Vitesco Technologies : Transcript Conference Call Q2 2022

VITESCO TECHNOLOGIES - CALL Q2/H1 2022

Company:	Vitesco Technologies
Conference Title:	Call Q2/H1 2022
Moderator:	Heiko Eber
Date:	Wednesday, 10th August 2022
Conference Time:	10:00 (UTC+01:00)

Operator:	Good day and welcome to the Vitesco Technologies second quarter and first half
	of 2022 Conference Call. Today's conference is being recorded, at this time; I
	would like to turn the conference over to Heiko Eber, Head of IR. Please go
	ahead, sir.
Heiko Eber:	Thank you very much operator. Ladies and gentlemen, I'm very happy to welcome
	you to our call on the financial results of the second quarter in 2022. The press
	release, the following presentation and our quarterly statement have been
	published today at 7am Central European Time on our Investor Relations website
	in the Reports and Presentation section. In addition, you can also find an
	overview of the most important KPIs on a quarterly basis available for your
	convenience on the website. We will also make, of course, this recording
	available afterwards. Before we come to today's agenda, I am sure you have all
	taken notice of our famous disclaimer. As you have seen in the invitation, Andreas
	Wolf, our CEO and our CFO, Werner Volz, are here to guide you through our
	presentation of the financial results and as always, they will report on the most
	important developments of the last quarter, the group and business unit
	development, as well as our cash flow and balance sheet. Afterwards, both
	gentlemen will be available for a Q&A opportunity, and now, without further ado,
	let me hand over to our CEO, Andreas Wolf.
Andreas Wolf:	Thank you, Heiko and thank you very much ladies and gentlemen for joining today.
	Another quarter is in the books, and it really was another challenging quarter that
	we had to manage; starting with the lockdowns in China, which led to a very weak
	month of April and it just continued with on-going semiconductor shortages, the
	war in Ukraine, and precautionary measures we had to take to manage the
	potential gas shortage in Europe. In this environment, we conclude another solid
	quarter with sales of almost €2.2 billion and 1.5% adjusted EBIT margin.
	That means that we also made further progress regarding the increasing input
	cost and the pass through to our customers. Also, the free cash flow was slightly
	positive even though we had increased our investments in the second quarter.
	Main drivers for the positive free cash flow were some one off effects, especially in

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	the working capital. And of course, we also made progress in our transformation
	towards electrification. We had €235 million of electrification sales in quarter two,
	amounting to a total electrification sales of half a billion Euros in the first half of
	2022. In addition, we also managed to win some more significant orders in
	electrification, the total sum of €3 billion in quarter two only. That means that
	more than 80% of our total order intake in quarter two are coming from the area of
	electrification. This does also include the 1.7 billion, battery management order
	intake, which we have communicated already during the quarter one presentation
	and, we could also communicate our strategic partnership with Renault. You have
	certainly all seen the press release a couple of weeks ago.
	We will join forces in the development of a high voltage One Box comprising the
	DC-to-DC converter, the on board charger and the inverter. Our goal is to
	increase the compactness by 45% and be ready for serial development in the mid
	of the decade. In addition, we will also start delivering our own high voltage box,
	which combines the DC-to-DC converter and the OBC starting in 2025. The part
	of that watch volume is already included in the quarter two, order intake figure.
	Further order winds should follow once we reach certain development milestones.
	As you can see, it was a very busy second quarter, but with plenty of good news
	for Vitesco Technologies. Let us now dive a little bit deeper into the financial part
	of it. As I've mentioned already, we generated sales of 2 billion and €165 million,
	an increase of 3.3% compared to the previous year. Of course, there were two
	major effects, which massively contributed to that increase, FX of 5.4% and the
	price increases, which we could negotiate with our customers. Without these
	effects, we would have lost sales year over year, especially due to the China
	lockdowns.
	The adjusted, EBIT came in at 1.5%, still significantly influenced from the
	semiconductor shortages and increasing input costs, which especially burdened
	the business unit electronic controls. CapEx was at 5.2% of sales, and I already
	mentioned the positive cash flow of close to €2 million. Our equity ratio at the end
	of quarter two was at a very strong 40.4%. If we now look at the development in
	light vehicle production, you can basically see the trend of the previous quarters
	continuing. Europe remains challenged and also China lost significant volumes
	due to the regional lockdowns, especially in April. Overall, the worldwide vehicle
	production was flat year on year. Our core technologies, we managed to
	outperform this flat market organically by 3.2 percentage points, mainly driven by
	the strong sales development in EC and SMA core technologies. At group level,
	however, we underperformed 1.4 percentage points compared to the light vehicle
	production, mainly because of our higher exposure to the weak European market,
	and with that, Werner will now give you some more details and KPIs around our
	second quarter.
Werner Volz:	Thank you, Andreas, and hello and welcome also, from my side. Andreas
	mentioned the key facts for the group already and I just want to highlight on
	additional information to provide some more insight. The main driver for our sales
	increase to €2.2 billion, were currency effects of 5.4 percentage points, mainly
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from the strong U.S. Dollar. The second main effect, were price increases. Which we managed to negotiate with our customers and which at least partially compensated for the higher input costs. On the negative side, I must especially highlight the volume, which could not be produced due to the lockdowns in China. Overall, we lost potential sales of more than €150 million in April and May. In addition, in Q2, we had to deal another time with additional gross costs, which amounted to around €140 million from topics such as price increases in production material, energy, and also freight.

With our progress in our negotiations with our customers, we are still confident to achieve the targeted 80% cost recovery for the full year. The share of actual costs, which we passed on in Q2, has already slightly increased compared to Q1. As a result, our adjusted EBIT came in at €33 million and a margin of 1.5%. As already mentioned during our Q1 call in May, please keep in mind that we had a little bit more than 15 million positive one off effects in the prior year, 2/3 of these in electronic controls, 1/3 in sensing and actuation. Our margin without the ramp up business in electrification technology in Q2 2022 was at 5.1%. Although not showing in my presentation now, I would like -

[Off-Topic Conversation]

Werner Volz:	So, I hope I do not repeat too much, and our assumption is right that we skip the
	call at slide seven. So, I'll try to catch up again with slide seven and I refer to
	Andreas again, and he mentioned the key facts for the group already and I'm
	going just to highlight on additional information to provide you some more insight
	and again, I would like to start at sales. The main driver for our sales increase to
	€2.2 billion, were currency effects of 5.4 percentage points, mainly from the strong
	U.S. Dollar. The second main effects were price increases which we managed to
	negotiate with our customers and which at least partially compensated for higher
	input costs. On the negative side, I must especially highlight the volume, which
	could not be produced due to the lockdowns in China.
	Overall, we lost potential sales of more than €150 million in April and May. In
	addition, in Q2, we had to deal another time with additional gross costs, which
	amounted just in Q2 to around €140 million from topics such as price increases in
	production material, energy and also freight. With our progress in our negotiations
	with our customers, we are still confident to achieve the target at 80% cost
	recovery for the full year. The share of actual costs, which we passed on in Q2,
	has already slightly increased compared to Q1. As a result, our adjusted EBIT
	came in at €33 million and a margin of 1.5%. As already mentioned during our Q1
	call in May, please keep in mind that we had a little more than 15 million positive
	one off effects in the quarter of the prior year accordingly, 2/3 of this in electronic
	controls, 1/3 in sensing and actuation. Our margin without the ramp up business
	and electrification technology in Q2 2022 was at 5.1%.
	Although not showing in my presentation I would like also to address the positive
	earnings per share in the first half year. Part of that is attributable to windfall

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profits in deferred taxes, coming from a revaluation of our pension liabilities beside the fact of our continuous improving, our global tax situation. Coming back to the operational business and talking about electrification technology now . Also, here we continued to suffer from global semiconductor shortages, which significantly held back our production output. Overall, we reported flat sales year over year, especially due to a challenging European market. Only our growth in China with our IT business could compensate for that. If we look at the profitability, we continue to record positive gross margin also in Q2, even though the input costs increased significantly.

Upfront expenses related to our high order intake, especially in research and development, were additional burdens and led to a slightly decrease in adjusted EBIT to -€70 million. As in the previous quarters, order intake was the big positive news for electrification technology. Out of the €3 billion electrification orde r intake, 2.3 billion were reported in electrification technology. A large part of that was obviously related to the order for battery management systems, which we have already communicated in May. I'm getting to slide nine and let us look now, at business unit, electronic controls. I think it's slide nine, yeah. As in the previous quarters, the impacts from material cost increases and lower sales had the highest impact in EC.

As a result, the €922 million of sales only translated into €20 million of adjusted EBIT, a margin of 2.1% and since most cost increases are related to our core technologies, the margin here was even lower. However, we are starting to see some positive sales momentum, especially in Germany and North America. The exceptionally high profitability in EC's non-core technologies was mainly due to one off effects related to a closure of a warranty case, which led to an income of almost €20 million in Q2. On the next slide, we see sensing and actuation, which on the other hand, continues to navigate very well in these difficult waters. Of course, currency was a helping factor by 5.5%, but the main drivers for the strong profitability of 10% for the whole business unit were solid demands in Germany and North America, as well as reimbursements for higher input costs, which we could negotiate with our customers. As a result, sensing and actuation's core technologies performed well with an adjusted EBIT margin of 13.4% at €673 million of sales. Once more, a very resilient quarter for sensing and actuation, which of course, also allows us to further finance our electrification strategy.

In our fourth business unit, contract manufacturing; we continued with the phase out. Organically, sales went down by 4.2%, even though we saw higher sales from higher input costs also in contract manufacturing, which we of course, completely pass on within higher prices towards Continental. In addition, also, currency effects led to more than 20 million higher sales in Q2, despite declining volumes. The adjusted event margin came in at 3% in line with the bilateral productivity, which we agreed with Continental and a reminder here, at that stage, on a group level, this is still a wash since we purchased a similar amount from Continental, resulting in lower costs of goods sold in our business units ET, EC and sensing and actuation. Let me now get to the cash flow. Despite the lower

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	profitability, we kept the operating cash flow on previous year's level. This was
	mainly due to some earlier than anticipated payments, which we received from
	some customers in a lower double digit, million-euro range.
	As expected, we also saw a higher cash outflow from CapEx in Q2 compared to
	Q1 approaching now the target at 6% of sales. Please remind that Q2 2021 was
	still heavily influenced by spin off effects with Continental, which materialized
	mainly in the investing and financing cash flow back then. Anyhow, our liquidity
	situation, which you can see on Slide 13, remains very comfortable. Despite the
	slight decrease in cash to €810 million, we still hold liquidity reserves of more than
	€1.6 billion with no near-term refinancing need. I think this is important to note.
	Our networking capital has increased year over year to now 5% of sales, mainly
	driven by the elevated inventory levels. Our net debt ratio remained stable
	compared to Q1 at -0.5X net debt to adjusted EBITDA. And our equity ratio
	actually increased significantly to 40%, the main reason for this was the
	revaluation of pension obligations considering anticipated higher interest rates,
	which resulted in an increase of OCI of around €280 million compared to Q1 2022.
	So, all in all, our balance sheet related KPIs reconfirm again our robust and solid
	balance sheet structure. Now finally, let us take a quick look at our guidance for
	the whole year of 2022. And here I think the main message is that there is nothing
	new to be told, we can confirm both our guidance and the outlook for the
	worldwide light vehicle production. Despite the continuous challenging markets,
	we expect and we are confident to reach our targets. This is especially driven by
	supporting factors like, number one, currency, number two, our price negotiations
	as well as, number three, gradual improvements of the overall semiconductor
	availability, which we do already see and anticipate to continue for the second half
	of 2022. And with that and I hope the line kept stable, I have reached the end of
	my part of the presentation and Andreas and I are now looking forward to your
	questions, but first, back to Heiko, I guess.
Heiko Eber:	Thank you very much, Andreas. Thank you, Werner, and once again, apologies for
	the connection problem, and of course, for your patients. So, as announced, we
	will now enter the Q&A part of today's session, and as always, since we would like
	to offer all participants the opportunity to ask questions, that is why we kindly ask
	you to limit yourself to two questions. And also, of course, if time allows, you can
	ask additional questions, after going back into the queue. So, operator, we are
	now ready to take on the first questions.
Operator:	Certainly, as a reminder to ask a question, please signal by pressing star one. The
	first question comes from Jose Asumendi from JP Morgan. Please go ahead.
Jose Asumendi:	Thank you very much. It's Jose from JP Morgan. A couple of questions please.
	The first one, I would like to understand a bit better, what you are seeing in terms
	of the ability to source semiconductors and whether the sourcing is becoming
	easier. Second, I would like to understand a bit better your view of the production
	outlook across different regions, mainly Europe and China, if you could share
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