Vitesco Technologies : Transcript Conference Call FY 2021

VITESCO TECHNOLOGIES GROUP AG - ANALYSTS CONFERENCE

TRANSCRIPTION

{EV00133270} - {60 min}

March 25, 2022

PRESENTATION

[video]

02:08 HEIKO EBER

Ladies and gentlemen, I'm very happy to welcome you to a first-time event again. We are here today to present and discuss Vitesco Technologies' first full-year results as a standalone company. The presentation and our annual report have been published today at 7:00 a.m. CET on our Investor Relations website, in the reports and presentations section. Andreas Wolf, our CEO, and our CFO Werner Volz are here to guide us through our presentation of the financial results. Afterwards, both gentlemen will be also available for a Q&A opportunity. And as always, we highly appreciate your feedback. Please feel invited to reach out to the Vitesco IR team. We collect your thoughts and suggestions and jointly work on continuously improving. And now, without further ado, let me hand over to our CEO, Andreas Wolf.

03:16 ANDREAS WOLF

Thank you, Heiko. And thank you very much, ladies and gentlemen for joining today. Unfortunately, we had to choose this virtual format. As you know, physical meetings are still only possible to a very limited extent, but I'm sure you will like this presentation, followed by a Q&A session. Anyhow, I'm glad to be here in front of you today. But before we start, in the name of the executive board, let me express our deepest sympathy with all people affected by the Russian war in the Ukraine. We are really shocked. In the name of Vitesco Technologies, I can only call on the Russian Government to end this war immediately. After having touched on such a difficult issue, I now need to find a way to switch to my presentation.

Let me try it like this. 2021 was a successful year. We ended with more than €8.3 billion sales. Our adjusted EBIT margin reach 1.8%, and all this in spite of COVID-19 chip shortages, supply chain disruptions, and material price increases. Next point: transformation to electrification. We made good progress. Let me give you three examples. Profitability: our electrification technology business unit increased the profitability margin by almost 40 percentage points. Sales: the overall electrification sales is now contributing more than 10% of total sales. Order intake: we secured €5.1 billion for electrification and €11.2 billion in total. And our electrification order intake was secured across our complete product portfolio. We were especially successful in the power electronics business. We won orders of more than €2.5 billion, more than 50% of the awarded business was linked to SiC high-voltage technology. In addition, our e-axle drive business secured around €1.1 billion of order intake. This is a very good proof point of the ongoing insourcing discussions. There is plenty of business for suppliers to be won. On top of that, our business units, Electronic Controls and Sensing & Actuation also contributed with an order intake of more than €1 billion in the electrification area. You can see two examples here.

Overall, we have now more than €51 billion of order backlog in our books. The electrification part now accounts for 1/3 already. In addition, the non-core ICE part is steadily declining. The strong momentum can also be seen in the book-to-bill ratio of our business unit electrification technology. It stood at 6.9. However, the group book-to-bill ratio was at 1.5, very strong as well. As you might remember, the sales target for our business unit electrification technology is more than €2 billion in 2025. With the order intake of 2021, we have now covered more than 90% of this forecasted sale. Furthermore, we are very confident to close the small remaining gap in the next months.

By the way, we started even better into 2022. We managed to secure major additional business awards, for example on the EMR4. This is our latest, more compact, more efficient generation of integrated e-axle drives. A global OEM awarded us just recently with platform business of around €2 billion for the 400-volt SiC technology.

That means we continue to prove that OEMs trust in Vitesco Technologies when it comes to the electric drive. And as you can imagine, there's more to come. The year is not yet over. Electrification will shape our future business. We want to reflect this also with a new business structure. Starting in 2023, we focus on two divisions instead of four business units. Klaus Hau will head the division Powertrain Solutions. He will continue to drive the biggest part of our core ICE technologies towards value and cash generation in the changing market environment. In addition, Klaus Hau will be responsible for managing the continuing phase out of the non-core technologies.

The division Electrification Solutions, which will be headed by Thomas Stierle, will comprise all products which are either already electrified today or will be electrified tomorrow. We are convinced that this set-up is the best way to reflect, in the mid-term to long-term basis, the development of Vitesco Technologies in the most comprehensive way. To provide even more details to the financial community, we will also continue to report our electrified business as part of the new divisional structure. This will be corresponding to the €888 million for fiscal year 2021 I just mentioned. We will also continuously report our progress. On top of that, we are planning to host a capital market day this fall. Here we will provide more details on the structural changes and updated mid-term targets for the new divisions, which we are currently finalizing. On group level however, our mid-term targets remain intact.

Let us now focus on sustainability - a very important topic. During the last Capital Market Day, we communicated ambitious ESG targets for Vitesco Technologies. Now, we can finally also provide you with a status quo. We have defined five focus areas of sustainability, which you can see here. More details on other material topics can be found in our sustainability report. Our electrified business, the KPI for clean mobility, now accounts for almost €900 million. That corresponds to 10.6% of the group sales. With our products, we are contributing to the Paris Climate Agreement. We want to achieve carbon neutrality along the entire value chain. Therefore, we are working on Vitesco's climate neutrality until 2030 at the latest. Right now, we have achieved more than 90%. However, we will go well beyond our direct environmental impact. By 2040 we want to be climate neutral considering Scope 1, 2, 3 emissions. We want to ensure this along our supply chain, optimizing our products regarding circularity and by using our own resources efficiently. To achieve our ambitious goals, we also need to be an attractive employer. That means, for example, fostering fair working conditions and diversity across all locations. Currently, the female share in leadership positions is at 13.6% for the whole group. This is an area where we further need to improve.

But let us now take a closer look at the financials. We gave our first guidance as a standalone group, together with the Q3 results in November. As you might remember, those were times of high uncertainty in the market. Overall, the market development was a little bit more favorable than we expected, except for Europe. Nevertheless, we managed to achieve the mid to upper end of our guidance in all KPIs. On the adjusted EBIT margin, we even exceeded the 1.5% to 1.7% span which we had communicated - one of the reasons that led to the pre-release on February 15th. The special effects, basically the factors our EBIT is adjusted for, were below the range we had anticipated. This was mainly due to the reversal of impairment losses in our high-voltage electrification business. Despite the difficult market environment in Europe, we managed to increase our sales by 4% versus 2020. We also significantly increased our profitability by 3%, to 1.8%. The increase in profitability also contributed to our positive free cash flow of €113 million in fiscal year 2021. Offsetting factors mainly came from increases in inventories. Our equity ratio even improved due to the spin-off from Continental. As you can see, it is now at 36.3% for the year-end of 2021.

Let us now talk about the market on Slide 12. As I already mentioned, the semiconductor shortages led to a much slower recovery of the worldwide slightly weaker production than we hoped for at the beginning of 2021. Europe was by far the weakest market in a very challenging environment. The Asian countries contributed the strongest growth. Nevertheless, we were able to outperform the worldwide light vehicle production, despite our high European sales exposure. In fact, we were able to increase our sales in an overall decreasing European market. On a group level, we outgrew the market by 0.7% based on organic sales. Our core technologies were able to

outperform by almost 4%. As you can already see, a successful year 2021. And with that, let me now hand over to our CFO, Werner Volz, who will dive deeper into our financials for you. Werner, the stage is yours.

15:43 WERNER VOLZ

Thank you very much, Andreas. As you know, we have already pre-released the figures on February 21st. Therefore, I will keep this session rather short and only talk about the most relevant aspects. Please feel free to use the question-and-answer opportunity if you want to ask or discuss any additional topics. Andreas has already mentioned it: we managed to significantly increase our profitability to 1.8%. Due to shortages in the supply chains, our organic sales growth was at only 4.1%, much lower than expected at the beginning of the year. We were able to offset almost €150 million from semiconductor shortage and an additional €45 million from raw material headwinds.

Let's take now a look at the margin without our business unit Electrification Technology, which still reported significant losses, in line with our plan due to the required pre-investments. The 5.4% adjusted EBIT margin is quite solid in this environment, but the business unit Electrification Technology also showed significant improvements. Sales growth was at almost 45%, and we also managed to increase our adjusted EBIT margin by almost 40 percentage points. The reversal of previous impairment losses in Q4 had no effect on the adjusted EBIT. In addition, we reported a positive gross margin for the first time in the history of our electrification business. The main sales driver for Electrification Technology in 2021 was our strong positioning in Europe, in the European market, but we will continue to grow in all our key regions, which can be seen in our 2021 order intake. We managed to secure business from Chinese, Asian, North American, and European customers. Overall, the order intake came in at €4 billion for ET, at a book-to-bill ratio of 6.9.

Let us now move to our business unit Electronic Controls. As you can see on the slide, both top and bottom line were significantly impacted by the supply situation, especially in the semiconductor area. Overall, we had to deal with a burden from premium freights and higher prices of €60 million in 2021. Combined with the lost volumes, Electronic Controls was the business unit most impacted by the semiconductor shortage. Despite these headwinds and the reduction in our sales, Electronic Controls was able to increase its profitability mainly due to our transformational progress and the corresponding operational improvements. As a consequence, we also had less warranty expenses compared to the previous year. So the core of business unit Electronic Controls contributed €2.2 billion of sales at a margin of 5.5%.

Now, let's move on to our business unit Sensing & Actuation. The headwinds from semiconductor shortage we experienced in Sensing & Actuation were of a similar size and magnitude as in Electronics Controls. However, we were able to support the increased demand for emission legislation in all major markets by covering shortages with broker parts, and to increase our organic sales by 10.8%. The strong performance of our core technologies, with 10.5% margin at €2.5 billion sales, helped us to significantly increase our profitability in Sensing & Actuation.

Finally, let's look at Contract Manufacturing. We continued our phase-out. The overall market rebounds stalled the phase out a little bit. However, the sales decreased by more than 5% versus 2020. The adjusted EBIT came in at 4.1%. This effect was overall offset on group level, as several times explained, because of the goods we purchased from Continental's contract manufacturing on the other side. In the next months, we will see a gradual decline of the adjusted EBIT margin. Our bilateral agreements foresee a certain mark-up reduction on both sides, on the Continental side and on our side. This will further decrease the margin dilution. Overall, the group impact of Contract Manufacturing will remain neutral.

Let us now focus on our cash flow profile on Slide 18. As you can see, we managed to significantly increase the operating cash flow. To a large extent, this was driven by the operational improvement from our business units. In addition, we managed to keep the working capital impact on our cash flow neutral for fiscal year 2021, despite the increase in inventories. The slightly higher CapEx in '21 was overcompensated by cash inflows, which mainly came from selling parts of our Korean entity back to Continental. Also, the transfer of manufacturing lines to Continental due to the contract manufacturing phase-out led to a cash inflow. Overall, our free cash flow came in at €113 million. The positive financing cash flow of €225 million is still mainly related to spin-off transactions with Continental. The financing cash flow of -7 in Q4 '21 was no longer impacted by such spin-off transactions. Therefore, we think this is better reflection of a representative financing cash flow moving forward.

Let's come back to the just mentioned spin-off transactions with Continental, mainly the end of cash pooling with Continental. That also drove the increase of our cash position to €614 million at the end of 2021. With that strong cash position, we did not draw obviously our €1 billion RCF at all. Consequently, our available liquidity amounted to €1.6 billion. As a side note, we managed to place a Schuldschein loan of €200 million in Q1 2022 to partially replace the RCF and improve our financial flexibility. With that, we took the first step of diversifying the mix of our financing instruments.

As a final point on our '21 financials, let us take a quick look at the balance sheet structure now. Our networking capital ratio slightly increased to 4.4% in 2001, mainly driven by the increase in inventories. Our net debt to adjusted EBITDA ratio decreased from -1 to -0.5, predominantly because of our increased adjusted EBITDA, while our net debt is actually still a net liquidity of €345 million. The decrease of our balance sheet total was mainly related to spin-off effects, and also contributed to an increase in our equity ratio, which now stands at 36.3%. As you can see, we continue to have a very strong balance sheet structure and cash position, despite the second COVID-19-affected business year in a row.

Let me come to our guidance for 2022 now, which we have to put under a big disclaimer. We and the entire industry are currently not able to estimate the full effects that the war in Ukraine will have on our markets and consequently also on Vitesco Technologies. Therefore, this guidance is not reflecting potential impacts of the war in Ukraine - not reflecting on Vitesco Technologies, not reflecting on the worldwide supply chains and not reflecting on the vehicle markets. Please keep that in mind when we now discuss the outlook itself. The underlying assumption is we expect a growth of around 8% to 10% for the worldwide light vehicle production. We anticipate the semiconductor situation to gradually ease starting in H2, so we also expect our sales to grow in 2022. Our outlook foresees sales of €8.6 billion to €9.1 billion. Please keep in mind that this also includes phase-out effects of non-core ICE technologies and contract manufacturing. The adjusted EBIT margin will presumably amount to 2.2% to 2.7%. This includes net headwinds from semiconductor shortage, material price increases, and wage inflation of a high double-digit million-euro amount. The gross impact of all these effects, of course, is materially higher. However, we are in close negotiations with our customers regarding the handling of costs which might not be automatically passed through via price clauses in our contracts. We expect our CapEx next year to be around 6% for the entire fiscal year, of course, fully focused on our core technologies and our electrification business. With that, we're confident to achieve a free cash flow of more than €50 million in 2022. This does also include restructuring payments, which we anticipate to be in the mid-double-digit million area. On a business unit level, we anticipate that both sales and adjusted EBIT will significantly increase in our traditional business units. Contract Manufacturing will continue to significantly decrease in both sales and adjusted EBIT, and this is in line with our phase-out plan. But let me repeat: this outlook, again, is not reflecting potential impacts of the war in Ukraine on Vitesco Technologies and our markets. With that, we have reached the end of today's presentation. And now, we are very glad to answer your questions. Heiko.