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Hello, and welcome to the TI Fluid Systems plc Third Quarter Trading Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bill Kozyra, CEO and President of TI Fluid Systems plc. Please go ahead, sir.
Yes. Good morning, everyone, and thanks for joining us today for our third quarter trading update conference call. I'm Bill Kozyra, the CEO and President of TI Fluid Systems. And I'm joined today by Ron Hundzinski, our CFO. I'd like to thank everyone for participating over the phone today, and I hope that each of you and your loved ones remain safe and healthy as we continue to deal with this unfortunate COVID-19 pandemic. I'm sure that you've seen the trading update we released this morning. We're very pleased to share with you the group's solid business results and the exciting news on electrification and dividends. To begin, I will be taking you through some key highlights before handing over to Ron, who will take you through the group's trading performance. Following that, Ron and I will be happy to take your questions. I'm pleased to report to you today that we continue to do what we say we would do. We continue to show the strengths of our resilient business model and experienced management team. Our revenue continues to outperform global light vehicle production, and our margin and cash flow generation remains strong. And we are delivering tangible results in our electrification strategy. We're excited today to announce that we have started high-volume production of a range of thermal fluid management products for Volkswagen's ID.3 and ID.4 electric vehicle programs. In addition to supplying Volkswagen with various battery electric thermal cooler assemblies, we're also very proud to be the sole supplier of an all-new CO2-based cabin comfort heat pump unit belt assembly on these vehicles, which is an exciting new technology that delivers increased operating efficiency and supports extended driving range over that of a traditional refrigeration-based cabin comfort system. We look forward to seeing the success of this new line of Volkswagen battery electric vehicles and the continued contributions of our leading technologies to help cars become greener and make the world a cleaner place to live. Worth noting is that TI Fluid Systems value per vehicle on these vehicles equipped with the CO2-based cabin comfort heat pump exceeds EUR 400 per car. We're also pleased to see the growth in value per vehicle we are securing with our battery electric vehicle new business wins. Our year-to-date 2020 battery electric vehicle new business wins are averaging EUR 135 per vehicle. That's 12.5% greater than that of the 2018 awards. And for certain variants or for some awards, we see a maximum of EUR 480 per vehicle, which is an increase of 20% versus 2018 new business wins. Our battery electric vehicle business wins continue to expand to all major production regions and diversify across global, regional and new OEM customer groups. These wins further demonstrate TI Fluid Systems' ability to deliver accretive value per vehicle on battery electric vehicles. In summary, we are extremely excited with our execution of our electrification strategy and the continued demonstration of our business results. And we look forward to sharing more of these successes with you as we continue to progress in this important strategic area. Now let me turn it over to Ron, who will take you through our trading results. Ron?
Thank you, Bill, and good morning, everyone. Let me begin with a summary of our trading results for Q3 2020 and the 9 months ended September 30, 2020. Let's start with the third quarter. Market conditions continue to improve as light vehicle production resumed in all regions following the COVID-19 related shutdowns in the first half. Global light vehicle production decreased by 3.5% in the quarter, and our revenue decreased by 5.1% year-over-year on a reported basis. On a constant currency basis, our third quarter revenue decreased slightly by 1.3%. This was a solid revenue outperformance of 2.2% for the third quarter. By region and on a constant currency basis, Europe and Africa revenue decreased by 11.4% compared to the same quarter last year given the continued weakness in European markets. North America experienced a marginal increase of 0.8%, and Asia Pacific continued to demonstrate a solid revenue increase of 10.7% year-over-year. By segment. FCS revenue decreased by 3.8% for the third quarter, which was a positive improvement against a challenging first half of the year. FTDS revenue increased by 1.9% year-over-year, benefiting from new business launches particularly in Asia Pacific region. Looking at the year-to-date for September 30, 2020, global light vehicle production decreased by 23.2% in the first 9 months of 2020, and our revenue decreased by 21.5% year-over-year at constant currency. That was an outperformance of 1.7%. Reviewing revenue by region. Europe and Africa revenue decreased by 28.2% year-over-year at constant currency, while Europe and African light vehicle production volumes decreased by 28.6%, resulting in a marginal outperformance of 0.4%. Europe and African revenue was driven primarily by new business launches in both segments, offsetting the impacts of overall lower production volumes. In Asia Pacific, our revenue decreased by 5.6% year-over-year on a constant currency basis and outperformed Asia Pacific light vehicle production by 12.2%. This double-digit outperformance was driven by new business launches in plastic fuel tanks particularly in China, where the group continues to benefit from the automotive megatrends of reduced evaporative emissions and increased fuel efficiency. In North America, our revenue decreased by 27.2% year-over-year on a constant currency basis or 0.7%, growing North American vehicle production. This marginal underperformance was driven by lower volumes for the region as a result of COVID-19 shutdowns in the first half of the year and certain platforms ending production. Moving to revenue by segment. FCS revenue decreased by 23.3% year-over-year on a constant currency basis to EUR 1.1 billion. This decrease was broadly in line with the market performance and driven mainly by volume decreases in Europe and North America, where the segment is weighted more. FTDS revenue decreased by 19.1% year-over-year on a constant currency basis to EUR 0.9 billion. This revenue decrease outperformed the market by 4.1% and was driven mainly by new business launches in Asia Pacific offset by some programs reaching end-of-life in North America region. Following the group's strong performance in the third quarter and first half of 2020, along with the success of the group's extensive cost reduction and cash preservation activities, we believe we now have sufficient visibility to provide guidance for our full year expectations. In 2020, we expect revenue to outperform global light vehicle production volume, excluding the impact of currency moves, to be in line with our prior 2019 outperformance of approximately 2%. As mentioned previously, the group's management has successfully implemented extensive cost reduction and cash preservation measures. With that and despite the extremely challenging environment, our operating flexibility is expected to deliver a full year adjusted EBIT margin in the mid-single-digit range. Additionally, we expect adjusted free cash flow to be in the double-digit millions -- I'm sorry, the high double-digit millions. We expect full year net debt to decrease from prior year 2019 level of EUR 738 million. And now I'd like to turn it back to Bill, who will update you on our dividend. Bill?
Yes, thank you, Ron. I'm pleased today to also provide you with a very positive update regarding our dividend situation. I feel it's important to reiterate that management and the Board are very mindful of the importance of dividends to the group's shareholders. And given the continued strength of cash generation and sufficient visibility for the full year expectations, we are committed to reinstating the group's dividend policy and payments for the 2020 fiscal year. In March 2021, and like usual, the Board intends to recommend a final dividend for 2020 based on the 2020 full year results. This final dividend will be recommended in accordance with the company's existing dividend policy of paying 30% of adjusted net income. Management and the Board currently believes this is both affordable and sustainable. This final dividend will be subject to shareholder approval at the company's 2021 AGM. Also in addition, we are pleased to announce that in light of the strong performance over the past several months, the Board also intends to be in a position to declare an additional interim dividend for 2020 in Q1 2021 based on the strength of the group's financial position and prospects. The final decision on the amount and the timing of this 2020 interim dividend will be communicated at the time of the group's full year 2020 trading update, which we expect in January of 2021. With that, I'd like to thank you for your participation in today's call. I hope everyone remains healthy and safe. And with that, I'd like to now open the phone line for any of your questions. Keith, could you please help us facilitate the Q&A session?
[Operator Instructions] And we'll now take our first question. It comes from Michael Tyndall of HSBC.
A couple of questions from me, if I may. Just the first one on the margin guidance, so mid-single digit for the full year, we did 2% in the first half. That feels like we're talking about 7-ish, 8-ish percent in the second half, yet revenues look to be, broadly speaking, we don't know about Q4 yet, flattish before currency. So I'm just wondering, are there any other headwinds holding back the margins in the second half? Because I would have thought, with some of the cost takeouts you've had, that perhaps we would actually see a quicker recovery of margin. So that was the first question. And then the second one, on a more positive note, on the EV side of things, could you just walk us through a little bit how we progress from here? Because the win on the VW product sounds very exciting, I would have thought that would generate -- if it's EUR 400 per unit, I would have thought that content per vehicle for electric vehicles starts to rise pretty swiftly going forward. I'm just wondering if that's the right assumption.
Yes, Michael, I'll start with the second, and then I'll turn it over to Ron on the first question.
Yes.
On the EV, we're pretty excited about where we're at, where we're going. Certainly, this initial high-volume production start-up with the Volkswagen ID.3 and ID.4 is just a good example of what we've been working on for years. And of course, we've communicated this to you in the past about winning this award. Keep in mind that this is the launch year for Volkswagen. I mean the total production units that they will produce this year of those 2 vehicles is probably around 100,000 vehicles. And so the revenue is not so significant yet in terms of the greater scope of the group's overall revenue. But as this vehicle is expected to ramp up to very high production volumes in the future, we're pretty excited about the contributions of this strong platform, amongst other platforms that we've won electric vehicle content on. Now from here, we continue to win other electric vehicle programs with thermal products across, as I mentioned in my remarks, all the regions and nearly many -- all of the OEMs. And the content ranges depending on the award and the design and so forth, but we feel we're off to a great start in this trajectory of electrification when we look at our position, our representation level on these electric vehicles, which will be launched over the next 3 years, as we've communicated previously, and our technology around lightweight polymers and our ability to bring in a new exciting fluid handling products in electrification space is just core to what the company is great at. And I think on the first one, I'll turn it over to Ron, but the -- I think the headline message is there are not any headwinds in the balance of 2020 other than the volumes being down. But I'll turn it over to Ron to give you more specifics on that.
Thank you, Bill. And Michael, as Bill said, the volumes you stated being flat, I would say our internal projection right now is slightly down. So you got to go with volume reduction. I'd say that's probably just to make sure we run the business on a conservative basis. But your math would be right. If you end up -- if you started with about 2%, you ended up mid, that would imply that dramatically higher margins in the second half of the year. As I said, volumes are impacted a little bit. On a couple of things is there's no headwinds as far as operational, but what we have done is we are putting back in place some of the measures that we implemented in the first half of the year, in particular, some of the wage deferrals we're putting back into the business back in the second half of the year. If you remove some of that, a couple of commercial activities that we deferred in the first half, we feel now that we can basically afford those activities. If you remove those activities, I think you'll see the margins will be very, very strong in the second half of the year. So really, it's just some one-offs that we're putting back into the business that we deferred in the first half, Michael.
We will now take our next question from Gabriel Adler of Citigroup.
A couple of questions, please. My first one is on recent trading because we're now almost halfway through the fourth quarter, and I was hoping you could provide an update on recent trading and in particular what your expectation is for the impact of tighter restrictions from the pandemic in Europe on auto production, especially if you have any conversations in the past few days or weeks with customers, that would be very interesting. And then my second question is on the comments in the release around the furlough repayments, which I thought was interesting. Could you confirm roughly how much the company has received from the U.K. Furlough Scheme this year? And then also, any color on how much benefit you received from other short time work program?
Let me start, and I'll turn it over to Ron. The impact of what's going on in Europe right now is really not affecting our business in the sense that autos appear to be unaffected, and autos are considered to be essential. So our production operations and our releases remain quite solid. So we don't expect any impact of that in the short term, although we don't -- we have not completed the year yet or gotten into, let's say, the first quarter of 2021. In terms of the -- repaying the U.K. government, I want to reiterate that we did not receive any funds from the U.K. government that came to the company. The monies went to our employees. And however, if it was a form of assistance to our employees, and so it's something that we decided that we would repay the U.K. government. And it's not a significant amount of money, just to be clear. We're talking about low single-digit millions, just to put it in perspective. But we think it's important to do that as far as making sure that people understand that our strong business results are not coming from the fact that our employees used furlough programs through the course of the year.
And by the way, the only thing I would add -- [indiscernible]. The only thing I would add is our U.K. operations are less than 1% of our revenue, so we were not talking -- I think we have 3 facilities and basically an office in the U.K. So it's not of at all any significance as far as our global operations. That's the only thing I would add, Bill.
Yes. That's right. Good point. Okay. Thanks.
Our next question comes from Jarek Pominkiewicz from Jefferies.
I've got 2, if I may. The first one is on dividend. You communicated that the final dividend will be calculated to be in line with the policy, while the interim dividends will effectively reflect the group's strength and prospects at the end of the year. Am I correct in reading that, overall, the dividend for 2020, so interims plus final, couldn't come in ahead of the policy since your net income for the first half of 2020 was negative? So that's on dividend. And may I ask on BEVs, the new business wins and the increase in average value per vehicle? When you communicated the latest update at H1, you alluded to the fact that you've got your broad content on half of the 46 platforms coming to the market. Now is this increase in content due to the fact that you managed to push through more content on these awards that you've communicated to us? Or are these as a result of incremental awards that you won, so there'll be more awards that you think you'll be on coming to the market over the next couple of years?
Okay. Yes, I'd like to comment. Again, Ron, feel free to add. On the dividend, the answer is yes. The combined dividend between the final dividend and the interim dividend will be ahead of policy, to use your terminology. So we're very proud to be able to announce that today. And then our value per vehicle increase, we -- I guess, I would describe that, that increasing average and increasing max comes from both additional wins as well as increasing technical content on these electric vehicles. So it's a combination of both, gaining more customer wins as well as bringing more content and more solutions. So -- and as I mentioned, we're very pleased with that progression when we think about our early achievements here as electrification is -- let's just say, for 2020, battery electric vehicles will be about 3% of the total global production, hybrid vehicles being in the range of, say, 10% of total global production. We're very pleased with our progress on our position and our content per vehicle on these new technology vehicles, which are so important to the future of the auto industry in terms of cleaning up the environment and to make the world a better place to live. Do you have anything you want to add to that?
No? Very good, nothing to add.
[Operator Instructions] We'll now take our next question from Harry Philips of Peel Hunt.
Just a quick question on the double-digit margin target and the rate of production you can achieve it off, what sort of market are you anticipating to be able to deliver that goal?
So Bill?
Ron, you want to take a shot at that?
Yes. Sure. Sure. Absolutely. So Harry, as you know, when we went into the year, we planned at -- when we heard about COVID coming, we planned the business at about 60 million light vehicle units per year for 2020, which then generated a lot of work around cash preservations and cost reductions as we came into the second quarter. And we executed extremely well, flawlessly, I'll be frank with you. We also, at the same time, implemented some restructuring. 8 plants, 2 of them downsizing, 6 of them we'll take out of the system. But more importantly, we took a look and we said, look, it could be 2024 before we get back to the 2019 volumes, I would say, roughly 88 million, 89 million global light vehicle units. And the management team said, we're not going to wait to get to double digits. So we took in excess of 16% of our fixed cost out. So with that said, obviously, I'm not giving guidance for 2022. And we don't have a Capital Market Day right now where I can give you long-term projections. But what I would say is we are going to get back to double-digit margins significantly lower than the 2019 volume numbers. I can't be more precise than that, but it's -- we're not going to have to wait for those volume numbers. Okay?
No, that's great. That's very helpful.
Thanks, Harry.
Our next question comes again from Jarek Pominkiewicz.
I'll just quickly squeeze one more. I just wanted to ask another question on the outlook for Q4. I understand your condition properly. You mentioned that the demand remained solid in the quarter so far, I -- which I think is currently forecasting a 3% decline year-on-year in volumes for the quarter. Do you see anything that would suggest with the increasing some of the restriction measures to Europe, do you see anything that could put this forecast in jeopardy or if we assume kind of a 3% decline year-on-year with the volumes in global production, this remains sensible for the quarter?
Yes, Jarek, we feel confident in the fourth quarter and the trends that we are seeing. And worth noting is that the car manufacturers are still trying to replenish inventories which are down compared to the sales rate for 2020. So normally, in a given year, we produce on a global basis around the number of vehicles that are sold in a given year, approximately. Well, for 2020, when we have 2 months of discontinued production operation and yet sales continue, you can imagine that total production is down compared to the global sales rate. So the OEMs continue to replenish their inventories, replenish their stock, and we don't see too much deviation from that in the remaining, say, 7, 8 weeks of the year. We have confidence in the outlook, and we have confidence in the fourth quarter.
It appears we have no further questions. At this time, Mr. Kozyra, I would like to hand the call back to you for any additional or closing remarks.
Yes. Thank you, operator. I'd like to thank you all once again for joining us this morning. These first 9 months of the year were significantly challenging, as I think all of you know, due to the global COVID-19 pandemic. But I'm really proud of our team, which has managed these challenges very well. We have and will continue to prioritize the health and safety of our employees and remain confident in our experienced management team to continue to deliver strong business results and successfully take advantage of the opportunities provided by the transition to electric vehicles. We remain very pleased with our progress on battery electric vehicles and the group's results in 2020. Thank you very much. Have a nice day. And with that, operator, feel free to disconnect the call. Bye now.
This concludes today's call. Thank you for your participation. You may now disconnect.