Sogefi S.p.A. (SGF) Earnings Call Transcript

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Sogefi 9 Months 2026 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Michele Cavigioli, Head of Finance. Please go ahead, sir. .

Good morning, everybody, and welcome. I'm going to comment the 9 months results, which you might have seen on the press release where set of quite solid results for Q3 and the 9 months 2026. I'm going to start on Page 3 with an overview and then I will spend more time on each item in the following of the presentation. So we had revenues plus 0.7%, plus 0.1% at current exchange rates. We had EBITDA adjusted EUR 112 million, almost. And this is a big implement towards the EUR 103 million in the 9 months of last year. We had nonrecurring items slightly above last year and a contribution margin, which is growing both in absolute value and in percentage. Fixed costs were contained in absolute value, in down in percentage. EBIT adjusted was also growing, both in absolute value and percent. And as I will comment later, the improvement in EBIT is a bit lower than the improvement in EBITDA due to some nonrecurring effects in D&A and write-downs. Net income of operating activities is therefore in line with last year. And then we have a positive impact from the disposal of Precision Springs, which happened in July. Free cash flow was 18.5% better than last year, which was 15%. This is before IFRS 16 and as a result of positive free cash flow and the extraordinary gain from the sale of Precision Springs. We now have net cash on the balance sheet and not net debt as we used to have before that. As a reminder, we, as announced already at the end of July, we completed the sale of Precision Springs, which as you remember, is a noncore unit with 3 plants and a EUR 28 million approximately revenues last year. We sold it for an EV of EUR 21 million. We cashed in 23.5%, and we're going to have a probably minor price adjustment in the next few months. I am now on Page 4, and I will comment in more detail on the on sales. I will comment on the sales at constant exchange rate versus the reference market production in each area. At the global level, we had plus 0.7% at constant FX versus a production of plus 1.4%. This average is, however, reflect a very different trends in different geographic areas. In fact, in Europe, we are plus 4.8% in a flat market, and this is mainly thanks to Air and Cooling. In North America, we are much better than the market, plus 5.2% versus minus 1.8%. In South America, sales at constant FX is minus 9.1%, but it's this year, in particular, is not really significant number because we normally -- because of hyperinflation in Argentina, we normally try to isolate the effect of FX and local inflation. However, this year, the 2 figures, inflation and cars devaluation were not in sync, plus all our costs in Argentina are really tied to the local inflation. For example, labor costs are local inflation lead, but many of the raw materials we buy are in dollars. So this number, minus 9.1% is not really meaningful this year, neither is plus 4.6% to effects the most significant number is volumes. So we measure the tons of steel sold, which in the case of suspension is a quite good indicator, is minus 1%. So I'm forming the market, which is plus 6%. This is the best indication of what's happening in South America for us. China, very negative number, not only for us, but also for the market were minus 16.8%, the market is minus 5.5% in reduction but sales, much worse than that. Sales, local sales in China are almost minus 20%, which means that the local market is very weak. But the local players, especially the Chinese players were able to increase exports substantially, which raised at the minus 5.5% is a mix of a very local -- very weak local market and a buoyant export market. Sogefi is working both for Chinese and for European and North American manufacturers in China. And of course, the non-Chinese were not exporting. So they were more affected by the local market which is minus EUR 20 million or less. And also they are progressively losing market share versus the local Chinese, which this explains the underperformance of Sogefi in China versus local production. India, a very positive market, both the market and for us, plus 18% and the market is plus 50%. When we look at -- on Page 5, sales by business unit, Air and Cooling is plus 6 constant effects, and this reflects a very strong performance in North America and an even better performance in Europe plus 16%, which is linked to the good performance of Stellantis and to the start of new projects. Decline in China is, as explained before, minus 16%. If we look at suspension, we have a similar decline in China. We have a strong growth in India. And in Europe, we have a almost flat performance in line with the market with passenger cars down 2% and heavy-duty up 1.8%. South America, we talked about before, so we can move to Page 6. And we see the evolution of the customer portfolio. As I said, Stellantis has had a good year. So it's improving versus the German premium manufacturer, mainly Daimler, BMW, for us. slight contraction, stable GM, a little bit less with Ford. Heavy-duty is improving a little bit. The Chinese OEMs, we said they had a setback this year. We can now move to Page 7, and I'm going to comment on the different items of the P&L. Sales, we just talked about. Contribution margin is growing, both in percentage and absolute value, and this is related to the good performance we had in managing pricing and purchasing. The effect of raw materials has not fed through the P&L yet. There is normally a delay and also energy prices, the effect of energy increase has been contained so far, thanks to, first of all, a diverse mix of energy sourcing, we are -- of course, many countries and not all of them have experienced big average increase. For example, in Europe, France is much better than maybe Italy and Germany. Plus we had some -- a few contracts with long-term fixed price. So the combination of all this meant that the squeeze was marginally positive in the 9 months, and this helped to maintain a very good or improving contribution margin. Fixed costs were stable in absolute value and down 1%, even if we take into account a slightly adverse FX effect on the cost the closure of Douai has not really affected or positively affected the fixed cost yet. We have now almost finished closing the plant, but the full impact of the cost savings will start Q4 and then it will be a regime next year. As a combination of fixed cost containment and increase in contribution margin, EBITDA adjusted improved substantially from EUR 14.3 million to EUR 15.3 million. And then we have slightly higher nonrecurring items than last year. This year, they are related mainly to warranties in Air and Cooling and some restructuring. Restructuring of Douai, as you know, is not included here because it was provisioned in P&L at the end of last year. EBITDA after nonrecurring items still growing from 100 to 17 and 4.6%. Then we have D&A, as I anticipated, you might see an increase versus last year in D&A, we have plus 5.3%. This was not there in the 6-month results. So it's happened in this quarter. And it is related for an amount close to EUR 3 million to CapEx that we have spent in the past, but we have not started amortizing yet until Q2 because we -- when we spend CapEx, then we start the P&L amortization as soon as the project for those CapEx were spent goes into production. So we had a few startup production in Q3, and this means that we had EUR 3 million new D&A, which kicked in, in this quarter. For the rest, it is a really nonrecurring one-off. So the remaining approximately EUR 2 million of higher G&A is a nonrecurring effect related to higher sales of tooling in Q3. Tooling are usually amortized over life of each project, for which this tooling has been produced and sold. So both revenues and amortization happened over the life of the project. In some cases, when the projects are early terminated or terminate earlier than expected, then the remaining portion of tooling is reversed to P&L, both in terms of sales and in terms of D&A. So this explains the increasing D&A. The EUR 2 million of tooling sales, as I said, is a pure one-off. The EUR 3 million, which I was referring to before, which is CapEx of the past, which went into production, it's going to, of course, continue in the rest of the year and the next years. However, we don't expect a further step-up of D&A in Q4 versus last year, which means that this difference EUR 5 million difference is probably going to be reflected also in the full year because even in 2025, of course, there are seasonalities and step-ups in D&A, which means that a plus in Q3 2026 is a bit compensated by that we had last year in Q4. So at the end of the year, we should have a similar difference in D&A than we have today, so around plus EUR 5 million in D&A. We have now also in write-downs, an increase. We have EUR 1 million, and this is mainly related to write-downs in China, at times of projects that we don't start in China. Financial results improving. We have decreased our debt. And consequently, we are paying less interest despite the increase of the interest rate. We have slightly higher taxes, but the tax rate has not really changed. We have a one-off of almost EUR 1 million in 2026. As a result of all of these, net income is in line with last year. We had much higher EBITDA, but then we have a bit higher D&A. So the net effect is that we have stable net income of operating activities at EUR 28 million in the 9 months. And then we have a net income of EUR 33 million, which benefits from a positive effect of the sale of Precision Springs. So we have almost EUR 8 million in net income there, which includes the net result of the Precision Springs until July when we sold it and the capital gain of disposal. We can now move to Page 8, and I will comment to the EBIT performance -- EBIT adjusted. So if we start from last year, we had EUR 49.8 million EBIT adjusted, then we have all these variances are calculated excluding FX effect. So volume contributed positively. The increase of the contribution margin brought EUR 3.5 million. Next, fixed cost, a slight improvement we have a D&A and write-down contribution of minus 4.4%. Here, we are excluding -- we have excluded the effect of the nonrecurring tooling amortization that I was talking about before. So you see only 4.4% here. And that effect is coming to the next box other, together with the FX impact. And this brings us to a EUR 51.6 million EBIT adjusted, which is an improvement over last year, both in absolute terms and even slightly on percentage terms. Page 9, free cash flow, we had, with a solid operational performance, you can see that [indiscernible] by operations are in line. We had a slightly higher working capital absorption, but this is in part due to a lower use of factoring of EUR 3 million compared to last year. We have slightly lower CapEx so far. It's a different phasing than last year. So the operational free cash flow is improving, 15.5% versus 15%. If we then factor in the cash in the -- extraordinary cash in of Precision Springs of EUR 25.1 million in terms of cash, we land with a net cash position of EUR 13.3 million. This compares to debt of EUR 13.9 million last year. I move to Page 10, comment the performance of suspensions, sales we already talked about. EBITDA despite the decrease in sales, constant effects, we have EBITDA adjusted growing. And this is thanks to an improvement in the contribution margin which reflects the better business mix evolution. And it is happening despite some negative effect that we have felt, especially in suspicion, not big, but some effect in terms of energy and raw material cost inflation. Fixed cost decreased. We -- as I said, that we have the initial effect of Douai but not really the full run rate effect of the fixed cost savings. We can now move to Page 11 to comment on Air and Cooling. Air and Cooling, as I said before, has had a very positive sales performance, plus 6% constant effect. This has helped to increase EBITDA adjusted, which is also benefiting from a contribution margin, which is much better than last year. And this also reflects business mix evolution. And in the case of Air and Cooling, also quite good effect from purchasing prices and raw material cost management despite the inflationary cost environment. I can now comment the Q3 P&L on Page 12. Sales are up 1.2% at constant FX, 4.8% in terms of actual current exchange rates. Contribution margin is much better than last year. This reflects the good squeeze management in Air and Cooling, especially, as I said, and also some temporary mix effect related to in particular to the tooling effect that we talked about before. Fixed costs down in percentage. EBITDA adjusted substantially higher in percentage in value. And then we have the D&A effect which we commented quite [indiscernible] before, you see here in Q3 because as I said, happened in Q3, same for the write-downs in China. As a result of this, we have after a substantial improvement in EBITDA adjusted because of all the effects on D&A and the recurring effect, we have a stability of results in EBIT adjusted, EBIT and net income from our operating activities compared to last year. And then we have the gain on disposal of Precision Springs, which raises the net income to EUR 14.9 million. We can move to the outlook on Page 14. As you might know, Standard & Poor's IHS is forecasting a weak Q4 for the market. The October projections pointed to minus 4% global with minus 3% in Europe, minus 2% in North America and minus 8% in China. So soft Q4 according to the analyst forecast. We are, therefore, also cautious on Q4, but this doesn't mean that the full year 2026 will be positive for Sogefi. We now have improved our guidance a little bit. We started the year with a low to mid-single-digit revenue decline. We now see for the full year just a low single-digit revenue decline range of 1% to 2% compared to last year. And we expect we have improved a little bit marginally also the guidance on adjusted EBIT. We formally had a stability in adjusted EBIT margin percent. We now see a little stability in the absolute value of adjusted EBIT despite the slight revenue decline, so a slight improvement in the guidance for the end of the year. I would now stop here, and I would open for questions on us.

[Operator Instructions] The first question is from Martino De Ambroggi, Equita.

Number one, you are guiding for Q4, which is, I would say, dramatically lower than the first 9 months. Because if I do the math correctly, you are guiding for something in the region of minus 10% in sales in Q4 and -- or in any case, down more than what you had in the first 9 months? And just a few millions because if I understand correctly, the adjusted EBIT is in absolute value, last year, it was EUR 55 million, so it means a few millions in Q4. So number one, trying to understand if you are excessively cautious or there is something that is particularly negative in Q4? Number two, the Air and Cooling, in Q3 had a very high profitability. So just to understand if it's sustainable going ahead or is unrepeatable? And number three, CapEx appears to be quite low in the 9 months. If I remember correctly, you had a guidance for EUR 75 million, EUR 80 million for the full year, which is probably tougher to be confirmed. So you will spend probably less.

Okay. So let's start with the CapEx. We are a little bit behind last year. And we don't expect to do the full EUR 80 million CapEx this year. We're probably going to be EUR 5 million to EUR 10 million lower than that. In terms of Air and Cooling profitability, yes, it was very good in Q3. As I said before, there are some inflationary pressures ongoing, which have not fed through the P&L completely. This is actually mainly for suspension rather than having pooling suspension is exposed to steel and energy and steel is very, very also dependent on energy. So in Europe, suspension could be more affected by cost inflation. But even in Air and Cooling, there is some cost inflation. We have managed to have a positive squeeze so far, but that's probably a challenge going forward for the rest of the year, plus in Q3, we had some nonrecurring effects in terms of contribution margin, which are linked to the tooling side. As I said before, the tooling, when you terminate early terminate a project, you reverse the remaining portion of sales and D&A into the P&L, all at once, which means that the sales component is not matched by costs in the contribution margin because the costs are amortized and they go after -- below the EBITDA. So this is also why even pooling had an exceptionally good Q3 in terms of profitability.

Michele, if I may, could you quantify the impact of these call it, one-off for tooling at EBITDA level? .

Yes. So we're talking about EUR 2 million to EUR 3 million sales and a couple of millions D&A. This is the nonrecurring effect.

Okay. So in terms of EBITDA is positive EUR 2 million, EUR 3 million, I understand. So it's this is really one-off, okay. .

Yes. Q4, yes, if you do the difference between full year and Q3, you get a very, very bad Q4. However, I wouldn't do the math just in pure mathematical way. Yes, we are cautious. We are cautious then I hope we will have been too cautious but we are planning for a cautious for a weaker Q4, not 10% sales, a bit better than minus 10%, closer to minus 5% than minus 10%. And EBIT, a few millions, yes, in terms of EBIT have adjusted, a bit better in terms of EBIT adjusted, so not just a few millions that could be a bit more. This is our forecast. Visibility is lower than usual, which is usually low because of the -- as I said, ongoing price inflation on the raw materials and energy, which we normally transfer to the customers. But as you well know, the timing of the transfer is not immediate. So when there is a shock on prices, you might have volatility in the P&L, especially if you look at a single quarter. Then, of course, what's important is that we need -- we are able to then recover the increase of costs for the future. And as you very well know, we have customers where we have indexation. We have other customers where we don't have indexations and then we need to fight to transfer the cost into the prices. We normally are able to do that. However, some customers tend to delay the adjustment and that is typically happening when the end of the year because all the customers are under pressure to show good full year results. So this is adding to the unpredictability of Q4, which is contribution margin, as I just said, but also sales because we -- I mean, so far, we had a good performance in sales. And now S&P is forecasting a quite weaker Q4. So let's see what will happen.

Okay. If I may, just on the adjusted EBIT, can we say it could be high single digit in absolute value for Q4?

Let's say, around mid-single digit.

Okay. But it's -- I clearly understand your prudence, but it seems to be extremely conservative. So that's my opinion.

I hope it will be conservative.

The next question is from Monica Bosio, Intensa Sanpaolo.