Vitesco Technologies Group AG
XETRA:VTSC
Earnings Call Analysis
Q3-2023 Analysis
Vitesco Technologies Group AG
In the face of a challenging global market, the company has weathered shifts in vehicle production with agility. Sales have modestly contracted to EUR 2.2 billion, reflecting broader economic headwinds. Despite this, the firm stands strong with an eye on the future, marked by significant progress in electrification—a 30% surge to EUR 324 million in sales—positioning the company well amidst the industry's transformative tides.
Investors would note with optimism the substantial EUR 2.5 billion in new business, fortified by EUR 1.5 billion in electrification orders alone. This accomplishment reflects a thriving ecosystem for the company's electrification ambitions, now boasting nearly EUR 7 billion in orders within just nine months of 2023.
The financial resilience is encapsulated with a solid 40%+ equity ratio and an adjusted EBIT at a sturdy 3.5%, or EUR 76 million. Capital expenditures have risen to 6.4%, financing over 75 product launches—a testament to the company's commitment to innovation and leadership in a rapidly evolving automotive landscape.
There's cause for celebration as the company outstrips global light vehicle production growth with 8 percentage points—an organic sales growth above 1% even after buffering against currency headwinds. Accompanied by a decreased focus on non-core business, culminating in a EUR 175 million reduction, the firm strides confidently forward.
The commitment to profitability is likely to land at the upper end of projections for the year. With operations tightening and prudent cost control measures in place, the Powertrain Solutions division has yielded a robust 6.9% adjusted EBIT margin, indicative of a future of sustained, disciplined growth.
The strong performance is echoed in the company's cash flow, where they've observed a substantial increase from the previous year, leading to a confident EUR 73 million in free cash flow. This embodies the firm's capability to generate value and effectively strategize for its fiscal objectives.
With the net working capital intensity in alignment with mid-term goals and a steady net debt to adjusted EBITDA ratio, the company maintains an unshakable financial foundation. The forecast for sales dips slightly beneath expectations, between EUR 9.2 billion to EUR 9.7 billion, with an adjusted EBIT margin between 2.9% to 3.4%—nevertheless, a robust outlook in sight.
There's a clear vision for the future, with continued investments in core technologies and electrification, forecasted to be 5% to 6% of sales. This strategic allocation ensures the company remains at the vanguard of industry innovation, while also predicting a steady free cash flow of EUR 50 million for the full year, regardless of the palpable challenges ahead.
As light vehicle production is expected to flourish by 6% to 8%, the company's strategy reflects a nuanced approach to the shifting landscape. Plans to bolster electrification sales and improve profitability towards a breakeven in 2024, alongside lifting the core ICE business margins, demonstrate the firm's nimble and strategic response to market needs.
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Good morning, ladies and gentlemen, and welcome to the Vitesco Technologies AG Conference Call Q3 2023. [Operator Instructions]
Let me now turn the floor over to your host, Heiko Eber.
Thank you very much, operator. Ladies and gentlemen, I'm very happy to welcome you to our call on financial results of the third quarter 2023. As always, the press release, the following presentation and our Q3 report has been published today at 7 a.m. CET on our Investor Relations website in the Reports and Presentations section. You can also find the document with an overview of the most important KPIs on a quarterly basis available for your convenience. We will also make as always a recording of this webcast available after the call.
Now before we look at today's agenda, I'm sure you have all taken notice of our by now well-known disclaimer. Today, Andreas Wolf, our CEO; and for the first time, Sabine Nitzsche, our CFO since November 1, 2023, have joined the meeting to guide you through our presentation on the financial results of the last quarter. As always, they will report on the most important developments at group and divisional level in the last quarter, including our current order intake level as well as our cash flow and balance sheet. And finally, for sure, we will discuss our financial outlook for fiscal year 2023. Afterwards, both will be available for our Q&A opportunity.
And as a reminder, I would kindly ask you for your understanding that we will not disclose further information on the Schaeffler tender offer at this moment as we are awaiting the official [indiscernible] Schaeffler by tomorrow. For the Q&A session later, please be aware that we are conducting a Q3 call. Therefore, please limit yourself to the questions related to our business and financial figures.
And now without further ado, let me hand over to our CEO, Andreas, please.
Yes. Thank you, Heiko. Ladies and gentlemen, welcome to our earnings call. Thank you for joining us today. The third quarter is in the books. It was dominated by 2 factors. We were able to achieve further improvements with regard to our profitability level as well as our cash flow generation.
To give you some numbers, our adjusted EBIT stood at 3.5%, which translates to EUR 76 million. Our free cash flow came in at EUR 73 million due to an increased profitability.
Let me now continue with our top line development. Our sales decreased slightly to EUR 2.2 billion in the third quarter. Apart from negative exchange rate effects, this was mainly driven by the accelerated decrease in our non-core sales, which is running according to our plans. At [indiscernible] of note, our electrification progress continues. As you can see on the left-hand side, our electrification sales increased to EUR 324 million to be precise. This is a very good step up of about 30% compared to last year. An additional proof point showing our progress in e-mobility is our order intake.
During the third quarter, we won about EUR 1.5 billion of new orders in electrification. In total, we acquired about EUR 2.5 billion worth of new business. That means we have achieved an electrification order intake of almost EUR 7 billion in the first 9 months of 2023. Important to mention here, we have won orders in all major regions and across our entire electrification portfolio, this underlines once more our attractive offering in that area.
I can confidently say that we are well on track to achieve our order intake targets for this year, achieving similar maybe even higher electrification numbers as last year. Overall, to sum up, it was a positive, but also eventful quarter.
The focus of this call is on our Q3 financial performance, as Heiko already mentioned, but you will have seen that Schaeffler AG announced a public tender offer for Vitesco Technologies Group AG for EUR 91 per share on October 9, 2023. Schaeffler AG is expected to publish the offer document tomorrow on November 15, 2023. As previously announced, our Executive Board and the independent special committee formed by the Supervisory Board will evaluate the offer document and merger planned by Schaeffler AG taking into account the interests of all Vitesco Technologies stakeholders. The Board will provide a reason statement of the offer, including a recommendation to Vitesco Technologies shareholders, which will be published in due course.
Let us now dive a little bit deeper into the financials. The EUR 2.2 billion sales, which I mentioned earlier, correspond to a decrease of about 4% compared to the third quarter 2022, influenced by negative FX effects. The sales development is in line with our expectations considering the planned phaseout of non-core business, which decreased by EUR 175 million in quarter 3. Supported by strong results within our electrification and core ICE business, we managed to increase our adjusted EBIT margin to 3.5%.
Our CapEx increased to 6.4%. One aspect I would like to highlight in this regard, we are managing over 75 product launches in '23 and '24, which support our significant growth within electrification. Our free cash flow came in at EUR 73 million, driven by higher profitability. Even though we had higher CapEx, our strong operating cash flow resulted in improved cash generation. And the final remark on our equity ratio, was more than 40%, it remains at a very solid level.
Let's move on to the market view. The worldwide light vehicle production picked up during the third quarter '23. North America saw the strongest recovery followed by Europe. Still, I have to say that the Chinese commercial vehicle market, unfortunately, continues to be challenging. Overall, we saw an increase of 3.8% in light vehicle production. As you can see from the bar chart on the right-hand side, in quarter 3 of 2023, our reported group level sales decreased by the already mentioned 4.4%. However, please keep in mind that our declining sales of non-core ICE business and contract manufacturing as well as negative FX effects are included in this figure. Organically, our electrification and core ICE sales outgrew global light vehicle production by more than 8 percentage points.
As already mentioned a couple of times, this number is more meaningful when comparing ourselves to the overall market environment.
And now you will receive more insights into our financial development from our CFO, Sabine Nitzsche. On personal note, I'm looking to my left, I'm very happy to have you, Sabine, on board, giving us a fresh view from the outside with great experience from the semiconductor industry.
Yes. Thank you, Andreas. Hello and a warm welcome also from my side. I would like to say a few personal words before we deep dive into our figures. I am very, very happy to be here at Vitesco Technologies. The team is super highly committed with a clear focus, a defined and I would say a well-defined strategy and lots of passion. My near focus is to help create the best future for our company. And of course, I put all my efforts to promote the success of Vitesco Technologies.
And now let us take a closer look at our top and bottom line development at group level. Even though you might see a smaller sales for the past quarter '23, our organic sales growth was slightly above 1%. That excludes currency-related headwinds of 4.1 percentage points as well as consolidation effects. Also, please keep in mind that we ramped down our non-core business by about EUR 175 million in Q3 '23. Apart from exchange rate effects, this is the main reason for our declining sales at group level. As already explained by Andreas, we increased our profitability to 3.5%, which is even above the end of our full year guidance. And as the year is coming to an end, I can already say that our profitability for the full year is very likely to be the upper end of our guidance.
One word on the status quo with regards to negotiations of cost transfers. Apart from [indiscernible] few, we concluded the negotiations with all customers regarding cost transfer agreements on higher input costs. We did see positive effects in this quarter on both top and bottom line and will further experience positive impact in Q4. To sum it up, this results very much in line with our full year target. And here, I would say thank you, thank you to all our employees who very contributed every single day to achieve our ambitious targets.
So now let's have a look at the resource of each division. And we are going to start with our Powertrain Solutions division. The main reason for a slower growth was, as mentioned, the planned ramp down of our non-core activity inside the segment. Contract manufacturing sales alone was down by 40% year-over-year. Overall, Q3 sales came in at around EUR 1.4 billion, with an adjusted EBIT margin of 6.9% in Powertrain Solutions division. Besides many factors, our continuous cost containment supported overall profitability levels in Q3.
Another aspect I'd like to highlight -- our core ICE business continued to achieve double-digit adjusted EBIT margins. To put this into numbers, we achieved an adjusted EBIT margin of 12.5%.
And now let's move on to our Electrification Solutions division. Here again, we saw the strongest growth underlining our ambitious midterm targets. We experienced a very strong top line development, which was especially driven by our performance in Asia and Germany. Our organic sales growth of roughly 22% equates to an outperformance of 18 percentage points compared to the global light vehicle production. And with regards to profitability, we managed to cut our losses by nearly half. As a result, we further improved adjusted EBIT margin for core ICE part of this division. This again demonstrates our efforts to turn this business back to double-digit levels.
You might remember -- this figure was negative in the first quarter due to material cost increases without full cost compensation. Quarter 2 landed at about 4%. Now in quarter 3, we've further improved our profitability in core ICE to 5.7%.
Let me now provide more transparency on the categories, electrification, core ICE and non-core. And let's start with the electrification part on the left-hand side. As you can see, we further increased our electrification sales by about 30%. As Andreas has already mentioned, this was due to further ramp-ups of new products and the better availability of critical components, and we will continue to grow. I would like to mention the improved adjusted EBIT margins by more than 6 percentage points, even though we had higher upfront costs for new product launches.
Our second category, core ICE, excluding electrification, experienced sales of about EUR 1.3 billion. Here, negative exchange rate effects resulted in a flattish development year-over-year. However, we saw an increase in our adjusted EBIT margin by 0.9 percentage points, driven by operating improvements in both divisions. As you can see on the right-hand side, our non-core business is further ramping down as planned. It also includes our contract manufacturing business. And you may have noticed the EBIT margin being slightly under 0%. But I would like to emphasize here, as we have already stated, our adjusted EBIT non-core is a [indiscernible] zero.
So to summarize, first, within the electrification area, we will continue to grow significantly and further improve profitability towards the targeted breakeven in 2024. Second, our [electrical] division core ICE business will see gradual step-ups providing attractive EBIT margins. And third, the ramp down of non-core is progressing according to plan. Here, we will see further acceleration especially in the area of contract manufacturing.
Moving on to Slide 11. I want to provide some insights on our cash development. As you can see, our operating cash flow came in much higher compared to last year and to a large extent, this was driven by improved profitability. Our investments increased slightly, resulting in investing cash flow of minus EUR 130 million. As stated on this slide, it was mainly due to higher spending prior to project ramp-ups. As a result, our free cash flow for the third quarter came in at EUR 73 million. The strong development underlines our confidence to reach our guided EUR 50 million for the fiscal year '23.
Talking about our financing cash flow, it came in slightly positive. Main reason we had the minor bank overdraft in this quarter. This all resulted in a continuous comfortable cash situation, as you can see in our balance sheet. Having said that, let us take a look at our balance sheet structure. It has not changed much compared to previous quarters, which means we maintain a rock solid and healthy structure. Our net working capital intensity decreased to 5.7% of sales in Q3 and is mainly driven by lower inventories and the cost receivables. The net working capital intensity is therefore in line with our anticipated midterm range of 5% to 6% of sales.
The net debt to adjusted EBITDA ratio remained stable and was at minus 0.3. Our net liquidity position of EUR 470 million underlines our still very comfortable liquidity situation despite the phaseout of our non-core business, especially contract manufacturing. On top of that, we still have our existing RCF, so that our available liquidity gross remains north of EUR 1.7 billion. And our equity ratio remains at a very solid level of above 40%.
Now I would like to move on to our expectations for the remainder of this year. Let me start with the left-hand side and further elaborate on our guidance, which I guess is very familiar with you, as we have shown already in our last presentation. Our outlook continues to foresee sales of EUR 9.2 billion to EUR 9.7 billion. However, given the ongoing weakness in the Chinese commercial vehicle market, the continued decrease in plug-in hybrid vehicles demand and expect this negative impact, the currency exchange rates will approximately come in slightly lower than the mid-point of our range.
The adjusted EBIT margin is still forecasted at 2.9% to 3.4%. As said, we are progressing well with our transformation. We continue to stick to our strict cost containment and the further improvements in the supply chain. However, this effect will help us to trend towards the upper end of the guided margin guidance. Due to a high number of process launches in this year, we continue to expect our CapEx ratio to range between 5% and 6% of sales for the entire year, fully focused on our core technologies and electrification. Lastly, we still see free cash flow of around EUR 50 million for the full year, as already mentioned earlier.
Moving on to the market outlook on the right side. We saw changes in the regional developments as the year progressed and the detailed provision you can see in that box. In total, the changes amount to a new forecast for worldwide light vehicle production, we expect light vehicle production to grow by 6% to 8%, previously 3% to 5% on a full year basis. The increased expectations for global vehicle production in fiscal year '23 will be burdened in particular by negative currency effects and a slight decline in demand for electric vehicles, especially for plug-in hybrids. Furthermore, we are closely monitoring global political development and given the uncertainty of these topics, we keep our guidance range unchanged.
And with that, I have reached the end of my presentation. It was a great pleasure to guide you for the first time through the financial section. And now I go back to you and ready for Q&A.
Thank you very much, Sabine. Thank you very much, Andreas. Ladies and gentlemen, as announced, we will now enter the Q&A session. And as always, we would like to offer all participants the opportunity to ask questions. So if time allows, you can, of course, ask further questions by going back into the queue. Operator, we are now ready to take on the first question.
[Operator Instructions]
And the first question comes from Marc-Ren Tonn.
Two actually, the first one would be on the, let's say, sluggish demand on plug-in hybrids, which you have managed. Is it something which you regard as being that the more a reflection of a change in incentive schemes in certain markets. or more, let's say, a structural issue, which may also, let's say, have an effect on the years that may follow or let's say, in the future?
And the second question, and sorry for coming back a bit on the Schaeffler offer. Just can you give us some indication on, let's say, the reception of this offer on the side of your clients? Do you already, let's say, have experienced any feedback from their side when it comes to, let's say, new order assignments, be it positive or negative? Or is it, let's say, entirely neutral and Vitesco is considered as Vitesco as it is today?
I would cover both questions, maybe starting with the plug-in hybrids. Just to remember, we always said the 48-volt belt hybrids, also plug-in hybrids are a kind of bridge technology. We are focusing all our energy and developments, et cetera, on battery electric vehicles because we see the battery electric vehicles as the winners of the electrification. And therefore, for us, it's not really a surprise that plug-ins are supported by incentives, et cetera. And there will be always bumpy development over time depending on how the incentives look like. And therefore, we already knew that with cuts in the incentives, the numbers will go down. It's now a little bit higher than we have foreseen. But all in all, not a big surprise for us.
Coming to the second question, Schaeffler. So what are our customers saying, got really a lot. So I'm in contact with all of them. Recently, there was no negative reaction. There was also not -- how can I say, spontaneous positive reaction, I would describe it as neutral. So they just wait for how the new conglomerate, how the new company Schaeffler new by end of the next year will look like. And therefore, a good starting point in the sense of not to post if not to make it.
Okay. So at the moment, there seems to be no further questions. [Operator Instructions] Okay. So there, at the moment, no further questions. So let me hand back over to Heiko Eber for some closing remarks.
Thank you. So not a real surprise to see not too many questions given the current situation. Consequently, I would like to close today's call. Thanks for your time. And as always, feel free to reach out to our IR team in case of any additional questions. Take care and talk to you soon.