Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Profitability improved year-over-year and sequentially despite lower net sales.
- Successful execution of cost reductions and pricing strategies.
- Strong cash flow supporting high levels of shareholder returns.
- High return on capital employed and improved leverage ratio to 1.2 times.
- Strategic cooperation agreement with XPENG AEROHT to pioneer safety solutions for future mobility.
Negative Points
- Sales in all regions developed less favorably than expected, especially in June.
- Lower light vehicle production and high call-off volatility impacted top line and earnings.
- Adjusted full-year 2024 guidance was revised down due to softer global light vehicle production.
- Negative impact from unfavorable currency translation effects and regional customer mix.
- Higher costs for raw materials, particularly steel and nylon, expected to be a headwind in the second half of 2024.
Q & A Highlights
Q: If I look at the midpoint of your guidance cut, it looks like close to a 30% decremental on lower sales. Is it a little bit higher than normal? Any thoughts on why it is toward the higher end, particularly with PSO?
A: We always said if it's basically LDP that is driving the sales development, then we would expect that the decremental margin would be at the higher end of the 20% to 30% range. On top of that, we also have a slight headwind from raw materials versus what we had expected previously. On the PSO, we have included a rate of around 17 to the dollars. Depending on how that moves in the second half of the year, that could be a difference to what we are assuming at the moment.
Q: How much of a mix headwind is baked in for the second half of the year? Is that expected to persist or is most of that sort of, I guess, 1% extra customer mix headwind already occurred in Q2?
A: The 12% we referred to was how the volumes in June developed compared to our expectations at the beginning of the quarter. The mix in the quarter had a negative 2-percentage-point effect. We expect that for the full year to be around negative 1%, mainly based on the sales mix in China improving in the second half for us versus the first half.
Q: Could you talk a little bit about your view on the light vehicle production of 3% for this year, slightly more than the 2% in comparison to I mean, the way you do this is Europe. That is that you are more cautious on?
A: Our slightly more negative view on the full year compared to S&P is connected to our more cautious view on Europe. We see effects from the overall business cycle and consumer demand being slightly weaker due to higher cost of living and higher interest rates. On price compensation, we are making good progress and have closed with the majority of our customers. It remains a detailed negotiation process.
Q: Is the headwind reported from out-of-period compensation just a timing issue or is there some inflation in the system that you're unable to recover? Will this headwind repeat again in Q3 and Q4?
A: The out-of-period compensation we referred to was higher last year compared to this year. It doesn't indicate anything that goes back further in time. As inflation comes down and negotiations conclude, the out-of-period impact becomes less significant. This year, we are negotiating impacts arriving in 2024, not 2023.
Q: There hasn't really been an improvement in call-off volatility over the past year. What's the main reason for why you expect that to improve ahead?
A: We expect call-off volatility to eventually return to normal as the automotive industry is used to working effectively with call-offs. The current volatility reflects the uncertain economic environment. Some customers are close to pre-pandemic targets, while others are further away, adjusting inventories with short notice.
Q: Could you specify or quantify what buckets will be driving the margin improvement in H2, especially in light of some raw material headwinds and car production headwinds?
A: We expect a slightly higher EBIT in the second half than in the first half, supported by structural and strategic initiatives, cost control, and increased customer compensations. These positives will be partly offset by higher raw material costs. The largest contributor to the margin improvement will be customer compensations.
Q: Could you give us a sense of the trajectory of cost reductions this year, both the $50 million of indirect that you said, as well as direct headcount reductions? What could those cost savings be on an annualized basis exiting this year?
A: Planned savings from our structural initiatives are unchanged at $50 million this year, ramping up to $100 million next year and $130 million when fully implemented. These cost reductions are on top of our traditional toolbox used to offset annual price reductions with customers.
Q: What's the right calculus on market outgrowth considering the shifting customer mix dynamic and changing price cost?
A: We believe that content growth will continue to be important, with more advanced solutions and price adjustments contributing. Market share growth will be less significant as we aim to defend our strong position. Our focus should be on the organic growth target of 4% to 6%, with 1% to 2% from light vehicle production growth, 1% to 2% from content growth, and 1% to 2% from additional business opportunities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
