Piaggio & C SpA

MIL:PIA

Earnings Call Transcript

[Raffaele Lupotto, executive]

Hello. Thank you very much for joining us today to follow this conference call on Q1 2018 financial results.

Today's conference call will be held by Mr. Roberto Colaninno, Piaggio Chairman and Chief Executive Officer; and by Mr. Simone Montanari, Piaggio Group Chief Financial Officer.

During the conference call, we will use the presentation that you can download from our group website.

As usual, I remind you that during today's conference call, we may use forward-looking statements that are subject to risks that can cause actual results to be materially different.

And now, I'm glad to hand over the conference call to Mr. Simone Montanari.

[Simone Montanari, executive]

Hello, everyone, and thanks for attending our call.

As usual, I will start the conference call from Page 3, giving you a snapshot of the main demand trends to move later on, on our results. Three main areas. Western countries, in particular Europe from one side, Asia Pacific and India on the other side, mixed trend.

In Europe, as expected, we experienced a slow start to the year, namely minus 4% the market declined compared to last quarter. The decrease came only and in particular on the 50cc segment, with an overall decrease of minus 30%. And on the other side we had the over 50 cc segment, both scooter and bikes, increasing compared to last year with a plus 5%.

The demand of the 50cc bike also been affected by the strong growth of the latter part of 2017, in the last quarter of 2017 that ended with volumes climbing around 90%. And as mentioned in prior calls, the step-up in volumes reflected the need to reduce the stock in the market at the end of 2017.

Additional, we may say that and we may highlight that the European market has been hit strongly in February and March with unusually unfavorable weather conditions, and starting from mid of April, weather condition improved, reversing the trend that we had in some market. We do already have official data from April and the market trend finally reverted to a plus 5%.

Looking at the trend by country. Spain has been the only major country ending up as compared to last year with scooters plus 18%, while bikes trend has been positive across Europe.

On the other side, with positive results, we have Asia that in Q1, trend mirrored the trend of last year. In particular, Vietnam kept posting a robust growth, high single-digit in scooter. Indonesia ended up by mid-single-digit growth, while other countries in the area showed mixed trend overall positive market dynamics.

As expected, and I like it in prior calls, the Indian 3-wheel light commercial vehicle climbed, not only again 2017, but overall, and most remarkable it increased compared to 2016 results. And in my opinion, these are very good, very positive starting points to have a market recovery across all the 2018 in India light commercial vehicle. In Indian 2-wheeler, the market kept on posting strong growth, driven again by scooter, ending up 24% against last quarter 2017.

Moving now to Page 4, we have a snapshot of cash performance. We are, again, very satisfied of the result that we achieved in the quarter. And that led us to another profitability peak in our history -- recent history.

In particular, and in details, net sales went up by 1% at current ForEx, but if we exclude the negative ForEx effect, the growth compared to last year would have been 7%. The positive result has been driven by strong performance in the emerging countries, as we will see more in detail later.

In terms of margins, Piaggio posted a sound growth in all operating metrics. In detail, EBITDA grew around EUR 2 million, up to EUR 43 million in the quarter. That has been the best absolute performance to date, with a margin uplift of 0.5 percentage point that pushed the ratio of net sales up to 13.8%.

It is important to notice that this result has been driven by significant improvement in the gross margin and with an uplift in the ratio to net sales of the gross margin that reached 31%. Excluding the ForEx effect, the ratio to net sales would have been a little smaller, also considering the growth and the uplift in the gross margin, thanks to the positive effect.

At the same time, we've been able to mitigate the seasonal cash absorption to EUR 56 million, thus keeping net debt well below the Q1 2017 level, EUR 30 million lower than 31st of March 2017.

Let's move now to Page 5 to have an in-depth analysis on the trend by businesses.

As you can see, the [ quarter ] ended with overall volumes increasing by 7%, leading to the same growth rate of revenues, plus 6.7% at cost on ForEx. This [ first ] result came on the back of strong growth in the emerging countries.

In particular, in India, India has been the main engine of the growth both in absolute and relative percentage terms. Indian 2-wheelers volumes and revenues kept on surging on the track and on the back of favorable market dynamics and on the success of our products. Once again, the bright spot has been in 2-wheelers India and in Vespa, with volumes up by [ 7% to 17% ] confirming the brand potential in this country. Additional, we achieved these strong results even after a notable average price uptick of around 5% of cost on ForEx.

On the other side, in [indiscernible] India region, light commercial vehicle posted a healthy performance, driven by both contribution of both domestic and export sales. I would like to highlight again that our results are not only above 2017, but also above 2016 level, thus suggesting that we should be at the outset of a long-lasting, sustainable growth.

Also, for [ SEB ], it is worth mentioning that we achieved the results with average prices on the rise compared to last year, excluding ForEx. The improvement of domestic sales together with the acceleration of exports is extremely positive if we look forward to 2018 results.

In Asia Pacific, volumes rose by 11%, leading to a 7% growth in revenues at cost on ForEX. In particular, the strong growth with both volumes and revenues of Indonesia, Taiwan, China and South Korea more than offset the weakness of Vietnam, which ended double-digit down. Noteworthy, again, also in Asia, Vespa volumes went up double-digit in India, plus 15% compared to last year.

In Western countries, 2-wheeler volumes have been negatively affected there by several drivers. First of all, the bad weather. Second, the plans of the 50cc European market, the prolonged weakness of the USA market and a low European seasonal dealer stock increase compared to last year, in preparation [ and important ] for the new product launches that will come in Q2, mainly the new Vespa.

Despite that, I would like to underline again the strong increase of the average selling price in Europe, around 12%, fast improving the strength of our brands and also thanks to a mix that is targeting the over 50cc compared to the 50cc one.

At country level, I can add that in Europe, the best performing countries has been Spain and Germany, that has been the only 2 major countries ending up versus prior year.

Let's move to Page 6 to look at the breakdown of the performance by product. First of all, we -- I underline again the performance very positive of Vespa. Among scooters, Vespa volumes grew around 12%, driven by India, Asia, leading to an overall positive revenue trend, notwithstanding the sharp negative ForEx effect in Asia and India. So even without the ForEX -- with the ForEX effect we grew in Vespa volumes, obviously, and net sales.

Also in Western countries, Vespa average selling prices went up more than 5%, further proving the strength of the brand. Among other scooters, we would like to highlight the positive performance of Liberty, ending up both in volumes and revenues, and MP3 with volumes ending up versus prior year, notwithstanding and ahead of the introduction of the 2 new versions that we will come into 2018.

Looking at bikes, we posted strong growth both in bikes, namely plus 32% in particular, with the brands Derbi and Aprilia that performed extremely well with double-digit volume and revenue growth. Aprilia Tuono, Shiver and Derbi Senda has been the outright bestseller.

In terms of pricing, as you can notice looking at the slide, the reduction of the average selling price has come -- came exclusively from negative mix effect together with the negative ForEx effect. Not considering ForEX effect, the average selling price would have been increased compared to last year.

Moving to Page 7, we may have a look at the EBITDA bridge. The EBITDA grew from EUR 41 million up to EUR 43 million. As said before, we achieved these record EBITDA results on the back of the outstanding performance at the gross margin level. We have been levered to -- able to increase the gross margin on sales up to 31% compared to the 38 -- 30.8% of last year.

In absolute terms, the gross margin growth has been driven, obviously, by the net sales improvement together with the percentage gross margin improvement. In addition, we had -- we have been able to reduce again and to maintain cash operating expenses lower than last year. Overall, we increased EUR 2 million in terms of EBITDA.

Going to Slide 8, we can have a look at the net profit bridge. Net profit, net result ended close to 3x higher than last year, starting from EUR 1.5 million up to EUR 4 million, with a significant uplift in terms of ratio to net sales. And this very positive result is stemming from higher EBITDA that we just commented on the previous slide but, overall, and more important, lower D&A compared to last year. And we know that in last year, we reached an historical peak in D&A. In 2018 the decrease of D&A will start and will continue in all the year long.

We decreased also the financial expenses. We had lower financial expenses compared to last year, around EUR 1 million, thanks to the management of the gross debt and a lower down of the net average price of the gross debt. We stepped up the tax rate at 43% that we think it will be the normalized level of the 2018 and that it reflects the different geographical mix of our results.

Overall, again, we move the, in terms of net result, from 0.5% up to 1.3%. And in terms of absolute terms from EUR 1.5 million up to EUR 4 million.

Page 9 -- Slide 9, we can summarize the figures that we just discussed. Net sales going up EUR 3.2 million from EUR 309 million in 2017, up to EUR 312 million, plus 1%. But not considering ForEx, mainly U.S. dollar and the Indian rupee devaluation, the growth in net sales would have been plus 7% in the same ratio and in the same size of the growth in units sold. Gross margin grew from 30.8%, up to 31%, and in terms of absolute terms, from EUR 95 million up to EUR 96.7 million.

EBITDA grew from 13.3% up to 13.8% at EUR 43.2 million. Depreciation went down from EUR 30 million in the first quarter of 2017, down to EUR 28.7 million in 2018. Financial expenses went down by EUR 1 million from EUR 8.5 million down to EUR 7.5 million, thanks to the income before tax lowered from EUR 2.5 million in the first quarter of 2017, up to EUR 7 million in the first quarter of 2018. After tax, with a tax rate of 43%, net income has been EUR 4 million against the EUR 1.5 million in 2017.

Furthermore, you can notice also the good performance at the cash flow level. We kept the net debt below prior year's level and in particular, at the 31st of March, 2017, our gross debt -- our net debt level has been EUR 532 million. We decreased the net debt at the EUR 503 million with a decrease of EUR 30 million in the last 12 months.

If we move to Page 10, we may have some more details in terms of cash flow. We can see that we started the year with EUR 447 million of debt. We know that in the first quarter we have a seasonal cash flow absorption. We had the same cash flow absorption in the first quarter of 2017 and also '16 on, it's seasonal. Compared to last year, the operating cash flow has been better than last year, EUR 3 million better, EUR 33 million compared to the EUR 30 million of last year. The operating cash -- the change in working capital has been lower compared to last year, we absorbed the EUR 63 million compared to the EUR 55 million of last year. And this is due mainly to a lower utilization of the factoring because of lower invoices and lower net sales in Europe. We increased capital expenditure of EUR 22 million compared to the EUR 18 million of last year. And we had an impact of around EUR 5 million coming from the adoption of new IFRS 9. Without this impact, the net financial position at the first quarter of 2018 would have been EUR 497 million compared to the EUR 503 million posted with the new accounting principles.

[Raffaele Lupotto, executive]

Okay, now we are ready to answer the questions you may have. So please go on.

[Operator]

[Operator Instructions] The first question is from Monica Bosio of Banca IMI.

[Monica Bosio, analyst]

Yes, the first one is on the European trend as for 2-wheelers. You know that top investment topic for investor is the recovery of the scooter market in Europe. If I have heard correctly, you told us that Aprilia at the European level was up by 4%. Can you give us more flavor? Is this -- are you referring to the scooters or to the total market? And if can you give us some highlights at the European level for the last month. And the second one is my usual question. I know that you do not release official guidance for EBITDA but the consensus is still pointing to EUR 200 million, EUR 204 million for the full year 2018. I was wondering if you are still confident on this on the back of the weaker trend of the scooter market in Europe due also to the weather conditions? Or if you believe that, at the end of the day, even if the market might be lower, you can offset with efficiencies and thus still reaching an EBITDA margin -- an EBITDA in the region of EUR 200 million, EUR 204 million? And the very last question is on the Indian 2-wheels operation. You are achieving very good results in 2-wheels in India, very outstanding. I was wondering if you believe that these operations can achieve the same profitability of the Indian light commercial vehicles? And if you can give us some indications in terms of volumes by year-end? And if you may, in 2019?

[Simone Montanari, executive]

Thanks, Miss Bosio, for your questions. I will start from the first one, that is the European trend. As we commented, the European trend in 2-wheelers in the first quarter has been negative. And the decrease was focused and limited to the 50cc segment in particular. We had minus 30% compared to the plus 5% on the over 50cc segment. The first data that we have provided you that are coming from the major countries are already posting a different trend compared to the [indiscernible] one. In particular, you're mentioning the plus 4% -- let's say 5% that we saw in the countries that already have official data. And I can confirm that it is a positive result, plus 5%, and this positive result is also for -- both for scooters and bikes. And so the April result in terms of market has been definitely different compared to the first 3 months one. Coming from your second question, EBITDA consensus. Yes, we are still confident that we're in a position to reach the consensus EBITDA in the region -- in the range from EUR 200 million up to EUR 205 million. As you correctly highlighted, the first quarter has been weak, more than our expectation in Europe. But it has fully been -- fully counterbalanced by the trend of the Indian and the Asian results. I see that these trends will continue throughout the year and considering these, I think that the EUR 200 million in EBITDA beyond EUR 200 million is still achievable and so I can rely on the consensus. In particular, Indian 2-wheelers, we're targeting a result of -- in the range of 90,000 vehicles in 2018 compared to the 70,000 vehicles in 2017, if this was the question. In terms of profitability, you're right. The underlying debt, the profitability of the 2-wheels is still not at the same level of the profitability of the light commercial vehicle in India. There are some percentage point of difference. I think that -- well, we have very different situation, commercial vehicle is a business that we are playing for a long -- a lot of years. And so we are already benefiting from scale, from operation, from sourcing capability. Indian 2-wheelers is quite a new business for us. I think that in the medium term, the profitability should be and could be considered at the same level, at least at the EBITDA level, thanks to a price premium, not thanks to an additional decreasing cost, but very likely in an additional increase in premium pricing and premium positioning. Hopefully that's the answer to your question.

[Operator]

[Operator Instructions] The next question is from Michele Baldelli of Exane BNP Paribas.

[Michele Baldelli, analyst]

I have a couple of them. First one, I would like to understand what could be the impact, let's say, the difference between what is your reported sell-in in the first quarter and the reference market in Europe? So what has been the difference in terms of trends? And the second question relates to the question just posed by Monica. On the fact that you expect to sell around 90,000 vehicles, am I right in assuming that anyway the total capacity is around 150,000 for this Indian facility? And if it's so, does it mean that anyway you will not be at the full speed in terms of capacity utilization rate? So I was just wondering into my head, is there probably also an operating leverage affecting the future if you will go over these 90,000 vehicles?

[Simone Montanari, executive]

Thanks, Mr. Baldelli. Starting from the first one, impact of sell-in. Well we have already commented on the market, the difference between the market trend and our results are mainly linked to 2 factors. The first one is that waiting for the launch of the new product that will come in Q2 and Q3, we did not have the same level of sell-in that we had last year, basically, so the gap is also driven by this to the fact that to the level of the stock of the net debt decreased in the quarter waiting for the new launches. The second driver has been a minor loss in market share and in particular in the over 50cc market share in Europe. In terms of India 2-wheels, 90,000 target. Yes, it is our target. Is there -- if the question is, is there any operating leverage that may come with the increase -- with a further increase in sales? Yes, I think that there is. You are right in pointing out that our overall capacity is 150,000 vehicles in [ two shift ] then we may also even increase this capacity without bigger investment. But by increasing net -- increasing volume sold we will increase a little bit also the operating capacity overall. But overall, again, and coming back to the question -- to the answer I gave to Miss Bosio, if I think to the medium term, the higher opportunity in order to improve profitability with India, I think that are coming more from increasing pricing than from decreasing costs.

[Operator]

The next question is from Filippo Prini of Kepler.

[Filippo Prini, analyst]

Two questions. The first one is on the gross margin that it's been very high, up over same level of last year. If you can give us an indication what you expect in terms of your efficiency, your production for -- on the full year basis? And the second is a clarification on ForEx. You pointed out, you quantify the impact of ForEx negative on revenues but you made also some reference to positive impact on -- from ForEx on the OpEx. So if you can give us also the impact of ForEx on EBITDA in the first quarter this year?

[Simone Montanari, executive]

Thanks, Mr. Prini. Gross margin, yes, we are satisfied with this level. I think that they are fairly high in compared to the 2017 one. The 2017 one was benefited and was affected positively by the increase in the production of the European manufacturing facility. In Q1 2018, as I say, we didn't have the same increase, but the major improvement and efficiency came from the cost of the product, and in particular from one side the international sourcing of our components, and also thanks to the ForEx effect. We lost 5 percentage points in growth on the net sales, thanks to the ForEx devaluation of the U.S. dollar and the Indian rupee. But on the other side we had also significant savings both from product cost and on operational expenses. Overall, if I sum up, the minus that we had in net sales and the saving that we had, both on product cost and operational expenses, we are, on an average, we are balanced. And actually, in this quarter, with this product mix, with this geographical mix there was a slight positive approach and slight positive impact coming from the ForEx, but very slight. Overall, you should consider us, with this level of geographical mix balanced in terms of ForEx and in particular U.S. dollar and Indian rupee.

[Filippo Prini, analyst]

Okay. Just a follow-up to be [indiscernible] Correctly. On the EBITDA basically, there is a 0 meaningless impact from ForEx?

[Simone Montanari, executive]

Lower than EUR 1 million.

[Operator]

There is no question at the moment. The next question is from Gabriele Gambarova of Banca Akros.

[Gabriele Gambarova, analyst]

I would ask you a brief comment on the APAC, on the Asian market perspectives. Do you think that this recovery is going to be somehow structural? What are your perspectives for the remainder of the year?

[Simone Montanari, executive]

Thanks, Mr. Gambarova. The action plan that we put in place starting from July '17 in Asia Pacific has been a structural action plan because we went through a full reorganization of the area. We changed the CEO. We are going through a reorganization of the dealer network and a renewal of the product plans. So the action plan has been structural. We expect that the result of the structural action plan will be structural as well. And if I look at the second quarter, the comparison will not be so easy, because the second quarter of 2017 has been quite positive if you look at second quarter 2017 Asia Pacific compared to the second quarter of 2016. But overall -- so the next quarter will be difficult on a comparison base. On a yearly basis, I expect that the growth will come also in Asia Pacific full year 2018 compared to full year 2017 for sure, in terms of units sold. In terms of revenues, these will depend also on the ForEx, as we saw in the first quarter.

[Operator]

[Operator Instructions]

[Raffaele Lupotto, executive]

Okay, so if there are no more questions, we can close the call now. As usual, you know you can call me later, also tomorrow, if you need to have further details, further information. Thank you very much for attending the conference call. Bye.

[Operator]

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.