Faurecia SA (OTC:FURCF) Q2 2016 Earnings Conference Call July 26, 2016 3:00 AM ET
Patrick Koller - Chief Executive Officer
Michel Favre - Group Chief Financial Officer & EVP
Horst Schneider - HSBC
Thomas Besson - Kepler Cheuvreux
Victoria Greer - Morgan Stanley
Gaetan Toulemonde - Deutsche Bank
Lello Ragione - Intermonte
José Asumendi - JPMorgan
Okay. I suggest to start. Good morning, ladies and gentlemen, and welcome to our 2016 Interim Result Presentation. The agenda of this presentation, I will start with the highlights. Michel, Michel Favre will then make a presentation of our financial performance, and I will conclude with the 2016 outlook.
Our highlights. H1 2016 is characterized by strong profitability and profitability improvement ahead of our objectives. Our total sales were at €9.53 billion, plus 3.4% on an organic basis. I think that this time, considering that the monolith values dropped by 5% which is equivalent of about €100 million and which penalized accordingly our total sales. I think it's important to look at the value added sales which were up plus 5% organic.
Our operating income at €490 million which means 5.1% operating margin on total sales or plus 110 basis points. 6.2% margin on added value. I'll reminded you, added value means total sales without monoliths. Here, an increase of 130 basis points. Our net cash flow at €205 million corresponds to 2.2% of our total sales, and our net income, €245 million, was up 56%.
Some additional highlights, strong growth and robust profitability improvement in Europe. Our operating margin increased by 110 basis points, Michel with detail this performance. And I should also add to this that our margin improvement linked to additional sales was at 29% which is significantly above what we were used to.
In North America, the strong profitability improvement we've recovered is confirming our operational breakthrough. Here, we achieved plus 180 basis points. The profitability in Asia remains at a high level despite more challenging market environment and, again, we will detail this. We achieved plus 20 basis points and operating margin at 9.9% in Asia.
I would like to add to this that in China, our sales to the Chinese OEMs, and you know how much it is important for us in the moment, soared 31% which represents 12% of our sales in China and this is putting us well on track on our target for 2018 which is 20% of our sales with Chinese OEMs.
Our three business groups showing profitability improvement and are converging to a similar profitability levels. They are all at or above 5% operating margin. Our order intake momentum is maintained. We are well on track, we are even a little bit in advance of some achieving the 2015 record performance.
I pass the floor to Michel for more details on our financial performance.
Good morning, ladies and gentlemen. Due to the Exterior divestment, product sales applying the IFRS 5 norms, all the 2015 figures in this presentation have been restated to allow us a comparison.
Our total sales amounted to €9.5 billion, up 0.5% in total value versus last year. Firstly, as anticipated in February, forex, mainly the Chinese renminbi , was negative by 2.5%. This should continue in the second half, but with a lower negative impact as currencies started to adopt against the euro in Q4 2015. Therefore, excluding forex impact and the limited scope impact, our total sales grew organically 3.4%.
Monolith sales decreased by 5% due to the price drop of precious metals. As a result, value added sales, which means our total sales less monolith sales, grew 5% organically. This 5% is the actual organic growth of the group in H1 2016.
On slide eight, you can see the significant improvement of our operating margin, which reached €490 million or 5.1% of total sales, up 110 basis points versus last year. Or most significant, a margin of 6.2% of value added sales, up 130 basis points. The major improvement was generated by additional volumes and better utilization rate in Europe, and a significant improvement of our operations in all locations and by savings linked with footprint optimization in South America and Russia. I would like to indicate that these figures integrate a significant investment in operating expenses to accelerate our projects, mainly the Faurecia 4.0, that means our digital project.
I would like now to make a quick review by regions. Starting with Europe, slide nine. You see that the group over performed the market with product sales growing like-for-like at 7.1%, above the 4.5% in case of automotive production in Europe. Growth was mainly coming from [indiscernible] and new competencies in business for Renault-Nissan, Ford and BMW.
As a result, European profitability continued its momentum at €245 million or 4.8% of sales, we posted a €64 million, a 90 basis point improvement, demonstrated a very high marginal contribution, about 29% on additional sales.
In North America on slide 10, our product sales dropped by 3.1% while production was up 3.3%. The gap was mainly due to the big drop of volumes in production of the Chrysler 200, which represented a sale loss of $110 million in this first half or 590 basis point of gross. North America will restart its sales growth momentum in 2017.
H1 2016 confirms the breakthrough in the operational performance made in our three business groups in the region. Operating margin increased by €43 million, $50 million, up 180 basis points of margin. For both Europe and North America, we're securing operating margin between 4.5% and 5% for the full year 2016.
On slide 11, you can see that our sales in Asia grew 3.8%, slightly over performing production, thanks to strong contribution of Korea and Thailand. Product sales in China were up like-for-like, 1% in the first half when restated from production transfer between China and Korea with a strong growth with Chinese OEM at 31%. As you know, Chinese OEM are capturing a big part of the production costs. Sales to [indiscernible] down mainly due to the drop of volumes of DPCA in the period, over 20%.
Asian operating margin continued to improve in the first half at €139 million or 9.9% of total sales, up 20 basis points versus last year. In China, our operating margin was almost stable and the performance improved in Korea and Thailand. The second half will confirm this operational performance. 2017 will see a strong acceleration of the sales growth, thanks to the ramp up of our new JVs.
On slide 12, you can see the complete profit and loss statement. Total sales increased by €43 million, up to €9.5 billion or 0.5%, while operating margin (sic) [income] (10:04) grew by €116 million (sic) [€106.6 million] (10:06) to €490 million which means a very high contribution on [indiscernible].
All the regions and the three business groups contributed this breakthrough. We continued our restructuring efforts with the implementation of the European industrial plan in Emissions Control and to adapt our footprint to the volume drop both in South America and Russia. Our financial result at €110 million was reflecting the impact of the refinancing mainly due to the early redemption of the December 2016 expensive bond. That means that €21 million of financial expenses were anticipated in H1 and, of course, will be recovered in H2. We have, therefore, secured close to €50 million savings in 2016 compared to 2015.
Corporate tax rate was 29.7%. Some tax optimization allowing some activation of deferred tax would drive to a 28% tax rate for the full year 2016. As you can notice, profit of the Exterior business were booked in a separated line, net profit of discontinued operations, which was initiated by the fact that we stopped depreciation which is in line with the IFRS 5 norms.
As a result, net group's income amounted to €245 million, up €93 million versus last year. The net profit after tax of the divested of Exterior business is estimated at €200 million and will be booked in the second half.
On slide 13, you can see the strong cash flow improvement with net cash flow reaching €205 million in the first half. As expected, the improvement was mainly coming from the robust EBITDA increase of €136 million up to €814 million.
Total CapEx and capitalized R&D at €417 million in the first half was comparable to last year level which was €398 million. For the full year we anticipate CapEx plus capitalized R&D to be around €1 billion. The finance expenses cash out was including the €21 million I was mentioning before and this would be of course recovered, as I mentioned, in H2. In the line others, we recorded the impact of the IFRS 5 norms, the classification.
On slide 14, I would like to remind you that we have successfully completed our refinancing since 2014, everything now is done. In March, we issued at a very effective price a seven-year bond of €700 million. In April, we repaid by anticipation a very expensive bond of €490 million.
Finally, in June, we have renegotiated with better terms our syndicated facility which is now a five-year one instead of 3+1+1. As you know, this line is undrawn. We have no significant repayment before 2022.
I give back the floor to Patrick for the 2016 outlook.
Thank you, Michel. So I would like now to guide you through the different business groups and to give you a few information about how the situation has evolved, and I would like to start with Interior Systems. So you know we communicated about our selectivity on the order intake, and this is in order to restore profitability. And this is also why we have a low point in terms of growth on Interior Systems in 2016. And we will rebound and I can give you one indicator - indication about that.
In 2016, we will have 46 launches of new products. Everything being comparable. We will have 94 launches in 2018. So, you see, our order intake is working. We are acquiring new businesses, and here, we will rebound.
With that, our strategy was paying off. You see here the margin evolution of Interior Systems, with 1.8% in 2013, achieving in the first half of this year 5%. So it's a real breakthrough. It's here in our foundations on which we can build our next phase of growth.
To be added, we have sold our plant in Fountain Inn in the U.S. This plant made or should have made $95 million of sales in the second half. We finalized the sale at the end of June, and this is closing or restructuring our plant to increase our operational excellence in North America. Clearly, the market consolidation is supporting the profitability improvement on the Interior Systems, but it is certainly not the only parameter.
If we have to look now on Emission Control, here you see that our operating margin improved. This is on value added sales from a 5.8% (sic) [5.6%] (16:17) in 2013 to 9.6% in the first half of 2015. Here, again, a significant increase and improvement of our profitability.
We are on track to recover our market share. The market share we had combining Faurecia plus Emcon at the time where we merged both companies. Considering the significant market share of this addition at that time, it was quite normal that we had to deal with that. I think that the quality of our innovations, of our products offer, the quality of our execution is now allowing us to be back on this very high level.
We also enjoy a strong business development with Cummins and this on commercial vehicles, on-road and off-road, and this will be important for our future growth. You know that the new regulations to come will boost a significant increase of the content and the value of our products.
Automotive Seating, we continue to accelerate our profitable growth. Here, you've seen that we have enjoyed a double-digit growth in 2015, and a very high growth rate at 9.2% in the first half of this year.
Our operating margin in 2013 was 4.2%, it is now 5.3% in the first half of this year. So you've seen that our three BGs have significantly progressed on execution. They all are converging to the same level of profitability.
Faurecia Interior Systems and Emissions Control Technologies, and we have communicated that to you, are at a low level of growth in 2016, but are rebounding from now on and we will see it in 2017 and 2018. And this is why - I will come back to this. I will be here first. And this is why this is the commitment we took during our Investor Day. We are committed to a 400 basis points growth during 2017 and 2018 and operating margin at 6%. And net cash flow above €500 million, and then EPS at €5. And we are perfectly on track to achieve this. This is our objective and especially the growth is still our objective.
Now, back - and I hope it will work - back to the Automotive Exteriors disposal, which we will close at the 29th of this month. July 11, the European Commission approved the sale of Faurecia Automotive Exteriors to Plastic Omnium. July 29, the closing of the deal based on an enterprise value of €665 million is confirmed, the divestiture commitment around €700 million of sales made by Plastic Omnium has no impact on the sale of the business by Faurecia or on the amount of the transaction. Estimated net capital gain of around €200 million to be booked in H2 below operating income.
And finally, this, and the fact that we will be close to be debt-free at the end of the year is allowing us to refocus on our priorities.
And what I just showed you now is - what I just wanted to show you now is our full year guidance and the full year guidance upgrade, the total sales between 1% and 3% is not changed, and I will come back to this. The operating margin on total sales, we propose a minimum of 5%, the previous guidance was between 4.6% and 5%. The net cash flow minimum of €300 million, it was previously around €300 million.
We are comfortable with this. You will certainly have questions about the sales growth. The uncertainty globally has increased in the last weeks. It has increased with the Brexit, it has increased with the events happened July the 15th in Turkey, we are getting closer to the Presidential election in the U.S. We have to deal with some terrorism attacks in the Western countries which is a significant event. So all of that is showing that we have to deal with this new environment, and we have selected to take this into account.
Our ambition is very clear. Our ambition is to become the leader in sustainable mobility and in the cockpit of the future. We want to expand our value spaces to reach more than 30% of our sales. This is perfectly in line with what we presented during our Investor Day. And our net cash flow objective, in order to fuel this ambition, is to achieve quickly more than 3% of total sales.
During our next meeting in the Paris Auto Show, we would have the pleasure to show you a few objects through presentations of some - what we are able to do and to propose to the market. But before our Friday, September 30, Paris Auto Show, we also have an intermediate possibility to meet you and this is September 8. This in Beijing for an strategy update on China with Jean-Michel Vallin and Li Jingcheng with Mathias Miedriech, which is responsible for Emissions Control.
We will do that in conjunction with the Daimler CMD in Beijing, September 6 and 7; and the Volkswagen Group China investor presentation also in Beijing, September 8 in the morning. You are very much welcome to both of these events.
This is closing our presentation. And we are now opening the question session.
Thanks so much, sir. [Operator Instructions] The first question is coming from Mr. Horst Schneider of HSBC. Please go ahead. Your line is open.
Yeah. Good morning. It's Horst here from HSBC. I've got three questions, please. First of all, I want to better understand your revenue guidance where you seem to include some socio-political risks. So I just want to know, I mean, if you strip out this monoliths effect in a normal environment, what could we expect in H2 in terms of product sales? And I want to know if you see already any negative impact, for example, in Europe, from the Brexit decision.
So second question that I have is basically on acquisitions. I mean, you have now completed the Exterior disposal more or less. So we expect in H2 here some news on this acquisition front. And then the third question is more housekeeping issue. I want to know which one-off we can expect in H2 2016 regarding restructuring. And I want to know also the impact from factoring in H1, please. Thank you.
Okay. Revenue guidance and you spoke about the Brexit. What we will have to wait is to see what the September month will be. You know that the September month in the UK is a very strong month. It's the model we have changed. And we will have a very clear indication of what the tendency will be after this.
This said, the UK are representing about 20% of the European, the west European market. We think that the Brexit could represent about 10% drop of the UK market. So you see what it means. And if this would materialize, it would flatten the growth in the second half in Europe.
You also have to take into account the profile of the second half, this especially in North America and in China. So we have in China, in Q4, a very strong growth in 2015, which we will see if it is possible to nudge. It will depend on a decision which we expect to be taken by the Chinese authorities in early October and which is linked to the 1.6 liter incentive.
If this would be cancelled then we would have certainly an additional sale in the last months of - just before, sorry - the last month because I don't know exactly to which date this incentive will be cancelled in 2016. But we will have for sure between four to six weeks between the announcement and the cancellation.
So when I spoke about uncertainty, I'm really speaking about uncertainties. When we look at the North American market, you have mixed indications. Today, we really don't know in which direction the market will go. I think the Brexit will have a negative impact. How much will it be? I think that at this stage, nobody can guess.
The minus 10% you are citing is mainly referring to IHS, right, that's what they forecast. That's not your forecast.
It's not only IHS, there's a kind of consensus in the moment around 10%. Some are even above this 10%. I think that it is probably the magnitude. It might be a little bit below 10%. But this is what we expect being the effect of the Brexit for 2016 for the second half.
Okay. Thank you.
So, I take the acquisition. You take the third one, Michel. Acquisitions, it's clear that having sold our Exterior business, we will be close to be debt free at the end of the year. We have the means to make external growth actions. But this said, we need to find the right target. We told you that we are looking for adding technology to the group. This especially in our both ambitions cockpit of the future and sustainable mobility. So we are checking what are the possibilities and we will certainly inform you as soon as we'll have closed the deal.
Okay. Coming back to the question on monolith, it's true that monolith this year is deflecting the growth. So, if you put apart the monolith...
And that's what happened.
We're upgrading our guidance impact in States as well.
Coming back to the other two questions, so restructuring, we have made it as a big part for the year. We cannot exclude some small adjustments, so take €70 million of restructuring for the full year, and we will be very close to this figure.
For factoring, we are expecting our guidance of €1 billion which means that we have the smaller €53 million to achieve in the first half, no increase in the second half. So if you [indiscernible] that I think that it is an actual €150 million free cash flow for the first half. We are above our initial budget on this figure.
I would like to add one point about the uncertainty on the second half. What we have done and it is launched already, we will accelerate our cost-cutting initiatives. We have three initiatives. The first one is linked to our global business services. The second one is linked to our global R&D expenses and here we are working on the hourly rate, but also on the number of hours per program, per development. And the third one which was mentioned by Michel is manufacturing 4.0 where we are significantly investing in digital productivities.
All right. Thank you very much.
Thanks so much, sir. We'll now go to Mr. Thomas Besson of Kepler Cheuvreux. Please go ahead.
Thank you very much. It's Thomas Besson, Kepler Cheuvreux. I have few questions as well. Could you first discuss the improvements you've already shown in LatAm in H1 and give us the outlook of both what you see in the market there over next 18 months and how we could anticipate your operating performance to develop knowing that the Brazilian real has improved a lot, but the peso and sol didn't. So can you give us some information there?
Secondly, with the picture you've given for Europe potentially flattening out in the next 18 months post Brexit, is it fair to assume that you can maintain the profitability of the operations in the region around 5% or is that too optimistic?
And thirdly, just a detailed question. You mentioned the potential to be at 28% tax rate for 2016. Can you explain where you get the credit from and what we should expect for 2017/2018? Because I think 2018 is a bit better than what you were anticipating earlier. Thank you.
For the two first question, I will have one single answer. I just showed you and I just confirmed that we are on track to deliver the 6% operating margin, the 7% on added value margin in 2018. And I'm confirming this considering and taking into account the uncertainty I just described.
When we made our presentation during the Investor Day, we said to you that even if we would not have and we would not benefit from the 200 basis points which are the market growth we have included, we would maintain to deliver something close to 6%. And this is something I do confirm again today. Tax rate?
Europe, definitely now, I repeat, 4.5% to 5% in the second half. And 5% is the minimum number we have to do in Europe when we see our present market share data.
Tax rate, 28%. You should remember we have something like €500 million of tax received not activated. A big part goes in France and Germany. We are improving a lot our operations in the two countries. We have as well some tax optimization, so it is why we are starting to activate in France and we will activate in both countries not only this year. So I can, with a lot confidence say to you that this 28% tax rate is recurrent, I think, at least the next two years.
Great. Thank you very much.
Thanks so much, sir. We'll now go to Victoria Greer of Morgan Stanley. Please go ahead.
Good morning. A couple of questions on China, first of all, please. You talked about the weakness in the international OEMs. Can you give a bit more details? And then on the local OEMs in China, you've clearly won a lot of business there, can you talk a little bit about content per car on that new business and the margin?
Second question then on North America profitability which has, obviously, moved very impressively in the half. You talked about Interior consolidation helping, but some other drivers. Could you talk a bit through the details of other drives on the North America margin? Thanks.
Okay. So about China to start with. We are currently penalized by two things, by the market growth which is not exactly what we have expected, and especially considering our mix. The growth today is and, in the first half, again, captured essentially by the Chinese OEMs. And as we mentioned, even if we are growing very fast, we only made 12% of our sales in China with the Chinese OEMs.
The second point is that 20% of our sales in China are made with DPCA and DPCA in the first half is lagging behind in terms of sales versus the other international OEMs. But to a large extent, I see this as an opportunity because with a low level of growth in China, we were able to maintain an high level of margin. And you questioned us several times about this capability. So we are able to do that.
We are able to do that also because we have reacted very quickly to the new normal conditions in China. We have quickly developed a new product offer which is specifically adapted to the Chinese OEMs, but - which seems to be also interesting for the international ones who have to converge and who have to find cost savings.
You know that we have - and we announced that - finalized very important for us joint ventures with Dongfeng and with CCAG. These joint ventures are - we are very close to conclude that, will be extended to all our product groups.
And we also have started discussions with another very important Chinese OEM. And these joint ventures, these relationship will boost and we will see a mechanical effect of these partnerships on our growth in the next future. And the next future is starting in 2017.
So we are confident. It is, in the moment, a little bit more difficult, but we are confident. And I'm saying it again, the 20% with Chinese OEMs in 2018, the 30% with Chinese OEMs in 2020 are a target we do confirm.
About North America, what are the drivers? I spoke about Fountain Inn which was an issue for us in the last years. We, today, are executing in North America at our standard level. We don't have any issue anymore with our plans. We have been able to transfer a significant part of our production to Mexico. It means that our mix today is - our cost mix is much better than it was. We still have potential there. We are considering increasing our head count and especially in our business services, our R&D, our program management, our purchasing in Mexico.
We also have - we're benefiting from a better mix in terms of value. Our market share on the trucks and SUVs is increasing significantly, and this will help in the coming months. By the way, we will start in the second half the Ford F-250. It's a complete seat business which is very significant.
Great. Thank you.
Thank you, Ms. Greer. We'll now go to Gaetan Toulemonde of Deutsche Bank. Please go ahead.
Yeah. Good morning. It's Gaetan speaking. Very quickly on what is concern, a common concern. Chrysler, can you remind us the impact on the results in the first half and what could be the impact on the full year? And when we talk about this disposal of that plant in the U.S., what is the impact on the operating result as a rough idea?
Well, Chrysler, $110 million on sales for the first half. We are expecting with respect to the program of FCA, $70 million additional burden and off-set for the second half. And I will not disclose figures, but you can take the factor of its impact on our margin. I would say negative 5%.
Right. So the full impact of the UF is considerable and you just spoke about it and it's a little bit less in the second half than in the first half. But what is interesting and I would like to share with you is that we are negotiating with FCA and we really have partnership with them, we have a very good relationship. We are negotiating replacement businesses which are not our businesses in the moment and which should allow us in the Detroit area to significantly increase our sales to FCA versus what it is or what it was before with UF.
And this linked to Ram, linked to the Grand Cherokee and linked to the Grand Wagoneer, which are businesses which will be - one has been decided for Interior Systems, it's Ram already. And so that business has the biggest volume. And the two others will be decided, will be sourced in the next week. The SOP of these businesses will start in mid of 2018 and will continue until 2019. So we will have on hold at the end of 2017, beginning of 2018, but we do not think about having to restructure our footprint, we will hopefully. And we will confirm that to you again before September and we will increase with FCA our sales. And as I said previously, with SUVs and with cars which in the moment are doing extremely well in North America.
Patrick, if I understand well, that means that you get no indemnity from the Chrysler 200, but the compensation is incremental new business starting in 2018? Is that correct?
Gaetan, I haven't said that. What I said - it will certainly be a compromise. It will be a mix of things. And one element is business compensation. But as I've said, it's more than a compensation. What we are targeting is significantly above in sales than what the UF is representing for us.
Okay. And Fountain Inn?
Fountain Inn is - the sales we would have made in the second half is $95 million. So we spoke about that. Fountain Inn is a plant which was delivering to BMW. We had significant issues in this plant. We were able to fix these issues recently. The plant is now sold. And it is closing our restructuring in North America.
Okay. And the impact on the bottom-line, order of magnitude?
It will be 10 basis points to 20 basis points, like I said.
For the North America. And if you - to your question, with the volume of the Chrysler 200 of last year, we would have been at 5% operating margin.
Okay. Thank you.
In North America.
Thanks so much, sir. We'll now go to Lello della Ragione of Intermonte. Please go ahead.
Thank you. This is Lello della Ragione from Intermonte SIM in Milan. I have a couple of question. First, coming back to Brexit and the forecast that you gave on Europe especially. You has always used a mix of IHS and some other sources as content. But in the meanwhile, in the short term, in the last weeks, considering the usually six weeks, plus six weeks that here in orders, do you see already some kind of a slowdown with all revenues of PSA in the last week? And especially, another thing that I wanted to ask, you mentioned just the impact on the UK car market. Are you including some kind of slowdown even in another region just for this effect without taking into account all the other events that happened in just the last week in Europe in terms of terrorism?
And then another question I wanted to ask is related to China instead. Do you see some kind of pressure that will jeopardize at this point the above 8% margin, actually close to 9% in the region coming from the right impression of foreign OEM and taking into account also the lower content of local OEMs or you're able to cope with the operating improvement? Thank you.
Again, I spoke about uncertainty and we feel this uncertainty also when we look at the programs we received from our customers. When, in the moment, we see some down trends, I think that they are more related to adjustments of inventories than anything else. I don't think that so far, and I don't have the July figures, the last programs. But so far, I haven't seen a significant tendency in Europe.
Yes, you're right. We are considering for the moment an impact in the UK and in the UK only. We do not take into account a drop which would be caused by the Brexit on Continental Europe. We would see what will happen, and we might reconsider this position for 2017.
About the pressure on the prices in China, what happened in China during the last 10 years, we had all to run behind the capacity and put the capacity according to the growth in place. During this phase, we were a little bit [indiscernible]. Okay. Sorry. So, during this phase, we were not focused on the program management, making sure that we will start on time. And so, we had, because of that, some potential on the costs.
What we are also doing, and this was not the case and it is the case on the other region, on the mature region where are working on what we call the AV, new models, of course, it depends on the customers where we are focusing on costs and trying to reduce cost without touching the margin. And we have dedicated teams in the different mature markets which are doing that. This has not happened yet in China and I do believe that in putting the resources in place, we will have potential.
The second point is that during this phase of very strong growth, and especially for the international OEMs, the cars were designed in their home base, and these cars are using their international specifications. The competition with the Chinese OEMs is obliging them now to revise these specifications. And here, again, adapting our products to the specificities of the Chinese market is opening new opportunities. In other words, considering all of that, I'm not concerned about our capacity to maintain, and this is a figure we repeated many times, 8% operating margin in Asia.
Okay. If I can have another question, actually just on the forex side, just looking at the impact of the pound and the effect on top line and operating income for the Europe region, considering both the transaction and translation effect usually have some 90% localization in UK. And what should we expect if exchange rates remain at the current level? What do you have in budget for the time being? If you can add something on that point. Thank you.
Okay. Our operations in UK, we are making €450 million, roughly, in UK, as production based in UK that is indexed to euro because we have some components coming from the continent. Net revenue exposure of roughly £60 million. This has been hedged.
So, no impact on 2016. And as I just mentioned, the [indiscernible] with the customer.
Okay. Great. Thank you.
Thank you very much, sir. [Operator Instructions] We will now go to José Asumendi of JPMorgan. Please go ahead. Your line is open.
Thank you for providing the update, Patrick, the first one if you could comment on the orders on Emission Control Technologies, I mean, if you have won any incremental orders from Volkswagen over the past months? And also if you could please comment a little bit more structurally where you see the profitability of Interior and Emission Control Technologies over the next two to three years after the improvement delivered in the first half?
And then Michel, can you maybe explain a little bit in terms of assumptions for the second half? I think the point is full of uncertainty. But is it reasonable again to assume stronger seasonality, a stronger EBIT specifically in Europe and North America in the second half versus the first half? Thank you.
About the growth, I will not give you some specifics about the platforms we've won with the different customers. What I can tell you is, and I can repeat the comment I made at the introduction of this presentation. When I look at our order intake achieved end of June, we are perfectly on track to repeat the record performance we made in 2015, which is a very factual sign of our future growth. And this is true for our three business groups. So we don't have one which is lagging behind. We are on track on the three of them.
The other thing about the operating margin potential, you've seen that we have achieved a certain level of convergence between the different BGs. So our target is to achieve in 2018 6% with this convergence. Michel.
Well, about seasonality, you know that there is [indiscernible] China, et cetera. So, Europe, due to the month of August, our sales are lower in second half than first half. But usually, we are better in profitability in the second half, so it is a good challenge again for this year.
On North America, sales are equal between the two semesters. We will and we want to improve the profitability in the second half. And in China/Asia, it is in February that there is the Chinese New Year. So the second half is higher than the first half. So profitability should be slightly better in second half.
Should be better in the second half in Asia.
Thank you. Brilliant.
Thanks so much, sir.
It's a fact. I mean, it's just three months. It's a fact, and we are improving. As you have seen, we are improving our operations and we continue to improve our operations.
Thanks Mr. Asumendi. Ladies and gentlemen, we'll now go to Horst Schneider of HSBC. Please go ahead.
Thanks for taking again a question from me. It's Horst here. I just want to know if you had any earnings impact from raw materials in H1.
Full year impact or H1.
Now, also in H1 if you had...
Sorry. Sorry. As you know, it is very erratic. The oil price is still low with some up and downs. Still we can see very small, [indiscernible] in the second half, but we you take the first half and probably the full year, we have a small positive full year impact from raw material, something like 10 basis points.
Because you know that we have pass-through mechanisms.
So, we are quite protected. But on the same time when the materials are going down, we are giving back some of the benefit. By the way, this is something which could boost our sale, our total sales in the second half if these raw materials would go slightly up.
And what was the earnings impact in H1 then from raw materials? It was10 basis points as well or?
A little more than 10 basis points.
Okay. All right. Thank you.
This is I think concluding this presentation of our H1 results. I would like to thank you very much. In a nutshell, we are improving significantly the profitability of all our business groups in all our regions. We have an order intake which is fueling the future growth. The future growth is confirmed. We are confirming here again the 2018 targets we proposed during the Investor Day. I thank you very much and I wish you a good day.
Ladies and gentlemen, that would conclude today's presentation. We thank you very much for your participation. You may now disconnect. Thank you.
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