Q3 2024 Forvia SE Corporate Sales Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Jose Asumendi - J.P. Morgan - Analyst : Good morning. A few questions, please. The first element around the outlook for 2025. Can you comment a little bit on your expectations for European production? It sounds like you're expecting portion to be down in '25 in Europe. Reading from your press release, North America could be up or China will be offset in Europe. You could comment a little bit on those dynamics, please. Second, how do you think about our performance to grow our production in 2025 as well? And then third, can you comment on the cost savings? How much do you expect on your cost action, specifically Europe? How much do you expect to book in the second half of 2024 and in 2025? Thank you. Olivier Durand - Forvia SE - Executive Vice President, Group Chief Financial Officer, Member of the Executive Committee Good morning. So on '25, I think on the production, we plan for flat market next year with a bit of growth in China and a bit of decline in Europe. Having said that, I think there is one factor that is an uncertainty which is what will be the impact of the CAFE regulation. And this -- and we all know that in fact, it leads to a real difficulty for this market and for the car makers, how they will implement it and confront it is not fully clear. So what we are doing is using the initiative of cost reduction that we have launched in order to be as agile as possible, as mobile and to get our breakeven points lower so that we can face any elements. So that's for the production. On the outperformance, since the creation of Forvia, we have been able to reach a performance between 300 and 500 basic points. We expect that to continue and this year, we have been able to do this even though the mix has not been so favorable with China being temporarily with in fact, an underperformance, which was not the usual situation. So I think it can enforce the strengths of the portfolio. So we anticipate to deal with some of the performance next year, we will validate that in the context of our budget exercise, and we will communicate accordingly. But I think we should continue to enjoy our performance next year. On the cost savings, we have three types of cost savings. One is the synergies. So we should enjoy this year EUR80 million, EUR90 million of synergy gains in the P&L compared to the year before and probably at least the same type of value next year. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 21, 2024 / 6:00AM, FRVIA.PA - Q3 2024 Forvia SE Corporate Sales Call The third one is the fact that we have done a complete and external cost selectivity which is giving additional element. And the third is EU-FORWARD in which in terms of [ad contribution], we have a strong start. We have more than 2,000 people add on reduction. But of course, in terms of costs, given the timing of execution will be lower. So if we summarize synergies, EUR80 million to EUR90 million for the year. Cost savings of the rest [a few tens of million] and EU-FORWARD, a few tens of million. And that's why you will see a much bigger level of cost reduction next year because then the combination of EU-FORWARD in full execution mode plus the continuation of the synergy gain should lead in a combined fashion to around EUR300 million of cost reduction in the P&L '25 versus '24 i.e., 1 point of the revenues.

Question: Michael Jacks - BofA Global Research - Analyst : Hi, good morning, Olivier. Thanks for the presentation. Perhaps if we can just start with the Moody's rating downgrade last week. What does that mean for you in terms of your cost of borrowing? My second question is given the weaker volume development for the year versus the previous expectation, are you still comfortable that you won't need to rely on higher payables or reverse factoring to any greater extent this year to help reach the cash flow target? And then my final question is just referring specifically to the delays in EV projects that you mentioned at the beginning of the presentation. Do your contracts accommodate compensation for delays in SOPs as well as lower volumes and just in general terms, how comfortable are you that the contract structures allow for adequate compensation? Should these EV volumes disappoint more significantly in 2025? Thank you. Olivier Durand - Forvia SE - Executive Vice President, Group Chief Financial Officer, Member of the Executive Committee Thank you for the questions. So on the downgrade of Moody's. So as you mentioned, Moody's has downgraded us last week. And it is in fact, it is down two evaluations. So evaluation is a downgrade by one notch to BS3 on on Forvia company. And so, they did a bit of a, what I would call a technical, but a real one on the debt itself for subordination aspect to be one. We are now in a situation in which our screen rating agencies have a very different ratings on us. It's BB+ on Fitch. It's BB in the S&P, both of them are [negative] and then you have you have Moody's which is unstable rating, but that's at a lower level. We know that Moody's has a very negative sense on the auto industry, but it is what it is. What we have seen since the announcement Thursday morning is that actually the net situation in spread has been fairly limited. In fact, I think on Friday night, it was around 10 basis points. So for the time being, we don't -- we do not see a direct consequence of this, but it's clear that this is REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 21, 2024 / 6:00AM, FRVIA.PA - Q3 2024 Forvia SE Corporate Sales Call the time that has to be watched in particular because you have investors that maybe with restrictions on the investment in the B1 rating note that can be also restriction in new issuance. Now let me highlight one thing in this context. We thanks to the refinancing we did in the first half. We have no significant maturities '24, '25. So I would say the direct impact of this is limited. It's unfortunate, but it is limited. The other point I would like to make is on the notes and the comments made by Moody's. You will see that the first element inside is related to the context and not related to the financial structure of Forvia. But the downgrade is a reality that we have to face. It reinforce, in fact, the central objective and the central motivation we have which is to reduce the debt of this company. On your second question, we have communicated clearly that the reverse factoring will go down. This was compared to last year. And I confirmed this, and I would like also to say that this is not contributing to performance in terms of cash flow in the recent period. On contract and compensation for delays and reduction of volume. Most of the contracts we have do not have per se or guarantee of volume. So if there are delays or if there is a lack of success of a given car, there is not a mechanical compensation. Having said that, two things are done. One is that the upfront cost, in particular, the R&D are negotiated so that they can be offset even with lower volume. And second, we negotiate all other elements inside the contract in order to have maximum indirect compensation. And there are many things that can be done because inside the activity you have always favors or accommodation that are provided by suppliers. Now, what we do is that all those accommodation and between good favors have to be paid and have to be paid at a substantial value. So we do compensation sometimes direct, sometimes also a bit indirect. Related to '25, I think your question is in particular for Europe. In case, if the CAFE regulation is leading to a fluctuation volatility on the motorization of the cars that will be sold next year. We are ready on two aspects. One is on the cost because anyway, we need to get our workers down just unforeseen the needs. And second, we will use any leverage we have in order to ensure that in case something is happening without warning, we are able to be compensated for the loss it can bring. So we are totally aware of the uncertainty that can happen. I think we have now experienced the volatility in this business, and we are much more ready than pre-COVID shortages to face this type of situation.

Question: Thomas Besson - Kepler Cheuvreux - Analyst : Thank you very much. I have a couple of questions as well, please. I mean, in the third quarter your best businesses and best regions underperformed quite substantially. What are you assuming over the coming quarters in 2025? Are you going to get any better support from these better businesses and regions or should we expect that to continue? Second, is there any update on your message on disposals? Do you still expect most of these to take place in 2025 and the cash flows to be in the second half of 2025? And lastly, could you remind us what you assume in terms of 2024 CapEx and capitalized R&D? I understand your message about 2025 combined below EUR2 billion. And do you see any short-term risk from potential social action in Germany if it were to happen? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 21, 2024 / 6:00AM, FRVIA.PA - Q3 2024 Forvia SE Corporate Sales Call Olivier Durand - Forvia SE - Executive Vice President, Group Chief Financial Officer, Member of the Executive Committee Can you repeat your first question? I'm not sure I understood.

Question: Thomas Besson - Kepler Cheuvreux - Analyst : My first question was about regional and business mix. I think you answered on the regional side. You didn't answer on the business mix. My second question was on the what you just replied on the CapEx and capitalize R&D. I think. Olivier Durand - Forvia SE - Executive Vice President, Group Chief Financial Officer, Member of the Executive Committee I think you had a question also on the meeting -- so from original standpoint -- from a business standpoint, it's clear that we have this year more goals in interior than in other businesses. This is related to the amount of started production that have been concentrated in particular, in the first half. You won't see something of this magnitude next year. You should see something more balanced between the different business groups. The extent will depend on the strength of the rebound of electrification, nevertheless. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 21, 2024 / 6:00AM, FRVIA.PA - Q3 2024 Forvia SE Corporate Sales Call In Germany, social activity, I would say it's a period of the year in which salary evolution are negotiated. So there is automatically things of this nature. Of course, this is compound by the difficulties and the major challenges faced by the German car industry that we all know. I do not see for the time being any direct consequence for us. Let me highlight that we have been able so far to do all the different negotiations related to EU-FORWARD in a smooth manner. And this has included several in sensitive countries from a social point of view, including Germany and in particular case of the reduction of the lighting plant in Lippstadt, i.e., the headquarters of HELLA for 700 people that have been agreed in June with the Liberal Representative in that site. I mean, this is something we watch but we are maintaining strong and regular coordination and dialogue with labor union and the employee representatives. So I think we will continue.

Question: George Galliers - Goldman Sachs - Analyst : Yeah. Good morning and thank you for taking my questions. Actually, I just wanted to ask a question around the developments with BYD. Clearly a big positive to see you with associated with them both in Hungary and also now in Turkey. Can you give us any insight into what the content per vehicle looks like or what you expect it to look like with respect to the products produced in those plants relative to the content you have already with other OEMs in Europe. Are these contracts going to be comparable to the broader average you see in terms of content per vehicle or given BYD's well renowned level of vertical integration, is it reasonable to assume slightly lower content per vehicle? Thank you. Olivier Durand - Forvia SE - Executive Vice President, Group Chief Financial Officer, Member of the Executive Committee So BYD, first of all, our activity with BYD is in the seating domain for the dominant part. This has been now extended to interiors and we are discussing also in other domains both in China and outside China. In relation to Hungary and Turkey, the starting point is in city on the content and the format similar to what we are doing with them in China and also in Thailand. I think our goal is to extend the coverage and we will see that over the course of the development. This is really the beginning with BYD in Europe and (inaudible) has been selected by BYD as a site only in July and August. So you have a kind of preselection. The fact that they are already attributing business to us in such an early stage is encouraging. In terms of the integration policy of BYD is the same logic as in China. And I would say that in terms of profitability, we should expect in fact continuing to benefit of the model of Chinese orient also in Europe because the development will be done in China. So in fact, some of the recipe or the shorter decisions, shorter upfront, shorter cycle will be applicable also to the model in Europe. But let's see how it develops, but I think it should be attractive compared to the mounting we are currently having in Europe for sure.

Question: Edoardo Spina - HSBC - Analyst : Hi, good morning. Thank you for taking my two questions. First on the CAFE regulation. If you could clarify, what source of uncertainty is for you as a supplier. Do you think a change could have an impact on the total volume produced or maybe the market share or perhaps just the disruption of the not knowing which models to produce. And the second question is on the BYD relationship. Just to ask if you expect BYD to have a similar level of virtual integration as they have in China. And also, if you expect maybe Chinese competitors to follow BYD or other Chinese OEMs in the future? Thank you. Olivier Durand - Forvia SE - Executive Vice President, Group Chief Financial Officer, Member of the Executive Committee Thank you. So CAFE regulation. I think, it's the big question mark of '25. This is representing a major hurdle pass for the car maker -- for some of the car makers in '25. The way it will happen is not fully clear at this stage. So the uncertainty is partly related to volume, but I would say for us is as much volatility and activity. If there is a bit lower volume, but the picture of the activity is clear, that's an environment in which we should function well. If they are back-end force, that will be a bit more complicated. But for the time being, what we can do is to try to identify possible risk factor in terms of model, be as diversified as possible in terms of activity and last to be more agile. So the reduction of the footprint, the concentration of activity, the reduction in some ways of the just in time side of the business should allow us to mitigate variations easier than it was the case before. That's what we can do on the CAFE regulation. And maybe the last point on the CAFE regulation is that five years ago, there was a little bit the same situation. The first year of implementation of the first threshold was creating some uncertainty and then things have been happening. So maybe there is a little bit of uncertainty in '25 and hopefully it will be clearer afterwards. On the BYD relationship -- BYD in Europe is once again is a start. So I think that their logic is to try to use suppliers -- large suppliers they know. And from this standpoint, it's very important to be recognized as an incumbent. We have been in China for 20 -- more than 20 years. We are with almost everyone in China. As a supplier of foreign plus local, we are the number five in China if you exclude tires and you exclude battery. So we are an incumbent. We are a Chinese supplier for BYD and for the others. And I guess this is part of the reason why they are selecting us. If we can extend the coverage, it's good. But let's start with what both of us we know. BYD is the most vocal Chinese OEM in terms of global emission European production expansion, but others are following. CHERY and [Lepnata] are coming as well and we are discussing in particular with one of the two in order also to be a supplier for them if and when they launch production in Europe. So it's not only about BYD, it's about extending the activity and be able to work with the new players from a production standpoint in Europe that are taking and will be taking market share from the traditional ones.