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Ladies and gentlemen, welcome to the 2018 Q3 conference of Plastic Omnium.I now hand over to Mr. Laurent Burelle, Chairman and CEO. Sir, please go ahead.
[Audio Gap]our Group CFO. So -- and I am Laurent Burelle, Chairman and CEO of Plastic Omnium. Welcome for this comment of the Q3 revenues of our 2018 operations. We -- I will start with the comment, and then I will pass on to Jean-Michel to conclude. And then we will ask your questions.For 2018, it was a very important year for Plastic Omnium in term of strategy. We become a pure automotive supplier. It has been a long way. Just to remind you, that in the last 10 years, we have acquired for around EUR 4 billion new activities: Faurecia plant in Germany and Spain, Peguform in Spain, Plastal in Poland, 4 activities in Michigan and half of our energy activities. That is plus EUR 4 billion turnover. And we have divest for around EUR 1 billion turnover. That's mean, the last 10 years, plus 3 -- plus EUR 4 billion in acquisition, minus EUR 1 billion in sales and a growth of EUR 3 billion. So we went from EUR 3 billion to EUR 9 billion. So we are a group in movement, in growth. On a yearly basis is -- something is happening. I just wanted to mention that as an opening statement.And I do confirm that we will dispose our environment business by the end of the year 2018 and become a pure player.Second, we took control of HBPO, world leader in front-end modules, in June '18, end of June '18, by acquisition of a 30% stake in -- of MAHLE. We now own 2/3 of HBPO. HBPO has today revenue of EUR 2 billion generated in Europe at 60% and the rest mainly in Mexico. It is a company, which does not manufacture. It is a design, purchasing, assembly and logistic company on a worldwide basis for OEMs who want to reach top-quality front-end module. That's mean it is a low profitabilities, 3%; very low investment, below 2% of turnover; and higher return on capital employed. And so we have now 2 foot: We have our Plastic Omnium Modules, which is a strategical access for the future development of the group because the autonomous car will need a new type of bigger modules. And we think HBPO will be an excellent basis to start from for the future design of the car. It's not only an add-on of growth in sales and profitability, it is an add-on for the long-term strategy of the productions of Plastic Omnium. This company is EUR 3 billion; has an order book which will bring it quickly around, let's say, 2021, around EUR 3 billion if we stay at the same perimeter of front-end module-only manufacturing. If we add on other modules to these company activities, then we will have a growth -- a quicker growth. It's not decided yet. It will depend the speed of the redesigning, reshaping of the car of tomorrow. So on one side, this HBPO PO modules activity; and on the other side, our historical businesses, our legacy business, which we call now PO industry.As a result, we have enjoyed for the first 9 months on an economical basis a 3.6% for the first 9 months growth and on the consolidated basis a 7% consolidated growth. On the last quarter, Q3, we have enjoyed a 15.7% growth on an economical basis; and on the pure that we don't report exactly the same way on the consolidated basis, Q3, a 30% growth. Those 2 -- so those 2 businesses, our legacy business PO industry, on one hand; and our new module business of the -- on other hand have put that, I think, in a quite good position for the strategic development of the future.I will let Jean-Michel Szczerba, our Co-CEO, comment by region and countries. And I will come back for general conclusion to you afterward.
Good morning. Jean-Michel Szczerba speaking.All in all at group level, the evolution of our sales over the first 9 months of 2018 is good. At constant exchange rate and perimeter, we are growing in each of our major production and assembly areas. That means we are gaining market share everywhere. And I confirm that, at the end of September, our intelligent exterior system will go from 16% market share to 19% in 2021. And our Clean Energy Systems will go from 22% market shares to 25% by 2021.By region. Europe, plus 2.2% growth, outperformance of 2.1 points. North America, plus 0.3% growth, 1.5 points outperformance. China, plus 10.2% growth and 8.7 points outperformance.For sure, the automotive production in Q3 suffered from an strong and unexpected deteriorations. When we met last July, Q3 was expected at plus 3.1%. Finally, the worldwide automotive production is for Q3 at minus 2.1%, affected by a huge collapse in Germany, minus 70% in Q3; and a downturn in China, minus 3.6% versus 3.8% expected 3 months ago. Those 2 countries represent 1/3 of the worldwide automotive production. But in this context, Plastic Omnium has grown by 16%. On one side, our historical business Plastic Omnium Industries has grown by 0.3%, outperforming the market by 2.4 points. And on the other side, we benefited from the full integration of HBPO.Now let's go more in details by regions. First, Europe. And I will start with Germany.Germany represents 18% of our revenue since the acquisition of Faurecia in 2016. It is our first contributors in terms of sales. And this market in Germany is impacted by the difficulties of certain OEMs in the application of the new WLTP standards, but we resist. The decrease of sales in Germany is only minus 12%, lower than that of the market. And if we exclude Germany, our sales in Europe are up by 2.2%, mainly thanks to a good activity in Eastern Europe, especially in Slovakia with the ramp-up of the Porsche Cayenne program, but I can mention other commercial successes. We are also very proud to get the order of the first PHEV of PSA in Europe.In China, our business is doing very well. We are growing by 4%, leading to an outperformance of almost 8 points. And months after months, we are loading our 26 plants and are growing our market shares in our 2 businesses with newcomers and new products. As an example, we won all the PHEV tenders in this country since the beginning of this year.North America. North America is -- will be our strategic creation where we enjoy good profit. In North America, sales were down by 2.5% in Q3. This anticipated and punctual decrease is mainly due to model changes at our BMW customer in the U.S. for which we started production in our Greer plant in South Carolina in July 2018. This plant, Greer, is a pilot plant for the implementation of Industry 4.0 within Plastic Omnium. 4 -- Industry 4.0 will allow us to gain even more industrial efficiency and will reduce capital employed. We have also launched 5 other new plants over the last 2 years. Those new plants will be at full speed in 2019 and confirm the acceleration of next year.In Dutch regions, HBPO is also gaining significant market shares. Mexico will represent 40% of the total sales of HBPO in 2021. That is to say more than EUR 1 billion compared to EUR 600 million today.So let's comment as the end of this year.For Q4, the latest IHS forecast show an automotive production slightly up 0.7%. Our growth will be around the same level as of Q3. That is to say plus 15%. Taking it -- into account this forecast, our economic sales in 2018 will grow at least by 5% and our consolidated sales will grow at least by 10%. Pro forma economic sales with HBPO on a full year basis without environment will reach around EUR 8.9 billion after EUR 250 million negative exchange impact. So -- and we confirm an acceleration of our organic growth in 2019. So sales and profitability. Concerning our profitability, despite the slowdown of the market, we will be able to maintain our performance. And we expect an operating result comparable to last year excluding the environment business.Net results. I would say, thanks to our -- some strategic moves we did this year, our net result will grow significantly. And then free cash flow: We confirm a triple-digit free cash flow. We are an independent group. This is key for our future industrial and research development.
Well, thank you, Jean-Michel, for those detailed comments on our activities.As a wrap-up, I would like to sum up. In several months, we have been facing a very volatile market and impact with numerous tension worldwide, especially WLTP, trade war, tariffs, increase in raw material, et cetera. But at the end of the day, we have no trade war in North America. It was expected by you, by the market, to have a trade war between U.S.A., Canada and Mexico. We have no trade war. We have an agreement. In South America, we have an agreement. So what are we -- are the risks in front of us? We have the Brexit. Will it be hard, total, soft, medium? We still don't know, but we are on both side of the channel. So the production, we will recuperate the production on whatever is the side of the channel this needs to be. And now we are facing the U.S.A.-China relationship, which is a big chunk of risk, but let's face it. We are strong, industrially speaking, in North America; and we are strong in China. So there too we are able to grow our businesses' turnover because we are already existing in those countries. That has affected very strongly our stock price, but in those moment of turmoil, we have to stick to our basics.What our basics are? We have a strong one-hand shareholder controlling the company with a wish, a will to -- on developing the business long term. So we are not facing any special risk on that side. We have a strong balance sheet. We have a low gearing. We have a low debt-to-EBITDA, and at the end of the day, we have a good profit. Is it 300? Is it 400? Is it 500? I don't know, but that's not the topic. We enjoy good profit with a good balance sheet and a low gearing. We have good traditional products, high market share. And we have innovating product in the pipe, those which are not high-risk activity. And those who are the high risk, like hydrogen, are monthly loaded on the P&L so we have no balance sheet and P&L risk. We are doing selective investment. We are enthusiastic of -- about Industry 4.0 to improve quality and profit in the future. And we have a strict control on cost to generate and improve our free cash flow to remain independent as we are.I have lived over the 1997 depression, which has been minus 17%. I have lived through the 28th of September 2008 depression, which has been minus 50% production in 1 day. And it has given us a lot of opportunity, and we have made EUR 4 billion acquisition and EUR 1 billion sales. I don't hope to do the same again, but I think we are in a difficult time for the 18 months to come. We are well armed to face that. We have a nice team. And I think the fundamentals, the customers, innovation and productivity is making me reassured for the future, I will say, of my company or the investors I represent today in front of you. I will explain through that in more details in December.And now we are ready to answer your questions.
[Operator Instructions] We have first question from Mr. Thomas Besson from Kepler Cheuvreux.
It's Thomas Besson. I have 2 questions, please. The first is on organic growth. The Q3 organic growth showed normal outperformance for Plastic Omnium because of your geographic mix. Can you talk about what you expect in terms of organic growth for relative performance versus a change in production in Q4? And in 2019, I understand you expect an acceleration. Should we think about a 4%, 5%, 6% outperformance? The second question is that something seems to really...
Yes, thank you. If I -- let's start question per question. Jean-Michel, the first one.
I would say the organic growth will be similar in Q4 as in Q3, as I mentioned just before. And we confirm an acceleration in 2019.
Okay, but you can't be more specific than that.
I think the market is very volatile. There is a lack of visibility, but our order book confirm that there will be an acceleration.
Okay. Second question, please, on China. The entire industry thought that this market will always going to grow 1 million per annum. It seems it's not going to grow 1 million this year, and I think that the financial markets seem to believe it's going to collapse. So can you tell us your update to the assumptions for Chinese light vehicle productions in 2018 and 2019 and give us a rough indication of what would be the impact on your accounts of a 5% or 10% decline in Chinese production if it were to happen?
The level of production in China is important, but which is more important is our growth in China. We have outperformed the market by 8 points since the beginning of the year. And we have implemented builds at 26 plants in the past. And we said to you last year, in July, that our target is to load right low to those 26 plants. We will continue to gain market share in both businesses. And concerning the evolution of these markets, I will say difficult to anticipate, but I would say this market maybe over the next 15 months will be flat.
But I will say, in the scenario of a minus 10%, which today I don't expect, but let's say if it was to come, we will flex immediately our fixed cost and our variable cost to adapt to this minus 10%. We are prepared for that. We are knowledgeable in that type of maneuvers. It could be the case. We will flex.
Next question, from Mr. Julian Radlinger from UBS.
So two as well. First one, also on China, yes. I understand that China plays an important role for your margin expansion story because in China you're going from a -- something around 75% capacity utilization on average to above 80%. That plays a big role in that part of your story. If the Chinese market is now slower, even if you do continue outperforming, is that -- is the margin expansion driven by China now somewhat impaired because the overall growth expectations there, your volume expectations have come down a little bit?
First, we are very satisfied with our current margins in China today, which is close to group levels. Second, we said that with all the order book we have we are able to significantly outperform the automotive production in China, meaning to bring growth in a flattish market. So again, on a like-for-like basis, with 0 growth, even with 0 growth, we enjoy a nice profitability in China. And if we can bring additional growth to it, that will bring operating leverage as well, but again the profitability we have today in China is already very good.
Great. And then the other question is just a simple one on the new operating results guidance. You're saying it's comparable to last year. Just so I'm 100% sure on how you -- or what you mean by that, can you just explain what the 2018 operating result will be comparable to? Last year, you said briefly it's going to exclude the Environment Division. Is there an IFRS 5 impact in there as well? What number are we looking at here to compare?
We -- in the perimeter, we are considering is IFRS 5. That means without environment; and with HBPO at 33% during the whole year, at 33%. The comparison -- excuse me, the comparison with '17. '17, it is without environment, with...
No, no, no. In 2017 and 2018. In 2018, we take for the first half year 33% of HBPO; and in second half of the year, 100% of HBPO. Compared with 2017...
Without environment and with HBPO at 33% during 12 months exactly.
Are we clear, or shall we...
I think we're clear. I mean I think we're clear. The number I have is $641 million. And if I take environment out from that, that number goes down by about 21 million, so I'm looking at $620 million. That's the number I'm looking at.
It's with IFRS 5 we are not -- you, we -- you are close to that number.
Okay. So now if I...
Because consolidation...
Understood, okay. So now if I look at 2018, I include HBPO from the moment that on -- that you consolidated it, et cetera; no Environment Division, then I'm looking at something around that number, $620 million.
That's it.
Perfect, confusing but understood.
Yes. The perimeter evolution is very strong.
Yes, l got it now.
We don't have any more question for the moment. [Operator Instructions] We have the next question from Pierre-Yves Quéméner from MainFirst.
Pierre Quéméner, MainFirst. Just to clarify the organic growth for -- your target for Q4 and 2019. And in Q4, organic growth should be in line with your organic growth of Q3; or in line with the market, that you expect flattish plus for the production -- for the car production. That's for Q4. And for 2019, you want to outperform a market that you don't quantify for the time being. You'd -- what kind of a car production do you plan on for 2019?
For Q4, we'll have the -- a comparable growth as Q3, organic growth. And concerning 2019, we confirm that we will outperform the market and with at a higher level than this year.
Okay, so Q4 should be down in terms of organic growth for you.
Yes, yes.
Next question, from Gaetan Toulemonde from Deutsche Bank.
It's Gaetan Toulemonde, Deutsche Bank, speaking. Just one simple question. When you mentioned a very sharp increase of net profit, can you remind us a little bit the magnitude of the capital gain you're going to make this year to which gain that sharp increase?
The sharp increase is linked to the evolution of perimeter that we mentioned during the call. This is to say the 1/3 acquisition of HBPO stake and the disposal of the environment business.
Okay, can you give us a number about the PPA bad will on one side, for example; and the capital gain on the other side, just rough number?
It's too early, as we are right now discussing with our auditors, to define the PPA and so on.
We don't have any more question for the moment. [Operator Instructions] We don't have any more question. Back to you for the conclusion, sir.
Well, ladies and gentlemen, thank you for your presence this morning.A very bumpy market right now, good fundamentals, enthusiastic in the industrialistic approach for the future. It could be an interesting time and, I think, for those who have a nice balance sheet full of opportunities.Thank you very much for your time.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.