Faurecia's (FURCF) Q3 2016 Results - Earnings Call Transcript

| About: Faurecia SA (FURCF)

Faurecia SA ACT (OTC:FURCF) Q3 2016 Results Earnings Conference Call October 13, 2016 ET

Executives

Michel Favre - CFO

Eric-Alain Michelis - VP of Financial Communications

Analysts

Victoria Greer - Morgan Stanley

Gaetan Toulemonde - Deutsche Bank

Horst Schneider - HSBC

José Asumendi - JPMorgan

Lello Della Ragione - Intermonte

Michael Foundoukidis - Natixis

Alexis Albert - Barclays

Operator

Good day and welcome to the Faurecia Q3 2016 Sales Conference Call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Michel Favre, Chief Financial Officer of Faurecia. Please go ahead sir.

Michel Favre

Thank you. Good evening ladies and gentlemen. I'm with Eric-Alain Michelis, our VP of Financial Communications. Our press release of the third quarter sales has just been issued and the commentary slide show that you have received or you can also find it on our Internet side.

As a preliminary remark, all the figures are presented according to the non-IFRS site which was excluding all the figures of the external business activity which has been divested end of July 2016.

Starting with Slide 2, our total sales decreased to €4,241 million but we are up on an organic basis by 1.6%. Although the quarter exchange rate generated 1.9% negative impact, scope impact was negative by €66 million which was mainly the Fountain Inn plant disposal.

Monolith sales was down 9% at €710 million. This decline was mainly coming from lower precious metal price. As a consequence, value added sales which means total sales minus monolith sales reached €3,531 million down 4.3% on the reported basis but up 3.7% organically.

As you know, value added sales do represent the real Group activity, therefore from now onwards we comment value-added sales instead of product sales or total sales. R&D & Tooling sales were up 21% organically at €280 million due to high number of new programs in development.

I will now comment the sales evolution by region on Slide 3 and 4. Starting with 2016, you can know that there were value added sales at €1,695 million decreased by 1.9% organically in line with an estimated minus 2% for car production in the period. Faurecia benefited from strong sales growth Renault-Nissan plus 15% thanks to the Megane and the Qashqai and to BMW plus 10%. On the other hand, sales were penalized by VW, by Daimler and by Ford who were [indiscernible].

In North America, value-added sales reached €150.7 million down 5.9% on the reported basis. Two main impacts might be noted, the Fountain Inn plant divestment which counted for €50 million sales last year in Q3, the top of volumes of Chrysler 200, minus 70% which was penalized in '16 and other businesses for a total of €38 million.

Excluding the scope of the Chrysler impact, organic growth would have been 2.9% slightly ahead of light vehicle production growth in North America. Sales to Nissan was 12% driven by interior and systems businesses. Nissan is now our top customer in the region.

On Slide 4 in Asia, sales were up 11.4% on a reported basis, 17.9% organically outperforming the light vehicle production cost. In China, sales slowed by 15% to €448 million in Q3 boosted by the sales of the local OEMs that is 40% of the value which now represents 14% of the Chinese sales to VW, plus 50% comes from Volkswagen Bora and the Skoda Superb.

South America light vehicle production was still down by 10% in the quarter. Faurecia reached 50.2% organic growth strongly top over the market with new programs being taken over from competition. Sales to Ford into PSA, sales by 135% and 44% effectively.

I will now comment the sales evaluation of business group on Slide 5 and 6. At €1.515 million Automotive Seating posted a solid 9.4% growth like-for-like over performing in Asia 38% and North America to 15%. Sales to Ford sold by 166% with the F-250 in North America and those to Renault-Nissan by 19%, sales to the Renault Megane, Dacia Duster and new Nissan Qashqai.

Emission control regulated sales were up by 2.8% like for like to €960 million. Coming to the Asian rebound to 25% and solid growth in South America plus 31%. Sales to GeelyVolvo was slightly up by 57% and those to VW by 17% thanks to new models, VW Senda in China, Audi A5 and Q7 and Volkswagen Tiguan in Europe.

On Slide 6 Interior Systems sales declined 2.9% due to the unfavorable mix. North American sales decreased by 16% penalized by the Chrysler 200 and the production adjustment of the Ford F-150. In Europe, sales to Daimler were down by 12% mainly the S-Class. Sales to Renault-Nissan rose by 10% thanks to the new Renault Megane and Nissan Navara.

Moving to year-to-date sales, I focused to comment only the Slide 9 to keep time for our Q&A session. On the reported basis total, sales were down by 4.3% impacted by the currency negative 2.3% and the scope negative 4.8%. For the full year you can anticipate that ForEx will be negative by at least 2% and scope impact would be negative by 1%.

On the same vein, monolith sales were down by 6.5% with minus €250 million impact from low operation metal prices, negative impact for the full year would be close to €300 million. Total value added sales were up 1.1% on reported basis but hold 4.6% organically. This quarter 6% is the actual growth of the book at the end of September 2016.

For the conclusion, Slide 13 after nine month of issuance, we can confirm with great confidence that our guidance for the full-year 2016 organic growth of total sales between 1% to 3%, operating margin of total sales minimum 5%, minimum €100 million of net cash flow. This guidance would translate into organic growth of value added sales between 3% to 5%, operating margin on value added sales close to 6%.

Operator, we can now open the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Victoria Greer of Morgan Stanley. Please go ahead.

Victoria Greer

Good evening and just two, please. Firstly, I'd just like to get into the weaker Europe organic growth trend. That was a big strong point for H1. I would just like to get into a bit more detail on them, which divisions or which product, which OEMs are the issue there?

And then actually really the same question for China where your local share has really accelerated a lots, the share with the local OEMs. Again, could you talk a bit about which OEMs and which divisions and what we should be thinking about there? Thanks.

Michel Favre

Thank you Victoria, good evening. Firstly if you allow me it's not so thigh. You know the rules in this business we have order book. We know with two year advance which business we’ve taken and which business we’ve gained et cetera. You know that our order book slowdown in '13 and '14 due to some financial restriction and this shows clearly restore profitability and cash before all.

And you know like me that consistent on well, we have accelerated order book which will have full impact from second half '17 onwards. So if we are slowdown and it is a relative slowdown because when you see that value added sales are close to 4%, so it is a relative slowdown and I think it could be not so far away from some piece.

So going back to your questions I have detected we see a lot of - we see impact in the meanwhile well know is the Chrysler 200 and you know that the Chrysler 200 will be very probably stopped at the end of this year because of the big move from sedan to trucks and SUVs in North America. So Chrysler is very successful on this segment but of course has the negative impact of the sedan.

We are as well and it was stated in my comments, Ford has announced as well some we say catch up production in Europe. That has well in North America on the F-150 and you know that we've huge we say a significant participation of F-150 on interiors and I think it was Faurecia’s that Daimler, class which was a fantastic success at the start, is a little slowing down with respect thanks to the fact that they have some competitors.

The first one is a BMW stated so these are and if you go back to last year here we see that Faurecia in Europe we have a very significant growth 9% which shows the success of this model. So we have a small collection about two years in Europe due to that. But as of for year the growth is Europe is very significant and much higher than the market.

Victoria Greer

Hi there, yes. And then on China, which obviously has accelerated a lot, could you talk a little bit about products or OEMs that are driving the stronger growth there?

Michel Favre

I have spoken of course of the local Chinese are plus 40% of business with them, and VW with the new models for 50. We will have now the impact of what you call Senda activity. In terms of Senda activity is two new models for Brazil and mainly two SUVs and we are confident because I think these models will have a good success and we'll have as welcome new models for further with Chang'an.

Victoria Greer

Great. And product wise is that emissions or seating or interiors or just across the board?

Michel Favre

Across the board.

Victoria Greer

Thank you very much.

Operator

Thank you. We'll take our next question from Gaetan Toulemonde of Deutsche Bank. Please go ahead.

Gaetan Toulemonde

Michel, good evening; it's Gaetan speaking. My question is a little bit beyond the third-quarter revenues, but I just need a qualitative answer. When you have negative revenues like in like-for-like in Europe and North America, in the second half or in the third quarter, despite this negative volume, can you increase in absolute terms sure profit contribution? That's my first question.

Michel Favre

Good evening Gaetan, thank you for your questions. Clearly in Europe we have a lot of improvement plan. We have some restructuring selling so the answer is definitely yes. And in North America we have commitment of 4.5% profitability and we will be at the rendezvous whatever the fact that we have some that we say are downside result.

Gaetan Toulemonde

Okay. I think that's a very clear answer. My second question is regarding your comments you just made regarding next year. I remember the capital market day when you are guiding for 6% organic growth between 2016 and 2018 with a small growth this year confirmed by these numbers and an acceleration next year towards 8% organic growth both in 2017 and 2018. You just made the comment that you will see -- we will see an acceleration starting in the second half.

So my question is very simple. Regarding this approximately 8% organic growth next year, will it be a very big difference between the growth in the first half and the second half, qualitatively speaking?

Michel Favre

I would like to check exactly the volume. I think the details we be tiny because we’ll many contribution of the new JVs accounting after in the first half. I’ll remind you the new JVs are the Chang'an, the JV of Chengdu and the JV of Pernambuco which working in Brazil for Chrysler.

So for us it will be more new models in the Europe and North America. So I don’t have the splint but clearly today we are targeting a mid single-digit I would say growth for next year because of that with the next generation clearly in '18 because in '18 we’ll have the full year impact of the new models.

Gaetan Toulemonde

Okay.

Michel Favre

Plus some additional models on Chengdu. So clearly we are totally in line which was we are disclosed on the Investor Day and we’re totally in the hallmark of our guidance, we’ve repeated end of July.

Gaetan Toulemonde

Okay, that's very clear. Thank you.

Michel Favre

Operator, there is no question. Hello. Is there another question? Is there another question, operator?

Operator

Pardoning the interruption ladies and gentlemen. I will go ahead and open the next line from Horst Schneider of HSBC. Please go ahead.

Horst Schneider

Yes. Thanks for taking my question. I hope you can hear me?

Michel Favre

Yes. We were disconnected and we have to go back. Thank you, Horst.

Horst Schneider

Okay, thank you. I just want to ask, obviously in the third quarter we saw a negative impact from Volkswagen. I want to know if you could quantify this effect. And I want to know also to which extent do you think this effect is going to reverse in the fourth quarter? Obviously also Volkswagen has to catch-up some production, so in other words, would you expect the European or the Western European production should outperform in the fourth quarter?

And maybe also you can make general statements on the outlook for the fourth quarter regarding market growth, if you're seeing any region at the moment, positive or negative surprises going into the fourth quarter. Thank you.

Michel Favre

Okay. With the VW our sales were down by low to middle single digit, I don’t want to be too much, preside you know for the past that was the impact due to the prevalent story. They were losing some production in Europe and mainly in South America as well, during August to September. We were more affected in South America less in Europe and because of the model we are only present in Emissions Control.

To speak about recovery on VW on - last quarter, which is not to add to VW and think it’s not so clear, guarantee is that not announce for the moment and I will say precise decision. Now going back to your questions of the next quarter, so the next quarter we think that stability of production will be the big one, why?

Because we have one working day less potentially two, these working days in terms of first of November. The first of November this year is Tuesday respect to last year which was Sunday. And which mean that in some countries, the Monday as well we not be work. So it is a major default as one day I will talk about it.

The second point if we speak of China, if I remember in China the last quarter of last year was boosted and by the implementation of a new tax incentive. This tax incentive is maintained this year. There will be we think as well boost probably less important that it will boost anywhere, because according to the measure this tax incentive should disappear at end of December.

You know like that when the tax incentive or tax advantage disappear normally, there are some anticipated purchases of GAAP. We think that anywhere China government will take other measures that they will announce anything soon on this. So it is overall picture.

One positive thing is that South America seems to stabilize and we speak of stability even up we will see, but apparently there is a change of trend, the change of mood in Brazil which will be I think very positive in the next quarter.

Horst Schneider

So - sorry, I didn’t get it fully. So for Europe you say you can outperform Europe in Q4 or not?

Michel Favre

I think we will beat next market. That was the same reason I had explained before, mainly the problem of mix and some will say production adjustment from some key customers like Ford which is official and like VW.

Horst Schneider

Okay, all right. Good. Thank you very much.

Operator

Thank you. We’ll take the next question from José Asumendi of JPMorgan. Please go ahead.

José Asumendi

Many thanks, Michel and Eric. Good evening. A couple of points please, Michel, so do you think there is a huge risk in Asia that this pre-by effect is going to lead to a buildup in inventories and we're going to have a quite complicated first quarter next year? That's the first question. How do you deal with this in terms of doing the budget next year, how much these thing portion down next year in Q1 in China year-on-year?

Michel Favre

We don’t think about inventories because it will be actual set of cap, because people will buy it. And even in some countries that our profit is possible in China, they are anticipating the said without I think the production it happens sometimes in Europe. So on your point there is the possibility that inventories will be low. So the Poland is more sales, how many advance sales of cars will be made in the last quarter. So what could be adjustment in the first half?

Now we have different scenario, people think that anyway change government will announce something in January. So we will see. We have taken in our budget an assumption of – we'd say low to mid-single digit volume growth in China next year.

So let's then differ, because we consider that the figure of this year is high, due to this tax incentive. So there will be a smart collection and other two years when you will take China between 2015, 2016, 2017 the figure sorry, you will see that we are on the trend of 5% to 6% volume growth in China. Less than before, but still a figure of something like 1 million cars additional.

José Asumendi

Great. Are you expecting the level of outperformance in China to continue the next few quarters in line with what we have seen in the last quarter?

Michel Favre

We think that with the Chengdu and Chang'an we will be able to catch-up and to potentially other performance of the market, between the first of second quarter next year.

José Asumendi

Okay. Brazil, Latin America outperformance, what is specifically going on there? The level of performance is huge. They must be bringing your operations there to breakeven, if not mistaken. Can you comment on that, please, a little bit?

Michel Favre

This is a very tough question. On one hand what has happened is we have taken over mainly some composite business from competition. Second there is of course some profitability we have made as you know bigger action plan. We are going from minus €40 million. We have given a guidance that this year it will be something like minus 20. We are in line with that improving a lot in the second half. We should be close to breakeven between the last quarter in the first half.

José Asumendi

Okay. Finally, M&A, where do we start on this? We've been discussing it for quite some time. When do you expect to finally have an announcement, if any? Or are we looking more into 2017 now?

Michel Favre

You know that José we cannot comment that. We have to be - I will say very strict on that M&A policy. We want clearly to our technology. We will take our time. So sorry I cannot answer your question.

José Asumendi

No problem, okay. Thanks a lot, appreciate it.

Operator

Thank you. And we’ll take the next question from Lello Della Ragione of Intermonte. Please go ahead.

Lello Della Ragione

Hi. Lello Della Ragione from Intermonte. Apologies if I repeat some questions from before, but I lost you at one point. Regarding Europe, looking at the fourth quarter, I got the point that there is a mix effect in terms of like-for-like sales and I was wondering, looking at your order, and confirmed order at the moment, if you see the possibility of a negative sign looking at the fourth quarter this year.

And the other question is just for housekeeping in terms of the closure that you confirmed the other day. Should we take into account some additional restructuring costs or the guidance that you gave for the full year is still in place? Thank you.

Michel Favre

Firstly on your question, you’ve probably seen there is recession in the market. So the recession are still very good in Europe and so this is a booster of the production. So it's more policy of our customer so which kind of inventory they want to have at the end of the year.

So some have already they have made a decision I think today we have more or less final program [indiscernible] for I think at the end of the year because as you know they have to plan their vacation for December is some impact officially what they have done, what they want to do and what kind of adjustment they have made.

So mainly if I am not mistaken Ford and this. So this is official. We know the figures. We cannot speak too much but what I can say to you is that Europe is still a very good market.

Lello Della Ragione

But in terms - I mean on the point - you have the comparison base, even though the number included the divested business, yet plus 10 which was even higher than the like for like sales that you got in the third quarter last year. So I was wondering even taking into account that since you said was driven by Daimler and some other model that helped you on that quarter if you looking at the fourth quarter your like for like is it fair to assume that we are going to see a very low organic growth or even close to the negative side even in the next quarter?

Michel Favre

I think it will be fine with sticking to the last quarter probably for stability up for Europe and we deeper we have a program and to be in line with that. So no, could you please - we have no more other performing in the market and due to the mix.

Lello Della Ragione

And on the closure in the U.S., there are some other restructuring costs there that we should take into account for the full year figures, or not?

Michel Favre

I cannot escape on the fact that the Chrysler 200 will stop the production at the end of this year. We are on the Chrysler two important businesses seating in interiors. That were so much because I think in the newspapers and the fact that on interiors we have a dedicated plan for the Chrysler 200 so this plant itself we have no long-term activity. This plant will stop.

We have already said that we did a really significant business for 2018 which we did in 15, 16 months for the replacement of the Chrysler 200 which is the run. There are some other opportunities for us but this will be '18.

So in the meantime we've no alternative, we close the plant, we’ll adjust out headcount and we will have some restructuring additional we can look like that. So if you want an updated guidance I think due to mainly to this point probably our restructuring cost would be more €70 million respective to the previous guidance at 60.

Lello Della Ragione

Brilliant. Thanks a lot. Thank you.

Operator

Thank you. We will take the next question from Michael Foundoukidis of Natixis. Please go ahead.

Michael Foundoukidis

Hi, Michel. Good evening. Just the last question on my side. Do you think you will be able to outperform the North American market starting H1 2017 or it's more in the H2 that we should expect that? Thank you.

Michel Favre

No, no I think we'll have still the Chrysler product in back in the first quarter because it was a cost on decline, we’ll have as well for year. So, it is why I don't, so I’m speaking like this I think the first quarter with the monitoring lines in the market we start to go back [indiscernible] the second part of the year.

Michael Foundoukidis

Okay, thanks.

Operator

Thank you. We'll take the next question from Alexis Albert of Barclays. Please go ahead.

Alexis Albert

Hi, good evening. This is Alexis from Barclays. Thank you for taking my question. Just one. Michel, can you repeat what you said about the restructuring? I'm sorry, I didn't get it, the restructuring in North America. You said it would be something instead of the previous guidance, but I missed that number.

Michel Favre

Good evening. So what I said is that due to the Chrysler 200 and the fact that it is anticipated on the stop will be normally to get [indiscernible] we will stop the production in December. We’ll close one plant in December due to that and so we are anticipating that our restructuring cost for the will be more €70 million instead of the previous guidance if you can - of 60, is that clear?

Alexis Albert

Yes, yes. Totally clear. Thank you, Michel. Second question was regarding Ford, because we're talking a lot about Chrysler and its impact on production on your own business and earnings. Can you just elaborate a little bit on Ford? Is it more Europe? Is it more North America? And is it having a significant impact on earnings or just marginal?

Michel Favre

On Ford you’ll have that we have this cost in position as announced Focus and Fiesta. On North America on what end they have slow down production of F-150. And on the other hand we are just stop of the F-250 in 15 so, all together we’ll impressed with further in North America.

Alexis Albert

Okay, altogether you're in plus with Ford, but is that if we sum up the start-up and the Fiesta is it having a small impact on profitability or is it all managed by the people at the plants in Europe and North America?

Michel Favre

We'll comment [indiscernible]. Altogether we are impressed.

Alexis Albert

Okay, thank you. And the last question if I may is on China. If I'm correct, the outlook for 2017 is - the outlook to start outperform the production in China in 2017 comes mainly from Chengdu and Chang'an. Chengdu with PSA and Chang'an with Ford. Are you worried about what's gone on with PSA in China? Do you think it could slightly derail the future outperformance of Faurecia in China?

Michel Favre

Sorry to correct you. It is modest for PSA but too modest as well for Dongfeng in the Chengdu plant and which we start the next month and in Chang'an as well, that is moderate for Chang'an, Chang'an the local.

Of course I cannot say that the volumes of DPCA which are down because it comes flat, we are following the customers, so it was, it is right on our growth in China this is the fact. Second thing, does it correct our figures for next year against especially yes, that is we are compensating with other customers.

So in our respect to our Investor Day which was in April, we are not anticipating such an impact on DPCA this year. We have not taken too positive impact on the new models, even if we are very confident of the success with the new models but we as well some order businesses compensated.

So this is why we full confirm and we have confirmed early September as figure for China and we have confirmed that we will be close to €4 billion of sales in 2018. You have on Internet the presentation if you want, if we are not to present in Chang'an in that.

Alexis Albert

No, no. Thank you very much, Michel. It was just that it is important to get your feeling on that because, as we can see since the beginning of the year, sometimes one car can have significant impact on - I mean not one car but one program can have a significant impact on the outlook. So I just wanted to make sure that PSA and Chengdu was not weighing too much into next year's growth.

Michel Favre

But what is important because it was bit of EBITDA it was lack initially. PSA is now coming with Chengdu production with two new press release mainly the 2008 but as well the 5008. You have seen probably [indiscernible] show this two new models, we can be very confident of the success of this new model and if we fit everywhere.

So for PSA and for us of course because we have the significant market share of this product, it is really I will say the recovery of volumes on the SUV signals.

Alexis Albert

Thank you very much.

Operator

[Operator Instructions] There are no further questions at this point. So I would like to turn the call back over to the speakers today for any additional or concluding remarks.

Michel Favre

Thank you for your attendance. Our next rendezvous now is early February for the full year results. Have a good evening. Bye, bye.

Operator

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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