. Now your question is specific to the LiDAR technology. And I'm going to tell you something. I'm not going to comment one or the other contracts. But I want to tell you that our third generation of product, which we call SCALA 3. is now under test at many different OEMs. We have announced already the order from Stellantis a few months ago. The commercial dynamic, the commercial momentum of this product is extremely strong. So I'm extremely positive and I'm extremely optimistic that in the weeks to come, we will be able to announce new orders when it comes to our LiDAR technology. So please keep posted for next coming positive news on our LiDAR technology.

And our next question for today will come from Michael Jacks from Bank of America.

Christophe. Two quick questions, if I may. On the first one is on the guidance. What is the level of cost inflation and pass-through that's been built into the 2023 guide? And then the second question is just on order intake. What was the actual value of the order intake and attached to the -- the high-voltage powertrain business in the second half? And does this now take you to 100% book status in relation to your 2025 revenue target.

Well, thank you for your question. The first question is on the pass through. So there is a new wave of inflation in 2023. As I said, it's about electronic components. It's about energy, it's about wages. And that's a true inflation wave that's coming on us. Well, now we are a little bit experienced because we had quite a similar wave or high wave in 2022 that I think we managed quite well. We're going to manage this new wave in the same -- in a similar way. And that's going to take some efforts that are going to be a mix of price increases that we're going to get from our customers and internal productivity measures. You remember, we had an efficiency plan last year, and we are continuing on this efficiency plan in 2023. So the solution of the inflation wave that's in front of us is on prices on the one hand and on the other hand, on internal productivity measures. And thanks to the combination of these 2, we're going to manage this inflation wave the same way we manage it last year. Coming to your second question, the order intake of powertrain high voltage is not a metric that we're going to report anymore. We are reporting on the order intake of Valeo and we're going to report on things like 2/3 of the order intake of powertrain is electrified. But I'm going to give you a sense. We are -- we have communicated at the end of S1 2022 that we had accumulated EUR 3 billion of order intake in 2020 -- in the first half of 2022. We have not stopped working at the end of S1 and we have continued to take orders in the second half of 2022. At the end of the day, the amount of order intake that we could secure in high-voltage powertrain is very much in line and coherent with the objective to have sales exceeding EUR 4 billion in high-voltage powertrain after 2025. So I think we are on track when it comes to the order entry of the high-voltage part of our powertrain business.

Understood. And then just following up on the first one then, should we think about a similar cost inflation level in 2020 as compared to 2022 then, so somewhere around the EUR 260 million mark.

Could you repeat your question, please?

And in value terms, should we think about the cost inflation development in 2020 at a similar level to what we saw in 2022?

No, the cost of -- or the inflation -- the cost of inflation, the additional cost that we're going to face in 2023 are going to be significantly lower than the one we had to face in 2022, just because the raw material increase that we saw in 2022 seems not to happen in 2023 and even some raw material are decreasing, as you know. So the inflation is made in 2023 of new categories, different categories. It's energy on the one hand, it's still electronic components similarly to 2022. It's wages. So there are new categories. But overall, the inflation weight is lower in 2023 than it has been in 2022.

Our next question comes from Philipp Koenig of Goldman Sachs.

My first question is just on the R&D. Can you just comment on R&D in 2023? Do you -- also with the order intake that you took, and you expect R&D to step up again because it obviously stepped up already quite meaningfully in 2022. And then in terms of the IFRS impact, I know it was lower than in previous years, but it did step up quite a bit from H1 to H2. So any sort of guidance on the IFRS impact for 2023? And then my second question is just sort of on the start to the year. We sort of had a bit of mixed messaging from other companies. So what can you sort of say on the volumes, availability of semiconductors in the first 2 months of the year?

Thank you for your question. Well, when it comes to R&D, I think we have very good news in 2022, and I would like to spend a little bit of time on it. We have higher R&D in 2022, but we are higher revenues as well or significantly higher revenues coming from our R&D. Therefore, the metric that we are using to really demonstrate our progress in terms of R&D cost is the net R&D. It's the R&D we spent minus the revenues we get from our customers from this R&D. And if you remember, in 2021, pro forma, our net R&D was 7.9% of our sales. In 2022, our net R&D is 6.8% of our sales. So we went from 7.9% in 2022 -- in 2021, sorry, to 6.8% in 2022. This is a 1.1 point improvement, which is a great improvement. Now where is this improvement coming from? This improvement is coming from the R&D synergies that we announced from the integration of Valeo Siemens on the one hand. And on the other hand, it's coming from a lot of progress we make on standardization, platformization of our R&D so that the amount of R&D we spend for each euro of order intake is being lowered in a significant manner. So I think this extremely good news for our business model had to be highlighted, and I'm pleased that your question gives me the opportunity to highlight it more. When it comes to the volume and the trading at the beginning of the year, it's not maybe as good as I would like it to be because in China, we still had, in January, some impact of COVID. But we're seeing in China, the volumes and the activity coming back in the second half of February. And globally speaking, when I look at January, when I look at the forecast we have for the next 3 months, when I look at the overall EDIs that we receive from our customers, we are comfortable with the guidance of between EUR 22 billion and EUR 23 billion of sales that we communicated to you during this meeting.

And can I maybe just give one quick follow-up question. You obviously mentioned that the operating margin should be rather skewed to the second half of the year with an improvement. Is there any sort of number that you can give us in terms of H1 to H2, I think last year, you guided to around 150 basis points. Should we assume something similar for this year?

I think it's too early to answer to this question precisely. We'll give you more update as time goes on. There's a couple of fundamental reasons why H2 is going to be higher than H1. One is that the volumes -- production volumes in H2 are going to be higher than the volumes in S&P numbers are showing a market or production volume in H2. That's 1.6 million cars higher than the production volume of H1, point number one. And point number two, and that was the same in 2022. There are some discussions with our customers that unfortunately take more time than we expect. This is a fact. This was a fact in 2022, and this is why we get a significant amount of compensation in S2 2022 with a carryback effect from January 1, 2022. And I have to say, unfortunately, it's going to be the same pattern in 2023. There will be some resolutions of ongoing negotiations at the beginning of this year, but I know as well that for some other customers, it will unfortunately take more time. So it's too early to say at which exact speed we're going to resolve all the existing ongoing negotiations. This is why I'm not in a position today to answer your question, but I know that the profitability in H2 will be significantly above the one of H1.

And next, we'll hear from Thomas Besson of Kepler Cheuvreux.

Thank you very much. It's Thomas with Kepler Cheuvreux. I have 2 questions, please. First, I'd like you to talk about the order intake. Historically, Valeo probably had an excess degree of confidence in explaining us that the order intake was going to translate necessarily into revenues in the future. Can you help us understanding how it's built now in terms of volume assumptions, takeup assumptions in terms of options, et cetera. And maybe mention to us if you plan to disclose the regional and business split of that order intake as you used to? Or if it's not something we're going to get. That's my first question.

Well, thank you, Thomas, for your question. On the first one, we are applying on the accountability of the intake, an extremely strict discipline. And this is something that, together with Robert since the beginning of this year, we are extremely strict with our teams. We are never using any more, any volume communicated by our customers. So the order intake that we have put in 2022 is an order intake, which is not based upon the volumes communicated by our customers. It's based upon our own assessment of the volume and our own assessment of the volume is at the time where we record the order intake based on S&P. This is the way we do. And I think it gives a lot of credibility to the calculation of the order intake. We started this new process together with Robert at the beginning of 2022. So the full order intake of 2022 relies on volumes, which are in line with the market and not in line with some dreams of customers to do more cars than they can actually build, point number one. Point number two, this order intake is coming with a high profitability and here as well. Together with Robert, we are putting an extremely strict discipline in the selection of the order intake. And this order intake is coming with a higher profitability than before. And this is a statement that we made I made during my presentation. And point number three, the order take by business group is not a reporting metric. This is not something that we are reporting. We are reporting the order intake globally. But I gave you some hints. I gave you the hint that there is a tremendous momentum on ADAS, 3x the sales on higher sales because we increased significantly our sales of ADAS in 2022. And I gave you as well the hint that on electrification, we are accelerating. So there's a pretty large amount of this order intake that's on powertrain high voltage, and that's on thermal E-Systems or systems for e-cars.

Thank you. I have simple modeling questions maybe to follow. Could you give us some indications on the absolute level of CapEx, interest and tax charge in '23, please?

And sorry, I didn't get your question. Can you repeat it, please?

Of course. Can you give us some indications about the '23 absolute CapEx interest charge and maybe an indication of where the tax rate is going to go to after a relatively high tax rate the last couple of years.

Robert will answer this question.

So concerning the tax rate, our target is around 35%, 3%, 5% -- 35%, sorry. Concerning financial expenses interest, we should be between EUR 140 million and EUR 150 million. And concerning our CapEx, we should be around slightly above 5.5% of our sales.

Which is a cash back of 2022. You remember in 2022, we had planned to decrease our level of inventory. It was not possible. Frankly speaking, it was not possible given the disruption of the supply chain. So we kept our inventory at a pretty high level. But at the same time, we compensated by a significant reduction of our CapEx. This was valid in '22. In '23, we will have to accept and implement some additional CapEx, probably a little bit higher than the 5.5% that we have in our business model. But at the same time, we will compensate by a reduction of the working capital because there's a lot less disruptions in the supply chain that we had in 2022. For instance, the seafreight had cycles that -- or transportation time that increased by 2 weeks pretty much for 2021 and 2022 and now it's back to normal. So we can reshape the loops, the logistic loops that we had to agree on during 2022. We can change this as soon as now.

Can I add a very quick follow-up, please?

Go ahead.

Can I ask if we have seen the trough in terms of margins for your 2 weakest divisions, which have been not for a while, thermal systems and powertrain. In H2, you were respectively at 6.5% for thermal 9.8% for powertrain. Do you think this is the absolute low or this may still decline in some of this business in H1, '23?

That's a good question. Well, I will differentiate powertrain and thermal. On powertrain, we are on track. If you take back the move-up presentation, the objective for powertrain we move up for 2022 was 10.4% on of EBITDA, and we have reached 10.9% of EBITDA. So powertrain is doing better than planned. Powertrain is doing better than planned. It's doing better because the integration of Valeo Siemens into Valeo and into powertrain works and works well. And I really want to insist on that. This integration is a success, delivers results, deliver synergies. And therefore, we have an improvement of the PTS financial delivery versus the plan. This was true in 2022, and I expect it to be true in 2023 as well. It means I expect a further improvement of powertrain year after year, according to the plan ahead of the plan that we showed during move-up. Now when it comes to thermal, it's a disappointment. I will not hide it. It's a disappointment in 2022. It has reasons, but it is a disappointment. And the main reason is the divergence of the price of the aluminum LME and the price we buy aluminum. And if I put in your hands, the products of Thermo is very simple. It's just aluminum. It's aluminum that is cut, it's aluminum that is stamped, it's aluminum that is brazed. t's aluminum that is assembled. This is about aluminum. So when we have a fundamental disconnect between the aluminum we buy and the aluminum we sell, it gives the results that you have seen at thermal. We have reacted extremely strongly towards our customers to make sure that we're going to change the index that is used for the thermal business, which used to be LME and which is going to be LME plus all the additions to the LME price, I mean the energy, I mean the premium, I mean the additive because we have magnesium in the aluminum and so on and so forth. So I do believe that we have the lowest point of profitability of thermal in 2022 that we're going to grow from there, but it's a true disappointment for all of us to see Thermal where we have seen it in 2022. But overall, we could achieve our guidance. It means that we have had all the good news to compensate for it in 2022.

Our next question comes from Christoph from Deutsche Bank.

The first one would be also coming back to the order intake and the margins that you've highlighted. My question would be, did you change the contract structure to some degree, on the indexation or cost components so that the margin that you highlight today will be the same in basically every macro environment when it comes to input costs also in '25 outside of the volumes, which you highlighted you take a haircut too? Or are there still, say, indexation deltas that you highlighted with thermal, which could impact the margin either way up or down? And then on '23 the outperformance that is implied. Could you just give a rough comment if we should expect the same pattern of outperformance like '23, so more back-end weighted? And were the business units sort of more aligned to one another? Or will there be another big spread between the units.

Your second question is related to sales of 2023, right? First one being on order intake. On the first one on the intake, in the contracts we have with our customers when it comes to the orders we were awarded in 2022, there's much better indexation than what we had before. We're learning the lessons. The auto industry is learning the lesson. I think nobody wants to spend 6 months of the year to negotiate things that should not be negotiated because they are so obvious. So as a consequence, it means that the contracts of 2022 are much better indexed than what we had before. Now not everything is indexed. And for instance, labor is not indexed. But what we have in our plan and what we have in our calculation of margins for the businesses that we got in 2022 includes the assumption of an inflation in the years to come. It means that when we make our calculation of margins, we account for an increase of wages in '23 in '24, in '25, in 26, based on a significant inflation in the years to come. As a consequence, we are believe we are on the safe side. We believe that we are taking the assumptions that are right and that protect the margins of Valeo and that makes meaningful the profitability of the order intake that I've reported to you today. Related to the second question on the 2023 sales, you can expect continued acceleration of ADAS. You can expect a continued acceleration of high-voltage powertrain. So what has been the success of Valeo in '22 should be, again, the success of Valeo in 2023. There's one gap, as I said in my presentation, visibility. Visibility has been lagging behind in 2022 for several reasons that I will not come back on now because I already explained it. It has turned in Q4, as explained, 6 points outperformance in Q4 of visibility when it was -- it has been an underperformance for the last 2 years. And as a consequence, I expect that the outperformance of visibility will be there in 2023. This is what we see in our budget and in our numbers.

Our next closure will come from Sanjay Bhagwani of Citi.

So my first question is on -- coming back on the thermal you mentioned. So you mentioned that you are basically changing the indexation to make it like LME plus some premium. So in fact, already done now. So let's say, for example, when we look at the LME price for aluminum for quarter 1, then automatically, the customers will apply the prices, which are like much lower than what they were last year. So customers would be expecting the price down on that. But if I understood it correctly, you are still paying the prices which are higher than the current price. So this is a change in the contract already happened or this could be a drag for, let's say, another half year or slightly more. That's my first question.

Well, thank you for your question. It's a very good question. And obviously, we're not discovering on February 23 that we have a problem on aluminum. We have discovered this as this divergence was created. And these diverseness appeared sometime around midyear of 2022. And therefore, we reacted very strongly, and we engaged into renegotiation with most customers. And the largest customers of thermal, this renegotiation has happened, and we are enjoying a higher price of the aluminum we sell to them at the beginning of this year. It's not done on all customers yet. We're going customer after customer, it takes some time, as you can expect. But we're seeing some support from our customers on this aspect.

Thank you. That is very helpful. And coming on to the electronics cost inflation. Are you also expecting electronics inflation as much lower this year? I guess, I guess, on aggregate, you talked about cost inflation is going to be significantly lower this year. So is that the same, let's say, on electronics as well? And also, are you already in discussions with adding the electronics component into the context as well? So any more color on that would be very helpful as well.

Well, thank you as well for this interesting question. The surcharge is -- the price increase -- cost increase of electronic components in '23 is lower than the one we had in '22. It's still significant, but it's lower. And I think it answers your question. We don't really have an indexation on electronic components in our contract because there's no index of electronic components. There's no existing index. You have index energy, you have index on transportation. You have indexed on raw material, of course, on all kinds of raw material, you have index on [indiscernible] , you wouldn't have any index on electronic components. And by the way, the situation is very different, whether it's a passive component, an active component, a microprocessor or MOSFET power module or you name it. So there is no existing index. So there is no indexation on electronic components, but we have onto electronic components, discussions that are category by category with our customers. And these are not the most difficult conversations because there's still a shortage because our customers want to secure having the right amount of electronic components in '22. And as a consequence, these discussions on the electronic components because we had them already in '22 because it's very factual and easy to understand are not the most difficult ones we have in '23. What is more difficult is energy, it's wages because it's new, but we have customers and us, the expertise and the experience of managing electronic components for already 1 year. So that's pretty easy to do.

So if I understood this correctly, electronics still requires negotiation, but this will be much partner now because you already have the process within [indiscernible]. That's correct.

That's correct.

Our next question comes from Pierre-Yves Quemener pf Stifel.

Yes. This is Pierre-Yves with Stifel. I would have to follow up to be sure that I fully understood what -- on your previous answers. The first one, going back to inflation. Christophe, you mentioned that the cost inflation, the net cost inflation for 23 should be significantly lower. But are you talking about lower than the EUR 200 million for input cost of last year of the overall inflation of EUR 260 million if we include the labor cost? And could we have a ballpark number? Are you baking in 50% less inflation, 60% less inflation to be the first question. I assume question is on the high-voltage business. I appreciate that you disclosed the impact of the power systems [VSEA] consolidation on the gross margin of having been a headwind of 40 bps in 2022. Is this the same impact at operating level? Or is it significantly higher if we are to factor in the SG&A, R&D cost attached to the business.

I will answer the first question, and I will let Robert answer the second one. On the first one, what I said is that the inflation wave is lower in '23 than it has been in '22. So when I say that, I mean the growth amount of the inflation wave. The problem we have to tackle is lower in '23 than the one we had to tackle in '22. Now this inflation wave will be addressed by a set of 2 measures: point number one, price increases at our customers. And point number two, productivity measures, cost reduction items at Valeo. The combination of these 2 elements, price increases on the one hand and productivities on the other hand, on a basis that's lower than the basis of last year, is leading to a compensation of the gross inflation of 23% in our P&L. This is what I wanted to share with you, and I hope it clarifies where I was not clear enough before. Robert, the second question?

So concerning the second question, you have seen that in the bridge concerning the operating margin between '21 and '22, we didn't show any figures concerning the change of perimeter linked to Valeo Siemens. This is because when we take into account the impact of the gross margin, there is almost no additional impact when it comes to the costs, which are below the gross margin. So you can consider that the impact of Valeo Siemens on the operating margin is the same order of magnitude as the one on the gross margin.

Very clear, Robert. One last question, Christophe, don't be mad at me. So you assume you will be able to fully compensate that new wave, which gross amount is lower than in 2022? That's the correct understanding through price increases and productivity?

Well, our target is a full compensation for sure, but I'm sure you have noticed that we've not guided for specific number when it comes to the operating margin of next year, but on a spread. So there's room for different kinds or different levels of compensation.

And our next question comes from Himanshu Agarwal of Jefferies.

The first 1 I have is on the cost inflation. Given in 2023 OEMs are likely to cut prices to support demand. When you are negotiating about the cost inflation regarding energy [indiscernible] . Are you getting any pushback from OEMs? And what level of confidence do you have in able to basically get the price compensation? And when could we start seeing this reflected into your earnings? Is it more going to be in Q1 or Q2 when we start seeing the price come headwind, EUR 75 million to EUR 100 million, but it is, in fact, a EUR 100 million tailwind. So what changed in the last 2 months because you mentioned inventory is still an elevated level?

I will take the first question, and Robert will take the second one. I think you know the answer to the first question. Of course, this pushback. I will not tell you that we are welcome with flowers, when we ask for price increase linked to wages and energy. Of course, we need to have these discussions. In some cases, they are tough. In some cases, they are difficult. In some cases, we have to use our pricing power because we have pricing power with our customers. Not everything is written in a contract. We are supporting our customers in many different ways. Some ways plan contractually. Some are not planned contractually. So we have pricing power versus our customers. It's tough, it's difficult, but I think we have a good track record in 2022. You remember when I mentioned this lack of compensation in '22 and give an order of magnitude, there was a kind of surprise in the financial community. We have been able to evaluate quite well what was going to be the impact in '22. I think we are in a position to evaluate quite well what's going to be the impact in '23, and we have encapsulated the different scenario in the spread of profitability that we have guided for today. So it's tough, but it's going to happen. Robert?

So concerning the free cash flow, you are right. When we communicated our sales for Q3, we were more pessimistic concerning the evolution of the working capital and especially concerning the evolution of the inventories. At the end of the year, finally, it was better, and I have to recognize that or forecast in terms of inventories were too pessimistic. On the other hand, we have also been helped by the fact that during the last quarter, we were able to take advantage on a better customer mix in terms of payment terms. The sales in Europe and the sales in North America were higher than what we were expecting in October. So it has also -- it has a positive impact on the working capital. So this is what I can say. You know the management, the forecast of the working capital is probably 1 of the things, which is the most difficult in finance, especially when the supply chain is very, very much disrupted. This is what I can tell you.

Well, I would like to thank you very much for your attention. We are just above the hour, and we are at the end of this Q&A session. I'm sorry for the questions that could not be asked and therefore, could not be answered, but I'm sure there will be other opportunities to address your remaining questions. Thank you very much for your attention, and have a good evening.