Earnings Transcript for EO.PA - Q1 Fiscal Year 2024

Operator: Good morning. This is the conference operator. Welcome and thank you for joining today’s Forvia First Quarter 2024 Sales Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Olivier Durand, Group Chief Financial Officer. Please go ahead, sir.

Olivier Durand: Thank you. Good morning, ladies and gentlemen. Welcome to the Q1 business overview call of Forvia. I am today with our Investor Relations team, Marc Maillet and Sebastian Lora. We will cover today the key events of Q1 for our company, and in particular, our revenue results for Q1, our progress in the delivery of our POWER25 strategic plan for which the central objective, as you know, is the deleveraging of the company and the confirmation of our guidance, ‘24 and ambition ‘25. On the achievement, the key achievements of Q1 ‘24. On the revenue side, we have achieved an outperformance of 390 basis points in Q1 in sales. We have recorded solid order intake at €6.5 billion, up €1 billion compared to the last period of ‘23. We have achieved already 25% of our second €1 billion disposal program. And we have issued €1.2 billion of new debts, replacing existing ones in order to extend our debt maturity and we have been able not only to do a large bond with maturity at ‘29 and ‘31 but also to come back to the Sulchine market. Before going to the commercial activity, I would like to highlight elements on key projects that we have. The first one is, of course, EU-FORWARD, which is – which has been launched in February. This is a 5-year project, aiming at restoring full competitiveness in Europe throughout our portfolio. I would like to highlight that the project is in good motion. We are executing properly site by site and we are confirming all the objective associated to it, €500 million of savings by ‘28 with savings already in ‘24. And also restructuring costs that are increasing slightly compared to our run rate, but the excess compare to the average is only €275 million over ‘24 to ‘28. And I confirm that this is all embarked in our – all our objectives, and are helping to achieve them and not the opposite. We don’t do these actions lightly, but we consider this is necessary in order to make sure that Europe is fully competitive throughout the portfolio. Last message, we have indeed some other capacities, but there are specific location and specific activities and we are delisting them in a selective manner. The second topic is about the development of our reach in China. A key element is the signature of a joint venture with Chery in the field of smart and sustainable cockpits with a goal to develop €1 billion of revenues by 2029, and you will see already impact of this even this year and more in ‘25. The interest of this joint venture is twofold

Operator: Thank you. [Operator Instructions] The first question is from Michael Jacks, Bank of America. Please go ahead.

Michael Jacks: Hi, good morning, Olivier. Thank you for the presentation. I’ll start out with pricing. What was the contribution in Q1 from inflation compensation? And then perhaps linked to that, some suppliers have reflected that compensation for wage inflation in 2023 was received mainly through lump sum payments, which means that 2024 negotiations needs to cover more than just current year inflation. Is this also the case with Forvia? And how confident are you that this can be achieved? And then one final question. I know you mentioned Ford, but could you please provide a little bit more color on the strong outperformance in North America? Was this driven by any specific program? Or is it more rebound in production by Ford in general? Thank you.

Olivier Durand: Thank you. Good morning. So on the inflation. So the inflation recovery and contribution in Q1 is something like 60, 70 basis points inside this 290 basis points above performance. On the recurrence, non-recurrent aspect and the difficulty to recover the inflation. This is clearly a topic for all the suppliers. So let’s be very clear. We are organized to make sure that we are recovering the inflation. It’s not easy. It’s a daily discussion case by case, but this is clearly a focus area, and we are starting all our business reviews with our different business group by the inflation recovery. On the recurrent and recurrent, you have, in fact, the two situations. You have some ransom agreement. You have some recurrent agreement. And we have also constellation of what existed before, which were LTA. LTA means annual price reductions. So you have a combination of the three, which we understand that, of course, the two parties have different views on this. The reality, we have to get it. Two other message maybe to pass on this. Number one, EU-FORWARD is about reducing our cost base. So you understand that producing our public base is also to recover the impact of the inflation on our side. And the last message is that in terms of salary inflation, this has been so far lower than last year. Let’s see what happens in ‘25, but the level of salary inflation we are facing has started to moderate. On NAO over performance, it’s quite a lot related to start the production of new programs more than strictly a market growth.

Michael Jacks: Okay, very clear. Thank you.

Operator: The next question is from José Asumendi of JPMorgan. Please go ahead.

José Asumendi: Good morning, Olivier. José Asumendi of JPMorgan. Three topics, please. The first one, can you elaborate a little bit more where are the excess pockets of capacity in which region and roughly which products so we can understand a bit better the plans to adjust capacity. Second, are you confident on offsetting the labor cost increases with productivity gains in 2024? Or do you think this is going to be a topic that you will be tackling more in the second half of the year? Or the question is more, are you making progress in the first half to offset those lower cost increases specifically? And then three if you please comment on how you want to improve the outperformance to coal production, specifically in Seating. And also in China, what’s the path to improve their performance into the second half of the year? Thank you.

Olivier Durand: Good morning, José. So on the capacity, so really, I would like to stress the message that they are in specific locations and specific type of activities. So you have – is related also to the nature of the business. So we have some other capacities in some part of interiors because those are big machines and also quite a big dedicated to a specific model or group of models. So if there is adjustment in the level, this has an impact. So that’s why we are addressing the specific cases and the specific countries, so it’s not exactly the same everywhere. The other overcapacity we have is obvious, which is the Clean Mobility exhaust system. The fact is that the electrification is slowing down in Europe does not slow us down on our side. So we are executing the restructuring action. And since the size of the individual Clean Mobility exams sites are limited, this is actually easier to do, and we have already initiated some in Q1. So Clean Mobility, obvious, the rate and pace of the electrification can vary, but the driver of the adjustment is related to the number of engines and the number of has happened. So if anything, it is helping us to convert in cash this activity. So we will do a thorough update on EU forwards in the publication of H1 showing the actions in terms of sites and giving you more elements and more details on the specific over capacity. But once again, this is not a general situation. And on the HELLA part, a lot is relating first of all, to ensure that we do not increase headcount and cost. So we have across the company and across the whole company, we have recruitment fee in Europe. And this is why I’m saying that the plant is reaching already savings in H1 because you don’t need a picturing measure is, in fact, avoiding costs. On the inflation recovery, you will see a seasonality between H1 similar to last year. I would like not to have it but this is a reality of the commercial negotiations. We will have more recovery in H2 than in H1, and it will participate to a seasonality of our operating margin between H1 that probably will have a similarity to what you have seen last year in Forvia. Clearly, we are taking the measures to lease that. But today, this is what I see. And vice versa, we don’t want to do a deal that will be nice on H1, but then bad at midterm. On the last question, just to be sure, José, you want some color on the outperformance in Seating in China. Is that correct?

José Asumendi: Yes. It looks like those are the two pockets of Forvia. We can accelerate improving the second half of the year between Q2 and the end of the year. So it will be great, yes, if you can add more color, if possible. Thank you.

Olivier Durand: So maybe let me start with China. The China activities is more diverse than it has been in the recent past. BYD, OB activity as a consequence of evolution of market share on the seat that was known and agreed with them. The impact is probably a bit more than what we – that was expected before given the evolution of production of BYD for the beginning of the year. That reinforce the benefits and the logic of what we have done, which is to develop with the other ones. We have double with Li Auto and we continue to grow. By the way, Li Auto is one of the customer inside the PBL lighting joint venture. We have this joint venture agreement with Chery, which I think is the first time that we have an agreement on a combined cockpit of the future strategy with a given customer, highlighting a different approach that the newcomers are taking, in particular, in this part of the world. And the speed of China being what it is, there will be already some impact in revenues this year, which is quite interesting in ‘30. So H1, we will have, in fact, a situation in Q2 probably similar than in Q1, and you will have a rebalanced versus market in H2. The expectation on the China market as a whole are fairly steady. I think the experts is playing quite a bit inside. And of course, our goal is not only to work with the Chinese OEM in China but to work outside China. You know that we have China with BYD. You know that BYD is having a fairly clear and advocated plan in Hungary, in Brazil, in Mexico. And we know also that other Chinese OEMs are considering also sites in Europe. I know at least two with whom we are negotiating. So the development of the China OEM offer is not only about China that not only about Asia but is also in Europe, which is interesting in terms of reusing our people and capacity. On – so a possible improvement on this one, which is a bit of a factor of the evolution of the market, however. On Seating, yes, you see, for instance, the order intake that we’ve got in Seating. We are making sure that this is with good condition financially. So for me, the outperformance and the growth in Seating is by far not the only one that I’m focusing on. What is important is that we are continuing to develop the electronics activity and that we continue to progress on the improvement of the operation performance in Seating and in Interiors. So, our outperformance growth, yes, but we have to ensure that we are delivering the bottom line. And we know that in Seating and probably even more in Interiors, we still have work to do.

José Asumendi: Thank you so much.

Operator: The next question is from Sanjay Bhagwani, Citi. Please go ahead.

Sanjay Bhagwani: Hello. Thank you very much for taking my questions. I have two questions as well. My first one is on organic growth outperformance. I understand that you mentioned there is roughly 530 basis points organic growth outperformance from volume mix and pricing. Of this 50 basis points to 70 basis points is pricing. So, just the volume mix somewhere around 450 basis points, which I think is very, very strong despite a challenging Q1 last year. So, can you maybe provide some color on how this develops into the next few quarters? There is outperformance on volume mix. And then how should we think of the pricing overall in the outperformance, continue move towards zero given big inflation will be a positive contributor but then the commodities be negative? That is my first question. And my second question is rather on confirmation of the guidance. So, I understand you do not…

Olivier Durand: I am sorry, but the line is pretty bad. Can you repeat your first question? I could not hear you.

Sanjay Bhagwani: Okay. Sorry. I will just repeat my first question. So, my first question was that Q1 organic growth outperformance of volume price mix somewhere around 530 basis points and pricing is somewhere around 60 basis points to 70 basis points. So, just outperformance from volume and mix is somewhere around 450 basis points, 460 basis points. So, I wanted to know if you could provide some color on how this progress is to the coming quarters given that we understand that the Q1 last year was a very high cost. And on that, how should we think of the pricing in the next few quarters? Could this be net-net zero given the wages go up and then other parts of the commodities come down because of the indexation? So, that is my first question. Sorry, could you hear me?

Olivier Durand: Yes, sure. I hope I get it right. So, I think your question was about outperformance of revenues in coming quarters and in particular, in relation to commodity price evolution. And there was also a question about the conversion of this in operating margin. So, on the revenues, overall, we have achieved in quite all the last quarters and outperformance between 300 basis points and 500 basis points. We expect this to continue with potentially variety between geographies, as you have seen in Q1. But the overall running trend is there. And the slowdown of electrification that we see is slowing down some of the growth on part of the HELLA portfolio, as you have seen. And vice versa there is a large offset of this through the Clean Mobility activity. On commodities, we are seeing some variations on commodities, up and down actually. And you see, on particular, the oil price, you see that the brand has come up quite a bit in the recent period. Now, it’s all I have seen, I don’t know today, but yesterday was going down. And of course, it’s related to the geopolitics of the Middle East. The impact for us is with a lag because of the type of the agreements we have on the supplier and on the customer side. But today, we are expecting net-net impact, not much impact overall commodities because you have some others that are going down and let’s see about semiconductors. On the profitability, the evolution, maybe two things to mention. The first one is that the evolution year-on-year is driven a bit by the outperformance because we are in a stable market. You have – after the contribution from the exit of this toxic, [ph] just-in-time contract that we had in Highland Park, which is providing a positive evolution. You have the synergies and the synergies impact for this year is around €80 million to €90 million year-on-year. And you have the add-on benefit of the implementation of EU-FORWARD, which should bring between €30 million and €50 million in operating margin throughout the year. The mix between H1 and H2 on inflation plus on the timing of some of those savings will mean that you will have a seasonal effect on the level of profitability. You have seen that last year. And I think you will see something of the same magnitude this year. So, H1 profitability will be lower than H2 profitability as we had last year. I hope I cover your – the first question, and I understand you have the second question.

Operator: [Operator Instructions] The next question is from Christoph Laskawi at Deutsche Bank. Please go ahead.

Christoph Laskawi: Good morning. Thank you for taking my questions as well. The first one will be on SOPs, which are slightly below expectations. You mentioned that for Seating. Do you experience that in other divisions as well? And what’s the visibility on that improving going forward? Do you think it’s more like supply chain related that is lower right now, or is it demand driven? That’s the first question. Thank you.

Olivier Durand: Good morning. I think the SOP delay is not so much on supply chain. So, we – there were reasons in Q1, and we have seen what happened in the Red Sea trades. But in fact, the supply chain is more resilient than before as a whole. And a case like this one, flows are diverted quite quickly. In the case of the Red Sea going through the Africa continent is between core cost in 10 days. So, there was a little bit of impact, but it’s quite marginal. We have not been the cause of any impact for information, but on the overall, not much. So – and there was Baltimore, but has been that much as well. So, I think the level of difficulties stop-and-go shortage of semiconductors. It’s not zero, but it’s I think more normal and fair level. So, I don’t think this is the cause. The cause of the delay is in, I think, more demands and variation of choice of some of the carmakers. I anticipate that this will continue to have some impact. On electrification, strictly, you see the slowdown in particular in Europe and good in North America. In Europe, that’s been largely driven by the changes on subsidies in some countries, starting with Germany. So, it has an immediate effect. Probably some of this will continue for a while, but the electrification penetration continue to grow. The question is how the carmakers will face the evolution of the CAFE regulation threshold. You know that this threshold is changing next year with a sharp drop on the road towards the full bank by mid-30s certified. And some of the carmakers have been clearly saying that in the current level of electrification of their sales, they will have to pay sizable penalties. So, either the penalties or they will adjust the pricing and the commercial strategy in order to increase the volume of electric cars being sold in Europe plus the competition of the Chinese. So, my take is that the slowdown of electrification is comparing at least for ‘25 and let’s see about the rest of the year in ‘24. What is important for us is do we have both on the different situation. You know that the vast majority of our portfolio is agnostic to board trains. But we have activities related to electrification in particular in some parts of the electronics plus lighting and vice versa. We have Clean Mobility on the non-EV side of things. And the offset is probably a bit negative on revenues, but on profitability, given the profitability of Clean Mobility and the actions we do in restructuring. It’s probably a neutral effect or close to at the bottom line. And I think that this is what is important for us given the volatility on the right-hand part of electrification.

Christoph Laskawi: Thank you. And second question is just on the disposal program and what’s still open to the next €1 billion. Should we think about that to be covered with several smaller transactions, or should there be one bigger, one making up for most of the camp that’s left? Thank you.

Olivier Durand: So, you see that we have done 25% in six months. I think it’s a rate that is not so bad in the context overall for this. You can expect the priority of operation. We expect a sizable one, and we expect some other ones to complement. So, it’s a bit of a combination. And as we mentioned, the impact on the consolidation on the Q3 numbers, is expected to be marginal, the event that some of the operations are more capital opening than strictly semi. The goal in all of these is, of course, to do operations to reduce our debt, which is the central goal, but is also simplifying the portfolio and to do it at good condition. The 25% that we have just done is leading to a capital gain of more than €100 million. So, we continue in fact to sell assets for profit. And I think it’s – we are making sure that we remain overall in this situation. So, it takes a bit of time on some of it, but the prospects are there. We just need to solidify this and to have the, let’s say, the carve-out and the financial aspect being organized so that the transactions can be executed.

Christoph Laskawi: Thank you.

Operator: [Operator Instructions] The next question is from Simon Keegan [ph] with Goldman Sachs. Please go ahead.

Unidentified Analyst: Good morning and thank you for taking my questions. My first question is in relation to the Seating contrast you cited. I was just wondering how much of that €2 billion is related to that contract? And can you give us any indication on the timing of the SOP? And then also, what was the principal differentiator that enabled you to win that contract in your view? And should this help you in further contracts in this area? And then secondly, just quickly following up on the SOP delays, are you able to quantify the impact at all? Thank you.

Olivier Durand: On your first question, you are talking about the major award that we mentioned in Seating price?

Unidentified Analyst: Yes, correct.

Olivier Durand: So, this one is with a large premium German OEM, more than €1 billion complete seats. So, the usual conversion in SOP for this is a 2 years long. And the duration of the model is 5 years to 7 years. So, I think we can give the idea of the revenue aspect. Maybe one thing that – to mention on our order intake recognition, we try to take away the edge on the level of the order intake compared to customer expectations as we know that not all cars will be as at the same level of success. So, the wider market is much more than €80 million. So, we take a cautiousness on compensating and the level of order intake are mentioning just to put this in perspective. Can you repeat your second question, sorry?

Unidentified Analyst: Yes, sure. And as just quickly on the SOP delays that you have kind of spoken to before. Are you able to quantify the impact at all?

Olivier Durand: I think the classification for Q1 only is in the €100 million, €150 million. So, something like this.

Unidentified Analyst: Okay. Thank you very much.

Operator: Mr. Durand, there are no more questions registered at this time. I will turn the conference back to you for any closing remarks.

Olivier Durand: So, thank you for this call this morning. So, you see that we continue to have outperformance in the market. We continue to have it in a diverse fashion. We are developing the Asia activity in diversified portfolio of customers, and moderating the dependency on BYD. And not only in China, but also in the rest of Asia, which is 22 million vehicles on which our market share is of course lower. So, the potential for expansion with Japanese OEM in Indian market is there, and we are geared to seize some of it. But at the end, the focus of the company is on deleveraging, and that’s why it’s very important that we have traction on our disposal program, and our financial cost and maturities on our debt. And we confirm that we are in the direction to achieve our guidance ‘24, and getting the strategic plan for ‘25 executed in all its metrics. Thank you.

Operator: Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.