TI Fluid Systems PLC

LSE:TIFS

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to the TI Fluid Systems plc first quarter trading statement call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tim Knutson. Please go ahead, sir.

[Timothy J. Knutson, CFO & Executive Director]

Good morning, everyone. Thank you for joining us today for our first quarter 2019 trading update conference call. I'm Tim Knutson, CFO of TI Fluid Systems, and I am joined today by our CEO and President, Bill Kozyra. I'm sure you have all seen the trading update we released this morning. Before Bill and I take your questions, I wanted to highlight a few items from the statement.The group achieved solid revenue of EUR 850 million in the first quarter. The first quarter experienced lower global vehicle production growth rates, with a particularly challenging environment in China. Global vehicle production declined by 6.7% in the first quarter, and our revenue decreased by 4.8% year-over-year at constant currency. This represents outperformance of 1.9%. Reviewing revenue by region, our European revenue decreased 2.1% year-over-year at constant currency and strongly outperformed European vehicle production by 6.1%. European revenue was driven primarily by favorable vehicle mix and tooling revenue in our FTDS segment. In Asia Pacific, our revenue slightly declined 1.9% year-over-year on a constant currency basis and outperformed Asia Pacific vehicle production by 5.6%. Our revenue in Asia Pacific continues to be strong primarily due to new fuel tank business in China. In North America, our revenue decreased by 11.6% year-over-year on a constant currency basis or 9.1% below North American vehicle production. Activity in the period was lower against a strong comparative for the same period in the prior year. There were also impacts from passenger vehicle mix.Reviewing revenue by our 2 segments, Fluid Carrying Systems, FCS; and Fluid Tank and Delivery Systems, FTDS. FCS revenue declined by 10.8% year-over-year on a constant currency basis to EUR 479 million. Revenue was relatively lower in comparison to a strong first quarter of 2018 levels in vehicle mix in North America. For our FTDS segment, revenue increased 4.2% year-over-year on a constant currency basis to EUR 371 million. FTDS benefited from strong growth, primarily in Europe and Asia Pacific with favorable program launches and tooling revenue.Given the group's successful history of managing volume fluctuations as well as its highly competitive and flexible cost base, our 2019 outlook remains unchanged. So with that, I am going to open up the call for questions.

[Operator]

[Operator Instructions] We'll take the first question from Raghav Gupta from Citibank.

[Raghav Gupta-Chaudhary]

I wanted to start with a focus on FCS and the 11% decline that you saw there in the first quarter. I appreciate kind of the quarters might be a little bit lumpy and you don't kind of tend to manage the business for a quarter. But I mean, this is the weakest result you've published since you listed, and I just wondered if you could elaborate a little bit more on your comment about launch timings and mix, specifically with regard to FCS. Can you provide us with any indication on when that might inflect? Is that going to continue into the second quarter? Is that what you see in terms of kind of the launch timings, please? That's the first question.

[Timothy J. Knutson, CFO & Executive Director]

Sure. In North America and in China, FCS has been impacted. So North America, this is where -- part of the business that we had in powertrain that was very strong in Q1 in North America last year and actually in the first half. Tough comparables going into this year. So that's one element that's impacting FCS' revenue. The other element is in China where we have very strong share positions in China that's being impacted by just the overall China vehicle volume environment. So as we progress through the year, we'd expect the situation to get better, especially in China. But North America, as we thought when we were coming into 2019, would be one of the more challenging revenue regions that we had in our business with Europe and Asia Pacific being much stronger in terms of outperformance.

[Raghav Gupta-Chaudhary]

North America, difficult because of the tough comp that you face? Or is it also there because of -- yes, sorry.

[Timothy J. Knutson, CFO & Executive Director]

It's a tough comp, and just as a reminder, in North America, we have much more reliance on the passenger car than we do the light truck market. For example, North America saw the trends in North America towards more light trucks, SUVs, it's not a favorable mix for our business, and that impacts both business but a bit more with FCS.

[Raghav Gupta-Chaudhary]

Okay. I mean I guess on that, we've seen from some of your peers that such mix-related issues, i.e., kind of being overweight sedans and not enough on light trucks and SUVs can take a long time to correct. Are you saying today that given your exposures, you don't -- you expect that pressure to persist? Or do you think that will kind of inflect in -- at some point in 2019?

[Timothy J. Knutson, CFO & Executive Director]

It's hard to know in terms of the inflection point. I would say in that regard it'll be -- continue to be a pressure with the consumer demands that we face in North America with our focus more on sedans. Although depending on timing of our launches that we'll have throughout '19 going into '20, there will just be our outperformance tends to change in various regions in a given year, probably not in '19, but as we look forward in the years to come, we'll have other launches and other favorable mix trends that we'd expect to see outperformance in North America, and likely then, you'd see some of the other regionals' outperformances come down.

[Raghav Gupta-Chaudhary]

Okay. And can you give us a bit more -- thank you for providing the color on North America and China for FCS and how it was impacted. Could we offer a couple of numbers? I know you've kind of split out what North America did and kind of what Asia Pacific has done. Can you split that out one level further and give us the number for FCS in North America by any chance?

[Timothy J. Knutson, CFO & Executive Director]

No, we don't break out our information in that regard.

[Raghav Gupta-Chaudhary]

Okay. Very well. I guess the second question, and I know this is a sales call, but you showed the margin resilience in the second half of '18 despite, I guess, the weak top line development that we saw. But what level of confidence do you have that you'll be able to -- what level of confidence do you have on your first half '19 margins? And what can we expect in terms of the year-over-year delta in first half '19 given this top line decline that you've seen in FCS which is clearly the highest margin business, the higher margin of 2 divisions? That's the second.

[Timothy J. Knutson, CFO & Executive Director]

Sure. Yes, sure. Well, we're maintaining our guidance which is consistent margins year-over-year as a basis on that we're looking at IHS' volume. So IHS, for example, we're looking at first half volume levels down, globally about 5%, 5.1%. Second half, recovery. So overall, the year is about, they're expecting about 1% down from a volume environment. And in that type of environment for the year, we should be able to, with our cost basis being so low, our flexibility, we should be able to maintain that consistent margin environment. The way it's looking, the first half, which is much softer vehicle production environment, we would see -- expect to see slight margin pressures or slight margin reductions in the first half and then pick up in the second half to get to that consistent level of margins for the year.

[Raghav Gupta-Chaudhary]

Okay. But when I -- if I just focus on FCS, second half '18 margin delta year-over-year, it was down around -- well, I guess, 2018 overall actually down 130 basis points to 11.1%. Is it that level of magnitude that we should expect or a higher decline given the top line pressure that you've seen?

[William L. Kozyra, CEO, President & Executive Director]

I'm just talking overall for the business when we're talking about margin reductions. And I would say that if we see some slight margin reduction in the first half, pick it up in the second half with this expected volume environment that we would see a bit more pressure on the FCS side than we would the FTDS side. And that's primarily because when you see the revenue impacts in North America and in China for the FCS business.

[Operator]

[Operator Instructions] We'll take the next question from David Larkam from Numis.

[David Alexander Larkam, Analyst]

Just on -- I wondered if you could talk a bit more about China. Obviously, that's been the weakest market. Just give us a sort of a bit more color as to what you're really seeing there.

[Timothy J. Knutson, CFO & Executive Director]

I mean for us it's actually fairly positive because we continue to expand our business in the FCS side, continue to launch new business. Our pressurized tanks, which we think are highly competitive in this space, are doing quite well. So that is really helping our outperformance, helping our overall revenue picture in China. The underlying environment continues to be difficult. I think if you look across, even the April sales in China are pretty difficult. Now we'll get into the second half where the comparable levels aren't as high from 2018 to 2019. I think yes, our teams tend to be pretty optimistic on where things will trend. But David, it's a tough market to have an assessment on given all the dynamics going on, not only in China, but also in the various political arenas.

[David Alexander Larkam, Analyst]

Okay. And one of the things that surprised me, as I said, you're a relatively new company to us, guys, the volatility that we see in terms of both regions and the divisions. How do you manage that? Because obviously, a facility which is growing at a nice clock rate is great, but when it has to go up by 10% or down by 5%, you get big drop-throughs and issues. So I'm sort of encouraged that it's not impacted the margins perhaps more than you are suggesting.

[Timothy J. Knutson, CFO & Executive Director]

Yes. Well I mean first off, revenue tends -- has been this way for us historically, revenue in terms of outperformance tends to change between regions given year-over-years and months just because we're so diversified with various customers launching different vehicles at different times. We typically will have Europe being strong 1 year, North America being off or vice versa. So that revenue picture's very not different for us. It's pretty environments that we've been very accustomed to. And just as a reminder, we're -- we run about 15% fixed cost to revenue. We have a very big reliance on temporary workforce, 2/3 of our workforce is in low-cost countries. All these plants, locations around the world are very good at flexing in the volume environments whenever they may be on upward or down. You saw the outperformance in the second half '18. And that's why if we look at maybe seeing some slight margin reductions overall for the first half, coming back in the second half but very good performance relative to any of the type of peers out there, we're confident in our ability to run in these types of environments.

[William L. Kozyra, CEO, President & Executive Director]

And David, this is Bill Kozyra. As we said before, we've been down this road before over the last 10 years, right? And that's why we often try to remind the listeners on such calls that this is a proven management team that's got a high level of experience, and we know how to flex in the one region or the other, or the one segment or the other to adjust for these variations that we get from quarter-to-quarter, half to half. And so that gives us the confidence and the ability to maintain these solid margins.

[Operator]

It appears there's no further questions at this time. I'd like to turn the call back to Tim. Please go ahead.

[Timothy J. Knutson, CFO & Executive Director]

Thank you. Once again, thanks for joining us this morning. Despite a bit of a difficult volume environment, we continue to expect the business to perform well as we have demonstrated in a number of prior periods. As a reminder to everyone, we have a Capital Markets event later this year on September 24, which will be taking place in London. There will be an opportunity to meet our executives from FCS and FTDS as well as viewing our products, including those for hybrid electric and electric vehicles. In the meantime, we look forward to speaking with you at our half year announcement. If you have any other questions, please contact either Alpha Amar, our Investor Relations Director, or myself. We'd be happy take your call. Thank you.

[Operator]

This concludes today's conference. Thank you, everyone, for your participation. You may now disconnect.