Vitesco Technologies Group AG

XETRA:VTSC

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Vitesco Technologies Group AG Conference Call Q1 2024. [Operator Instructions] Let me now turn the floor over to your host, Heiko Eber.

[Heiko Eber, executive]

Thank you very much, operator. Ladies and gentlemen, I'm very happy to welcome you to our today's call on the financial results of the first quarter 2024.

The press release, the presentation and our quarterly financial statement have been published today at 7 a.m. Central European Time on our Investor Relations home page.

Furthermore, as usual, you will find a short summary of the most important KPIs on a quarterly and annual basis for your convenience. And for sure, we will, afterwards, provide a recording of this webcast.

Now before we have a look at today's agenda, I again have to ask you to take notice of our well-known disclaimer.

And looking at the agenda today, we have Andreas Wolf, our CEO; and Sabine Nitzsche, our CFO. They both have joined the webcast to guide you through the key information in our presentation on group and divisional level. And of course, in addition, we will talk about our cash flow and balance sheet. Afterwards, both will be available for our Q&A session.

And now without further ado, let me hand over to our CEO, Andreas.

[Andreas Wolf, executive]

Yes. Thank you, Heiko, and thank you very much, ladies and gentlemen, for joining us today.

The first quarter of the year 2024 is in the books. Unfortunately, the market continued to be challenging. Global light vehicle production, especially for electric vehicles, saw more or less a flattish development. However, we managed to maneuver our company smoothly through the rough sea. This resulted in a solid quarter for Vitesco Technologies.

But let me guide you through our key figures step-by-step. Our sales came in at around EUR 2 billion, and our adjusted EBIT margin stood at 1.7%.

Speaking about our free cash flow, it was in line with our expectations due mainly to special effects related to Contract Manufacturing, which we mentioned already in our fiscal year 2023 call. Given the change in our form of favorable payment terms and the return of spinoff-related advance payments to Continental, this figure ends up quite negative.

Knowing that deliveries of battery electric vehicles in the European market remained at previous year's level and due to the postponement of some project ramp-ups in all regions, in Q1 2024, sales in Electrification were lower than in Q1 2023.

Also, to be noted, some customers remained to be cautious with orders and projected volumes. We have seen quite some shifts in the markets to a later date. But we are very confident to see an improvement not only in Electrification sales starting in quarter 2, but also in the order intake level for the full year 2024. The overall market dynamic stays intact. Latest breakthroughs in battery technology will support this trend.

I would like to make a final point on this slide. At both AGMs, two weeks ago, Vitesco Technologies and Schaeffler shareholders have voted in favor of the pending merger. This means for us we are fully engaged in the next steps to form a new, bigger entity fully focused on future technologies according to our Stronger Together philosophy.

Let me elaborate a bit more on our numbers. The EUR 2 billion sales are corresponding to a decrease of about 14% compared to Q1 2023. However, the sales development at the beginning of the year is in line with our expectations considering the lack of sales from divested business and the expected decline in Contract Manufacturing, which decreased by EUR 185 million year-on-year.

Supported by less dilutive noncore sales, we managed to increase our adjusted EBIT margin to 1.7%.

Our CapEx of 4.2% of sales remained constant when compared to Q1 2023. One aspect I would like to highlight again, we still have many Electrification product launches in 2024, which support our significant growth in Electrification. We are fully committed to spend our money in the right area.

Our free cash flow was burdened by different special effects as already explained on the previous slide.

And the final remark on our equity ratio was about 38%, it remains at a very solid level.

Let's move on to the market view before I hand over to Sabine for a deeper financial insight in a minute. The worldwide light vehicle production saw a flat development in the first quarter of 2024. Only China and North America saw an increase in volumes. However, those could not compensate for the decline in Europe and the rest of the world.

As you can see from the bar chart on the right-hand side, our reported group level sales decreased by 13.9%. But I never get tired of repeating, this figure includes, again, our declining sales of noncore business and Contract Manufacturing as well as negative exchange rate effects. Organically, our Electrification and core ICE sales outgrew the global light vehicle production by about 4.5 percentage points.

So all in all, I can say with full conviction that we have steered our company pretty solidly in a turbulent environment.

And with that, you will now receive more insights into our financials from our CFO, Sabine Nitzsche.

[Sabine Nitzsche, executive]

Yes. Thank you, Andreas, and a warm welcome also from my side.

Let us now take a closer look at our top and bottom line development at group level. Since Andreas already explained our core KPIs, I will keep this session rather short and only focus on the most relevant aspects. Our organic sales growth was at minus 7.5%. That excludes currency-related headwinds of 2.1 percentage points as well as consolidation effects.

But I would like to highlight our core technologies, including both Electrification and core ICE. Here, we saw a revenue of about EUR 1.6 billion and a further improved adjusted EBIT margin of 1.7%.

Also, please keep in mind that we ramped down our noncore business by more than 40%, including consolidation effect from divested businesses for [indiscernible] and Italy and negative FX effects. Those 3 topics dragged down our top line development.

To sum it up, our Q1 was very much in line with our expectations.

Let's further look at the results of each division. We will start as visual with our Powertrain Solutions division. The main reason for declining sales was, as mentioned, the planned ramp-down of our noncore activities. Inside this segment, Contract Manufacturing sales alone were down by about 75% year-over-year and that's all in line with our expectations.

Overall, sales came in at around EUR 1.3 billion with an improved adjusted EBIT margin of 8.9%. And I have to say very impressive is the profitability of our core ICE business within this division. Even though our sales declined to EUR 825 million, we managed to further improve our adjusted EBIT margin to 13.4%. These numbers, again, underline the resilience and strength of our core ICE portfolio.

Now let's discuss our Electrification Solutions division. As in the past, we continued to increase our sales, which especially was driven by our performance in Europe. Our organic sales growth of more than 4% equates to an outperformance of over 5 percentage points compared to the global light vehicle production.

And with regards to profitability, we managed to keep our adjusted EBIT margin rather flat at about minus 10%. This number reflects, amongst others, the increased costs, which we see for our various project ramp-ups in Electrification.

And one note on our core ICE business. We further improved the adjusted EBIT margin to break-even level. This again demonstrates our efforts to turn this business back to our former profitability level. And as you may remember, this figure was negative in the first quarter 2023.

Before we close the financial reporting section of our top and bottom line development, I would like to provide more transparency on the categories, Electrification core ICE and noncore. Given the challenging market environment for battery electric vehicles and due to the postponement of some project ramp-ups across all regions in Q1 '24, sales and profitability in Electrification were below the previous year's level. However, I am very confident that we will see a step-up in both figures for Q2 2024.

As already experienced at the end of last year, there might be near-term ups and downs, but the growth story for Electrification is still intact. This will be clearly visible in the remainder of the year. We believe that we are well positioned to succeed across the EV landscape on a global basis.

Core ICE sales came in at EUR 1.3 billion, similar to Q1 2023. But we saw an incremental increase in our adjusted EBIT margin to 7.5% from previous year's 5.2%, which reflects our Brazilian core ICE business. This again demonstrates even when Electrification growth is under pressure, it is offset by stronger performance in our core ICE portfolio.

And last but not least, the ramp down of our noncore business is accelerating as planned. Here, our adjusted EBIT came in slightly positive.

So let's summarize the slide to 3 key statements. First, within the Electrification area, the hiccups we currently see will not stay for long. We will regain traction in Q2 '24 and onwards.

Our very resilient core ICE business will see gradual step-up providing attractive EBIT margins.

And lastly, the ramp-down of noncore, especially in Contract Manufacturing, is progressing according to plan as we have once again proven in this quarter.

On Slide 11, I want to provide some insights on our cash development. As you can see, our operating cash flow came in lower compared to last year's quarter. To a large extent, this was driven by lower top line development and higher working capital.

Our investments increased, resulting in an investing cash flow of minus EUR 134 million. This was mainly due to higher spending for project ramp-ups in the area of Electrification.

And as a result, our free cash flow for the period came in at minus EUR 91 million and was again in line with our expectations.

And again, special effects related to Contract Manufacturing led to an outflow of cash in this quarter.

Talking about our financing cash flow. This was characterized by utilization of a loan agreement, which was provided by Schaeffler. Hence, it came in positive at EUR 66 million. This all resulted in a continuous solid cash situation.

So now let's move on to our balance sheet structure. It has not changed much compared to previous conference calls, which means we still maintain a very solid structure. Our net working capital intensity increased to 6.3% of sales, mainly driven by a decrease in accounts payable related to Contract Manufacturing.

The net working capital intensity will continue to trend around the anticipated midterm range of 5% to 6% of sales.

The net debt-to-adjusted EBITDA ratio remained stable at minus 0.3.

Our net liquidity position of EUR 228 million underlying also very comfortable cash situation despite the phaseout of our noncore business. On top of that, we still have undrawn credit lines so that our available liquidity gross remains north of EUR 1.8 billion.

And to finalize with our equity ratio, it remains at a very solid level of about 38%.

As you can see, we continue to have a very robust balance sheet structure and cash position.

The most important message on this slide is we confirm our guidance for the fiscal year 2024. This applies not only to our global light vehicle production forecast, which can be seen on the right-hand side, but also to our guidance on a group level.

When talking about our group sales, our strong anticipated growth in Electrification and core ICE will not compensate for the almost EUR 1 billion of planned decrease in noncore activities. Should we see sales support full year ranging between EUR 8.3 million to EUR 8.8 billion, the adjusted EBIT margin will presumably come in at 4.5% to 5%. This clearly demonstrates our transformational progress and also reflects our ambition to achieve breakeven within our Electrification portfolio.

Due to the high number of product launches in this year, especially in the second half of 2024, we expect our CapEx ratio to come in at about 7% of sales for the entire year, fully focused to invest into Electrification.

Coming over to our free cash flow. This is expected to be around minus EUR 350 million. Given the change in our former favorable payment terms and the return of spin-off-related advanced payments with Continental, this figure ends up quite negative.

And please remember, the outlook for the fiscal year 2024 does not consider any effects resulting from the integration into Schaeffler.

Overall, we remain our path towards Electrification while ramping down our noncore business. This can be ultimately seen in our gradually improving profitability, which will be supported by our anticipated Electrification break-even target in 2024.

And with that, I have reached the end of my presentation. Thank you very much for listening. And now back to you, Heiko.

[Heiko Eber, executive]

Thank you very much, Sabine. Thank you very much, Andreas. Ladies and gentlemen, we will shortly enter our Q&A session. Before I hand over to the operator for questions, allow me one short personal note. As already mentioned yesterday in the Schaeffler earnings call, I will already go ahead and take over the IR team at Schaeffler [indiscernible]. A big, big thank you to all of you for the very open and constructive and trustful cooperation over the last years. Thanks to Andreas and Sabine for their benchmark leadership and a special thanks to the best IR team ever.

See you soon on the green side. And now back to the operator.

[Operator]

[Operator Instructions] Ladies and gentlemen, there seems to be no questions coming, so I'm handing the floor back over to the host. Oh, no, I'm so sorry. Right now, one question just dropped. It is of Sian Keegan of Goldman Sachs.

[Sian Keegan, analyst]

Can you hear me now?

[Operator]

Yes. We can.

[Sian Keegan, analyst]

Perfect. I was wondering if perhaps you could help with how to think about your path to sort of break-even in Electrification this year. If I remember correctly, you're looking to reach a level of around EUR 2 billion in revenues in order to be able to achieve that breakeven. Obviously, given the EUR 269 million posted at 1Q, this leaves quite some way to go over the last 9 months.

So I guess what I'm trying to understand is whether you still expect to reach that EUR 2 billion in sales in 2024? Or if you perhaps you [ scope ] to reach breakeven on the full year basis at a lower level of Electrification sales?

[Andreas Wolf, executive]

Maybe I can answer that question. Yes, over the last years, we said EUR 2 billion is somehow the landmark that we can do a breakeven. But we have anticipated and seen that sales might come in a little bit lower, and therefore, we also adjusted our cost bases to it. So even having a lower sales than EUR 2 billion, we continue to target the breakeven in 2024.

[Heiko Eber, executive]

Thanks, Andreas. That was a clear statement.

[Andreas Wolf, executive]

As always, yes.

[Operator]

So at the moment, there are no further questions in the queue. So now I do hand over the floor back to Heiko Eber.

[Heiko Eber, executive]

Thank you. So as the number of questions does not really come as a surprise given our, let's say, special situation, I guess we should close today's call.

Nevertheless, if there are more questions coming to your mind afterwards, feel free to reach out to our IR team.

So thanks for your interest in Vitesco. Thanks to the team for the preparation. Have a good day, and talk to you soon. Thank you.