Faurecia SE

PAR:EO

Earnings Call Transcript

[Operator]

Good day, and welcome to the Faurecia conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michel Favre, Faurecia Group’s Chief Financial Officer. Please go ahead, sir.

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

Thank you. Good morning, ladies and gentlemen. Thank you for your attendance to our conference call, presenting our sales figures for the first quarter of the year. The press release was posted this morning at 7 a.m. Paris Time on our website, and the slideshow I am now going to comment is also available on our website and [indiscernible] which is enclosed in the press release. I am today with Marc Maillet, our VP Investor Relations; and Olivier Durand, our Deputy CFO.Let me start off Slide 2 with the key facts for the quarter. In '17, Faurecia had already partly anticipated the implementation of the new revenue recognition IFRS15 standard presenting value-added sales. Main impact was the exclusion of the monoliths sales. In addition, as on January '18, revenue from tooling is now recognized as transfer of control to the customer, which is commonly called the Production Part Approval Process or PPAP. And this recognition is made shortly before serial production. The development costs are recognized as set-up costs for the serial parts production and the corresponding revenue is included in product sales. The corresponding impacts are not material on 2017 sales, as you can see in the tables provided in the appendices.In Q1 2018, the contribution from Chinese bolt-ons acquired in '17 was EUR 57 million, representing 1.4% of last year group sales and 8.3% of last year Asian sales. The main contributions are the JV with Coagent, which is consolidated since January 1, '18 in our Interiors business group and amounted to EUR 34 million in Q1. The JV with Wuling which is consolidated since 1st of February '18 in our Seating business group and amounted to EUR 23 million in Q1.Slide 3 now summarizes the key messages from our first quarter sales. Sales for the first quarter amounted to EUR 4,315 million compared to EUR 4,200 million in the first quarter '17. On the reported basis, sales grew by 2.7%. Our sales were hit by a significant negative currency impact of EUR 281 million, the equivalent of 6.7 percentage points. This strong year-on-year negative currency impact should gradually reduce in the coming quarter. Excluding this impact, we posted strong sales growth of 9.3% outperforming the automotive production by 960 basis points.As expected, the automotive production recorded a limited decline of 0.3% during the first quarter. However, the market is expected to speed up during the second quarter. All our 3 business groups posted solid growth in the quarter: Seating at plus 7.5%, Interiors at plus 14%, and Clean Mobility at plus 6.8%. Sales growth outperformed the automotive production in all regions: Europe by 920 basis points, North America by 690 basis points, Asia by 1,570 basis points, and South America by 1,150 basis points. I will comment later on our strengthened confidence for the full year.Let me now comment on our sales performance by region, then by business group in the coming slide. Let's start with Slide 4 with Europe which represented 53% of our group sales in the quarter. In the first quarter '18, sales in the region totaled EUR 2,279 million. They were up 9.1% if we exclude the negative currency impact of EUR 20 million, the equivalent of minus 1 percentage point of sales. Our sales in Europe outperformed by 920 basis points the European automotive production, which dropped by 0.1%. Europe generated almost half of the group sales growth in the quarter with Seating as a major contributor, notably with the ramp-up production for the successful PSA 3008 and 5008 SUV models.Interiors and Clean Mobility also contributed to the growth with Interiors supported by sales to Jaguar Land Rover, Volvo, and PSA. And Clean Mobility supported by the ramp-up production for the Jaguar E-PACE and increased volume of the commercial vehicles.Let's continue with Slide 5 with North America, representing 25% of group sales in the quarter. In the quarter, sales in the region amounted to EUR 1,603 million (sic) [ EUR 1,063 million ], up 4.2% excluding a strong negative impact of the dollar for EUR 164 million or minus 14 percentage points of sales. This 4.2% organic sales growth outperformed by 690 basis points the North American automotive production which dropped by 2.7%. The 2 business group, Interiors and Clean Mobility, were the main growth drivers effectively at plus 19% and plus 9% at constant currencies. They partly offset Seating which dropped by 9%. For Interiors, it is worth to mention the ramp-up production of the Jeep Wrangler and for Clean Mobility the ramp-up of the Ram 1500 as well as the Grand Wagoneer.Slide 6 is about Asia, representing 17% of our sales in the quarter. In the quarter, sales in the region amounted to EUR 742 million, up 15.2% if we exclude the negative impact from renminbi of EUR 51 million or 7.4 percentage point of sales. Growth included the contribution of the newly consolidated Chinese JVs for an amount of EUR 57 million or 8.3% of last year's sales, 1 with Wuling for Seating and the other 1 with Coagent for Interiors. The 15.2% growth at constant currency representing a strong outperformance of 1,570 basis points compared to the Asian automotive production which dropped 0.5% during the quarter.If we look at China, our sales amounted to EUR 565 million, up 12% at constant currencies. They included the contribution of the 2 new JVs consolidated this quarter. Our sales in China represented 76% of the region's sales and 13% of group sales in the quarter. Sales to Chinese OEMs amounted to EUR 153 million, up 89% at constant currency, representing 27% of our sales in the country.Let's review our first quarter '18 sales now by business group. Let's start on Slide 7 with Seating, representing 42% of our sales in the quarter. In the quarter, sales amounted to EUR 1,817 million, up 7.5% excluding a negative impact from currencies of 5.8 percentage points, mainly attributable to the dollar and renminbi versus the euro. They included a contribution of EUR 23 million, a 1.3 percentage points from the newly consolidated JV with Wuling in China. Sales from Seating outperformed by 780 basis points the worldwide automotive production which [indiscernible] dropped by 0.3% in the quarter.With 10.8% growth, Europe contributed over 75% of the business group's sales growth, first through increased volume for the successful PSA 3008 and 5008 models. The growth in the region was also marked by the start of production for the Porsche Cayenne. Asia and South America grew by double digits, respectively by 25.5% and 19.2% at constant currencies. In North America, sales dropped by 9% reflecting both the market decline and the ramp-down in production for the Nissan Altima and some Mercedes models.Next move on with Slide 8 to our Interiors business group which represented 32% of our sales in the quarter. In the first quarter sales totaled EUR 1,391 million, up 14%, excluding a negative impact from currencies of EUR 89 million or 6.8 percentage point of sales. During this quarter, we have consolidated the JV with Coagent, which contributed for EUR 34 million in sales or a 2.6% in percentage points. Interiors outperformed by 1,430 basis points the worldwide automotive production, which, as already mentioned, [indiscernible] dropped by 0.3%. All regions contributed to the strong sales performance, with Europe recording plus 9% growth, North America plus 19% growth, Asia [indiscernible] plus 26%, and South America plus 23%.In Europe, growth was driven by increased sales, specifically to Jaguar Land Rover, Volvo, and PSA for the following models: the ramp-up in production in the new Range Rover model, the Velar; the successful launch of the new Jaguar model, the E-PACE SUV; for Volvo, the start of production for the new SUV, XC40 combined with increased volumes for the XC60 I've also mention; and for PSA, the growth was boosted by the increased volumes of the successful 3008 and 5008 models. North America was also a strong contributor to sales growth and particularly with the ramp-up of production for the Jeep Wrangler.Let's move to Slide 9 with Clean Mobility, representing 26% of our sales in the quarter. Sales totaled EUR 1,106 million, up 6.8% excluding the EUR 89 million of negative currency impact, representing 8 percentage points. Growth at constant currencies outperformed by 710 basis points the worldwide automotive production. North America at 9.3% was main growth driver contributing indeed to circa 45% of growth benefiting from increased volumes with FCA and more specifically sales to the ramp-up production of the Ram 1500 and the Jeep Grand Wagoneer.Europe and South America posted very decent growth as well with respectively plus 5.3% and plus 30.6%. In Europe, Clean Mobility benefitted from increased volumes of the PSA 3008 and 5008 models as well as the ramp-up production for the Jaguar E-PACE and for the Deutz commercial vehicles. In South America, Clean Mobility benefitted from increased volumes for the Toyota Hilux as well as start of production for the VW Polo model. In Asia, sales growth stood at plus 0.8% as our continued strong growth with Chinese OEMs at plus 14% was partly offset by the end of 2 programs for VW.Now with Slide 10, let me comment on our outlook for '18. Considering our current expectations of the worldwide automotive production to grow by at least 2% for the year, in line with latest IHS forecast and a robust double-digit growth of our sales in second quarter, double-digit [indiscernible], we are very confident in our ability to reach all the objectives we announced last February. I remind you our next Capital Market Day, which will be held on May 15 in Paris. We are looking forward to seeing you there.I said in February, we'll provide an update on sustainable mobility with the progress achieved since we had our last Capital Market Day in June 17 focusing on Clean Mobility solutions. On May 15, we dedicate most of the day to present our strategic vision for spotlight on growth. We'll also comment on our 2020 financial target and 2025 ambitions for the group.We are now ready to answer your questions.

[Operator]

[Operator Instructions] We will now take our first question from José Asumendi from JPMorgan.

[José Maria Asumendi, Head of the European Automotive Team]

José at JPMorgan. Just a couple of questions please. I guess we will have plenty of time to discuss everything at the Capital Markets Day. But can you talk a little bit about your recent announcement, new tech center in Japan, what's the proportion of revenues you have with Japanese customers and what can you do strategically to grow revenues with Japanese customers over the coming years or maybe product wise how could this work out? Second on Opel, can you sort of analyze what kind of share of revenues could you generate with Opel? Are you seeing currently any disruption there? And are you winning any contracts, new contracts with them recently, or is this in the process that could be in the making? And then finally, North America Seating revenues down. I understand with 2 models being ramped down. Do you have an offsetting factor for these 2 vehicles over the coming quarters? Those are the 3 questions, please.

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

So starting with Japan, so we have opened as you have [indiscernible] a new development center. We were already there, but we have grouped our different pieces in 1 site and clearly with the ambition to empower our presence in Japan. We are now mainly working with Nissan, as you know. What we see is that Nissan [indiscernible], is a leader [indiscernible] to Nissan for both interiors and clean mobility. So clearly with this move with I would say the integration of Mitsubishi probably as well with some other customers, but we will be less talkative on that, we have some strong potential with Japanese customers. So it is the first step to empower our positions with respect to the big Japanese customers for Nissan to be much more I would say credible respect to them and to continue to grow with them. Today I think Nissan is representing something like 6% or 7% of our sales. It will grow with our order book. And it will clearly accelerate. The second question on Opel, as you know, we are making more or less 0.7% to 0.8% of group sales with Opel, mainly on vehicles developed in common in the past between PSA and Opel, produced by PSA and [ Badge ] Opel. And the main 1 is if I'm not mistaken, the Opel, not Zafira, the [indiscernible] production. I can say that through the [indiscernible] inside Opel and PSA, we will mechanically gain market share because we are already validated as [indiscernible] on the Opel cars. For development of other businesses, there are some big regulatory process [indiscernible]. Of course, we are participating. I don't know if we will publish our future success, but we are confident that in U.S., we'll get some new businesses with Opel. And on -- sorry?

[José Maria Asumendi, Head of the European Automotive Team]

In the U.S.

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

Sorry?

[José Maria Asumendi, Head of the European Automotive Team]

In the U.S.?

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

In the U.S. I was coming at U.S. So in U.S. as you are seeing, we have a good growth. The market was still down. IHS is more positive on the volumes there for the next quarters. Big contributors will be the Jeep, the different Jeep, the Grand Wagoneer for Clean Mobility, Wrangler for Interiors, the Ram we have both Interiors and Clean Mobility, and Ram as you know is a big, big volume. We will have Tesla because I am sure that Tesla will ramp-up their production. So we have lot of new businesses. Of course, we have some end of businesses, 1 is Daimler, but altogether I am very confident that we'll continue to overperform the market on a significant matter. Is that an answer for you?

[Operator]

We will now take our next question from Ashik Kurian from Jefferies.

[Ashik Kurian, Equity Analyst]

It's Ashik Kurian from Jefferies. Just a few questions because you are the first 1 to report, I thought I'll take the opportunity to maybe get your thoughts on what are you seeing in terms of production trends for Q2 and Q3. You've confirmed double-digit growth in Q2. Are you seeing OEMs trying to stock up into Q2? And then what are the implications for that in Q3? Then a few housekeeping questions. The tailwind from the JV consolidation was slightly lower than what I had expected. You probably have a couple of other JVs ramping up through the upcoming quarters. So maybe if you can give an estimate of what that number would be maybe in the upcoming quarters and what your estimate for that is for the full year. And then just thought we'll get an update on the impact from FX and raw materials. Again the FX impact was a bit higher than what I had in the model. I'm just wondering whether do you have any impact on the transactions and I know you're mostly nicely hedged, but with these currency moves is there any impact on the EBIT from transaction and also any impact from raw materials or what's the latest view on raw material headwind to EBIT?

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

So starting with volumes, I think IHS is more or less forecasting plus 3% on volume production for the second quarter. As you know, today we have the production program from customers. Usually that expects fully the program, except big macro problem. So we have a very good view on our first half and we will have as usual a very good view –– a good view, not very good, but a good view late July on the program of the second half. Usually there is the finalization [indiscernible] in end of August, but they give already some I will say good – I will say first forecast end of July. On inventory management, we have not noticed anything. It's difficult for me to answer on global picture, but I don't think that customers will make inventories in the second quarter. So clearly, we are more thinking that it is reflecting the trend offsets with [indiscernible] famous problem of working days and selling days. So what we have indicated is that first we said our momentum, the new program and they have mentioned summer [indiscernible] is very important for the group. We will over-perform the market in the second quarter and on top of that due to some stuff we will have as well some tooling and R&D steps [indiscernible]. So very robust double-digit figures that we are expecting for the second quarter. Coming to the JVs, you're right, the market underestimate –– overestimate, sorry, the JV impact. The market forgets 1 thing is that there is a new Chinese year. So in fact in China it is not 3 months but only 2 months, so which is why you have this limited figure of 1.4%. On top of that, I indicated that in February we will positively consolidate because our partners have to prepare to come out of their business. So we have the several JV with Wuling which will be probably consolidated in Q2 and we have the JV with [indiscernible] which will be consolidated in Q2 as well. So you can probably -- not completely but double the figures for the second quarter and these figures will be a little more, more than 3% in the second half. And for the full year, it will be between 2.5% and 3% for the impact of the [indiscernible]. Now material price increase, so we have seen the graph of different evolution. On 1 side, the gas price is okay. The plastic is okay. We have some small impact in steel, but as you know, we have some Asia contract and we [indiscernible] covered. So I will repeat what we have said in February. We will have a smaller negative impact, but I would say it is almost immaterial. So it is not something that we can't complain [indiscernible] which is especially negative. And as a pass through, I will say probably material will be something like 1%, 1.5% in our sales price. Have I answered your question?

[Ashik Kurian, Equity Analyst]

Just on –– do you have any FX, transaction FX or is that completely hedged?

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

On FX, it is a very good question. Firstly, if we continue the current forex, that means more or less the dollar at $1.22, $1.23, then it'll be at 780 with respect to euro that we are a euro company as you know. I expect the forex to be at negative minus 4 for the full year, but it's [indiscernible]. So clearly, as we indicated, this figure end of quarter and positively going to minus 1, minus 2 in the last quarter, but of course at the current forex. Going now to the transactions, as you know we are regionally exposed. So we are [indiscernible] seeing in each region which we are selling. So we have mainly some [indiscernible] parts coming from Europe to Americas and mainly for [indiscernible]. This is Asia and this is as well a [indiscernible] to our customers with sometimes lead time but as it is mandated pass, the customer takes the risk. So I insist something like $500 million exposure.

[Ashik Kurian, Equity Analyst]

Okay. Just a quick follow-up. You mentioned strong growth of R&D and tooling sales in second quarter. Just wanted to refresh my memory, what are the margins on those R&D and tolling business. Is that in line with group or are the margins lower on R&D and tolling business?

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

No. It is in line with the group.

[Operator]

Next question from Sascha Gommel from Credit Suisse.

[Sascha Gommel, Research Analyst]

I have got one on Clean Mobility actually. It's a division that shows the lowest outperformance against car production. I was wondering what's the reason behind it. Is it just the low growth in China due to the ramp down of the 2 VW models? And then the related question, will there be replacements, i.e. we'll see ramp-ups in the rest of the year from VW in China? And then maybe also related to Clean Mobility, China 5 is now implemented across the country. Do you see any major impact from that. And also how do you see the business progressing with China 6 starting to phase-in in 2020.

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

Clean Mobility is accelerating the growth, so [indiscernible]. So it is joining the 2 other [ businesses ]. In terms of [ businesses ], we have some big contribution of new models. At least on Interiors on the [indiscernible] next half of the year, probably Tesla. For Seating, we have the very big contribution of the new SUVs of VW, so it is why Seating and Interiors are posting [indiscernible]. So which is why they are posting a higher growth. For Clean Mobility, if you take the [indiscernible] figures, I have to insist on 1 thing is that half of our Chinese business today is Clean Mobility. So they are more impacted [indiscernible] by the product. Going now to the business, to be honest I have limited view on VW. It has a different start and end of production in China, but if we take the customer mix, I am confident that VW will continue to over-perform in China. And we have a strong market share as you know with VW in Clean Mobility.

[Sascha Gommel, Research Analyst]

And regarding the regulation, do you expect significant impact from that?

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

Regulations, there were [indiscernible] regulations. So if I'm not mistaken, it is now 2021 country side. So they have postponed the big cities. It doesn't change the fact that there will be [indiscernible] because customers cannot start when [indiscernible]. So we will see the ramp up progressively late '19 and 2020. We will make an update on that in the [indiscernible].

[Operator]

We will now take our next question from Kai Mueller from Bank of America Merrill Lynch.

[Kai Alexander Mueller, Associate and Analyst]

Kai Mueller here from Bank of America Merrill Lynch. One question mainly, if I may. It's on your Clean Mobility business we touched on it before. Two parts of it: firstly, given obviously the ongoing debates in the European market and the very weakness in diesel sales, how have you seen not necessarily the current sales but also the outlooks by the OEM changing? Have you seen them shifting more of their production to petrol vehicles? And if so, can you just remind us sort of what your split is and what your content is, petrol vehicles versus diesel vehicles, in your Clean Mobility business and sort of how you're trying to tackle the situation as we see obviously diesel declines?

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

So if you remember, as you're aware, we will make an update on [indiscernible]. [indiscernible] automotive worldwide is something like 16% of our sales, not more, 600-something. Of course, big part is Europe. In Europe, we are more or less balanced between diesel and gasoline. And as you have seen, Europe was important to post a 5% growth in Clean Mobility. So it was, I think, a good result. When we see now the market, definitely I think that diesel will continue to drop. And if I [indiscernible] probably it will drop by something like 4% to 5%. I think the image is definitely damaged and anywhere as well for customer, not for ourselves, there's a risk of tax advantages. So I think the trend is there. We see customers trying to manage that because they have some kind of capacity to produce engines. You know that for us it's a non-matter to switch a line from diesel to gasoline. It's really a non-matter for us. It's a problem of weeks and very limited I will say CapEx. So this is more something to ask to customers if they need a certain mix of diesel, so probably they will try to smooth this evolution. It is our conviction. That we will see. Yes, if I remind you about content, I think we have [indiscernible] content in Europe by something like EUR 160 or EUR 170 per car for gasoline. And we have an average content of EUR 180, EUR 190 per car for diesel. So we have a small downside when we switch from diesel to gasoline which is immaterial [indiscernible] but which is material for the European equity. So in Europe, we have some gain of market share and we will add some. I was mentioning Opel before. We have the development of commercial vehicles. So Europe, in our plan is a goal to post a small growth but [indiscernible].

[Kai Alexander Mueller, Associate and Analyst]

And maybe just to follow up, we've obviously touched on it. A lot of your growth is coming from Asia, also through all these new bolt-ons you've been making. How would that impact your working capital because a lot of your competitors are often speaking about worsening payment terms when you do business in the Asian markets? Can you see that? And can you just remind us how much of your net cash flow generation for this year you expect to generate again from squeezing working capital further?

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

Your first question, [indiscernible] is not easy to be paid on time with some customers. [indiscernible] anybody of course, but 1 of the big topics that we have probably to improve our procedures, to improve our relationship, and it is 1 of our upside, if we can use that because we were not so good at the end of '17. So it is [indiscernible]. So we have a small impact, but we have a negative impact, I agree with you, year-after-year due to this development of diesel. On working capital itself, we would like [indiscernible] different plants, improvement of customer overdues, reduction by [indiscernible] on the inventories, some further I would say improvement on supplier terms, and mainly on better measurement of the project because as you know, we have a lot of cash, if I can use expression, [indiscernible] is the project management. And we would like to be [indiscernible] working capital evolution this year, so which means expect China to grow and improvement between EUR 30 million to EUR 50 million.

[Kai Alexander Mueller, Associate and Analyst]

And maybe just to remind us, I remember I think when Carlos Ghosn was presenting at the -- I think he was at the parliamentary hearing, 1 of the question was why the OEMs are squeezing their supplies? Has that been coming up on the supply level as well as you obviously are trying to get better payment terms with your suppliers?

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

First thing, I will not speak about squeezing. We have some clear terms and conditions with customers. They [indiscernible] in the past. So it is stamina for long term. Some countries [indiscernible] because before it was 90 days and it has gone to 60 days [indiscernible]. So we are more in the shortening of some customer supplier terms. So this is a global picture. Now with respect to our suppliers, we work to be as competitive as possible, so to go through something like 60 days average. And we are offering to our work suppliers reverse factoring. That means respect to the [indiscernible] nature of Faurecia, they can take money from the banks at very, very attractive costs. And it is as well an improvement of [indiscernible]. So I am convinced that it's digitization as well of order chain. So I'm convinced that this kind of tool will help everybody and, of course, our small suppliers.

[Operator]

[Operator Instruction] As there are no further questions in the queue at this time, I would like to turn the call back for any additional or closing remarks.

[Michel Alain Maurice Favre, Executive VP of Finance & Group CFO]

If there is no more questions, thank you for your attendance. As you have seen, we are starting the year on a very good momentum. And it will accelerate in the second quarter. And I would like to repeat that we have this very important event on the 15th of May. We'll show you a lot of demonstrations. We'll explain you again which is our key strategies that will transform the company to make this company much more profitable and to accelerate growth. So please come to our Investor Day. In the meantime, have a very good day. Thank you.

[Operator]

Thank you. That will conclude today's conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect.