Varroc Lighting Systems, Inc. (OPM) Earnings Call Transcript & Summary

Hello and welcome to the Plastic Omnium Investors Conference. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded for the duration of the call. [Operator Instructions] I will now hand over the call to your host, Mr. Laurent Favre, the CEO, to begin the conference. Thank you.

Yes. Good morning, everybody, and I hope you can hear me. I hope you can hear us. I'm here with Kathleen and the rest of the team to comment what we announced yesterday evening, meaning that we closed the deal of the acquisition of Varroc Lighting. We are very happy about that. You know that in April, we signed a deal. And during the signing and the closing, I think the team did a great job and was able to make a good operation for Plastic Omnium. We will talk briefly about what is Varroc Lighting, why we are doing that, before handing over to you if you have some questions and remarks you want to share with us. Normally, you should see the screen and the presentation. I propose that we go to the first page, which is the Page #3 where you can see in a nutshell what is Varroc Lighting, meaning what are we talking about when we talk about this operation. Varroc Lighting is, as you may know, is a key automotive lighting player, is one of the top 10 worldwide covering all the range of kind of lighting and being strongly present in BEV segment, because in BC segment, they are dilator free, meaning that they do serve all the customers working in BEV and most of the platforms in BEV. It can be Tesla, it can be Renault BEV, Stellantis and so on and so on. And therefore, a good customer portfolio, the technology we need in order to step in, in lighting with already a champion in the lighting business worldwide. We like very much as well, as we already mentioned, the fact that Varroc Lighting, which is now PO Lighting since today, has facilities only in best-cost countries. And as the market is very competitive, as the lighting market is very competitive, we are convinced that this footprint will be a great advantage compared to the competition. When I talk about best-cost country, it means for Americas, we are present in Mexico. In Europe, that is mainly Czech Republic, but also Poland. But also facilities in Morocco and in Turkey. And therefore, you can see that all these countries are very competitive in terms of skills. We can find that income of costs as well, which is a key factor for us in this lighting business. In total, we talk about annual sales of EUR 0.8 billion right now for Varroc Lighting, 6,500 employees. The manufacturing facilities I mentioned before, a strong R&D capacity for sure in lighting and the R&D capacity as well is mainly located in Czech Republic, but also in Romania, also countries with a great case, but to best cost basically. And long-standing relationship with OEMs. I was mentioning before, that they are connected with very important OEMs. Their biggest customer is the Volkswagen Group, where they do cover Volkswagen, Fiat and Skoda as brand. They are also strongly present in the premium segment with Jaguar Land Rover. They work with Stellantis and with Renault, but also with Ford and Tesla and with other customers. These are the main customers. That was Varroc Lighting in a nutshell. If you go to the next page, the Page 4, you will see the key transaction parameter. We are very happy to have been able to renegotiate the enterprise value. You may remember that we signed in April for an EV of EUR 600 million at this time. And we have been able to reduce this EUR 600 million down to EUR 520 million, which does reflect the fact that the market, for sure, between April and now they changed, that the inflation did increase, but the volumes are still pretty unstable. And it was important for us to reflect the market situation, meaning the environment into the BEV. Therefore, I believe, a very good news for PO because this kind of company with the assets they have, the facilities they have, the equipments, which is mostly brand new, the capacity they have, they could produce close to twice more than what they are producing today to -- for a price of EUR 520 million. I'm convinced it's an excellent deal for Plastic Omnium. In terms of financing, as you know, we can, for sure, self-finance the deal. You know that Plastic Omnium has had always very strong liquidity available, strong cash available at closing, and the closing was yesterday. We did pay EUR 217 million. We decided to go to lighting for many reasons you know, but a very important topic for us was the customer support. I was mentioning the customers that Varroc Lighting was working with. These are customers which are very familiar to Plastic Omnium. And we made the deal with a strong, I would say, commercial or customer commitment. When I say a strong commercial commitment, it means that the customers are willing to invest in lighting with PO. Therefore, they want to build up a new champion of lighting because they also believe that the footprint, the technology Varroc Lighting did develop the last year is the right one for what they did and also for their growth. They believe as well in the assets, meaning in the factories, in the equipment and in the people as well. And for sure, they do believe in Plastic Omnium as well because we have a track record in M&A. You know that 50% of our growth in the last 20 years was based on M&A operation. Therefore, we know how to make it. But also we know how to make it in terms of addressing operational issues. And lighting is different than what we are doing. But at the end, it's also about injection, about assembly. And these are skills we have, for sure, within Plastic Omnium. Therefore, strong customer commitment, customer commitment in term of growth, long-term growth, but also in term of commercial support to make sure that the results of Varroc Lighting, which were pretty poor in the previous months because of the market, because of the performance, because of the inflation, will be much better immediately after the closing because of this obvious commercial commitment with the customers. Therefore, we are very positive about the short term, the middle and the long term because, again, we have a strong customer commitment, and they are willing to develop the lighting business with Plastic Omnium. When we talk about the lighting business with Plastic Omnium, that is the next page, which is the Page 5. At the end, we are talking now about PO Lighting division, which is the merge of AMLS, the acquisition we had some months ago, the Varroc Lighting one. And in total, we talk about EUR 1 billion sales, about 7,000 people, about all the technologies, sorry, we need in order to be a champion in lighting and to continue to develop this business. We are very confident in the fact that we can digest, integrate and turn around this business. Again, because of the track record that was mentioning before in M&A. Because as well, we did put in place a team and management team already since some months, which is the right mix of PO people who have the experience of the PO company, who have the experience of what we mean with the operational excellence, but also AMLS and Varroc, who are the expert in term of lighting business. Therefore, we have a team in place. We are ready to start immediately from today. That means to start in the operation, integration, in the commercial topics to have immediately, I would say, a positive effect on the results. The Lighting business for us will be a growth story in the coming years because, again, it's a growing business, basically, the lighting. There is more and more lighting in a car, as you know. Because the customers, if they are investing with us in this business, that means that they want to develop the business with PO. Therefore, we will have a stand-alone activity division of EUR 1 billion sales starting this year dedicated on lighting with the target for sure to go with new customers in new geographies and to become even stronger in the future. We do see also a lot of synergies with what we are doing today, meaning our bumper business, our module business, and that is also the reason why the customers were so motivated to have us in the lighting business because with the combination of bumper, lighting and module business, allow PO to have something which is unique for the customers, and it's fitting to the trend they want to develop, and they are trying to build out this kind of champion. Therefore, for us, a huge potential in term of growth and in term of differentiation in the future. Short term will be for sure to fix the [ duration ] and to come back to a normal, I would say, a double-digit EBITDA margin within 24 to 36 months. That were our commitment during the signing. That is still our commitment and the team is really focused on that, and we know how to address it. Therefore, that is the great news of the day for us, that we wanted to share with you. Now we are inviting as an important player, EUR 1 billion sales. We have 7,000 people willing, motivating, to develop the lighting business within PO and we have the strong commitment of our customers. And that to a price which is really decent because, again, we have been able to reduce massively the EV between the segment closing. That was the short presentation of the deal. And now I would like to hand over to you if you have some questions or some remarks that you want to share with us.

[Operator Instructions] We will take the first question from line Akshat Kacker from JPMorgan.

Laurent, Kathleen, Akshat from JPMorgan. Three questions from my side, please. The first one on key customer relationships. You talked about the importance of customers supporting you through this journey. Can you just tell us what is the concentration of revenues today with the top 5 OEMs in the business, please? The second question is on the lighting division in total. You just mentioned that this is a growth business for you and you have installed capacity to double the sales. How much of this growth do you already see in the order book today? Or probably in different words, is that EUR 1.5 billion target by 2027, front-end loaded or back-end loaded? And the final question is, is it possible to share some expectations on the EBITDA margin profile of the business for 2022? And how quickly can you get this to breakeven, please?

Akshat, regarding the customer mix, I would say, the biggest customer is the Volkswagen Group. Volkswagen Group, it does represent about 30% to 40% of Varroc Lighting. That means that is the biggest one. And when we talk about Volkswagen Group, that is the Volkswagen brand, they are, for example -- or we are, for example, present in the ID.3, ID.4, that is also Fiat and Cooper and that is also Skoda. Therefore, a group, but basically three brands which does represent between 30% and 40%. And then you have Jaguar Land Rover, Ford and Stellantis who does represent 10% to 15%; and Renault, which is a bit smaller and Tesla as well. That is more or less the situation by customer, again, with a strong focus on Volkswagen. And Volkswagen was really willing us to be in the lighting business. When we talk about growth I was mentioning that our assessment is that there is a potential to double the sales with the current industrial capacity, which is good in place in Varroc Lighting and now in PO Lighting. The target we have on middle term is EUR 1.5 billion. A big part of this EUR 1.5 billion is either booked or is based on customer commitment as well. I was mentioning the customer commitment before to help us to make the deal because, for sure, when we invest mainly in a new technology like that, it's because we believe in it, but it's also because we are confident that the customers are willing us to do it and are supporting us. Therefore, the EUR 1.5 billion which we had as a target on midterm is mainly secured either with orders or with commitments from customers. Regarding the results. Our target was from day 1 to be close to breakeven with what we are going to do in term of synergies, in purchasing and so on, but also with the commercial support of the customers. Therefore, they are losing money. They were losing money. Our target is to be close to breakeven from day 1. Maybe it will last some days or months, but that is the target we have. We will give you more information when we will talk about our Q3 phase. Then we will give you an indication about how we do see Q4 for the acquisition.

We will take the next question from line Thomas Besson from Kepler.

Two questions, please. First, to follow-up on what you just said. I remember the message was more that you would lose EUR 15 million, EUR 20 million in year 1 for Varroc Lighting. Can you confirm that 2023 in theory according to your plan and customer support, it should no longer be a negative impact from lighting in '23? And the second question, is about lighting versus your existing businesses in industries, so bumpers on one end, which I think has some similarities in terms of being an aspect business, changed at least once during the life of a car and the fuel tank business, which has the opposite, it has a longer lifeline. Can you give us some indications about the execution risks you see associated with the short-term life of lighting business within the life of a car? So you have to renew it once or twice during the life of the car? How does it complicate your view? And does it make it a more challenging business or the opposite a more attractive business in your view?

Then for your first question, Thomas, this year, for sure, we will learn, I would say, the Varroc Lighting business. We will have also costs for the transaction. As you know, one-timer, which we won't have next year. Next year, as you mentioned before, our target is to be breakeven in the lighting business. That is the target we have. Regarding what you were mentioning, that lighting is in each case, at least there is a kind of new lighting. That is exactly what we have in the bumper business. We are used to manage that anyway. And that is the key to manage it properly. First of all, it's always an opportunity with our customers because every time we change you have opportunities, if you understand what I mean. Therefore, we are used to do that because it's the way the external business, the bumper business is being managed today. That's the first point. And the second point, I think the key will be to standardize as much as possible the product technology of the lighting business, meaning that even if we have changes in terms of design, we can always rely on a standard base to optimize the cost of the project.

Congratulations on the negotiation.

Sorry?

I said, congratulations on the negotiation.

I just wanted you to repeat because it's always nice to have something positive. Thank you, Thomas.

We will take the next question from line Michael from ODDO.

Laurent, Kathleen, two questions remaining on my side. On the financing and refinancing potential needs that you estimate potentially also including HBPO in the coming, let's say, 12 to 18 months? And maybe some comments also on your debt maturity schedule. And last, still on financing, any idea where financial costs would land next year also including HBPO?

And I will hand over to you, Kathleen, please.

Yes, thank you. In terms of the financing, so we've been able to finance this acquisition and the other acquisitions through our own liquidity this year. So as you know, we have a very strong balance sheet, very high liquidity at the end of December 2021. If you recall, we had EUR 2.7 billion. So we're not in the short term, requiring any additional financing to do this. Our next maturity role is in mid-2024, EUR 500 million. We do have a slight debt repayment in 2023, EUR 159 million, but that in mid-year as well, but that is some insignificant. So as you can see, we're fairly well stocked up in cash and liquidity to be able to do all of these acquisitions. HBPO, as you know, has not closed yet, it will close most likely in Q4 this year. And we estimate the sum of all of these acquisitions to be roughly around EUR 1 billion.