TI Fluid Systems PLC

LSE:TIFS

Earnings Call Transcript 2020-Q1

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

Good morning, everybody. This is Bill Kozyra, and thank you for joining us today for our first quarter 2020 trading update conference call. I'm joined today by Ron Hundzinski, our company's Chief Financial Officer. I'm sure you've all seen the trading update that we released this morning. Before Ron and I take you through our update and your questions, I'd like to express my thank you to everybody on this call, their families, their coworkers and all who remain to be supportive to others during this challenging life and work reality this unfortunate pandemic places us all in. It's a very difficult time, and I think we realize the significance of this, and I'm sure you do as well. But I am confident that we will get through this and hopefully soon move towards a more familiar and safer way of life. This morning, we will outline actions we have taken to address these unprecedented times as well as share an important humanitarian area of collaboration between TI Fluid Systems and one of our longest-standing OEM customers in a moment, after first highlighting a few items in our Q1 trading update at the onset. So I'd like to first turn it over to Ron to give you some updates. Ron?

[Ronald T. Hundzinski, CFO & Executive Director]

Thank you, Bill, and good morning, everyone. The group achieved a resilient level of revenue at EUR 717 million in the first quarter of 2020. The first quarter experienced a significantly lower global vehicle production growth environment due to the impact of the widening COVID-19 pandemic. Suspension of all typical behavior and economic activity resulted in an unprecedented global light vehicle production decline of 23% versus Q1 of 2019. In turn, our revenue decreased by 16% year-over-year on a constant currency basis. This, however, represented outperformance of 7%. European region revenue decreased 14.3% year-over-year at constant currency, yet still outperformed European vehicle production by 4.9%. European revenue was driven primarily by favorable vehicle mix for both segments and new program launches in our FCS segment.Asia Pacific experienced the earlier impact of COVID-19 virus and saw a deeper revenue decline of 24.9% year-over-year on a constant currency basis, but managed to outperform Asia Pacific light vehicle production by 5.2%. Revenue outperformance for both segments was driven by production ramp-up impacts of recent new business awards. North America felt less of the impact of COVID-19 virus in the first quarter, while revenue decreased by 10.2% year-over-year on a constant currency basis or roughly in line with North America light vehicle production. Revenue was benefited by tooling sales for both segments and, again, new program launches for FTS.Revenue segment -- I'm sorry, reviewing segment revenue, Fluid Carrying Systems revenue declined by 17.8% year-over-year on a constant currency basis to EUR 397 million and was heavily impacted by factory closures. Fuel Tank and Delivery Systems revenue decreased 14.1% year-over-year on a constant currency basis to EUR 321 million. FTDS benefit from lower exposure to Asia Pacific market being offset by higher market exposure in Europe. And now I'll turn the call back over to Bill. Bill?

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

Thanks, Ron. In light of the COVID-19 pandemic and early in the first week of March, we took on a number of steps to protect our employees, their families and the communities where we operate. We have moved to remote work setting for all applicable staff employees and developed a significantly enhanced personal safety, hygiene and social distancing procedure, work space layout and scheduling for our manufacturing employees. We believe that this has contributed to a meaningful reduction of potential COVID spread and saved many lives across the TI Fluid Systems' employees, families and surrounding communities. In addition, TI Fluid Systems is proud to help Ford Motor Company and 3M to provide much needed humanitarian support for our frontline health care workers' safety. In an unprecedented time of 2 weeks, we were able to design, prototype, tool and begin production of an air flex tube assembly for powered, filtered air-purifying respiratory systems or which referred to as a PAPR. The PAPR system consists of a protective face shield and hood which is connected by our flexible air tube to a smaller filter blower pack worn by the user typically attached by your belt or at your -- on your backpack. This one-size-fits-all flex air tube meets the needs of all size of workers, leaving them only to worry about the task at hand, that is to save lives. Although we were not able to confidently provide a 2020 outlook at this juncture given materially uncertainty around the macro market backdrop, I want to assure you that we have and we will continue to take the necessary actions to significantly reduce our operating costs and maintain our focus to conserve cash. We initiated in early March a major global cost savings initiative across all locations and all functional areas and have implemented many things such as hiring freeze, postponed wage and salary increases and instituted staff and executive salary reductions as well as worker furloughs. We are carefully monitoring our capital allocation and working capital investments in relation to the levels of customer and regional volume recovery. We believe that our significant cost reductions and cash preservation measures will assist us throughout the 2020 calendar year. I want to remind you that our strong 2019 results positioned us to begin 2020 on a solid financial and liquidity footing. Given the widening spread of COVID-19, the significant negative economic impacts and the potential for a prolonged reduction in global light vehicle production, we took the precautionary decisions in March to draw on our revolving credit facilities. Including this, our liquidity position totaled EUR 600 million at the end of March 2020. After considering our strong Q1 2020 performance and overall liquidity as well as our financial position, I'm pleased to report to you that the Board and the management supports the payment of the 2019 final dividend as previously announced. I'm very pleased to share this good news with you today. As a reminder, the 2019 final dividend amount of EUR 0.0594 was converted to sterling using the London closing spot rate on the 24th of April 2020. Subject to shareholder approval on the 14th of May 2020, this 2019 final dividend will be payable in cash on the 29th of May 2020 for those on the register on the record of date of 24th of April 2020. So in summary, Q1 was a challenging quarter from a global auto vehicle production perspective. We continue to believe that the company is well positioned to manage through the COVID-19 pandemic. We will continue to focus on cash, cost and operational flexibility. We have a highly experienced management team, most all of us have had a similar experience 10 years ago, and we remain confident that TI Fluid Systems is well positioned to recover as the global light vehicle production volume increases over the next time frame. So with that, I would like to open the phone for any of your questions. Operator, can you please open the line for questions?

[Operator]

[Operator Instructions] We will take the first question from Samantha Jelley from Citigroup.

[Unknown]

Samantha here. I'd like to ask a question about your fixed cost and cost optimization. You've previously suggested the business targets an operating leverage of between 25% and 30%. As part of your response to the crisis, will you be able to reduce your fixed cost below this range? Or does this remain a reasonable target for the business? My second question is that North American outperformance remains weaker compared to other regions because of vehicle mix. Could you just comment on the company's strategy here to adjust underexposure to pickups and SUVs given these segments continue to significantly outperform sedans?

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

Sure, Samantha. Thank you. This is Bill. I'll take the second part of the question and then have Ron speak to the fixed cost after the question on North American performance. So as you are familiar, the company is underexposed on large pickup trucks and large SUVs, which have been growing in, I'll say, demand in the North American region. And this has been one of the factors as to why our North American outperformance is lower than the other regions.Our strategy to respond to that is we have an increased focus on large pickup trucks and SUVs in terms of content on those vehicles. We've historically not focused on those vehicles because they are regional platforms, and our forte is really global platforms, as we've mentioned in the past. And I'm confident that between that increased focus on large SUVs and large pickup trucks, along with other new business opportunities, that we will be able to get back with a more balanced outperformance as we look across the globe.As to the fixed cost aspect, I'll turn that question over to Ron.

[Ronald T. Hundzinski, CFO & Executive Director]

Thank you, Bill. Yes, Samantha, there are 2 parts to your question. The first one was the operating leverage. Our goal is operating leverage, as you stated, as such, 25% to 30%. So that is our goal. The next question is about fixed cost. And as Jim -- I'm sorry, as Bill mentioned in his opening remarks, the company has taken a significant number of cost reduction activities that we monitor weekly. The list was given out by Bill, but I could add some more. On the cash side, we are reducing CapEx spending. We are taking full advantage of all the government opportunities to defer cash into a subsequent year. In addition to that, we have action plans of significant, I would say, fixed cost reductions in our plants, our corporate headquarters. And we're basically turning over every rock that we can to see how we can preserve cash and lower our fixed cost so that we can obtain that operating leverage. So thank you, Samantha, for the question.

[Operator]

We'll take the next question from Michael Tyndall from HSBC.

[Michael J. Tyndall, UK MidCap Equity Analyst]

It's Mike Tyndall from HSBC. Just a couple from me. I'm going to be a little bit greedy here. Can we talk at all about the magnitude of the cost savings and the CapEx cuts? I realize you've said that there's significant programs going on, but I just wondered if you could perhaps give us some sort of scale there. And my second question is around temp workers. If I'm not wrong, roughly 14% of your workforce was temp at the end of last year. Can you give us a feel for where that is today? Are you using cut the bite, for example, in Germany? Where are we in terms of headcount?And then I guess the last one, just thinking a bit further ahead. Can we talk about the mood at the OEMs at the moment in terms of -- are they so focused on the here and now that some of the longer-term programs have been put to one side? Or have they effectively said, we must continue on with these programs? And to what degree are you involved in that side of their business?

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

Yes. So, Michael, thank you very much for your questions. In terms of the magnitude of the cost reductions and the CapEx reductions, we're not in position to quantify the magnitude of those, but I will say that they are significant. And I mean very significant. It's the culture of this company to respond to revenue changes and have the operational flexibility. And I'm quite pleased with how quickly our team has been able to act starting, really, the beginning of the year when we first had the COVID-19 situation in Asia Pacific. But then as it moved through Europe and then North America, I believe that we have responded quite quickly. In terms of temporary workers, certainly, yes, we've always maintained a certain percentage of temporary workers. That number fluctuates. And as you can imagine, when we have such significant and unprecedented volume reductions, those are the first workers that are flexed out of the operation, if you will. But with the magnitude of the reduction in revenue that we've experienced, for example, in Europe and now North America with complete shutdowns, you can hopefully appreciate we have sent literally everybody home as a result of not having any products to produce.And then in various countries, as Ron mentioned, we look for opportunities to reduce cost and staff, the labor cost reductions as well as employee furloughs. And in various countries, we've asked our employees to utilize the social programs that are in place to help support them while they have been laid off, if you will, either temporary layoff or technical furlough, if you can imagine. In terms of the mood at the OEMs, I would say that the OEMs have tended to be rather positive and upbeat. It's too soon for them to identify fully their program changes and the programs that they maybe moved out, although I would expect that to be communicated here in the next 30 days or so. Some OEMs have announced some program delays or some program cuts, but that's been the exception and not the rule. And we are involved at that level of detail and discussion with the OEMs as a preferred Tier 1 global supplier and having very close relationships to literally every OEM that produces cars around the globe.

[Michael J. Tyndall, UK MidCap Equity Analyst]

Excellent. Just 1 follow-up, if I may. Some of the other suppliers, because the production stoppage was so swift, we saw some stockpiling at OEMs of parts. And I wondered to what degree the outperformance you saw in the first quarter was related to that. And I guess the other way of saying it is, do you think you can hold that outperformance in the second quarter?

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

Well, we're not in a position to speculate outperformance in the second quarter, which will, quite frankly, be a challenging quarter, recognizing that for the bulk of the second quarter, we will have had significant shutdowns in Europe and in North America. And I'm pleased that the trend has been generally better than expected in Asia Pacific with the production volumes there. But in any case, we would expect that the outperformance in the first quarter is not likely or thought to be a result of any stockpiling of product, if you will. There was a fairly orderly -- believe it or not, even though it was rapid, fairly orderly, I'll say, shutdown of the operations in Europe and North America. And keep in mind that we have a very global business, and it's very diversified across many OEMs. And so it would be unlikely that this outperformance is a result of any, I'll say, stockpiling of parts or rapid shutdown of operations.

[Ronald T. Hundzinski, CFO & Executive Director]

Bill, I could give a little bit more color on the outperformance. There was 2 significant factors of outperformance. One is, if you look at our regional mix throughout the year, that contributes to about half the performance. The other half was a very strange mix within the region. And what I mean by that is our outperformance in Asia Pacific was extremely high, primarily driven by our -- some product launches in specific customers in the Korean market and somewhat also in the Chinese market. So about half was driven by global mix, regional mix, and the other half was driven by regional mix within the region, like I said, specifically Asia Pacific. So that's some more color on the outperformance.

[Operator]

We'll take the next question from James Gerlis from Tellworth.

[Unknown]

One for me. Just in terms of your understanding of the inventory situation in terms of, I suppose, the finished autos inventory as well as parts production part, what do you think the level of inventory is now relative to normal? And what's the implication of that on the timing of potential ramp-up of production as in when that comes?

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

Well, it's clear that the OEMs have continued to do some online sales and other sales. And those inventories have, in fact, I'll say, shrunk over the last 6 weeks or so. The OEMs are quite anxious to replenish that inventory, and that's why the start-ups are soon going to resume here, for example, in North America, likely the end of May. They have already started in Europe, and that started last week already -- or actually 2 weeks ago already. And so while the start-up is a very well structured, coordinated effort by the car companies and the suppliers, the ramp-up is very, I'll say, initially slow. As you can imagine, these factories have implemented and we have implemented, I'll say, special precautions around social distancing and so forth. And so the output, at least initially, as people come back to work and start with these new hygiene protocols and personal protection equipment protocols, creates a platform for a slightly slower start-up. So that's all work in process at this time, but I believe it's going quite well. And certainly, our start-up in China and Korea occurred very, very well and very quickly. And that continues and we continue to replenish the inventory balances that the OEMs need to have that ample supply. And as I mentioned earlier, we're quite pleased with the -- what appears to be the continued solid demand by the end consumer buying these vehicles, particularly in China. If you look at the month of April, for example, at the retail level, the demand is only down a few percent versus April of 2019. So I think that's a very positive development that shows the resilience of the business.

[Operator]

[Operator Instructions] It appears that there are no further question at this time. I'd like to turn the conference back to Mr. Kozyra for any additional or closing remarks.

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

Okay. Thank you, operator. And if there are no further questions, and in closing, please note, we are navigating our way through these challenging times, and I am confident that we will take the appropriate measures to safeguard our employees and successfully steer our business through this challenging and unprecedented situation. Thank you very much for your time this morning, and have a nice day. With that, operator, please disconnect the call. Thank you.

[Operator]

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