Valeo SE (FR) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Valeo First Quarter Sales Conference Call. Today's call is being recorded. And now I'd like to turn the call over to Mr. Christophe Perillat, CEO of Valeo. Sir, please go ahead.

Well, thank you very much, and good evening to all. Well, thank you for joining the call for Q1 2023 sales. My presentation will be short, less than 10 minutes, followed by a Q&A session for another 30 minutes. And together with Valeo CFO, Robert Charvier, who is joining me in answering your questions. Please, on your slide deck, go to Slide 2. And let me start with 4 important elements that I would like to highlight today. Point number one, Valeo had a solid start in 2023 with our sales up 15% to close to EUR 5.5 billion. This solid starts, and this is my point number 2, reflects, as we announced a continued acceleration of valuing electrification and in ADAS. Three, we continue to see good momentum in these 2 domains. And in particular, since the beginning of the year, I would like to highlight that we have already booked around EUR 4 billion for high-voltage electric powertrain systems in all kinds of technologies, including the 800V SiC inverter and onboard chargers. And last but not least, we confirm our guidance for 2023. Please go to Slide 3, where total sales amounted to EUR 5.5 billion, as I just said, up 15%, including the contribution of our high-voltage electric powertrain of EUR 362 million, and this strong growth is driven by the acceleration in electrification and in ADAS, just in line with our strategy. Our OE sales grew by 13% on an adjusted basis, that is to say including the high-voltage business, and this represents an outperformance of 7 points compared to the global automotive production based on the latest data from April received from S&P Global Mobility. Let me highlight as well that our Aftermarket business is again very robust with a 6% increase in sales compared to the already high Q1 2022. Slide 4 now, when we talk about continuous acceleration in electrification, this is clearly reflected in the numbers. Our sales in high voltage powertrain grew by 69% to reach EUR 362 million in Q1. The EUR 4 billion orders that we received and booked since the beginning of the year to date is very good news in this respect. It gives us confidence in our ability to achieve the objectives that we have set ourselves. EUR 4 billion just in 4 months, it's, I believe, extremely encouraging confirm our objective to reach EUR 4 billion of sales in this business by 2030. But because as well, these orders relate in particular to our 800-volt silicon carbide technologies meaning inverters, meaning onboard chargers in all regions of the world, including Europe, North America and Asian customers. Now please turn to Slide 5 because in ADAS, too, we have good news, and we are continuing to accelerate. Our sales increased by 21% in Q1, reaching EUR 761 million and here again, we see strong momentum with our technologies. Let me highlight the recent announcement of 2 new major contracts for third generation LiDAR, what we call SCALA 3, one with a leading Asian manufacturer, the other one with a leading American robotaxi company, and together with the strategic order we booked last year, we have now registered orders worth more than EUR 1 billion for SCALA 3 LIDAR. Slide 6 now, [indiscernible], and this is quite important. And good to hear the Aftermarket was again dynamic with 6% growth. This is to be compared with an already very high comparison basis with strong sales growth in Q1 2022. It's good news, as you know, because Aftermarket is a business with good contributing margin. Please note, we recently received the Supplier of the Year Award from Nexus, our biggest customer and the world's largest aftermarket player. It shows how much confidence those we serve have in us. Now Page 7, there is no change to what we presented in February, we confirm the 2023 guidance. In a year that is marked by a rise in energy prices and wages, our priorities are very clear: optimizing our cost and negotiating compensation with our customers. In this respect, let me tell you that we made good progress on these discussions. They always take more time than we wish for sure, but I'll remind you that as a consequence of it, there will be a significant improvement of our profitability in H2, which means some imbalance between H1 and H2 profitability. But again, at this stage, I think it's too early to guide on a more precise H1. We will do it as we firmly signed the inflation deals that are currently under discussions with our customers. Now Slide 8, where we can have a closer look at our sales by type, by region, by business group, and we can start with Slide 9 with our total sales again amounting to EUR 5.482 billion. This represents 11% like-for-like adjusted growth. Our OE sales and our Aftermarket business grew, respectively, 13% and 6% on a like-for-like adjusted basis. On the next page, Slide 10, you can see that on a worldwide basis, we outperformed the market by 7 points, which I believe underlines the great [indiscernible] that the high-voltage electric powertrain business now represents for us. Let me walk through the different regions. Europe, we have performed by 5 points, supported by ADAS. This is cameras but as well electrification. In Asia, we performed by 6 points, supported by the momentum in all our business groups. In China, we underperformed by 2 points, mainly due to a significant contract that expired with the Japanese automaker for front-end modules and some favorable mix at [ VBT ], which we should recover before year-end. In North America, we were penalized by disruptions in the production of our customers and some production delays see at customer level on some of the platforms that the group is currently delivering, and this created an unfavorable mix for us. Therefore, we underperformed by 7 points, and we are convinced it's a temporary solution -- situation, sorry, as it's expecting to improve in the second part of the year. Now Page 11, which shows the status by business group. Our Comfort and Driving Assistance and our Powertrain System business groups are ready today, the group outperformance engines, and this is driven by ADAS and driven, as you know, by electrification. Our CDA Business Group outperformed the market by 11 points, in particular to the ADAS activity, particularly cameras, which is 15 points higher than the market. Our Powertrain Systems business group outperformed the market by 14 points, thanks to the performance of our High Voltage business. Our Thermal Systems business group outperformed the market by 2 points, driven by [ e-thermal ] systems for EV cars, especially in Europe, and our Visibility Systems business group performed in line with the market. If you remember, for this business group, last year, we experienced an underperformance. We will have this year performance in line with the market and an overperformance as we get close to the end of the year as we're going to benefit starting in the second half of the year from start of production and a very large number of projects. We should, for Visibility as well see an improved product mix as the component supply should return to normal. I think I said most of what you need to know relative to the sales of the Q1. But before opening the Q&A, I would just like to conclude by reminding you that our performance in Q1 is absolutely in line with our strategy. We continue our acceleration, acceleration in ADAS, acceleration in electrification, and this is what fuels our growth and our order intake. Thank you very much for your attention, and Robert and I are now available to answer your questions.

[Operator Instructions] [ And we'll first share ] from Chris McNally of Evercore.

Thanks so much. Two questions, one on the macro and then one on outgrowth. So on production, there's been a lot of different comments from the suppliers this fall and the earnings season, and we're also seeing a difference in some of the numbers between the forecasters. Could you just talk about how -- for what you can see the production developed over the course of the quarter, if there was any disruptions? And also just generally, maybe we could talk about sequential, do you see sort of the outlook, the call offs you're getting for Q2, Q3, even just Q4, do you think it's a little bit better than what you saw in Q1?

Well, thank you for your question. Yes, we have experienced disruptions in the first quarter. There's still some supply chain issue here or there. We believe that these disruptions are a little better planned, better anticipated and are recovered later on the following week or during the same month. We are seeing now the S&P Global Mobility forecast being very much stable at 85 million cars for now several months in a row. As far as we are concerned and when we look at Q1 and when we look at the forecast that we are receiving from our customers and looking as well as the stability of the S&P Global Mobility forecast, we are not worried about the market.

Perfect. And just -- maybe just to think about -- do you expect that production would be -- global production to be higher in Q2 and Q3 than maybe Q1 just from what you see sort of the year-over-year and some of those are confusing. So if we just think about sequential growth, do you think Q2 will be higher than Q1?

Well, Q1 has been impacted in one of the largest markets in the world, China by both the Covid in January and the New Years in February. So going forward, we're seeing some recovery during the course of Q2. So we are seeing, overall, we're sticking to the S&P Global Mobility forecast that calls for Q2, high production, slightly higher production than Q1. Again, looking at the call-offs from our customers and the number of cars they aim to produce during the full year, we are not worried about the market.

Okay. Perfect. And then just on the outgrowth a little bit of -- you made some comments second half or first half on the launches. And then maybe if you could just add a little bit of detail around Visibility and Thermal where they've been underperformers for some time now. I think Powertrain and Comfort, I think we'll spend most of the time on the call. But just -- can you give an idea about what's holding back Visibility and Thermal second half over first half?

Well, absolutely. On Visibility, if you remember the numbers from last year, we have underperformed last year the market. And starting Q4, it was starting to get better, and this is when I said that Visibility will be in line with the market in the first half and the first half of 2023 before picking up with outperformance later on during the year, so we had significant start with production. We had significant launches coming in the second half of the year that gives me confidence that from the second part of the year and for sure, Q4, there will be outperformance of Visibility. So the growth engines that we have today with Powertrain and ADAS will continue while the Visibility engine, if I may say so, will start in the second part of the year.

And our next question comes from José Asumendi of JPMorgan.

Jose from JPMorgan. [indiscernible] A few -- 2 questions, please. The first one, just can you talk a little bit around your -- the order backlog in High Voltage and how this is translating into revenues in the coming years? It looks like your [ EUR 2 billion ] sales of '25 looks a little bit conservative in the light of the backlog you have. So can you maybe talk a little bit about how the business is progressing and this come back again to the comments on the encouragement on the orders? And then second, can you discuss a little bit the pricing, please. It sounds like pricing from your comments will have a significant impact, especially in the second half of the year. Maybe you can give us a bit more color with regards to how does this work on the supplier side, on the Valeo side. You've closed the agreements, maybe in the first half of the year, and we've seen the impact in the second half. Should we expect some impact from pricing in the first half? Just a little bit to get more confidence with regards to pricing?

Sure. Thank you for your 2 questions. And will start with the first one, Jose, on the backlog on High Voltage. The road map that we communicated when making the decision of acquiring the Siemens shares within Valeo Siemens was the road map with EUR 2 billion sales in 2025 and EUR 4 billion sales in 2030. Seen from today, I think these numbers are conservative, and there will be a time for us to update you on our progress related to the High-voltage Valeo Powertrain activities. And just to give you some heads up, we are making very significant progress in all fields. I think this is visible, and this is why we communicated on that already today, which is visible already from the order intake that we have secured up to now this year with EUR 4 billion. Of course, getting EUR 4 billion already after 4 months gives us potential to improve our sales in 2030 when you get more than EUR 4 billion per year at the point of time, you are delivering more than EUR 4 billion of sales per year. And when you reach EUR 4 billion already after 4 months, it means you're going to get more than EUR 4 billion orders for the full year. So what we're seeing today is very positive. What we're seeing today is the sign of an integration process that's very successful. Again, there will be a time for us to update you on our progress, which I consider is very significant. And to very clearly answer your question, I think that we have a lot of potential to deliver better than the EUR 2 billion of sales in '25 and the EUR 4 billion in 2030. When it comes to pricing, we're making good progress as well. This, on the 1 hand, good progress, it means that the discussions are fair, in my mind, but they are very detailed. It takes a lot of work. It takes a lot of detail. It takes a lot of audits. When it comes to pricing discussions, and this is always quite frustrating. What is frustrating is the time it takes. It takes more time than we wish, unfortunately. And therefore, when I consider that a significant part of the deals will be secured in H1 based a risk that some of the discussions are going to continue throughout H2 and this is the reason why we are guiding for a difference or improvement in our profitability in H2 versus H1 quite similarly to what you've seen in '22, where some of the discussion lasted longer. The time it takes is important, but what is more important is whether these discussions are fair and are giving positive results. I'm confident that the discussions are going to give the positive results that we expect.

And our next question will come from Sanjay Bhagwani.

This is Sanjay Bhagwani from Citi. I've got 2 questions as well. So my first one is on the organic growth. Could you please provide some color on what is the regional light vehicle production tailwind did you see in quarter 1? And if this also includes some sort of pricing, that is my first question, and I'll just follow up to the next one.

Thanks. It was quite difficult to hear you. I would ask you to repeat your question, please?

Yes, sure. Is it any better now?

It seems to be better, yes.

So I'm trying to look at the organic growth that what is the regional tailwind in that like regional mix tailwind in the organic growth? And is there any element of rising already in Q1 in these numbers? So that is my first question.

No, there's no pricing in it. There is no pricing for the reason that even for the deals that we secured at the end of the quarter and that are retroactive during first, it takes some time to get the purchase orders. There's a [indiscernible] process after a deal has been cut to transform this negotiation or this new contract into purchase orders. And therefore, it's not recognized in sales of Q1.

And on the regional tailwind, regional mix tailwind?

On the payments, you said?

Sorry. So the geographical mix tailwind. So let's say, Europe and U.S. has outperformed China, so what sort of tailwind you have seen overall? What is like vehicle production driven by the geographical mix exposure?

So there's -- I mean the geographical mix of 3 points, and this is linked to the fact that we have a share of our sales in Europe, that's 50% and therefore, when we are outperforming in Europe that gives us a kind of credit in the geographical mix, so this is a simple as that. We are growing or we have been growing significantly in a region where we have 50% of our sales and to be very clearly in the presentation we make, we are identifying this in our reporting.

That is very clear. And I think you alluded to the pricing side. So maybe can you please remind us, are you going for the peak price increase or lump sum payments? And if, let's say, this is peak price increase, then if you agree with the customer that the new prices will be applicable from H2, then in Q2, you may see some lump sum payments side, I mean, from Q1, which is already you have discussed and agreed upon, but also the Q2. So maybe if you can provide some color on the mechanics?

Sure. Of course, there are more price updates than lump sum. There might be some lump sums for some specific categories of cost input, but the general rule is that it's price update and not lump sum, point number one. And point number two, whatever agreement we go for, we sign has -- or includes a [indiscernible] price adjustments starting January 1, 2023, and this is one of the reason why you have a stronger second semester versus the first semester because you have in the profitability of H2 a part of the profitability of H1.

And next, we'll hear from Christoph Laskawi of Deutsche Bank.

Christoph from Deutsche. The first one would be on the start stops and [ call for volatility ] that you've highlighted, especially for North America. Could you potentially comment a bit on other regions and more product specific, where that is most challenging or has been most challenging in Q1? And when we think about the current trading, do you see this already normalizing so that we should see a smaller impact only in Q2? Or is it really only in H2 that you point to where the production schedule should be a bit more as move when it comes to your own facilities? And then the second block would just be on the high-voltage order wins that you had. You already said those are across the regions and with various customers. Are those like 2, 3 big ones or even more contracts that you've signed? And if possible, any Chinese local OEMs in there or mostly Western?

Well, thank you for your questions. On disruptions, I would not like to highlight too much on disruptions given what we have been going for in 2020. In 2021 and 2022, I think our production sites have done how to adjust, how to adopt, [ how to meet ] the cost impact. And as you know, we are pretty agile at Valeo. We've not created as far as we are concerned any disruption by ourselves, so we are adjusting, we are adapting. We have seen some disruptions, but of course, less than last year. In Europe, we've seen some in North America. We continue to think that the situation improved quarter-after-quarter, so we have seen Q1 better than last year. We believe Q2 will be better than Q1. To seeing the issues being resolved one by one, so this is not something that is on the top of our mind today. When it comes to -- and maybe differently from some other Tier 1s, we don't have a lot of just-in-time operations. It means that we can produce more 1 day and stop during the full day of the next day, which helps the production plant organization. It helps to reduce the cost of disruptions versus the Tier 1s that had a just-in-time operation. When it comes to high-voltage orders, this EUR 4 billion is made of a handful of orders. You have -- I mean we don't have the authorization of our customers to disclose these orders. I'm sorry not to be able to give you more on that. But I can tell you, again, we have business in North America. We have business in Asia. Asia is several countries. We have business in China as well, including Asia. We have 800-volt silicon carbide inverter. We had [ e-Axle ]. We have silicon carbide onboard charger, so there's -- I mean, there's a variety of products, but I don't want to give you the view that it's a little bit of everything. At the same time, we have since we acquired the shares of Siemens, Valeo Siemens, restructured significantly the product offer, reorganized the product offer, streamline the product offer. We have a limited number of motors that we are proposing to cover the full spectrum of technologies. We have a very standard, 800-volt inverter that's extremely standard, and that can afford from 80-kilowatt to 300-kilowatt in a very standard manner just adding bricks. So we have created today a product offer that can cost very different businesses while limiting significantly the R&D expense, and I think this is becoming a competitive advantage of our high-voltage operations.