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Good day and welcome to the TI Fluid Systems plc Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tim Knutson. Please go ahead.
Thank you. Good morning, everyone. Thank you for joining us today for our Third Quarter 2019 Trading Update Conference Call. I'm Tim Knutson, CFO of TI Fluid Systems, and I'm joined today by our CEO and President, Bill Kozyra.
Good morning.
I am sure you have all seen the trading update we released this morning. Before Bill and I take your questions, I wanted to highlight a few items from the statement. In the third quarter, market conditions remained soft in the global vehicle production environment. Despite this backdrop, group revenue for the third quarter grew approximately 1% year-over-year on a reported basis and declined slightly by 1% at constant currency. We solidly outperformed global vehicle production by 2.2% for the third quarter. By region, on a constant currency basis, European revenue increased 2.8%, and Asia Pacific was flat year-over-year.In North America, we experienced a 7.7% decline, which was lower than the first half of 2019 decline of 8.1%. However, this region continued to be impacted by mix and a strong comparable for last year.By division, FCS revenue declined 4.8% for the third quarter, which was a positive improvement against the challenging first half of the year. FTDS revenue increased by 4.4% year-over-year, benefiting from new business launches, including an increase in tooling revenue.Looking at year-to-date to September 30, 2019, global vehicle production decreased by 5.9% in the first 9 months of 2019, and our revenue decreased by 3.9% year-over-year at constant currency. This was an outperformance of 2%. Revenue by region. Our European revenue slightly decreased 2% year-over-year at constant currency and strongly outperformed European vehicle production by 4.5%. European revenue was driven primarily by increased tooling revenue ahead of new business launches in our FTDS segment.In Asia Pacific, our revenue declined 3.2% year-over-year on a constant currency basis and outperformed Asia Pacific vehicle production by 3.8%. Our revenue in Asia Pacific was strong, primarily due to new Fuel Tank business in China, where the group continues to benefit from the automotive megatrend movement to reduce evaporative emissions and increased fuel efficiency.In North America, our revenue decreased by 8% year-over-year on a constant currency basis or 5.8% below the North American vehicle production. Launch activity in the period was lower against a strong comparative to the same period in the prior year. There were also impacts from vehicle mix, we have a lower exposure to SUV and light truck programs in this region.Moving to revenue by division. FCS revenue declined by 8% year-over-year on a constant currency basis to $1.4 billion. Revenue was relatively lower given the continued reduced production environment in China and vehicle mix in North America. FTDS revenue increased 2% year-over-year on a constant currency basis to $1.1 billion. FCS benefited from new business of Asia Pacific and strong tooling revenue in Europe. Given the group's successful history of managing volume fluctuations as well as its highly flexible and competitive cost base, our 2019 outlook provided in the first half announcement in August and reiterated during our successful Capital Markets event in September, remains unchanged. So with that, I'm going to open up the call for questions. Operator?
[Operator Instructions] We'll take our first question from Raghav Gupta from Citi.
A few questions. The top line trends for the 2 divisions, I guess, continue to diverge. It seems plausible, at least to me, that the FCS and FTDS margins will cross in the second half of this year. Is that in line with your own expectations? That's the first one. And should I ask them one at a time, or should I give them all to you at once, chaps?
Yes, I will answer both of them if you want. And then we can go to your next question.
Okay, cool.
The FCS and FTDS trends, obviously, are really impacted by FCS in China, where the volume environment for FCS in China continues to be difficult, although, as we see in Q3, the trend on outperformance revenue for FCS got better in Asia Pacific, primarily from some increased launches and some vehicles we're on. So as it relates to margins, that business will trend towards where China heads. And I think it's a pretty positive trend in Q3. We'll see where Q4 and 2020 goes. But from a margin standpoint, we do see both businesses being on the right path of performance. And ultimately, if China comes back to a decent production environment, the FCS margin should be a bit higher than FTDS, although both of the divisions are very strong and fairly close together today.
Sure. But I guess the concern is the 400 basis points of contraction that you've seen in FCS and the trend continues to be negative. Obviously a good performance in FTDS, in part, driven by product mix to a certain extent and the operational leverage, I guess, that you're seeing. But are you saying that FCS margins even when things improve from a cycle perspective, we shouldn't be expecting them to recover back to the 14% that they once were?
No. That's sort of the exact opposite of what I said is that as we get to a steadier production environment, especially in China, we would expect FCS to revert to historical levels of margin. And we'll have a little bit of recovery from a performance standpoint, we'll need to have, and we talked about some of the margin impacts we have from some powertrain business in North America that are lower than average in our past calls. But there's no reason, as this business continues to perform quite well, that we can't get back to historical margins in FCS as the production environment improves.
Helpful. And then I guess, secondly, on FCS, you referred to mix issues in North America, I guess, weighing on top line, I think you might have just made a reference to it just now in your response to my first question regarding content per vehicle on, perhaps, it's sedans versus pickups. Can you just give a bit more detail on what this is? What these mix issues are in North America?
Well, North America is not a concept per vehicle issue as much as we have -- we're under-indexed in the SUV and light truck market. So as in North America, that market continues and even over the past few months, continues to expand its share, that's a negative mix for us, given we don't have -- we have an under-indexed portion of that business versus the small car segment. And that trend hasn't [ happened ] this year, and we'll see how it continues.
Fine. I appreciate this is a revenue call. But I mean, on the cost side, what are the key levers that you're pulling here to stem the pressure on margins? I understand what you're saying about an improvement in light vehicle production, but is there anything that you can, kind of, anecdotally you could give us in terms of the opportunities that you see in the business to reduce costs further to help, I guess, alleviate some of the margin pressure that you're seeing?
Yes. Well, first off, I mean, cost reductions, cost focus has been core to what we do and continue to do so in this environment is even more so. We continue to scrutinize headcount, making sure that, that fixed cost as a percentage of revenue continues to be below 15%. We are adjusting headcounts in various regions. We spoke before about a restructuring in China that adjusts our cost structure there. We're looking at other areas that we continue to adjust and flex labor. As it relates to plants, we do take out plants as the customers take out assembly plants, and we'll adjust the quarter there. So I just -- cost reductions, cost improvements, working through our various activities around the globe, are core to the business success here and why we perform so well even in a slightly down market from a revenue standpoint, we continue to have a lot of confidence in our margins and the ability for us to generate cash flow.
[Operator Instructions] We'll take our next question from Gaetan from Deutsche Bank.
Just very quick question. First of all, what's your picture regarding the fourth quarter? Can you give us a little bit of an idea by region: North America; Europe; and China? And I have a second question, is that we are hearing from German OEMs that they might extend the payment term to the suppliers, is it something you feel that already or it's no change for you?
So on the latter, in payment terms during -- we have -- it's not impacting us. We've not heard that, and we continue to focus on working capital throughout the business. So we don't see that as a concern. I think as we think about Q4, we're maintaining our guidance, where we talk about outperformance for the year. Solidly -- solidly, probably the same range, so where we've done in for the first 3 quarters of the year, potentially up or down a bit depending on tooling revenue, depending on where fluid production ends up at the end of the year. And I think Q4 -- the trends for Q4 per region will be similar to what we saw in Q3. I think a couple of things: one, China seems to be -- has stabilized and -- for FCS, could be a bit better as we get into Q4. We'll have to see where that lands. And then, we're always -- timing of launches, especially in Europe for some activity for FTDS, could provide some tooling revenue, whether it's Q4, into Q1 with some production ramps headed. So I think both of those regions seem to be pretty steady to potentially a bit of up. And then that should be a good trend line going into 2020.North America will probably continue the trend of some difficult comparables. It's also the mix issue that don't seem to be abating in the mix for SUVs and light trucks in the U.S. But I think, overall, for our business, the trends in Q3 are very positive from stabilizing to getting a bit better from an outperformance standpoint. We'd expect that to continue into Q4. It should be a pretty good backdrop heading into 2020.
Okay. That's very clear. And I assume that the GM strike had a very limited impact on you guys, correct?
Yes. Very limited impact for us.
[Operator Instructions] There are no questions at this time.
Okay. Thank you. Once again, I appreciate joining us this morning. Despite a bit of the market softness, we continue to outperform global vehicle production and expect the business to perform well, both from a margin and free cash flow basis. I'd also want to thank everyone for the strong attendance at our Capital Markets event in London in September. We received a tremendous amount of positive feedback from this event, and we very much appreciate your ongoing support.If you have any other questions, please contact either Alpha Amar, our Investor Relations Director, or myself, we'd be happy to take your call. Once again, thank you very much.
Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.