Valeo SE (FR) Earnings Call Transcript & Summary

Good evening. This is the conference operator. Welcome, and thank you for joining the Valeo Third Quarter 2024 Sales Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Christophe Perillat, CEO of Valeo. Please go ahead, sir.

Well, thank you very much, and good evening, everyone, and thank you for attending our third quarter sales presentation. So as usual, we spend 1 hour together, 15 minutes of presentation that I will share with Edouard de Pirey, our CFO, followed by a 45-minute Q&A session. So let's go directly to Slide #4. I think no surprise for you given the publications of our peers and customers that we are navigating in a more and more challenging environment this year. But the important point is that we are on track. We are on track to deliver on margins, to deliver on cash, thanks to our significant and efficient cost adjustment measures and therefore, the decrease of the breakeven point of the company. So the environment is challenging. It's challenging today in the sense that we see a lower activity in all regions. This is due to market deterioration. This is due as well to delayed SOP, start of production by our customers. They are facing development issues and as well because there's inventory management in North America at OEM level. So in this situation and to deal with that, we have strongly -- we have proactively launched a set of cost reduction measures to adjust our cost base, especially as you know, in the POWER division. You remember, we've merged the 2 activities, powertrain and thermal with the creation of a POWER division that was in the first half of this year. This division is focused on electrification, and this division is now fully operational. We are as well optimizing cost cutting effort at every level of the company, which is in addition to the savings expected from the new POWER division. We are very selective in the way we're choosing new businesses giving priority to cash and profit. And we expect because we are more selective on orders, we expect a better efficiency in our R&D growth efforts with a level expected to be significantly lower in H2 versus H1. We are as well pursuing a strict control of our investments to allow us to meet our free cash flow guidance in '24. And as you know, we've been very strict and efficient in negotiating conversations with our customers, especially in the businesses where the volumes were significantly lower than we initially expected, for instance, on high-voltage business. Well, let's now look more in detail at our 2024 guidance and go to Slide 5. So the environment is much more challenging. And we see Q4 activity continuing to deteriorate further versus Q3 activity. Therefore, we have adjusted our sales objective from EUR 22 billion to EUR 21.3 billion. In this environment, we are maintaining our operating margin guidance between 4% and 5%, and our free cash flow guidance around EUR 350 million. This will lead to a significantly higher margin in the second half than the first half. And this is thanks to the rigorous management of our activities and the quick implementation of cost adjustment measures. Let me turn now to 2025 and go to Slide 6. In 2025, I believe that the environment will remain challenging. We're continuing to see worsening economic conditions and significant uncertainty around the production volumes of our customers. I'm just going to give a few examples. Will the recently announced economic measures in China have an impact on the automotive market or not? Will there be more measures in China or not? Turning to Europe, will the CAFE rule to be modified in 2025 or not? What impact will these rules have on the 2025 volumes? Turning to North America. What will be the impact of the U.S. elections on the economy and the automotive market? Is the inventory reduction in North America over or will it last in 2025? And globally worldwide will our customers further delay some key launches or will they finally ramp up? Well, this is many, many questions and not a lot of answers. There's a lack of clarity today when it comes to the 2025 automotive market. Valeo was at the Mondial Auto Show in Paris a couple of weeks ago or last week. I've been talking to many of our customers, and we understand from our customers that several of them are delaying their budget process because they need more time to share with us their 2025 volumes. So our customers today are not giving us precise data when it comes to 2025 volumes. Therefore, under these circumstances and because we lack clarity, it is wise that we publish our 2025 guidance adapted to these new market conditions when we publish 2024 results. But for 2025, I want to be very clear, we will remain fully focused on generating free cash flow and reducing our debt. There are uncertainties when it comes to sales in 2025. There's a lot of things we don't know, but there are things that we know, what do we know? We know that we will deliver an OE sales outperformance versus the automotive production, we will outperform the market in 2025. And given the progress made on the cost side, we will deliver a significant improvement in profitability and in free cash flow generation versus 2024. This we know. Now I hand over to Edouard for more details on our third quarter.

Thank you. Thank you very much, Christophe, and good evening to everyone. So let's move directly to Q3 sales by type on the Slide 7. In the third quarter 2024, Valeo sales reached close to EUR 5 billion, which is down 2% like-for-like. ForEx had a negative impact of minus 1.8 points, and scope had a negative impact of minus 1.6 points. As far as OEM sales are concerned, they were down 2% like-for-like, largely impacted by lower volumes. It represents 3 points outperformance compared to the automotive production as measured by S&P Global Mobility. Aftermarket recorded a sound growth at plus 3% like-for-like, benefiting from, on the one hand, the continuous increase of the average age of cars in the market, and on the other hand, our high-value offering. Miscellaneous sales performed strongly, supported in particular by prototype sales, preparing the upcoming numerous start of production in the LIGHT division. Let's see now on Slide 9, the outperformance by region. In Europe, we have outperformed automotive production by 6 points. The POWER division benefited from growth in its traditional business. This momentum more than offset the impact of the drop in activity on certain electric vehicle platforms. The BRAIN division reported robust growth in its interior experience business, particularly Displays, Phone-As-A-Key and Telematics, while the LIGHT division was lifted by a number of production launches. North America on its side was nearly in line with the market. In China, we underperformed automotive production by 9 points. We continue the repositioning of our customer portfolio with around half of our OEM sales and 60% of our order intake recorded with local automakers in China since the beginning of 2024. The LIGHT division is fully benefiting from recent production launches for a North American EV automaker and several Chinese automakers. In Asia, excluding China, we outperformed automotive production by 10 percentage points, thanks to good momentum for the BRAIN Division in ADAS. On Slide 10, we recorded positive like-for-like outperformance in all businesses this quarter, except in high-voltage business within our POWER division. The POWER division outperformed slightly the market by 1 point in the quarter. The BRAIN division outperformed the production by 5 points and the LIGHT division outperformed by 4 points. So let's start with the POWER division on Slide #11. The POWER division's traditional activities, so thermal systems, transmission systems and 48-volt outperformed automotive production by 2 points. This more than offset the decline in the high-voltage electric powertrain activity allowing the POWER division to post a slight outperformance. On Slide 12, you see that we stick to the implementation of the self-help measures to improve the profitability of the POWER division. We have concluded the social and legal procedures initiated in H1 and the POWER division is now fully operational, as Christophe said before. We have already launched on top new cost reduction initiatives in multiple countries, we do confirm the full EUR 200 million run rate savings as of 2026. The measures are already generating EUR 50 million of savings in H2 '24 and will generate EUR 150 million of savings in 2025. On Slide 13, the BRAIN division outperformed the market by 5 points. Within the division, the ADAS business outperformed by 2 points of the automotive production, while the interior experience business outperformed by 12 points, driven by strong production ramp-ups in Displays, Phone-As-A-Key and Telematics. The Slide 14 shows a focus on our interior experience offerings. We bring high value-added electronic systems and software for human machine interfaces and connectivity. The strong drivers are: a, regulation, such as for occupant monitoring or steering wheel sensors; b, software-defined vehicles for telematics and Phone-As-A-Key, and C, the desire for modern and comfortable interfaces for head-up displays and interactive services. ADAS and internal experience combined to deliver enhanced safety, ease of use and interactivity. Finally, Slide 15. The LIGHT division outperformed of 4 points was mainly driven by the ramp-up of numerous production launches. You can see on Slide 16, some examples of the 300 starts of production that will take place throughout the year 2024. Thank you for your attention. I now hand over back to Christophe for the conclusion.

Well, thank you very much, Edouard. And to conclude, let's go on the Slide #18. We remain absolutely focused on delivering on H2. I would like to remind you the 5 priorities that we have for H2. One is we are accelerating the cost control initiatives. We want to be ahead of the market slowdown. We are reducing the gross R&D to support cash generation. We're closing the last remaining customer discussions. We keep on generating cost savings from our supply base. And finally, we are completing our divestment program by signing the additional EUR 100 million transaction by year-end. Well, we are 14 minutes after the start. I would like to thank you for your attention, and we can now turn to your questions. Thank you again.

[Operator Instructions] The first question is from Thomas Besson of Kepler Cheuvreux.

I have 2 very simple questions. The first one is trying to understand the revisions in the revenue guide. So I think in February, the midpoint for the revenue guide was EUR 23 billion, now it's EUR 21.3 billion. So it's 7.4% down. And so I'd like you to explain us why this is the case? Because I mean, the revisions to global light vehicle production forecast probably accounts for about half of that. There's a negative geographic mix and client mix, but I still struggle to understand how we moved from EUR 23 billion to EUR 21.3 billion? That's the first question. And the second question is more simple. Aftermarket revenues, EUR 538 million. You talk about a scope effect of 4.2% and an exchange rate of 4.4% both negative. And I'd like you to just explain why this is such a negative ForEx and negative scope? And within that question, maybe you can -- you remind us what exactly has been sold for the various scope effects, is that possible?

Sure. Well, thank you very much, Thomas, for your questions. When it comes to the sales, because I think that's your first question. There's a few things that are explaining the bridge between the EUR 23 billion and then the EUR 22 billion and then the EUR 21.3 billion. I think we are clear in July relative to the move from EUR 23 billion to EUR 22 billion. That was the electrification business that was planned to be at EUR 1.4 billion for the year, and that will reduce to EUR 1 billion. And now we're reducing further to EUR 850 million for 2024. We had a couple of points of currency between the EUR 23 billion and the EUR 22 billion, and the rest was due to the decrease of the S&P volume from what was planned when the guidance was set up to the situation of July. Now since July, we saw -- and we saw it at the very beginning in the second part of August, a decrease of volumes in the EDI we received from our customers in Q3. Then we had -- when we're looking at Q4, still pretty solid EDIs. Looking at the EDIs in the last 2 weeks, they've been going down quite significantly, especially for the month of December, where we see a lot of customer shutdowns that are now planned that were not planned. And this is the reason why we are -- basically 8 weeks or 7 weeks before the shutdown. We are now pretty firm EDI received from our customers. And we look now at ourselves being down. In Q3, you saw minus 5% on the overall market, but we're seeing from our numbers, we're seeing a further decrease of the market in the second part of the semester. It's not necessary what S&P is seeing at this point of time. But I guess they will catch up with the numbers, and there might be as well an inventory reduction situation between OEM and suppliers in the second part of the semester. So we don't know exactly what S&P will say, but we are sure of the EDIs that we have received now from our customers. They are now pretty stable, and we prefer to guide the market on what we see in terms of sales. But have in mind that besides the sales, and I would say, despite the sales, we are in a position, thanks to all the efforts being done by the company and the reduced -- reduction of the breakeven point. We are in a position to maintain our guidance for the full year. And not only that, we are in a position to continue to say that we are seeing a significantly higher margin and cash flow duration in H2 versus H1. When it comes to your second question on aftermarket. I will not comment on the currency, maybe Edouard will add on the currency side. But on the scope, we sold an aftermarket activity during Q3. It's a company called Piaa, P-I-A-A, that's a Japanese company, which was not really adherent to our aftermarket business for the reason that we are selling in this company, non-value products. So it was a kind of resale activity with profitability not in line with our expectation, a growth expectation not in line with our expectation and selling non-value products. We decided to sell this activity in Q3, and this is what is the scope in the aftermarket -- when it comes to the aftermarket scale, this is what is the scope effect.

The next question is from George Galliers of Goldman Sachs.

Thank you very much Christophe for articulately expressing some of the issues that the industry is facing as we go into 2025. You mentioned the delay in SOPs at customers. Are the customers giving you any insight or do you know what is driving the delay in the SOPs? Is it issues with the vehicle's development or launches? Is it concerns around demand for the vehicles or poor variable economics? Are OEMs stalling SOPs to try and gain the 2025 CO2 requirements? Any insights into why these SOPs are getting delayed would be very helpful for us in trying to better understand how the industry might shape up in 2025 and the implications for yourselves? Second question I had was with respect to battery electric vehicles in general. Can you give us any insight into what share of your total order book for 2025 across POWER, BRAIN and LIGHTING is related to battery electric vehicle platforms just to give us some idea of your potential sensitivity to either a slower or faster evolution in the BEV market next year?

Well, thank you, George, for your questions. Related to your question on the delay of SOP. Well, I've been in the automotive industry for now 25 years, I am getting older. I've never seen a situation like the one we have today. I'm seeing a lot of customers disorganized. I'm seeing a lot of customers unable to ramp up and to achieve the SOP at the date where it's supposed to be done. . The way I see it, well, it's not one answer for all situations. But the way I see it is difficulties in the development cycle of the new cars. So it's more technical issues. While it's not all the customers and don't ask me to name one or the other because I fully respect my customers, and I will not put their names in this kind of conference call. But definitely, some customers are facing significant development issues and are delaying their SOP. Of course, it's our role to help them and we help them as much as we can. And for the perimeters that we are responsible for. Valeo is not responsible. Valeo is absolutely not in this story, but we're seeing difficulties especially when it comes to software, especially when it comes to electrification, especially when it comes to new technologies. But to my surprise, not only, not only. So this is a critical situation because, as you know, we have invested. We have production lines. As you know, we have spent the R&D. In some cases, we have to start amortizing the costs because we have a little bit of a ramp-up but not the full ramp-up because the cars are not fully ready to ramp up. So that's really detrimental to our performance, which is another way to see that our performance is rather good in this environment because despite this, we are able to make it happen. We're not going to dream, and that's my point on 2025. We think this situation continuing to deteriorate. It means that when the delay of SOP were 3 months, they're now 6 months, where there were 6 months, they are now 1 year when they were 1 year, they are now 18 months. So we are continuing to see this deterioration happening. We believe there will be further deterioration in 2025, and that's the reason why in a lot of the SOP that we have been working on for 2025 are likely for some of them to be delayed into 2026. That's unfortunate, but that's the way it is. The only thing we can do on our side is, of course, to go for compensation on the one hand, but more importantly, it's to lower the breakeven point of Valeo, be prepared for a situation which is impacting all Tier 1s and continuing to lower the cost of the company so that we can deliver and we will deliver a significantly improved margin in '25 versus '24. When it comes to the share of our order book on BEV, frankly speaking, I'm not counting for an improvement of our BEV sales in '25 versus '24. I know that the CAFE rules in Europe should trigger an increase of the BEV cars being sold in 2025. But looking at the past, I'm very cautious about 2025 and the potential increase of BEV sales in 2025. I prefer to be cautious. I prefer to say that we might not see an increase of BEV sales. And I remind you that on the one hand, 50% of the group is agnostic to electrification. I remind you that we are a strong on BEV than we are on PHEV. And I remind you that we've done a very intense job since the acquisition of Valeo Siemens to build a flexible footprint, shutting down the plants of Valeo Siemens and transferring the production lines into Valeo ICE plants so that we have a flexible manufacturing footprint on the POWER side. And this is what guides us to say that we'll continue to significantly improve the margin of Valeo and, of course, the margin of POWER, even in a context where the BEV sales might not grow in '25 versus '24.

The next question is from Michael Jacks of Bank of America.

Under current visibility, could you give us some steer on where you are orientating within the margin guide range of 4% to 5% for the year? And could you please outline or at least quantify specific cost measures that you are counting on for H2 versus H1. And could you also please give us an indication of the magnitude of gross R&D reduction expected half-on-half?

Sure. Can I ask you to repeat the first question, please, because I'm not sure I understand it fully. .

Yes. I mean could you give us a sense for where you think the margin is going to land relative to the margin guidance. Do you think you're tracking the midpoint or more at the low end for the full year?

Okay. Okay. Okay. I understood. Well, related to your first question, the wording I used -- we used in this presentation is H2 margin should be significantly higher than H1, okay? This is the wording I used. How can I say that? I would be disappointed if significant would not mean 0.5 point, right, okay? So this is my translation of why -- what significant means. And remember, in H1, our operating margin was 4.0%. When it comes to H2 cost saving versus H1 and pretty much that relates to the answer to the first question, we are expecting a EUR 50 million cost saving in H2 from the cost-saving measures that were decided and implemented during the course of H1, and this is coming from the reorganization of POWER. And as you know, we are preparing further cost reductions. We announced a few projects related to a few plants here or there, including in France, in order to fuel the cost saving measures that will help us to further improve our margin in '25 versus '24. When it comes to the R&D, Edouard, do you want to answer the question?

Yes, I do confirm what we said during the first half results call is that we have peaked gross R&D in Q1. Q2 was lower than Q1, and Q3 was lower than Q2 and Q4 will be lower than Q3. So basically, R&D cost, R&D growth costs are decreasing, thanks to the R&D efficiency program that we are leading these days.

The next question is from José Asumendi of JPMorgan.

A couple of questions, please. I would like to understand a bit better the self-help measures of Valeo into next year. And Christophe, if you could please maybe elaborate a little bit more self-help within BRAIN, that will be very interesting and POWER, on both -- any examples that you think are helping the margins. It may be also order backlog and profitability of that order backlog in the case of BRAIN? And second question with regards to the free cash flow, can you help us or help me understand it better if working capital will be a benefit on cash in the second half of the year? And is this also one of the maybe reasons to be a bit more optimistic on free cash flow?

Okay. Edouard will remind you the numbers when it comes to self-help. What I want to say is that we are walking the talk when it comes to self-help. What we try to do is be ahead of the plan when it comes to cost reductions. Remember, we have decided for significant restructuring of POWER at the very beginning of this year at the time where it was still planned that H2 volumes would be higher than H1. So we are trying to be ahead of the plan when it comes to deciding and implementing self-help measures. We have implemented the first wave of self-help measures in 6 months, which is helping us in H2, and we have announced on the 15th of July, a second wave of reorganization when it comes to specific plans where we are disappointed of their profitability and we're moving and walking the talk on this in order to be in a position to deliver the right amount of self-help measures in 2025. The amount that we had communicated before and that I confirm that we expect self-help measures to be in the range of EUR 150 million in 2025, and they will reach EUR 200 million in 2026. No change versus what we communicated to you in February, if my memory is correct. When it comes to the working capital, I will turn to Edouard.

Thank you, Christophe. So as far as working capital is concerned on free cash flow for the second half of this year, naturally the impact will be lower than H1. First, because in H1, we already had the impact of the decrease of inventories and the decrease of inventories has been done and we do not plan it to be much further in the second half, while we continue to improve our working capital, in particular, by increasing the payment terms of our suppliers by negotiating further with them, thanks to our possibilities there. We do confirm the EUR 350 million free cash flow for the year, also thanks to a decrease of the CapEx that we planned because as we said, there are postponements of start of production. There are postponements of projects. And therefore, we have less investment flows. And this allows us to stick to this EUR 350 million of free cash flow, our definition, so after tax and before interest for the full year.

So we are reducing our capacity CapEx. We are reducing our project CapEx for the reasons that you can understand, given the uncertainty of the market.

The next question is from Ross MacDonald of Morgan Stanley.

And thank you for the very clear answers. That's been very helpful. Christophe, just coming back to your opening remarks, and you mentioned the record uncertainty and George highlighted that, that was very helpful to itemize the list of key issues heading into next year. Can I maybe ask across those issues that you laid out, which one you see as the biggest risk to 2025 visibility at this time? Is it the CAFE uncertainty, the SOP delays, the China uncertainty or the destocking situation in North America?

Well, thank you, Ross, for your question. I mean, an easy answer would be to say all of them, but you're asking me to make a choice. So I would try to answer your question. Given the fact that 46% of our sales are in Europe, I would say that the main one besides, of course, the overall macroeconomic situation is the impact that the CAFE rules might have on the European volumes. So that's -- that's an answer for Valeo. It might be a different answer for another Tier 1, depending on where we have the most sales. But given the profile of sales of Valeo and 46% of our sales in Europe, the point where I'm having the most uncertainty, in my opinion, is the impact of the CAFE rules.