Valeo SE (FR) Earnings Call Transcript & Summary

Good evening, everyone. Thank you for attending Valeo's 2024 First Semester Results Video Conference. We'll spend 1 hour together, around 20 minutes of joint presentation with Valeo's CFO, Edouard de Pirey, followed by a Q&A session. In H1, we continue to improve profitability and cash generation. Our H1 margins and free cash flow are aligned with our full year guidance. We achieved this, thanks to a strict control of our cost and our cash in a low-market context. Our sales reached EUR 11.1 billion, up 1% compared to H1 '23 on a like-for-like basis. Our EBITDA reached 12.4%, which is up 0.8 points. And our operating margin is at 4.0%, also up 0.8 points compared to H1 '23. And last but not least, our free cash flow has already reached EUR 121 million after one-off exceptional costs of our self-help measures. This represents EUR 277 million more of cash generation on H1 '23. I would like now to share with you 5 important highlights from our first semester, well in line with what we presented last February: the reduction in our costs and the customers' compensation, which put us on track with our guidance; a strict management of cash at each level of our organization, reflecting a shift in mindset; the creation of Valeo POWER to combine our powertrain and the thermal solutions for all types of vehicle powertrain. This reorganization allows us to reduce our breakeven point and to increase the flexibility of our Powertrain System. Indeed, we now combine in the same plants the technologies for convention engines and the technologies for electric vehicles. We also completed the sale of our Thermal Commercial Vehicle business as a part of our asset disposal program and our new group CSR agreement, which reiterates and reinforce our commitments in that field. So as you can see, these half year results are marked by a strong effort on cost control. The gross margin increased by 1.4 points to reach 18.5%. This is thanks to the good control of our operations and to the first effect of self-help measures. The increase of our R&D expenditures is lower than expected, thanks to increased efficiency of our R&D in the context of, as you know, particularly high order intake in '22 and '23. Gross R&D and IFRS impact have started decreasing from Q2 after reaching their peak in Q1. Last, we cut. We cut costs on SG&A expenses, which decreased by 11 -- or sorry, EUR 18 million year-on-year or 0.2 points. As announced in February, we have introduced a new financial segment reporting around 3 divisions: POWER, BRAIN and LIGHT. It's indeed an important step for the group, which is now ready to move forward and to accelerate. On Slide 8, now you can see some illustration of our new comprehensive and competitive offering for all powertrain architectures with advanced technologies for optimized temperature and power management. We'll be able to leverage significant synergies between our 2 former activities. Next, I'd like to illustrate our recent activity at BRAIN with a focus on a new sensor, which completes our portfolio with a thermal camera. It's the most cost-effective solution to detect pedestrians at night when 75% of fatal pedestrian accidents occur. The sale of this kind of sensor and of course, the associated software will be supported by the new regulation of automotive emergency braking in the U.S. We have already signed a major contract with a global OEM for this technology. In terms of lighting now, the half year was marked by a number of launches. You can see a few iconic ones on Slide 10 like the Renault 5 E-Tech Electric, the Lynk & Co Z10 or the BMW 3 Series with our carpet light. Over the full year, our LIGHT division expects to bring into production close to 300 new projects. This half year confirms our trajectory of improved profitability and cash generation and the continued acceleration of our transformation. Therefore, we reaffirm our margins and our free cash flow objectives for '24 and '25. And on the other hand, we adjust our sales objectives at around EUR 22 billion in '24 and between EUR 23.5 billion and EUR 24.5 billion in 2025. And this is notably due to the expected continued softness of high-voltage powertrain sales, which we see now around EUR 1 billion for the full year '24. Now I'd like to hand over to Edouard for more details on this half year's performance and results.

Thank you, Christophe, and good evening, everyone. Let's now take a closer look at the financial performance of this first half of the year '24. I will let you have a look at the backup slides for Q2 figures. Starting first with the sales by type on Slide 13. At the end of June '24, Valeo's sales reached EUR 11.1 billion, plus 1% like-for-like. ForEx had a negative impact of minus 1.2 points, and scope had a negligible impact of minus 0.6 points. As far as OEM sales are concerned, they were down 1% like-for-like largely impacted by low activity of high voltage, and I will come back to it later. Aftermarket recorded a sound growth at plus 5%, benefiting on one hand from the continuous increase of the average age of cars in the market and on the other hand, from our high-value offering. Miscellaneous sales performed strongly, supported by prototype sales preparing the upcoming numerous starts of production in the LIGHT division, as Christophe just explained. Moving to Slide 14. Our global performance was slightly negative at minus 1 point. It includes minus 4 points of negative impact of lower sales in high voltage, a situation that has continued since Q3 2023 and minus 1 point unfavorable geographical mix. By region, Europe performance came out in line with low high-voltage electric powertrain sales mitigated by strong growth in ADAS and positive growth in the other POWER division's activities. North America outperformed by 1 point. Asia, excluding China, outperformed by 6 points. China. Performance was down 7 points mainly due to our customers' mix. Chinese OEMs today represent 47% of our sales in China. This is 4 points better than last year but still lower than the share of these OEMs in the Chinese market. We continue to reposition our customers' portfolio. In this first half, 70% of our orders in China were taken with Chinese OEMs. We will see the first benefits of this repositioning in the second half of '24. On Slide 15, we recorded positive like-for-like growth in all businesses this first semester except in high-voltage powertrain. In fact, in high voltage, we recorded a low level of sales at minus 43% on H1 2023. Activity on certain high-voltage platforms in Europe are low since Q3 last year. And we have a very unfavorable comparison basis versus H1 '23, where sales more than doubled versus H1 '22. POWER, excluding high-voltage powertrain, was plus 2%. This relates to traditional, thermal and powertrain product lines, which, as you know, are profitable and cash generating. BRAIN was plus 6% with a good level of growth of plus 7% in ADAS and a sustained growth of 4% in interior experience. Finally, LIGHT was plus 2%. By segment now, starting with the POWER division on Slide 16, formerly powertrain and thermal business groups now merged into one single division. Sales amounted to EUR 5.7 billion. The division OEM sales underperformed the market by 5 points, including minus 7 points as high-voltage impact. POWER EBITDA margin was up 0.7 points to 10.3% of sales, supported by the synergies plan resulting from the integration of the high-voltage electrical business, the mixed product effect with the growth of profitable and cash-generating activities of traditional businesses within POWER and finally, the improved profitability of the former Thermal Systems business group whose EBITDA margin grew by 2.4 points year-on-year to 9%. On Slide 17, BRAIN showed a good financial performance this first half. Sales came at EUR 2.6 billion, an outperformance of 6 points as far as OEM sales are concerned. As expected, the level of activity was good in Q2, especially in cameras. As you know, BRAIN is the division which contributes the most to the group's EBITDA. It now includes the Top Column Module business. BRAIN improved its EBITDA margin significantly by 2.2 points to 15.9% of sales. On Slide 18, LIGHT sales amounted to EUR 2.9 billion, an outperformance of 2 points for OEM sales, sustained especially by the EV business in China with Chinese OEMs and with a North American automaker in both North America and in China. EBITDA margin recorded a good resilience at 12.7% of sales in the context of high costs needed to prepare for numerous production launches, low business levels due to production stoppages at several Japanese automakers and the depreciation of the yen against the euro. Slide 19, order intake. In the first half, we booked orders worth EUR 9.1 billion with significantly better embedded margins. As you know, several OEMs have postponed their projects pending key choices on their powertrain and electronics architectures, leading to postponed award decisions. We also maintain our high selectivity of order intake to focus on midterm profit as well as on short-term cash generation. As explained earlier this year, this lower level of orders is fully compatible with our midterm growth after exceptional levels we booked in the last 2 years. Let's now have a broad view on group's financial performance on Slide 20. The group operating margin performance is in line with our 2024 margins and free cash flow targets and encouraging by showing a sequential improvement over the last semesters despite a challenging market environment. Indeed, at the end of June '24, EBITDA reached EUR 1.4 billion, plus 6%. EBITDA margin improved by 0.8 points at 12.4% of sales. Operating margin improved by 0.8 points at 4.0% of sales. This represents 450 -- sorry, EUR 445 million, an increase of 23%. Net attributable income was at EUR 141 million, plus 18% and free cash flow generation at EUR 121 million after one-off restructuring costs, up EUR 277 million. On Slide 21, the 0.8 points improvement of our operating margin on H1 '23 came from: A, plus 1.4 points from gross margin improvement even after a slight negative volume effect, thanks to good control of operations and first effects of self-help measures; improved profitability of existing and new contracts, you will note that the level of provisions reversal on onerous and unfavorable contracts was much lower than last year; B, plus 2 -- plus 0.2 points from strict control of SG&A, as explained by Christophe; and C, minus 0.8 points of R&D expenditures impact. These expenses represent the cost of development for the outstanding EUR 70 billion of orders booked in the last 2 years, reduced on the other hand by better R&D efficiency than expected. The IFRS impact is finally limited to 2.4 points. The R&D expenditures will continue to decrease in H2. On Slide 22, starting from operating margin, excluding JV and associates, at EUR 445 million; other income and expenses at minus EUR 50 million, including EUR 134 million of restructuring charges, balanced by EUR 94 million gain on the disposal of Thermal Commercial Vehicles business; cost of net debt at minus EUR 123 million in the context of higher interest rates; income taxes at EUR 89 million, implying an effective tax rate of 34%. So bottom line, Valeo's net attributable income reached EUR 141 million after EUR 32 million of minorities. As far as our cost reduction initiatives are concerned on Slide 23, we already finalized in H1 our restructuring plan we announced in January. We recognized EUR 119 million of charges in the first half and EUR 25 million as cash expenses. You remember that -- our project by allocating EUR 300 million in one-off exceptional self-help measures over the 2 years period of '24, '25. We expect to generate run rate cost saving of EUR 200 million with a positive impact from 2026 on an annual basis. On Slide 24, the free cash flow came out at EUR 121 million after one-off restructuring costs with a positive contribution of EBITDA by EUR 1.4 billion; the strict control of capital expenditures in the context of close to EUR 70 billion of order intake received over the last 2 years; a positive working capital variation, notably thanks to a sustained EUR 290 million reduction in inventories, particularly of semiconductors; and restructuring costs of EUR 44 million, including EUR 25 million of exceptional one-off self-help measures. Bottom line, net cash flow represented an outflow of EUR 43 million, reflecting EUR 149 million in net interest, EUR 118 million in dividends and the EUR 212 million in cash proceeds recorded in other financial items from the sale of the Thermal Commercial Vehicle business. And the financial structure to conclude on Slide 25. At the end of June '24, financial net debt stood at EUR 4.0 billion, a stable amount compared with the level of December '23. Leverage ratio on a 12-month rolling basis has improved at 1.5x at the end of June. Deleveraging remains our top priority. We expect to decrease the level of net debt at the end of December '24. Valeo has a sound financial structure based on a balanced debt profile and a solid liquidity situation. Thank you for your attention, and I'll hand over back to Christophe for the conclusion.

Well, thank you very much, Edouard. It's time for conclusion. This half year confirms our trajectory of improved profitability and cash generation and the continued acceleration of our transformation. Let me focus on our key priorities for the second semester: accelerating our cost control initiatives; generating cost savings from our supply base, and this includes price negotiation with our suppliers, better competitiveness from them and also design-to-cost proposals; reducing in H2 our gross R&D to support the cash generation; closing the few customers' discussions which are still open; and completing our divestment program, which means signing the remaining EUR 100 million of divestment transactions by the end of the year. You can trust all the Valeo teams to be fully embarked and to deliver 100% of those priorities. Well, thank you for listening. Edouard and I are now available to answer your questions.

[Operator Instructions] The first question is from José Asumendi with JPMorgan.

Christophe, congratulations on the progress on -- in the first half. A couple of questions, please. Can you comment a little bit the walk from '24 into '25? You seem to be getting much, much closer to signing very specifically the target. So can you speak a little bit about what do you expect in the jump -- in the walk between '24 and '25 to drive earnings into next year? What are the biggest movers there? And then second, on the bridge on R&D for the second half, should we expect a tailwind, a headwind? How should we think about that move from the profit bridge in the second half R&D?

Well, thank you very much, José. It's good that you talked -- and you asked a question about '25. It means you're comfortable or confident in what we said and what we guided for, for '24. I appreciate that. Going from '24 to '25, I would like to get back to what we told you -- sorry, I think this came -- what we told you in February. We have showed this bridge from '24 and '25 and pretty much is going to be the same, the same levers except that you're going to have less volume effect, less volume impact because we are reducing our sales assumption for '25. I think we're doing it in a realistic way. We should not dream. The market is not as good as we planned for it in February 2024. And therefore, we acknowledge it. We consider that we have to live with it. Therefore, we are lowering the sales level. We'll have less volume effect. But on the other hand, we're going to have more cost self-help reduction measures. This is the balance that we have. So just take the one that we disclosed in February '24 where we're going to have less volume impact, but we are accelerating on our cost reduction program as you have seen in the last weeks with the announcements that we made. And I remind you that in '25, we're going to start benefiting from these better contracts that we signed in '22 or from '22 that are going to hit the P&L partly from '25. Relative to the second question on the bridge R&D, do you want to answer the question, Edouard?

It's my pleasure to discuss. So as far as H2 is concerned for R&D, as we said, we plan to have our gross R&D decreasing in H2 compared to H1. So this is definitely a tailwind for us. You remember that we guided at the beginning of the year for an IFRS impact of 2.8 points in the first half and 2 points in the second half. We finally landed at 2.4 for the first half, and we still plan to decrease and go down to 2.0 points of IFRS impact for the second half.

The next question is from Christoph Laskawi with Deutsche Bank.

The first one will be just coming back also to a statement that you just made on the order intake and the embedded margin that you have in the backlog. Now you just lowered the volume assumptions. And I was wondering, could you comment on the margin impact of the backlog that those lower volume assumptions have? Still well supportive of your target in '25 and later? Or how should we think about that comment would be appreciated. And then just on the outperformance or underperformance in China, could you comment on the phasing in H2? Are you seeing the programs that you signed with the local Chinese now ramping up and improving that number? Or should we basically expect that to be about the same level?