Peugeot SA (PEUGF) On Q2 2018 Results Earnings Call Transcript

Peugeot S.A. (OTCPK:PEUGF) Q3 2018 Earnings Conference Call October 24, 2018 12:00 PM ET

Executives

Philippe de Rovira - CFO

Analysts

Thomas Besson - Kepler Cheuvreux

Gaetan Toulemonde - Deutsche Bank

José Asumendi - JPMorgan

Horst Schneider - HSBC

Stephen Reitman - Société Générale

Pierre-Yves Quemener - MainFirst

Operator

Ladies and gentlemen, welcome to the Group PSA Q3 2018 Results Conference Call. This presentation will be hosted by Mr. Philippe de Rovira, CFO and Member of the Executive Committee of the Group PSA.

Sir, Please go ahead.

Philippe de Rovira

Thank you. Good afternoon and thank you for joining the call. I'm very pleased to be with you today to present to you the third quarter review of Group PSA. Before going to the detailed slides, a short introduction; the third quarter has been very Celtic for many of our main competitors because of the implementation of the new WLTP test in Europe from September 01.

For PSA in Europe, the third quarter has being a normal quarter, as the Group was fully prepared for WLTP, all models of our five brands were homologated before the deadline of September 01 and we were able to serve normally our customers without any need to make a costly push of our cost in the network at the end of August.

In Europe after an increase of market share of 0.5 points during the first half of '18, Peugeot Citroën DS accelerated its market share growth in Europe, reaching 0.6 points in Q3 '18 compared to Q3 '17.

Let's now have a look at the results in more detail in the next slide. On Slide 3, Q3 worldwide sales were down 16.7% compared to Q3 '17, many due to the suspension of our activities in Iran since May 01, the low performance in China in a weak market and the currency depreciation in Turkey, Argentina and Brazil.

In the emerging markets, given the Forex headwinds, we've decided to stick to a policy to protect our margins rather than our volumes. In Europe, Group PSA grew it's sales by more than 8% including OV for PC alone as mentioned before, we increased our market share by 0.6 points in Q3 '18 versus Q3 '17.

The success of our recent launches was confirmed during the third quarter Peugeot 308 and 508 considering that their success was Citroën C3 and C3 across while enabling Citroën to accelerate its growth and for DS it's new flagship DS 7 CROSSBACK now successfully contributing to the Group's result.

Year-to-date Peugeot Citroën have increased their market share respectively by 0.3 from 0.2 on other strongest growing brands in Europe among the top 10 brands and there is more to come within new Peugeot 508 just launched, the new DS 3 CROSSBACK to be launched in the first half of '19 and the C5 Aircross in the C-SUV segment, which is a core of the market and a fast growing segment.

This new SUV will enable Citroën to accelerate its growth in the coming quarters. We're also continuing to reinforce our leadership in the LCV segment in Europe. Thanks to a strong commercial performance of our range of products. Our recently reviewed compact van ranch, Peugeot Partner and Citroen Berlingo, combined with the new OV combo have received the International Award Van of the year '19.

Let's have a look at the stock situation on Slide 4. As you can see PCD inventories are at the right level and in line with our sales. They compare to particularly low level of inventories in Q3 '17. OV inventories on the other hand have been sharply reduced to converge to what's PC best practice in terms of inventory management and there is more to come.

On Slide 5, let's now move on to Group revenue, which grew by 7.8% versus last year, reaching €15.4 billion in Q3 '18. This include Opel Vauxhall revenue for €3.9 billion. PCD revenue increased by 0.8% compared to a strong third quarter '17. If you remember that in H1 '17 we had some production constraints, especially in 308 and 508.

As a result revenue on H1 '17 was unusually low and revenue on H2 was unusually high. In '18, we are back to normal seasonality with H1 stronger than H2, which is also the case for OV. The trend is also positive for Faurecia whose revenue increased by close to 6%.

On Slide 6, we represent to you the PCD revenue bridge. Growth was mainly supported by product mix, price and safety partner, partially offset by FX end volumes. FX remained a strong headwind with a 2.3% negative impact, the most important part coming from the Argentinian peso, but also the currencies in Turkey and Brazil, partly compensated in the pricing where we had positive impact of 1.5%.

As you know, there is always lag between the currency depreciation and the full impact of price increases, but we will stick to our pricing discipline to protect margins. Volumes had a negative impact for 2.9% mainly due to the decrease of sales in Latin American and Middle East and Africa.

Product mix continue to be a strong driver of our revenue growth with 2.2% increase, compared to last year mainly thanks to DS 7 CROSSBACK and C3 Aircross. Sales to partner also continued to improve 1.4% with a ramp up of sales to Opel Vauxhall partners now including the new combo van.

On Slide 7, let's now move to year-to-date view of the Group review, which amounts to €54 billion, up more than 29%. At constant '15 exchange rate and perimeter, group revenue is up 21.6%.

Our Push to Pass target is 10% revenue growth by the end of this year and an additional 15% by the end of 2021. The PCD Automotive division revenue increased by 8.2% and the trend is also positive for Faurecia with a rise of 5.4%. At the end of September '18, OV revenue amounted to $13.8 billion for nine months compared to two months only in '17.

Slide 8, now regarding the '18 markets, we have revised down the market in Latin America from 4% to 3% to take into account the evolution in Argentina and in China from 2% to 1% given the recent trend. The outlook isn’t changed for Russia and for Europe, we had previously a forecast of a stable market and we revising it up with a 2% growth.

Three points to conclude, Group PSA has continued to grow in Q3, thank to OV integration and PCD market share performance. In Europe, we have a strong order book and plants are running at full speed.

Second point, Q3 has been a normal quarter as WLTP homologation has been properly managed and H2 will be a normal semester in terms of seasonality compared to H1. Third point, we remain fully focused on the execution of the strategic plans, in particular running out on new successful models to deliver steady product family mix.

No change of guidance until February '19 date of our full year results. When we will give our targets for the second half of our Push to Pass strategic plan.

And now I'm ready to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Thomas Besson from Kepler Cheuvreux. Sir please go ahead.

Thomas Besson

Thank you. It's Thomas Besson from Kepler Cheuvreux. Two questions then, the first one on your comments about your order intake in Europe and the European pricing environment. Can you give us some more details on that topic?

And the second on your Chinese business, we had the impression that your relative performance in China was troughing at the end of Q2. Obviously the market is changing in China, but your business seems to deteriorate again.

Can you comment as well on that whether we should -- what we should expect in terms of possible infusion of cash into the business or what kind of pluses we should expect from this business needs to, thank you?

Philippe de Rovira

Okay. Thank you, Thomas for your two questions or three questions. As to the order intake, well the order book at the end of September is really good as I mentioned and then, when I look at the situation just today, October is also going in the right direction, which is a very good sign.

We think that in October we continue to benefit from the fact that some competitors do not have their full range available for the customers, which is definitely an advantage for us and on top of that, given the recent use from the decision of the government in the night from Monday to Tuesday, we see another opportunity with this recent major to perform well in terms of orders in the coming weeks and months.

As to the pricing environment, what we can see is the car makers we their new range, amalgamated WLTP new wrench, the pricing are definitely up, which is a good single, but to be clear up front, I think the reality of the market when they're finished to clear their stocks on the old cars, but the first single on the pricing environment with the cars that are amalgamated on the new WLTP standoff is positive.

As to the Chinese business, we're not happy with the performance in Q3 as you can see in the slide and definitely to your question, let's have a few about cash a few observations. The first one on the JV with the Changan, so for DS we have one thing that will help is we have loaded the plant Shenzhen, thanks to the introduction of a car of our partner that is currently in the industrialization phase and will come into production in the coming months, which will help a lot in terms of absorbing the cost of the plant and that will be some help, but registration remains tense [ph].

On DPCA, so our joint ventures with DFM for Peugeot and Citroen, you'll remember that in the first half we were still making profit, given the evolution of volume, we're working to decrease the breakeven point. So we're working on cost every day because it's only by reducing correctly fixed cost in the tougher environment and preserve the profitability, but it's fair to say that given the Q3 results, it become more challenging.

Thomas Besson

Very good. Thank you very much.

Operator

The next question comes from Gaetan Toulemonde from Deutsche Bank. Sir please go ahead.

Gaetan Toulemonde

Good afternoon. Good evening. It's Gaetan speaking, Deutsche Bank. Two questions, first one, I want to go back on comment on China. You have massive overcapacity with Dongfeng joint venture. Any risk that you might have to write off part of the capacity, this year, beginning of next year? Can you help us a little bit on that?

And the second question is on the FX, if I would properly different slide in the past looks like that in Q3, the negative impact of FX on the operating result will be lower than the trend of H1, did I do my arithmetic properly or I'm wrong somewhere?

Philippe de Rovira

Okay. Thanks Gaetan for the two questions. Let's start with the second one. On the Forex, it's -- you've done your math perfectly well no doubt, but I think we need to look at FX volume and price together because what we've done as a choice is we've given the priority on the profits rather than volumes.

So the FX of the depreciation in Argentina until here you can see it in Forex, but you can also see it in volume and country mix in fact. So I think we should look at these three effects together because they are really linked.

As to the question on China, well, the first thing to do and we're working on that is to take the measures to treat the overcapacity that you mentioned. Well, have in mind that in China, the question is not I would say specific to PSA as many OEM built big industrial capacities and I was mentioning to you the solution that we found in CAPSA with our partner which was to lower the plant, which of course reduced a lot the size of the problem. So before talking of something else, let's go to the physical solutions.

Gaetan Toulemonde

Okay. So that means that there's no intention for any type of write-off linked to that underutilized capacity in China, which is pretty massive?

Philippe de Rovira

Well, today it's revenue call. We're working on it and we'll come back to you on the full year result on that subject.

Gaetan Toulemonde

Okay. Thank you.

Operator

The next question comes from José Asumendi from JPMorgan. Sir, please go ahead.

José Asumendi

Thanks. I also have two questions please. The first one on PCD, can you maybe just break out how much is the negative impact of country mix within the volume on country mix on the revenue bridge?

Also on revenue bridge if you could just give us a few thoughts on OV volume mix currency, what was positive, what was negative, just ballpark volume price mix and currency on OV specifically please, did you give any guidance on that?

And then on and then the final thing would be on product launches, can you just repeat again what are the product launches we should be expecting by the end of the year across Peugeot Citroën and DS please? Thank you.

Philippe de Rovira

Okay. So maybe let's start with the last point product launches, what we had is the Peugeot 508 that is just being launched. We've got the Peugeot partner Berlingo on Combo that are just on the road and after that, what I've mentioned is C5 Aircross in the C-SUV segment, which is coming just in two or three months and we got after that the DS 3 CROSSBACK in the first half of '19.

As to the question on volume on country mix, well, we don't really give that detail, but well, basically what is important to see is in Argentina and Brazil, we've got -- in Argentina sorry, we've got a strong market share. So it is clear that the impact of Argentina is key into volume and country mix impact that you got and this is quite significant.

And OV, sorry your question again on OV was…

José Asumendi

Just a little bit, if you can give us any guidance where year-on-year the volumes of all the up around is currency a headwind or a tailwinds and product mix is positive or negative, just big picture.

Philippe de Rovira

Okay. Well, if you look at the market share of OV, it's been decreasing during the three quarters, but the good news is the performance was the decrease in market share has been reduced in Q2 compared to Q1 and reduced in Q3 compared to Q2.

But just remember that in OV, our focus definitely is not volume. Our focus is restore profitability to go on reducing the breakeven point to reduce the cost and this is our first intention. This is exactly similar to what we've done with PCD at the start or back in the race and really that's our top priority because we consider that we first need to have some business and some business in top of each car that we sell is at profit, which means working on channels, pricing power and once you got some business, you can grow again in some manner.

As to Forex on OV side, there is no big Forex impact compared to the previous because the main thing is the GBP in Europe. Outside Europe you got the impact of Turkey in which OV is quite significant, is the only place outside Europe where OV can operate today. So it's significant overseas.

José Asumendi

Got you. And then product mix is positive.

Philippe de Rovira

Product mix should be a positive for OV in the second half yes.

José Asumendi

Okay. Thank you very much.

Operator

Our next question is from [indiscernible] Sir, please go ahead.

Unidentified Analyst

Good evening, Philippe. Two questions, first of all on the product mix at group level, PCD, it's been massively positive in '17 obviously more this year and the question is, should we expect this driver to fade rapidly from 2019 onwards or should it remain supportive thanks for the LCVs and the full availability of the year the products that you just mentioned, that's the first question?

Second question is more let's say forward-looking, I would say its two question in one. I know that it's a sales call, but obviously everyone is wondering what it means for earnings going forward. What has happened since H1? First are you uncomfortable with the current earnings consensus and second, could we have a preliminary review of what you see as a risk and opportunities for PSA next year, in a year where we could be -- we could see some kind of cyclical downturn in Europe, which is by far your largest end market, thank you?

Philippe de Rovira

Okay. Thanks for the question. Well, on the product mix, you remember that we've announced in the Push to Pass plan that we will launch one model per year per brand and per region and the fact that we are doing that makes us comfortable with the fact that we'll have regularly each favorable product mix.

That's a big change compared to what PCD had done in the past. That's also something that we are having to use its mythology in OV and that's very important because the old cars are substituted regularly by new successful cars. So definitely the answer, we'll have a favorable product mix next year compared to '18.

I think you have felt in my voice that for me the Q3 has not being compared to our competitor an issue. So I think you've felt in my voice I am confidence. We don't give as you know the result per quarter, contrary to some competitors, but definitely there will be the normal seasonality between H1 on H2 that's additionally every year while '17 was an exception that you remember why. So I am feeling comfortable on that respect.

About next year in '19, well, I don't know if '19 is the most challenging year. It might not be in my opinion should not be. I think the big game changer is more 2020 and the Q2 regulation in which we are well prepared, but for next year given what we've got in terms of products coming to the market, I feel quite comfortable and really in particular the DS 3 CROSSBACK, the C5 Aircross, and 508 are all products that should be well performing.

DS 3 CROSSBACK it help us to increase the average price of the cars sold. 508 is also doing a nice start in terms of orders. So quite – well, really confident about '19.

Unidentified Analyst

All right. Brilliant. Thanks very much.

Operator

The next question comes from Horst Schneider from HSBC. Sir, please go ahead.

Horst Schneider

Yes. Good evening and also thanks for taking my questions. I have only some follow-ups so when you say you have got a good order book could you maybe be a little bit more precise what does that mean? What is you level of visibility we have seen that September sales has come a little bit under pressure on a wholesale basis and I see that Q4 comparison base is also pretty high.

So would you expect that you have again positive units sales growth in the fourth quarter? That will be my first question? And the next question is more general one also following the question from José that we see that the share price comes under pressure and obviously the concern is that your earnings come under pressure and then the volumes come under pressure and we get it from other car makers that there is some uncertainty now on the volume side.

So therefore I want to get some that you reaffirm again that you are not that much linked to the volume development because you still manage the company more on profits and not on volume. So are you kind of immune to some volume volatility? Is that the right view or you would say that this lower volumes also your earnings should come under pressure?

Philippe de Rovira

Okay. The view is following. In Europe in PCD we've got an industrial production system that is running at full speed where with more than 110% renewable ratio, which is really high, which means in fact that if we had some volume decrease because of the markets as you suggest, just reducing the production in some plants that are running at extremely high level for example, we've got two plants that are run 150% will not be bad news in terms of cost.

So that's the first part of the answer. The second part of the answer is what protects this company is the low breakeven point on the technical answer. I would say above all the mindset is what I this company the last five years basically is when we got something difficult coming a headwind coming, the level of reaction and how fast we react as change dramatically, you can call it agility that's the way to summarize it and I think that's what will protect us against adverse evolution if there is.

So really in '19 for the moment to maybe it links to the first question, the order books well, I don't know -- I don't think it makes a lot of sense to remember because the outlook is order book expressed in number of days is not -- the right level is not the same for each brand, just an example.

If you got OV, the order book of OV, it's linked to a country in which people buy their car not on stock but ordering their own car. So the order book is always higher than for example since [ph] when that is linked to market for example, the markets in which balance stock.

So what I am -- so I don't give you a figure, but what I can tell you is I compare myself to the predecessor and I'm feeling comfortable.

Horst Schneider

Okay. But unit sales, there is some likelihood that it can be positive?

Philippe de Rovira

Well, what I think is on PCD we're going to grow -- to continue to grow market share to deliver a favorable product mix and it's much more product mix than volume. It's probably some pricing much more than volume that is driving our performance in terms of economical results.

Horst Schneider

Okay. Excellent. That's very clear. Thank you.

Operator

Your next question comes from Stephen Reitman from Société Générale. Sir, please go ahead.

Stephen Reitman

Thank you. Good afternoon. I have two questions. as well, first of all on the slide looking at the revenue growth by division. obviously you're only showing the two months from 2017 that you consolidated Opel Vauxhall and if I try to annualize that, you suggest that something like 7% decline in revenue in Q3 this year gets Q3 last year. Is that a reasonable assumption looking at the math?

My second question is on the sales to partners. You're up 1.4% mentioning with including sales to Opel Vauxhall. What was the impact of Iran on that sales to partners figure? Thank you.

Philippe de Rovira

Well, maybe let's start on the second question. In fact, sales to Iran is a marginal thing because you remember that in fact Iran was an opportunity but we were only at a stage where we were about to get the benefit of this opportunity but it was absolutely marginal in terms of renew for the group.

So we had in the P&L earning cash all impact before the end of June '18 or was in the publication of the first half. So it's normal impact and it will not be any impact in the coming months. It's just a lost opportunity.

On OV side, as you know it doesn't -- if we don't publish '17 because it doesn't make any sense because it was not the same accounting gap. It was the same perimeter and we simply do not have set of accounts of last year and once again in OV I mentioned the evolution of market share that less unfavorable quarter after quarter, but once our main priority in OV at that stage is profitability before being volume. So I don't repeat my previous comment, but that's really the answer.

Stephen Reitman

So you're happy with the pricing developments within Opel Vauxhall?

Philippe de Rovira

Well, in pricing probably, we're improving. You remember that in the base plan, we had said that we would deliver plus two the first year, plus one and plus one, the two following years. We are definitely on track and we will not change our policy.

Stephen Reitman

Thank you very much.

Operator

We have no questions for the moment. [Operator Instructions] We have a question from Charles [ph] from Redburn. Sir please go ahead.

UnidentifiedAnalyst

Hi, It's Charlie [ph] from Redburn. Thanks for taking my questions. Just a quick one actually. On the others items in the revenue bridge, plus 0.9%. Can you just explain what are the factors driving that?

Philippe de Rovira

Yes. It's the evolution of buyback cars in fact.

UnidentifiedAnalyst

Okay. So as in you're selling fewer buyback cars?

Philippe de Rovira

Correct.

UnidentifiedAnalyst

Great. Thank you.

Operator

We have a question from Pierre-Yves Quemener from MainFirst. Sir please go ahead.

Pierre-Yves Quemener

Good morning, Philippe first and just to follow-up just going back to the bridge, looking at the volume country mix negative 2.9% what is share of the country mix? Is it slightly positive? Is it fair to assume that?

Philippe de Rovira

Well, the country mix is slightly favorable.

Pierre-Yves Quemener

Okay. By a couple of 10 that wouldn’t be shocking to assume that as well?

Philippe de Rovira

Slightly favorable.

Pierre-Yves Quemener

Okay. Thanks very much for that one.

Operator

We have no further question for the moment. [Operator Instructions] We have no further question.

Philippe de Rovira

Okay. Well, thank you to all of you for participating to this call. So just a few words to conclude. Europe, strong order book, plants running at full speed. We basically remain focused on the execution of our strategy. We are just focused to deliver the new successful models as on plan in order to deliver product family mix and that's really what matter for us at the moment.

Thanks to all of you. Good bye.

Operator

Ladies and gentlemen, thank you for your attendance. This call has been closed. You may now disconnect.

Source : https://seekingalpha.com/article/4214017-peugeot-s-peugf-q3-2018-results-earnings-call-transcript

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