OPmobility SE (OPM) Earnings Call Transcript

Hello, and welcome to the 2022 third quarter sales. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over to your host, Kathleen Wantz-O’Rourke, CFO and ISO of Plastic Omnium to begin today's conference. Thank you.

Good morning to everyone. Thank you very much for joining our call this morning. I'll spend about 20 minutes going through the main highlights of the past quarter and then we'll open up for questions and answers. As an introduction, I'd like to say that the last 3 months have been extremely busy for the group on several fronts. I can say that we're proud of our overall achievements in an automotive market, which remains challenging. Growth in this quarter has been extremely strong, coming in at 32.6% as reported and at 22.4% on a like-for-like basis on the back of the recovery, following Q3 in 2021 that was exceptionally disrupted, as you know, by the stop-and-goes linked to the semiconductor crisis. The past quarter has also been intense on the external growth topic as the group has closed 3 acquisitions in the past 3 months, AMLS Osram, ACTIA Power and VLS. The group's strong balance sheet, high liquidity and low leverage has been a strong facilitating factor in our quest to diversify and increase content and value per vehicle. Order intake continues to be very dynamic across all regions of the group, with the hydrogen activity, particularly successful with the award of 4 major contracts, Ford, Safra, Stellantis and Hyvia. Finally, the group confirms its annual guidance on a like-for-like basis, excluding the acquisitions, of course. If we move on, S&P, as you can see on the left-hand side of this slide, S&P Global Mobility has reported automotive production for the first 9 months of the year at 58.2 million vehicles corresponding to a growth of 8.3%. 20.5 million vehicles were manufactured in the third quarter of 2022 according to S&P and representing a growth rate against the third quarter of 2021 of 28.8%. The semiconductor crisis is estimated to have cost 4.1 million vehicles in production for the first 9 months of 2022. The outlook for 2022 according to S&P Global Mobility is a weak Q4 with a growth of 2.8%. And that projects the annual automotive production according to S&P at 79.2 million vehicles and a growth of 6.8% against the full year 2021. Plastic Omnium's outlook in terms of production remains unchanged at 77 million vehicles as per our guidance. Whilst production numbers seem to be recovering, inflation, as you can see in the middle of the chart, remains the key issue for suppliers. First lien, energy prices have skyrocketed with gas and electricity prices having multiplied by 12x and 3x, respectively, when compared to the group's baseline of 2020. As you can also see on this slide, raw material and wage inflation, so inflation in general are equally challenging across all geographies of the Group. The Group is actively managing, of course, and monitoring these topics. And as mentioned in the H1 -- in the first half year results of 2022, we estimated the gross impact of inflation at approximately EUR 90 million for which we managed to mitigate just under 2/3, containing the net impact of inflation in the first half of the year to an estimated EUR 30 million. And these ballpark ratios still hold at the end of September, i.e., approximately 60% of the inflation impact has been mitigated. On the right-hand side of this slide, you can see that automotive production has been quite differentiated from one region to the other over the past 9 months. Europe has been impacted by both the supply chain disruptions and the war in Ukraine and registers according to S&P, negative growth of 2.7%. North America and the rest of Asia, excluding China, have been strong relays for the group. Whilst growth in China has been very strong in our joint venture with YFPO, Yangfeng, but impacted nevertheless in our fuel tanks business with the acceleration of electric vehicles. As mentioned, Q3 has been rich in terms of external growth, as you can see on this chart, 3 acquisitions have been closed, as I mentioned earlier, AMLS Osram, ACTIA Power and Varroc Lighting Systems, and the group has now entered into the process of completion accounts and should have a final view on the accounts by the end of the current fiscal year. This slide contains the same information that we predicted at the CMD in May of this year. Thanks to our strong balance sheet, high liquidity and low leverage, we have been able to use this position of strength to acquire these portfolio elements that strengthen our diversification strategy and give us access to increased content and value per vehicle. As you know, these acquisitions have suffered over the past 3 years under COVID and the supply chain disruptions. And Plastic Omnium has committed to returning these activities to mid-single-digit operating margins within the next 24 to 36 months. A dedicated PMI team has been set up and is piloted directly by the new management teams and our day one readiness plans were conclusive, and we are now in the process of launching our action plans, and these have been divided into 4 initiatives. First of all, sales and program management, securing and maintaining customer relationships to build the future and participate in upcoming RFQs, addressing loss-making or late programs and mitigating the inflation risk. The second initiative is around industrial improvement, deploying what we call the PO-way in terms of operations to restore client trust to review inventories and investments and to capture savings. The third initiative is around purchasing savings by leveraging off our Omega program, so reviewing the procurement potential in terms of massification opportunities for both direct and indirect procurement, particularly in the area of electronics and IT. And finally, cost synergies through a more streamlined operating model, harnessing what mutual competencies within both PO and within the various acquisitions that we have closed. If I move on to the next slide, I'd just like to focus and say a few words on 2 examples of new orders over the past quarter. First of all, the Ford F-150 Ice, our fuel systems business has been awarded this significant contract for the supply of 500,000 tanks per year from September 2026 for 6 years. This is a replacement order of a value of approximately $550 million, which will be manufactured for the greater part in our factory in Huron in the United States. And the second success that I'd like to touch upon is that of the Audi Q9, our exterior systems business has been awarded an order for a combination of tailgate, front-end module and front-end carrier, and this order of a value of approximately EUR 45 million will be manufactured in our plants in Lozorno in Slovakia, for both electric and thermal powertrains. And here, we're talking about 27,000 units per year with the start of production planned for June 2025. And this particularity of this order is that it's the first time that we will be manufacturing a plastic tailgate for a German premium customer. In terms of start of production, so launches in Q3. On this slide, I'd like to focus on the launch in September of the Hyundai Stargazer. This is the first launch in our new fuel systems plant in Indonesia, and this plant will manufacture 90,000 tanks per year for a total revenue of approximately EUR 60 million for close on 6 years. And the particularity of this business is that Hyundai launched their plant one year ago with a first program in steel. And our team in Plastic Omnium has managed to convince the Hyundai headquarters to launch the next program in plastic with PO. And this is a new example of where there remains room in the market to grow in fuel systems through the change from steel to plastic. And just a word to clarify the 29 SOPs that you can see on the screen in Q3 2022. The start of production are generally predetermined in advance with the customers at the time of securing the order. In Q3 2021, 60 SOPs took place of which a number work catch up, following the recovery from the pandemic. If we now move on to the New Energies business. During the past quarter, our New Energies activity was awarded 4 significant contracts in the heavy mobility segment. On the left-hand side of the screen, you'll see that we have secured 2 major orders for both Stellantis and Hyvia for the design and production of high pressure systems consisting of not only 700 bar vessels, but also the associated systems, piping and racks in particular. And these systems will equip light commercial vehicles and will be manufactured in a new dedicated low-carbon plant that will be constructed in Compiègne in France and which will produce 80,000 tanks per year, starting in 2025 for a duration of 7 and 10 years, respectively. This same plant has received public funding as part of the important project of common European interest for EUR 74 million. We're also very pleased to have secured an association together with Ford as part of the U.S. Department of Energy's SuperTruck 3 program. The group will be supplying here 700 bar type high-pressure vessels to equip a range of zero-emission pickup trucks as a prototype starting in 2023 and which is financed by the Department of Energy. This first demo fleet positions the group within the SuperTruck program in the United States which other U.S. manufacturers will also likely partake. And finally, another significant first together with Safra, with whom we have partnered to manufacture and deliver both 700 bar hydrogen tanks and 2x 50-kilowatt fuel cell systems for the retrofit of the new high city coaches. And the first units will be delivered already in 2023 with a ramp-up foreseen over the next 10 years. Q3 was also quite busy in terms of our intentions to acquire the final 1/3 of HBPO. We came to an agreement with Hella to acquire the remaining 1/3 of HBPO for an enterprise value of EUR 290 million. The transaction has received an initial approval from the European antitrust authorities and the approval from the other antitrust authorities in other geographies is expected in Q4 this year. This acquisition once again gives the group the strategic freedom to develop new systems and leverage the new lighting capabilities in the Group. A quick word on ESG, so that we don't lose focus on this very important topic for the Group. And we'd like to focus this morning on energy savings, which is the topic of the moment. In addition to the hedging and the PPA, virtual PPA activities that we have secured or in the process of securing like all groups, we have also intensified what we do internally to save on energy and accelerate our carbon neutrality road map. In our partnership with Schneider Electric, we have equipped another 7 sites with our energy management systems to monitor energy consumption and further, we have decided worldwide, regardless of the energy situation in the various geographies to limit heating in all buildings to 19 degrees Celsius and air conditioning will only kick in as of 26 degrees Celsius across all of our sites worldwide. As a reminder, our objectives through our carbon neutrality road map that we presented on the eighth of December 2021, our carbon neutrality in Scopes 1 and 2 in 2025, 30% reduction in upstream and downstream Scope 3 emissions by 2030 and carbon neutrality in all 3 scopes by 2050. Over the past 9 months, the group has launched an initiative to explore how we can increase the proportion of recycled materials in our products. In terms of nonfinancial performance, Plastic Omnium, and we're very pleased with this, has maintained its platinum status with EcoVadis improving its score over 2021 by moving to 80% versus 75% in 2021. And the group also made a very important decision and it's probably a first in the industry to merge sustainability and human resources into one function. And this decision clearly puts talent at the heart of the company's strategy and should reinforce employer notoriety. And last of all, the group has launched a search or economy initiative, which encourages the sale of materials and secondhand equipment between the various sites of the Group. Coming up to the sales figures. So the first message on this slide is that Europe has passed beneath the bar of 50% of revenue at the end of the first 9 months of activity in 2022. At the end of 2021, if you can remember, Europe represented 53% of revenue, and this change in mix can be attributed to strong growth in North America and Asia, excluding China. Two regions, which moved from 26% and 7%, respectively, in 2021 to 29% and 8% at the end of September 2022. Sales growth has been strong across all geographies, as you can see, systematically outperforming the market with the exception to China. And there, we need to nuance. Our joint venture with Yangfeng has enjoyed double-digit growth over the past 9 months, considerably outperforming the market. And our fuel tank business is experiencing the acceleration of electric vehicles in the Chinese domestic market. The Q1 sales per business whether on an economic revenue or consolidated revenue basis. Growth in the third quarter of 2022 has been double digit across all business lines of the group. The scope contributions of the acquisitions at the end of September comes to EUR 44 million representing just 2.5% of sales in Plastic Omnium industries where they have been allocated. Obviously, the notion of performance in Q3 2022 when compared with Q3 2021, contains a strong recovery from the semiconductor crisis experienced, as you know, through the significant stop-and-goes in 2021. Foreign exchange differences amount to EUR 113 million in the third quarter for economic revenue and EUR 100 million for consolidated revenue. As mentioned earlier in the presentation, the number of SOPs so the start of production in Q3 2022 was lower than in Q3 2021. And this does not -- and I'd like to underline that correspond to a reduction in business, but just a timing issue on the programs, and that was foreseen in our annual outlook. We're looking at the base business, and that's in the box that you can see at the bottom of your slide, you can distinguish the growth without the SOPs and associated projects. The base business of the group has enjoyed highly double-digit growth, both as reported and on a like-for-like basis, leading to a 4-point outperformance, all things being equal across the market in 2022 -- Q3 2022. Coming now to the acquisition. We foresee for the period of June to December, a positive scope contribution of approximately EUR 300 million in sales. The cash flow impact is estimated at a negative EUR 130 million restated for exceptional disbursements that are related to the acquisition of VLS. And the memory you have on this slide, an overview of the enterprise values of the 4 acquisitions which amount to a total of EUR 927.5 million. I'd like to recall that our net debt-to-EBITDA ratio at the end of 2021 was only at 1.1x, which leaves room to maneuver, whilst respecting our capital allocation framework that we presented at the CMD of approximately 2.0x. Investments that contribute to increasing this ratio temporarily must have the capacity to return to the group profile within 24 to 36 months. And this is the objective that we have clearly set through the acquisition portfolio. All of these acquisitions are funded through existing available liquidity, which enables the group to maintain its financial independence, which is even more appreciable in the current financial market context where inflation is driving interest rates to levels that have not been seen for well over 20 years. Coming to the outlook. S&P foresees 6.8% growth between 2021 and 2022, and forecast in the second half of the year at 41.5 million vehicles in production, up 10% against the first half of 2022. Plastic Omnium maintained its base assumption of 77 million vehicles produced in 2022 with growth expected at 4.2% for the semester against a first half, which accumulated at minus 0.4%. And coming on to the last slide of our presentation, the group confirms its initial guidance on a stand-alone basis prior to acquisitions, albeit in the lower range of operating margin. And the group has reviewed its outlook to include the impact of the acquisitions and foresees a combined operating margin of between 4% and 4.5% of sales and free cash flow upwards of EUR 140 million by the end of this business year. So that's it for me. I would now like to hand over to the Q&A session. Just as a reminder, you can ask your questions via the webcast or via the telephone.

[Operator Instructions] We will take our first question from [indiscernible] from BNB.

Sorry, I guess that was me. Julien from BNP Exane. Yes, the first question on your guidance. Still a very wide range considering that there's only 1.5 months of production to go until the end of the year. Can you maybe elaborate on which part of the range do you expect to be able to be? And then going back to the acquisitions, I understand that it will take time to get the profitability of this business' under control. And I fully appreciate that. It's going to be a long journey. But at the same time, do you think there are going to be quick fixes to maybe bring at least under control, the margin of the business you have acquired? Or it's going to be a more gradual hockey-stick type of journey?

As I mentioned, when you're talking about the guidance, I imagine you're talking about the PO stand-alone guidance. As I mentioned, we expect to be within the guidance but in the lower part of the range. So that narrows the range, if you like, in response to your question. Profitability in quick fixes. There are -- as I mentioned to you, there are the 4 initiatives that we're working on. Amongst the quick fixes, obviously, is the evaluation and the discussions with our customers, in particular, around the various programs that we have identified that where profitability could be improved, and those discussions have advanced quite significantly with our customers, and we're currently in the process of seeing how we can achieve better pricing and also some volume agreements moving forward, which gives us the chance, if you like, to be able to launch in parallel the operational improvements as you know, in any operational turnaround program. And there is certainly [ nurture ], you get things moving. So we're able to be able to do these 2 things in parallel to be able to mitigate the turnaround topic and to be able to compensate significantly the loss-making situation that these companies are currently in.

Very clear. Can I just ask a boring one? On the EUR 130 million of adjustment on the free cash flow, can you maybe elaborate on what the restatements are in relation to the Varroc acquisition?

Yes. Well, we're expecting to -- as you can see, we've got the enterprise value with EUR 927 million roughly in total. And so there are a number of topics here that we're looking at. Obviously, in particular, for VLS, they haven't had access to a lot of bank financing over the past months and have been using supplier and customer financing instruments to be able to finance their operations. And so there are a number of catch-up payments that we need to do and also the run of the business up until the end of the year, whilst we're putting into place the customer support, and that accounts for the EUR 130 million. So that's an end of the year topic.

We will take the next question from Thomas from Kepler.

It's Thomas Besson, Kepler Cheuvreux. I'd like to come back to the implicit losses you make in these 3, 4 months of consolidating these new businesses. I know it's a bit early. But shall we assume or can we assume that 2023, we get a neutral impact? Or should we still assume that you will have a negative impact from the acquisition?

Thank you, Thomas, for your question. We're not giving any guidance for 2023 at this stage. This is a sales call. I mean, as we've had the occasion to mention already, our goal is to mitigate as much as possible in 2023. So -- and we'll give you ample guidance on that as we release our outlook for 2023. But that is the objective is that we come as close to breakeven as possible next year. It can't be excluded, of course, that there will be a slight impact on the group, but it's not supposed to be in great magnitude.

Okay. Understood. Can you elaborate on which of the acquisition is effectively driving these losses? Because I mean, we understood from the Varroc that Varroc would have a neutral impact, so is it all coming from the other 2 smaller deals? Or are there any, what we could call eventually one-offs in the last quarter that are accounted for as adjusted -- as part of your adjusted EBIT?

There are certain number of one-offs, of course. All 3 objects have really suffered through the COVID crisis and the semiconductor crisis. And we have been in a position with our strong balance sheet and high liquidity to be able to procure these companies in this environment. And so we have a turnaround plans in place for all 3.

Okay. Last question. Could you confirm the cash outflow you anticipate for this year? I understand the amount of EV, but are you willing to separate that between the different components?

Yes. I think you had the information there. You had the enterprise value and you have the free cash flow impact on the acquisitions. So the sum of those is roughly the cash outflow.

We will take the next question from Pierre-Yves from Stifel.

Just a clarification into next year, on a stand-alone basis, excluding the acquisition, given what we expect to be probably a tougher year regarding light vehicle product share, the impact of input cost, but some more on energy cost and labor cost. Is it reasonable to expect that you might be able, once again, without the acquisition to grow margins next year even before cancellation of the newly acquired entities? That would be our first question.

Well, I mean, obviously, this is in the call for the guidance of 2023. We're in the budgeting process at the moment, as you can imagine. So it's -- I'm not in a position really to give a lot of clarity. But what we've already said, as you know, first of all, production next year should show some growth. We acquired -- confident that there'll be moderate growth again next year at this stage. In terms of energy costs, as we've also had the opportunity to mention. We've been very happy with the way that we've managed this topic in 2022. And the way we've covered and hedged our positions for the year 2023. Just for memory, we have hedged 93% in gas and 85% in electricity next year. And if you look at the spot rates compared to our baseline of 2020, you'll see that both gas and electricity have increased by 1,300% and 1,400%, respectively. So looking at that, we're expecting an increase of roughly about 60% on the baseline because even though we've secured those prices, obviously, we've secured them at a higher level, and we're very pleased with this result because there aren't a lot of companies from what I've understood that have managed to secure an increase that is -- that has -- is that low. And so that's the outlook on energy. So production, we'll probably see some growth, energy will be an issue, and we're already starting to work on the mitigation topics, as I mentioned earlier, by looking at our own consumption by accelerating our carbon neutrality road map and in particular, the on-site generation solutions through solar panels and wind turbines, energy management systems and further completing our positions in terms of hedges. We're moving forward quite well on our virtual PPAs. We're looking at various geographies in Europe to be able to secure an independent supply of electricity moving forward.

Okay. And on labor cost side, is it anything we have to keep in mind in terms of foreseeable inflation maybe by geographies. Is NAFTA a concern for next year? Is Europe a concern for next year in terms of specific increase in wages inflation?