TI Fluid Systems PLC

LSE:TIFS

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to the TI Fluid Systems plc First Quarter Trading Statement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bill Kozyra, CEO and President of TI Fluid Systems plc. Please go ahead.

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

Thank you. Good morning, everyone, and thank you for joining us today for our first quarter 2021 trading update conference call. I'm Bill Kozyra, the CEO and President of TI Fluid Systems. And I'm joined today by our Chief Financial Officer, Ron Hundzinski; and our Chief Operating Officer, Hans Dieltjens. I'm sure you've all seen the trading update that we've released this morning. Before Ron and Hans take you through our update, I'd like to thank everyone on this call, their families and coworkers and all who remain to be supportive to others during the challenges we still face in navigating this unfortunate pandemic. I'm confident we are getting closer to hopefully soon move towards a more familiar and safer way of life. Before handing over to Ron, I want to take a moment to say with confidence that the Q1 2021 represents a strong start to the year for our company. I'm pleased with the progressive gains we have made both in revenue and margin expectations. As light vehicle production volumes stabilize in their recovery, we continue to expect our performance to return to the pre-COVID-19 levels. As we stand here today, we remain committed to the outlook guidance issued on March 16. And despite the ongoing volatility in light vehicle production forecasting in the first quarter, we remain confident that our full year 2021 revenue will outperform global light vehicle production volumes. With recovering light vehicle production volumes and the benefits arising from the restructuring program we started in 2020, we continue to target a high single-digit adjusted EBIT margin. These earnings will support the adjusted free cash flow generation similar to pre-COVID levels and a resumption of the dividend policy targeting a payout ratio of 30% of adjusted net income. Before having Hans provide you with some feedback from our 2021 Capital Markets event, I will hand the call over to Ron to highlight a few of our items in our Q1 trading update at the outset. So Ron, over to you.

[Ronald T. Hundzinski, CFO & Executive Director]

Thank you, Bill, and good morning, everyone. As Bill mentioned, the group generated a strong level of revenue of EUR 787 million in the first quarter of 2021. The first quarter experienced a volatile global vehicle production environment due to various supply-related constraints impacting specific OEM plant uptime scheduling. Although volatile, the global light vehicle production continued its recovery with an increase of 14% versus Q1 of 2020. As a result, our revenue increased by 14.2% year-over-year on a constant currency basis. This represents outperformance of 0.2%. European region revenue increased 5.9% year-over-year at constant currency, which significantly outperformed European vehicle production by 6.8%. European revenue was driven primarily by favorable new electric vehicle business launches. Asia Pacific region revenue continued to be strong, increasing by 49.5% year-over-year on a constant currency basis and outperforming Asia Pacific light vehicle production by 16.9%. Revenue outperformance for both segments was driven by new business launches, particularly in China. North America region revenue decreased by 5.2% year-over-year on a constant currency basis and slightly underperformed North America light vehicle production by 0.7%. This underperformance was caused by the planned ramp-down of powertrain programs as the company continues to focus on EV-related programs. This decline offset was favorable impacts of new business launches in both divisions. Reviewing segment revenue, Fluid Carrying Systems, FCS, revenue increased by 10.9% year-over-year on a constant currency basis to EUR 419 million and was primarily driven by the ramp-up of new BEV business launches in Europe and continued growth in China, offsetting the aforementioned impact of powertrain deemphasis in North America. Fuel Tank and Delivery Systems, FTDS, revenue increased 18.1% year-over-year on a constant currency basis to EUR 368 million. FTDS continues to benefit from successful business launches in Asia Pacific and North America. Before handing over to Hans, I'd like to highlight the refinancing the company completed in April. On April 16, TI Fluid Systems issued its inaugural European 8-year unsecured bond with proceeds of EUR 600 million, which were used to repay portions of the existing USD and euro secured term loans. In addition, our USD and euro secured term loans and the $225 million revolving credit facility were repriced and had their maturities extended by 2 years from 2024 to 2026. We are extremely pleased with this transaction as it serves to diversify, stagger and extend the average maturity of our debt portfolio from 4 years to 7 years. In addition, our weighted average cost of debt was reduced to 3.6% from 4.5%, which is expected to provide the company the benefits of reduced annual interest expenses of around EUR 10 million. In addition, both Moody's and Standard & Poor's rating agencies view the transaction as credit positive, with TI Fluid Systems receiving an outlook upgrade to stable from negative from S&P. The highly successful transaction is a testament to the market's recognition of the company's performance and the global TI Fluid Systems team delivering its objectives. With that, I will hand the call over to Hans.

[Hans Dieltjens, Chief Operating Officer]

Thank you, Ron, and good morning, everyone. Well, we were pleased to hold our 2021 Capital Markets event on the 13th of April, where we met virtually with over 90 investors to provide an update on our company's strategy and technology, which we named Fluid Evolution. Thank you to all on the call who were able to participate. The feedback we have received illustrated that the audience was impressed with our progress in developing and selling products to meet our customers' electrical vehicle needs. We felt that this event was important to update the market on our progress. And we look to continue to provide you further updates as the year progresses. While in case you were unable to attend, a replay of our presentation can be found on our Investor Relations website. We remain excited of the execution of our strategy that has led to so much success. Look forward to continuing the success of Fluid Evolution. Thank you, and back over to you, Bill.

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

Yes. Thanks, Hans, and also thanks to you, Ron. And thank you to all of you who were able to attend and join our Capital Markets event. We were quite pleased to share with you our latest technology and advancements, particularly focused on the transition to electrification. So in summary, our Q1 2021 was a strong quarter for the company. We continue to believe that the company is well positioned to manage through the remaining challenges of the COVID-19 pandemic and continue to take advantage of the transition to electric vehicles. We will continue to focus on growing revenue in excess of global light vehicle production, strong profitability and excellent cash generation. Just as a reminder, we have a highly experienced management team and look forward to the great year ahead and, together with Hans, a smooth and steady CEO transition towards the end of this year. So with that, I would now like to open the phone line for any questions that you might have. Operator, can you assist us with the questions, please?

[Operator]

[Operator Instructions] Jarek from Jefferies.

[Jaroslaw Marek Pominkiewicz, Equity Analyst]

I've got 2 questions if I may. Number one, while you continue to guide for outperformance in 2021, you were only broadly in line in the first quarter. Is it due to the same tailwinds that you saw at the end of last year in the fourth quarter, the ramp-downs in North America? Are these headwinds now over? Or do you expect some spillover into next quarters as well? And second more technical question with regards to the refinancing. May I ask what you expect for the net finance charge for this year? Is it around EUR 65 million?

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

Yes. So this is Bill Kozyra. I'll take the first question and then turn it over to Ron for the refinancing question. So yes, we are guiding outperformance for the full year in excess of global light vehicle production. We are confident that, that will occur through the course of the year. Now keep in mind, when you measure outperformance in a very short period of time, it becomes, I'll say, more meaningless in the sense that you have production program ramp-ups and ramp-downs. And so a very short period of time to measure outperformance is not necessarily indication of a 12-month period. So as we mentioned, the small outperformance in the first quarter of 2021 was a result of our intentional and planned ramp-down of particular products, particularly in the powertrain area affecting -- which ramped down, and those will continue to ramp down over time as we transition to electrification and those programs come to an end. But by the same token, electric vehicles are building momentum. And we would expect that our outperformance for the full year to be, as we indicated, in excess of global light vehicle production. So to be patient as we get through the first half and of course, the full year, I think you'll see what we mean specifically in terms of outperformance. And it really doesn't have anything to do with last year 2020. I mean these short periods of time, as I mentioned now, are difficult to try to conclude anything from in terms of outperformance. Ron, do you want to speak to the refinancing question, please?

[Ronald T. Hundzinski, CFO & Executive Director]

Sure. This is Ron. You are in the ballpark of your interest expense. It's a little bit higher. We won't see the full effect of the EUR 10 million. We'll see 3 quarters of it this year. And just keep in mind, when you're doing your cash flow, that's the expense, not the cash. We do have some amortization of fees that we pay. So that's -- when you go roll that into the cash flow statement, just reduce that by some amortization because that's the cash interest expense. But yes, you're in the zip code, so to speak.

[Operator]

We'll take our next question, Dominic Convey from Numis.

[Dominic Convey, Research Analyst]

I mean you alluded to it in your opening remarks about volatility in global light vehicle forecasts in recent weeks. We've seen a number of suppliers trimming their full year expectations. Can you just be a little bit more explicit what your assumptions are and what you make in terms of global light vehicle production in 2021? And I guess follow-up really is how you expect the phasing in terms of revenues and profits to give us a little bit of a steer on the first half-second half split, please?

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

Ron, do you want to handle that one?

[Ronald T. Hundzinski, CFO & Executive Director]

Sure, I will. Yes, Dominic. It's Ron. We are currently looking at 83.5 million units from IHS. And when Bill said it's volatile, and I think I mentioned it in my script, if you would have watched IHS over several months, it came into your about 84.7 million units, and they trimmed it slightly, trimmed it slightly again and trimmed it slightly again. So we've had now 1, 2, 3, 4 consecutive months revisions of them revising it down primarily because of the chip shortages, what they've been saying is the revision. We experienced some data as well. When we closed the first quarter out and IHS updated, I believe it was the April forecast for the first quarter, they did a significant revision of nearly 4% from their prior forecast of adjusting the first quarter output, and they upped it by 4%. So that's a lot of volatility to make a 1-month adjustment to a quarter by that amount. And in addition, you've seen a lot of information about some downtimes by the OEMs and some mix changes they're working through. So that's what we're meaning by volatility, and that's what we're keeping our eye on. Now your second part of the question, as far as phasing, in general, we're going to face seasonality with how the businesses normally run. And what I mean by that is that we generally have very strong second quarter results. First quarter, second is usually the strongest. The third quarter as a seasonality typically is lower for the automotive industry. Volumes are lower because of shutdowns and changeovers and so on and so forth. So that tends to be the lower -- the lowest amount of profitability and sales for the industry, and then it's followed by the fourth quarter. So I'd say we're going to follow that seasonality, which is more in tune with a normal year. This year, production is going to be somewhat of a normal year despite these headwinds you're hearing about chip shortages. But when we compare it to last year, this is a much more normal seasonality year that we're experiencing. And that -- albeit it's a little bit lower than 2019, but the seasonality trend remains the same. All right, Jarek -- I mean, Dominic?

[Dominic Convey, Research Analyst]

Thank you.

[Operator]

[Operator Instructions] We'll take our next question, Harry Philips from Peel Hunt.

[Harry Philips, Analyst]

Just to maybe follow up on Dom's point more is just if you didn't have the powertrain sort of planned reductions, where would your sort of core performance be in terms of global light vehicle production?

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

Well, if we were to exclude that, those planned ramp-downs, our outperformance would be in excess of 3%. I think it's 3.8% or 3.3% if you were to exclude it. So that's why we're confident that, Harry, for the full year, we will have the outperformance that we traditionally have for this business.

[Harry Philips, Analyst]

And how does that impact margins? Because I would imagine powertrain is not quite as good margin as your -- some of your other businesses. Not we're going to go and change margin targets today, but again, it just underpins your earlier comments about high single-digit margins for the current year.

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

Yes. Actually, less powertrain business is beneficial to our margins as they tend to be lower profitability than our company average. They also have historically been very capital-intensive products relative to our overall CapEx investment model in their business. So they -- the decision that we have to wind down those products as we have intensified our focus on electrification, as you all know, has many residual benefits for the company. So we stand by the decision we took to intensify our focus around these electric vehicles. And as you know, we've been very successful with very strong representation levels and awards on electrification. It's really key to the future of our company, and we're very pleased with where we're at.

[Harry Philips, Analyst]

Fantastic. And just very finally, and I'm sure this plays into sort of Hans' line as well, if you like. But in terms of is it predominantly sort of North American wind-down in powertrain? Or is it more a global spread?

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

No, it's primarily actually one plant in North America that if we were to exclude that, we would have this 3.5-ish percent outperformance, right? So it's very, very, I'll say, localized in one region, in fact, in one plant. It's not a global issue at all.

[Ronald T. Hundzinski, CFO & Executive Director]

I would add, Harry, that if you exclude that plant out of the North America performance, right, that I said we were 0.7% under performance, we would actually exceed it by 9%, just to give it the magnitude of impact in North America. So just another data point.

[Harry Philips, Analyst]

Sorry, just let me make sure, you would have outperformed by 9% without that?

[Ronald T. Hundzinski, CFO & Executive Director]

In North, yes.

[Harry Philips, Analyst]

Wow. Okay.

[David J. Royce, Investor Relations Director]

That's for the region of North America.

[Ronald T. Hundzinski, CFO & Executive Director]

For the region. Thank you, Dave. The region of North, yes.

[Operator]

We'll take our next question, Philipp Konig from Goldman Sachs.

[Philipp Konig, Research Analyst]

I just wanted to follow up on the North American performance. Obviously, last year, you underperformed the market because you've been underindexed to both large-sized SUVs and pickup trucks. I was just wondering now that you mentioned obviously that without the ramp-down of that powertrain business, you would have had a really strong outperformance. If you recorded any new order wins or ramp-up of new business on any of these platforms from any of the large 3 American players in the large SUV or pickup truck segment, any color there would be highly appreciated.

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

Yes. Philipp, this is Bill Kozyra. Yes, we have. We're not in a position to talk about them yet out of respect for our customers. But please continue to be patient, and we will share those with you just as soon as we can. But we have been successful in our efforts to focus on that particular vehicle -- local North American regional vehicle segment. Stay tuned.

[Ronald T. Hundzinski, CFO & Executive Director]

We'll have press releases, Bill. You might want to mention that when we are able to announce some, check our website with the due press release.

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

Yes. So we typically wait for the OEM to announce the vehicle first. And actually, our protocol has been to wait until the OEM introduces in the public domain or introduces into production the vehicle. And then as we're respectful not to steal their thunder, then we can share with the world that we're successful in having XYZ business on that particular vehicle. So as you know, this has been an effort in the making for some few years now. You know how our business model works where business is sourced. For example, now for example, the year 2023, 2024, a few years in advance of it actually coming into production and what we experienced this year was a result of the work we did 2 and 3 years ago, in some cases, 4 years ago. And so you continue to be patient with us, I think you'd be pleased that we have focused on this vehicle segment, and we have been successful in changing our mix, if you will, of passenger cars and full-size trucks and SUVs in the North American region.

[Operator]

We'll take our next question, José Asumendi from JPMorgan.

[José Maria Asumendi, Head of the European Automotive Team]

Bill and Ron, it's José, JPMorgan. Couple of items, please. Can you speak a little bit more about the growth momentum in FTDS? Just if you could give more color in terms of the strong momentum in Q1, how do you expect that going into the coming quarters and a little bit of around the product launches you had by region. Second, when it comes to Ford North America, I mean we're aware of the large production cuts they're doing sequentially in Q2 versus Q1. Can you talk a little bit about your ability to weather this kind of production changes on your North American business? And just in general, what can you do to reduce the fixed cost base in Q2? How variable your cost base is -- how flexible are you to withstand these changes in Q2?

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

Yes. I guess I'd like to start and touch on maybe the second question and then turn it over to Hans to speak about the growth in FTDS and our success to -- particularly in Asia Pacific. But with respect to Ford North America, yes, we are able to weather the storm actually with all of these OEMs, not just Ford. And we continue to focus on fixed cost reduction and flex our cost in line with global production volume changes. I think we proved that not only in 2008 and '09 when we had a rapid reduction in volume but also in -- last year in 2020 where we quickly adjusted our cost base. And as you may know, we announced middle of last year a major restructuring program to reduce our fixed cost by 15%, 1-5 percent. And that is underway, and that will be complete now by the end of 2021. And so we're starting to see the benefits of that restructuring initiative to reduce fixed costs by closing 6 facilities worldwide and having 2 partial closures in addition to those 6, so call it 6 plus. And we constantly flex our cost in line with global vehicle production. So the production cutbacks that we see at various OEMs around the world are something that we are managing successfully. We still believe 2021 will be an excellent year for the company with what we have provided in our outlook. And we're confident that we will continue to do what we do well and weather the storm. So I'd like to turn it over to Hans to speak about the growth in FTDS particularly, which was the first part of your question, José. Hans?

[Hans Dieltjens, Chief Operating Officer]

Okay. Yes, this is Hans. Concerning the growth in FTDS, as you could see, the FTDS growth is mainly in Asia Pacific and, to that matter, mainly in China. The growth in China has had and will have basically 2 drivers. First, in China, there is an upgrade of the technology necessary for the evolving emission legislations in that country. And then secondly, China has still a considerable steel market that -- steel tank market that has to transfer and is transferring into a plastic tank market as we speak. So that -- these drivers have driven an outperformance for the FTDS division in China. Now looking forward, it is my expectation that this will be similar going forward or the same trends will continue going forward as these drivers did not change in the Chinese market mainly. Additional to that, I would say that FTDS also has seen several new launches when it comes to Korea and the Korean production for similar reasons of technology uplift to lower emission products and to hybrid products that have driven revenue increases also in our Korean operations, what is also expected to continue through the remainder of the year.

[Operator]

[Operator Instructions] There are no questions at this time. So I will turn the conference back to Bill Kozyra for any additional or closing remarks.

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

Okay. Thank you, operator. And with no further questions and in closing, I'd like to thank you for your participation today. And we look forward to further updating you on our progress in August with our first half results for 2021. Hopefully, we'll have a chance to see many of you face-to-face as we get into the late summer or early fall, and I look forward to that. Meanwhile, thank you very much. Please remain safe, and have a wonderful day. With that, operator, please disconnect the call. Thank you.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.