Edited Transcript of LEVE3.SA earnings conference call or presentation 13-May-19 12:30pm GMT – Yahoo Finance

As far as sales are concerned, we are very satisfied that we were able to maintain our growth track record during a challenging transformation phase in the automotive industry. As just said, in 2018, our sales reached EUR 12.6 billion. After adjustment for exchange rate effect of EUR 393 million, and changes in the consolidation group of EUR 359 million, organic sales growth reached 4.4% and rose well above the market average.

The main drivers of the exchange effects with the US dollars, Brazilian real and Argentine peso. The consolidation effects were mainly due to the sale of HBPO reduce to be consolidated in our group accounts at quarter until June 26. I would like to stress that all our business units, the Mechatronics division, as well as our profit centers contributed to the organic growth in 2018.

During the financial year under review, earnings were much higher than in recent years. Despite increased material prices and tariffs, we achieved an EBITDA margin of 10.9%. Certainly the one-off effect from the sale of HBPO and BMTS as well as lower warranty expenses than in previous year, were some of the main drivers of that positive development. Adjusted for the joint venture sales, the EBITDA margin was 8.2%. The operational business showed lower contributions in the second half of the year starting in China and becoming a global trend by the fourth quarter. Reasons were increased material prices and tariffs, amongst others.

The EBIT margin of 6.1% is impacted by scheduled annual amortization of goodwill and purchase price allocation from part exhibition, which accounts for 1.1 percentage point. Overall, net income improved significantly to EUR 446 million, representing a net margin of 3.5%.

As you are probably be aware of, Mahle’s committed by internal statues not to surpass certain financial ratios. After the sale of our joint venture, the equity ratio rose to 36.4% and rose well above our minimum threshold of 33%. Our net debt-to-EBITDA ratio was 0.8 was also significantly improved. These figures who reflect our strong commitment to implicit investment grade rating. They also show that we act decisively to reach these key figures whenever we fall short of them, like we did with the equity ratio in 2017.

Turning to our cash position. You can see that despite our good results, cash generation was not satisfactory. Our cash flow from operations amounted to EUR 425 million, which is lower than in the previous year. This was mainly due to one-time payments from last year’s warranty claims, which was settled in 2018 as well as an increased working capital at year-end. As in the previous year, cash flow from investing activities was marked by high capital expenditures for tangible assets. The significant year-on-year difference of plus EUR 305 million, however, resulted primarily from the sale of HBPO and BMTS. This was partly offset by the acquisition of a further 5% stake in MAHLE Behr GmBH & Co. KG, as well as our increased shareholding in the Italian aftermarket service solution company, Brain Bee. Cash flow from financing activities was dominated by the prepayment of a long-term financial liabilities amounted to EUR 139 million. This allowed us to reduce our interest expense as well as cash levels and to reduce part of our 2022 maturities.

In conclusion then, despite the discrete — decreased cash flow from operations and consistently high capital expenditures, net cash at the end of the period amounted to EUR 240 million.

Philipp Kuckuck will now bring you up-to-date on our highlights regarding products and innovations.

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Philipp Kuckuck, [3]

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Thank you, Jan.Let’s now turn to the most important part of our deal strategy. We want to develop solutions that meet the future needs of our customer. We, therefore, constantly analyze future mobility scenarios and their implications for our business. The focus is on strengthening our market position in core businesses and continuing to optimize the combustion engine, while at the same time investing at new areas of growth and technologies for alternative drive concepts.

In the past year, we demonstrated once again that Mahle provides innovative solutions for all automotive future scenarios. With our integrated R&D approach, we benefit from the R&D know how of existing Mahle business unit as well as the R&D expertise of newly added units. This enables us to successfully create new products for the changing needs of our customers. A very good example of this is the old management module for vehicles with electric drive. (inaudible) operation of several components. The electric drive motor, the gearbox, (inaudible) oil-cooled battery and the power electronics. The integration of the function cooling, filtration and oil extraction in a compact module of further advanced… such as weight reduction, lower pressure loss and reduction of the interfaces and thus the assembly effort compared to individual component, optimal use of space and optimized thermal management. As Mahle develops and produces all its components itself, we talk about a high-value add. Other examples are the on-board charger for battery-power vehicles or the e-compressor. The basis for our excellent R&D expertise is also our consistent portfolio strategy over the past few years. With a clear focus on our co-expertise areas, we increased our degree of vertical integration. The acquisitions of Letrika, Delphi Thermal, (inaudible) and Ebikemotion as well as our increased stake in Mahle Behr, to name just a few, helps create additional scope for our successful innovations within our dual strategy.

On Page 11, you can find some examples. Just last year, we introduced the e-compressor, a central component for the thermal management of the electric power trains and all the other components needed for a battery-electric vehicle. The e-compressor is suitable for cooling the interior and the battery both during operations and charging. The cooling capacity provided by the e-compressor is it requires to increase charging power and to accelerate discharging process by keeping the battery cooled even during rapid charging processes. The e-compressor is not only a great product, but also an excellent example of how our organization grows together and the combination of competencies creates real added value. It combines the technological basis from Mahle Behr and the Delphi Thermal acquisitions and as our electrical engine competence from the acquisitions of Letrika can finish it with the systems during competence of the power electronics from (inaudible).

Electronic systems are becoming increasingly important in our modern vehicles. The powertrain of the future as a system consisting of hardware and software that communicates and interacts within the vehicle in an intelligent and interconnected manner. As a pioneer of future mobility solutions, Mahle is, therefore, continuously expanding its activities in the area of electronics.

In late October 2018, Mahle commissioned its very first production plant for e-compressors in Hungary. Compressors are the heart of the air-condition system and the electric compressor will remove the link between air-condition and the combustion engine, thus allowing it to work in the battery-electric vehicle.

In 2018 Mahle also opened a new research and development center for electronics in Spain, representing a significant element of our capabilities to shape future mobility. We will employ around 250 engineers in Valencia working on developing new product and concepts for sustainable mobility and making Valencia Mahle’s global center for entities for electronics.

Mahle is committed to electric drive, and in addition to classic OEM market, also serves off-road applications such as (inaudible) at the market for E-bikes. In 2018, Mahle purchased 100% of the shares in Ebikemotion, Spanish specialist for (inaudible) Drive human machine interfaces and connectivity. This acquisition has strengthen the group’s activities in the area of electrically powered bicycles and will contribute the expansion of Mahle’s overall system expertise. Another way to put innovation on the road is with Mahle corporate start-up team. As the name suggests, chargeBIG means charging on a large scale. So it’s tackling one of the most important aspects of e-mobility.

Although an increasing number of battery-powered vehicles are coming onto our roads, one question remain unanswered, how are we going to charge all of these electric vehicles efficiently? From individual charging point to a nationwide network infrastructure, chargeBIG answers the question in the form of an intelligent charging system, which (inaudible) can be installed anywhere. The goal of chargeBIG is to make charging of large fleets more efficient by charging the batteries according to the needs of the customers. Cars parked for longer period of time can be charged more slowly and thus more vehicles can be charged at the same time and capacity is freed for faster charging of the individual cars where needed. It also has a positive effect on battery itself as slow charging is more gentle on the battery attending the effect of live car. Mahle’s innovations in the field of e-mobility are being well received by the market and has not only resulted in significant orders, but also in the (inaudible) of our customer portfolio. Mahle Group sales in the field of e-mobility are expected to exceed EUR 1 billion per year by the end of 2023.

In terms of market development, IHS expects lower production levels for 2019 compared to our last call in September 2018. Across all regions, expectations has decreased while South America still expect to grow albeit at a slower speed, all other regions will see worsening of market conditions. With regards to heavy-duty vehicles to global market is expected to shrink by 1.4%, although expectation for growth rates across all regions have declined Europe, North as well as South America are still expected to positively contribute, while prospects for Asia Pacific have worsened with an expected decline of 4.8%. Potential impacts from recent discussions such as sanctions, cumulative tariffs or a hard Brexit, are difficult to estimate.

Sales volume have been slightly below budgets so far in 2019. Trade restrictions such as Brexit and the tariff dispute between the U.S. and China as well as economic fluctuations and changes through a political framework in individual regions, all countries can have major impact on market development and thus on the business development of our company.

We are addressing risk posed by possible shifts in technology and the market environment as well as the opportunities they offer with our dual strategy.

Moreover, our solid financial situation with an equity ratio 36.4% and a net debt-to-EBITDA ratio of 4.8% provides the firm foundation for the ongoing development of our business.

Nevertheless, we have intensified our internal efforts to raise profitability and reduce cost. For example, we executive a program that focuses on harmonizing the production system within our group, and we continues standardizing nonproduction functional work stream and transferring them to shared service centers in best cost countries.

Despite all these changes, we are looking forward to the opportunities ahead and intend to capitalize on them with our industry-leading innovations.

This outlook concludes our presentation. Jan Thiele and I would be — I would like to thank you for your attention, and we’ll be happy to answer any of your questions following in the Q&A session.