Faurecia S.E. (OTCPK:FURCF) Q2 2022 Earnings Conference Call July 25, 2022 5:00 AM ET
Company Participants
Patrick Koller – Chief Executive Officer
Olivier Durand – Executive Vice-President, Group Chief Financial Officer
Conference Call Participants
Christoph Laskawi – Deutsche Bank
Tom Narayan – RBC
José Asumendi – JPMorgan
Patrick Koller
Welcome to our H1 2022 Results Presentation. Before introducing the agenda of this meeting, I would like to introduce Olivier Durand, who is our new CFO, replacing Michel Favre who is today the CEO of HELLA.
May be Olivier, if you want to say a few words?
Olivier Durand
I’d be happy to. Thank you, Patrick. So Olivier Durand, the new CFO of Forvia Group and Faurecia since July 1st replacing Michel. I have been in Faurecia for the last five years, four years as Deputy CFO and the last year managing the operations in electronics, Faurecia Clarion Electronics Business Group based in Japan. Before Faurecia, 25 years of working experience mainly in financial role with the last position being the CEO and the CFO of Alcatel-Lucent, first acquisition by Nokia before squeeze out, so familiar with minority shareholders protection.
Patrick Koller
Thank you, Olivier. So the summary, I will start with the key highlights of the first half. Olivier will then take over to present the H1 results and the 2022 guidance and I will conclude the meeting with our way forward.
Starting with the H1 2022 key highlights. So you know, we are in a heightened inflationary context in H1 with low volumes, low volumes related to the crisis in Ukraine which started in February and it generated some supply chain disruptions mainly in Europe, but also the COVID-related restrictions in China two months lockdown in the second quarter and this is especially in Changchun where FAW is located and in Shanghai, so two very important automotive hubs in China. And not to forget it, we continue to have issues with the semiconductor shortages. We had to Stop & Gos into the U.S. and in Europe mainly.
The inflation is also an issue. It’s still very high and especially on the materials in the first half, we had significant price increases and we also have to face the price increases which will last in the second half on the energy costs. In this context we gave ourselves four priorities; deleveraging the Group, integrating and executing synergies with HELLA, enhancing resilience and reducing the breakeven point, and optimizing cash versus growth in other words to be selective on our order intake taking into account new equation of strategy.
When we look at the main highlights, we closed in January 31th the deal of the acquisitions of HELLA. To just remind you, we signed the deal the 14th of august in 2021, so all of that was rapid, quick. We also had our 100 days recently in June, so it’s not a long period of time, even if it looks like. We are working together for now and very long time. We acquired 82% and not 100%, which means a total amount of €5.4 billion, and what is remaining to be refinanced is 1.7% post capital increase.
The creation of Forvia, the combination of Faurecia and HELLA, in terms of operations and in terms of our teams, with the consolidation started 1st of February of this year. We made the capital increase of €705 million in June successfully which is contributing to the refinancing without increasing the debt. And the integration and implementation is perfectly on track and I will give you some figures later on to consolidate to put facts around it.
We had a very solid order intake of exceeding in fact, €15 billion in H1 and which is perfectly aligned with our three strategic levers of growth. It allowed us first to the market in some key technologies and I will describe also in a little bit more details these technologies in which we want to grow. Our ESG conviction I think materialized even further during this period of time with the STBi validated net zero target for 2045 it’s the first automotive company achieving it. It’s the first French company achieving it out of about 20 companies worldwide.
We also have implemented our sustainable material division with some strategic partnerships. It’s very clear that here a powerful ecosystem is needed and we have implemented our action plan for energy resilience and I will give you something as about this also.
So now about the H1 key figures. First, our sales, at €11.6 billion up 49.3% on a reported basis, including five months of Heller, and plus 9% on an organic basis. The corresponding outperformance, organic outperformance was at plus 960 basis points, this Faurecia and standalone, out of which 790 basis points were related purely to volumes, plus 520 basis points related to inflation and pass through and minus 350 basis points related to our regional mix.
Operating margin at 3.7%, mainly reflecting and strong inflation, which mechanical impact is at about 100 basis points. So the performance would be at 4.7% and expressing the volatility in OEM programs, which we call the Stop & Gos and the two months lockdown in China. We achieved a positive net cash flow of €102 million.
Back to the order intake, exceeding €15 billion in H1 with profitability level, and also the strategic alignment with our group ambition. So electronics represented €5 billion, 33% of our order intake. It includes Clarion Electronics. China represented €4.1 billion, 27%. EVs, battery electric vehicles and fuel cell electric vehicles represented €4.7 billion, 31% and finally the most attractive segments, the premium segments and the SUVs represented €8.7 billion, 58%, which allowed us to have an content per vehicle at a record level in H1. This very good result is also allowing us to be much more selective in the second half, again to find the best equation between growth and cash up fronts.
Our three strategic levels for growth; electrification and energy management, safe and automated driving, digital and sustainable cockpit experiences, a few highlights related to that. About battery electric vehicles, we got our first orders for coolant control hub, which allows us or which allows OEMs to distribute calories like it is needed, so not only to cool, but also to eat up some of the components of the fuel [ph] chain. On FCEV I will be back, but just to remind you that we are covering 75% of the value chain and that we have won some significant orders. We also made a partnership with Air Liquide for liquid for liquid storage for heavy mobility.
We entered with first orders into the container storage and transportation systems, which is not an automotive business, but which is a significant market at about the size of the mobility storage, which I think is very important. And on the stack side we made and we achieved between Symbio and Schaeffler what I believe is a very significant joint venture for bipolar plate, I think we have the best partner possible for these very complex elements.
On safe and automated driving, we were very successful with our last generation of 77 gigahertz radars. We got new awards especially in China for E-mirrors. And also our portfolio of X-by-wire progressed significantly. You know, these are very complex algorithms and softwares using fail operational systems, which means full redundancies, including sensors. And we got our first order for brake pedals by-wire which again is very important for the automated driving solutions.
Not to forget in safe and automated driving, there is a significant new trend, which is very large lighting front panels which are including the [indiscernible] but which are also including as and BV [ph] has no need for a grill in the front of the car, some possibilities to message, to have animations, lighting animations for information to the external world, and which is now which is increasing the complexity integrating the headlamps.
On the digital cockpit, we enhanced our coverage with Faurecia Aptoide which is an App Store with than 3 million vehicles now equipped and with two new significant programs with German OEMs. We also have achieved significant innovations and orders on the interior lighting and all, you know, the signatures, the lighting signatures of the vehicles. And finally we made a partnership with Veolia, which is authorizing us to achieve at least 30% of recycled polypore materials in our interiors very soon in 2025.
About hydrogen, the major achievements in H1 2022 is probably the achievement of €500 million, it’s even more than €500 million lifetime sales in order intake and this mainly with Stellantis on the stacks, so this is related to Symbio and with EVO, so with [indiscernible] for the tanks. But I think that these two are very important with SOPs, which are in the next two years. So I think this is materializing the transfer from a project base to an industrial manufacturing base.
We also won two pilot projects for heavy duty trucks with MAN in Germany and with CEC in California. We worked on high capacity hydrogen storage systems for refilling stations with the other containers I spoke about and this in the Zero Emission Valley. We also had fueled cell stack system and joint venture, I spoke about that. It’s named in INNOPLATE.
About our conviction related to the climate change. So we communicated already that for 2025, we would be at CO2 neutral for 1 and 2. In 2030 our target is to reduce by 45% scope 1, 2 and 3 in fact, scope 3 having achieved neutrality for scope 1 and 2. And in 2045, I said it, we will be neutral including scope 3, and this is SBTi net zero. What are we speaking here about, it’s this curve? So may be 2045 seems far away. It is not. We have an intermediate, which is tomorrow, which is 2030. And it’s very, when you think about generations of vehicle, you do not have a lot of generations of vehicle. So you have to implement immediately these new architectures with new materials. What is important and what is allowing us to achieve this net zero is what we are doing on the material side.
We will combine recycled materials with bio sourced materials, which will allow us to have CO2 negative formulations and this capture of CO2 is part of the recipe to allow us to be at net zero and I think that this is very important. What is also legitimating us in this field is that if you increase through these complex formulations, the viability on the material side, you need to be able to compensate it on the process side. And what we are doing? We are doing formulations, which are related to some processes and applications for the automotive industry mainly. In order to capture the value, you need to be quick and to have the right perimeter in terms of feedstock. So this is why we, in the moment are negotiating with different partners the capacity for the Group in the next future to have access to significant volumes on recycled materials and bio sourced materials.
We will have more than 400 engineers in 2025, which is again, tomorrow working on these new materials and our target is to achieve more than €2 billion of sales. So including material sales to the outside world, not only related to our needs in 2030. What type of materials are we considering? We are considering compounds. We are considering foils and we are considering carbon fibers. We are owning the patents of force and consumption project, which is happening in France, but we have some other interesting projects in America related to the same approach.
I also would like to speak about what we are doing on metal, on steel. We have an agreement for green steel with SSAB to develop ultralow CO2 seed [ph] structures mainly. And we participated to the creation of gravity which is a direct reduction iron process, and which is a new intermediate step in the production of steel, very interesting. It happens in the north of France and which will guarantee volumes to — for VM.
About energy efficiency, I think that this one is particularly important when you look at the inflations. When you look at what we did in the frame of Scope 1 and scope 2, we are able, we will be able taking as a reference 2019 in 2023 to save 22% of our electricity consumption. Considering these, you see that 6% of this consumption will be related to some investments. The other one is simply reducing our consumption. Of course, it works with some materials with some new procedures we have put in place and which are working very well. To this, we add a self-production of about 7%. It means 1 million square meters of solar panels on all our sites.
If I add up, so the 7% of course is not for free, but it is not working on the inflation mechanisms of the electricity you buy on the market. So the saving in 2023 related to this is close to €40 million, and this will allow us to manage this significant inflation, we are hedged, we are partially hedged in 2023, but without this we will be impacted significantly at that time.
A few words about HELLA and its integration. We achieved already 600 million life time sales of revenue synergies, especially in Europe and in China. We have identified around 200 synergy opportunities, which are in the process to be executed. And clearly our cost synergies and optimization announced above €250 million in 2025 are on track. We will go one step further down this road, and we will work mainly on further synergy projects related to electronics, to our information systems, to cyber security and to the digital transformation.
We are aligning our standardization approach across all systems and tools and I should say operations, manufacturing, around the Group. On the right hand side, you see some figures about surveys we do on a quarterly basis. It’s pulse, it’s under the responsibility of BCG and it’s interesting because BCG has a pretty large data bank and is capable to give us some benchmark information.
And you see about, and this is happening with about 4,000 to 5,000 HELLA employees in the management area. And you see that there is a very strong, willingness above 88%, readiness above 83%, and an assessment of ability to do it, which is also high above 75%. These three, when I listen to BCG are above their benchmarks.
What I also would like to remind you is that the legal form of HELLA, the game there and GmBH and Co. KGaH which is a commended company with our 82% stake are allowing us to achieve the synergies we have identified. We have for them defined the legal frames, in order to guarantee the protection of the minority shareholders, but this is working.
And I think that with this, we go to the second part which are the H1 2022 results, up to you now.
Olivier Durand
Thank you, Patrick. So first of all a presentation of the market itself. Patrick was mentioning Stop & Go and the COVID restriction in China, and this is really the main factor of the period. Overall, the production has been flattish year-on-year at the low level of €37 million, but I think even more important that the absolute is the way it has happened. Europe has been heavily affected in particular at the beginning of the semester, by the Stop & Go, which is impacting in particular, or just in time side of the activities. China, two months of lock down in particular, April, the government has done a lot of things to help the industry alleviate the COVID restriction, which allowed a translation of a catch up in June, which is behind what we see at the end of the day, China being flattish on Q2 and overall plus 5.8%, but we are heavily in Europe, so of course the mix vision is speaking has been negative for us in H1. This is what was behind the 350 basic points mentioned by Patrick early on.
Now in terms of quality of the activity, clearly inflation and Stop & Go and this chart is trying to show some color on those two factors. So, on the Faurecia organic scope, gross impact of inflation, €500 million raw material, energy transportation, a bit in wages. We have been able to offset €400 of this €500 million, 80% recovery. The contractual pass through on raw materials, in particular on metal are quite good. There is a time lag, of course, and you will see more of it in H2. And also the negotiations with customers have been happening with a time lag as well, which means that the level of impact has been more important in H1 than what we will anticipate for H2. So, net impact on the operating margin 100% basic points on the operating margin, given those elements.
On the Stop & Go and COVID, this chart is trying to show what happened to us during this period. We are showing the number of days that have been lost or are actually lost due to COVID restriction in China or Stop & Go decision by the supply chain, our customers. And you see big level in Europe, particularly in March. And of course the severe level given the lockdowns in the main city, Shanghai, Changchun in a whole alleviating. The good news to be confirmed over average too is that you see those curves are going down at the end of the semester, which is an encouraging sign that we will have to follow up in the second half.
So to give details on the revenue. So the 11.6 reported plus 49.3%, this includes five months of consideration of HELLA from February 1st. On an organic basis, i.e. excluding scope, excluding ForEx, plus 9% the market was down 0.6%, so we have an outperformance of 960 basis points. These 960 basis points, three factors, the original mix negative that I mentioned given the reduction of Europe due to Stop & Gos in and the war in Ukraine at the beginning of the year, the inflation pass through and the volume excluding regional mix of 790 basis points, a good outperformance for the company.
On the operating margin, we can say that we had a resilient operating margin despite all those headwinds, and at 3.7% with an improvement Q2 versus Q1. If we look at the bar chart of the bottom, the first four columns are talking about impact on an organic basis, i.e. Faurecia and we are reflecting the HELLA contribution in the fifth one [ph] as €130 million i.e. 4.7% of sales.
So war in Ukraine, COVID in China, negative impact of €122 million, which is the combination of the volume and the Stop & Gos. Our specific issue, Michigan Seating program, €45 million. This €45 million is €30 million on operational issues on our side, sharply down from H2 2021, but still a burden on the results and €50 million are related on Stop & Gos of this specific one. The net cost of inflation of minus €100 million I mentioned before, resilient section is mitigating part of the impact related to China lockdowns and the war in Ukraine in consequence.
You see that inside those elements, there are also indication of the progress to expect on H2, in particular, on Michigan extra cost and on the net cost of inflation, I will come back to this in my H2 full year presentation.
If I go by business group, starting with seating, Seating has been particularly impacted by Stop & Gos and inflation aspect, not only in the Michigan program, but also quite a lot in Europe, just in time business is of course very impacted by Stop & Gos decision in the last minute. Also, we should say that we have issues in terms of execution, flexibilization of the cost and we are working on this one, so that H2 is better than what we are reflecting here.
On Interiors an overall performance that I would say good. If you take into account the dilutive effect of inflation, you see that this is the main driver between the 4.9% of H1 last year, and the 3.6% of H1 2022. So overall it means operational improvement in many of the domain and a good level of inflation past through knowing that inflation past through in plastic is less indexed than in steel. So I would say a good a good evolution Interior. And it means that with the operational improvement that are done H2 will have a good evolution.
Clean Mobility, an important evolution of the profitability. This is related of course to Stop & Gos. This is of course related to the lockdown in China, but it means also that in China we are heavily in Shanghai, in Changchun, which were the main cities and [indiscernible] that were impacted by lockdown, plus the choice of OEMs between BV and ICE cars in the context of lockdown, you’ll see that we had a drop of revenues in China of 11.9%. This is a significant contribution of the current level of margin, given that we have a good regional margin in China in Clean Mobility.
Clarion Electronics, my business group, so €11 million of operating loss. Semiconductors playing a big part, not only in terms of shortages, but also in terms of prices. We have been affected also by the weights of the lockdowns in China. Clarion Electronics is first of all a nascent business and the supply chain is heavy in China, not only for us, but also for the semiconductor companies. It has limited the growth that we work on by two thirds and it has also, I’ll say the timing of the repricing has been a bit delayed knowing that Japanese companies are starting their fiscal year, April 1st. So some of the improvement will be leading clearly to a positive operating margin in H2.
Showing HELLA contributions, so HELLA is €2.789 million of sales over the first five months, February to end of June, €130 million in operating income contribution 4.7%. This is reflecting also that HELLA has been impacted by the same factors as Faurecia, suppression, bottleneck also inflation and partial recovery of the cost in past through. For your information, HELLA has reported their preliminary fiscal year 2021, 2022 results last week on July 20. You know that their fiscal year is currently 1st of June to end of May of a given year and they will report their full presentation in fact on August 18 giving additional information.
One thing I would like to highlight about HELLA is that HELLA is also recording outperformance on a full fiscal year basis. They recorded in fact, negative minus 2.4% in revenues, organic excluding ForEx compared to minus 9% Markit. Why 9% is because in fact, when you take the fiscal year, there was heavy H2 of last year, and no recuperation of the lockdown days of China in the months of June. So also a positive and performance in HELLA of more than 660 basis points.
If I move to regions, so in the regions numbers you have for H1 2022, the Forvia picture, i.e. Faurecia, plus the five months of HELLA in all the regions. Europe, this is the place, as I mentioned, for Seating in which you have heavy impact of the Stop & gos. You see that in fact, in terms of volume activity has been down, if it excludes the past through in the revenues and also this is where, as I mentioned, Seating at operational issues and flexibilization to improve for the second half.
North America, 26% of the revenues, the main topic in H1 has been related to the Michigan program in the period. Asia, a fairly resilient operating margin, 9.1% in the region on the back of a good result in China. Considering the two months COVID lockdown in many cities and the disruption of activity, I would say this is a positive evolution. Take into account the inflation dilution effect, and you see that the evolution of margin in the context is quite good and this is encouraging for the second half and the following quarters.
Rest of the world, only 4% of the revenues. This is only South Africa and South America, 6.3% in operating income. This is an acceptable performance when you take into account the evolution year-on-year, restated of a tax recovery in Brazil that we had of €13 million, meaning that the H1 2021 was more 8.5 operating margin.
Now, if I move to present the detail of the income statements, starting with the operating margin, in complement to the comments before, I would like to highlight the change in the shape of our P&L that the Forvia scope is representing. HELLA has better gross margin than the historic Faurecia, which is reflecting the content in technology. It’s reflecting the good position in many products that HELLA is bringing to Forvia.
The second is the level of R&D that we have in the new company, €1 billion per semester in gross R&D. You see the power of the company that we are creating. The third element I would like to highlight is the level of capitalization. We have a lower level of capitalization in the 54% range versus 70% before. This is good. It means a better conversion in cash, a better cash generation for the new company for the same operating margin. And the last item is the SG&A. The SG&A, of course, currently at higher than historical level is confirming the potential for synergies as part of the combination.
Now, if we move to the net income, we are registering in fact net loss group share of minus €296 million in H1. Two third of those are related on the one side to integration and financial cost related to the acquisition of HELLA and €87 million to one off charges related to the downsizing in Russia. We have closed most or we have stopped most of the plants in Russia. We have, we are complying with all the regulations and sanctions that are applicable on Russia given the war in Ukraine and we have taken into account the consequence in restructuring and other cost receivables, inventories being stranded.
If you look line-by-line, let me highlight a few of them. Amortization of goodwill is €95 million. This is in fact the consequence of the acquisition of HELLA with five months of amortization of this goodwill. So you can consider going forward around €100 million per semester. Restructuring €155 million, so first all is about Russia, as I mentioned, but is also given the context we are taking restructuring measures elsewhere to ensure the reduction and the optimization of the breakeven point.
And the last element is on the interest expense. You see the high level of €292 million. This is not only related to the financial — related to the acquisition of HELLA, but also impact on our ForEx hedges, given the heavy fluctuation in the U.S. dollar in the period, so less recurrent, if I can say going forward.
On the net cash flow, so we have registered a positive net cash flow of €102 million in the six months, I think is for me the best indication of resilience. This has been achieved on the back, on the EBITDA €1.3 billion. It has been also with flat working capital. We have in fact peaked in inventories at the end of April and we start to decrease from then, and this is one of the key focus area of the second half. We have also €234 million of factoring. We have now the receivable factoring program in application throughout Forvia which allow to mitigate some of the headwinds and time lag on inflation management that we had in the first half.
Evolution of the net debt, so we have a net at €8.4 billion at the end of June. This is reflecting of course, the acquisition of HELLA. So HELLA El acquisition is €4.9 billion in cash after inclusion of the participation of the family to the capital of Faurecia. This is after the €690 million net proceeds from the capital increase that we have been successfully doing in early June and this is integrating the depth that remain in HELLA €516 million. We are at a 3.1 net-debt-to-EBITDA level at the end of June. No covenant to be tested since to the renegotiation with the banks that was done in April. So we — and we are targeting to be at 3 at the end of the year.
More details on the refinancing. So Patrick was mentioning that €1.7 billion remains to be financed. We have done two third already inclusive of the capital increase done early June. We have additional debt instruments that we are looking at. The first one being plus €200 million coming very soon and the compliment is related to our €1 billion asset divestment program that is underway. Our commitment is to complete and cash in this program by the end of 2023 and I think the first operation will happen this year. We have in the €1.7 billion remaining the most of it is 1.6 is the bridge-to-bond, which is and we have headroom until August 2023.
Complimenting this, resume on liquidity and debt, so strong liquidity at the end of June. The €6.1 billion is €4.2 billion in variable cash combined Faurecia and HELLA. And this is including the two facilities not used at all of 1.5 and 0.45 senior credit facility respectively Faurecia and HELLA.
On the debt profile you see in 2023 the bridge-to-bond in yellow, this is the main factor after other ones are more limited until 2027, two key elements to highlight inside this maturity profile; current cost of debt below 2.8% and second, two thirds of our interest rates are fixed, the main valuable one being the bridge-to-bond. We have maintained credit rating with the three agencies, first acquisition.
If I move now to the guidance, what is happening for the rest of the year, we will confirm our guidance and I will explain why. Number one, we are prudent on the volume. We are considering a volume of cars of 74 million vehicles for the year, i.e. in H2 equivalent to H1. This is below IHS, but we remain prudent given what we have seen in the past period. The second is that this page is trying to highlight evolution H1 and H2 and compared to the 3.7% that we add in operating margin in H1, three key factors to take into account.
Number one, improvement of Seating operations starting with the Michigan Seating program. You see that we were at €100 million loss at H2 2021. We are down to 30 in H1 2022. So you see the curve and this curve should be close to breakeven in H2. The second is related to inflation management. We had an impact of around 100 basis points in H1. Given the time lag of some of the indexation measures and the full impact of some of the repricing that have happened we have reduction of this one by 50 points reduction by half.
And the last one is operating leverage on volumes and improved cost flexibilization in some of the activities FCM and Seating in particular. If you take those three into accounts, you are getting to 5.3 in H2, and you are getting to the middle of the range for the year between 4 and 5. I would say that evolution within this will depend a little bit on the volume. If the volume is above 74 million you will understand that we will be more on the high side of the range.
On the net cash flow, we are prudent in this element and we have decided to take a reserve for a safety stock of €100 million in order to secure supply in Europe alternative source, given the risk of energy shortages this winter in Europe. So this €100 million normally we will have done this in H1 2023. We advanced this so that we protect our operation and our activities. We have created a crisis committee to tackle this, to monitor the situation and the first order will start at the end of this month.
In terms of the rest of the cash flow, we will monitor the situation in all aspect. We will improve the operational discipline, and we will launch a program that I call managed by the cash. Some initiatives existed and exists today in Faurecia and HELLA convert to cash to take the one of Faurecia. We will combine those ones. We will take the best practices and we will make sure to embark this from the quotation to the collection, i.e. inclusive of order selectivity as Patrick was highlighting. The impact of this will be progressive, but this is clearly key so that we generate cash on a going forward basis in a structural manner.
So this is — so we are anticipating streak, and the net-debt-to-EBITDA level, this is considering the evolution of operation that I mentioned before. We have a first operation in our divestment program that is ongoing. If it were to materialize in cash, depending on the antitrust, that could help in fact, this factor. We have clearly the commitment to deleverage this company through this program in managed by the cash and divestment.
So this is allowing us to confirm the guidance. So, €23 billion to €24 billion in revenues, 4.5% in operating margin and net cash flow at breakeven, taking into account the €100 million that we are putting aside. One comment to make on the level of revenues, we have kept the same guidance, i.e. we have kept a U.S. dollar to Euro at 1.13. It’s below what is currently happening. If the U.S. dollar would remain roughly speaking at parity, you can consider half a billion in revenues on top of what we are showing here, which will not change. In fact these are parameters that we are mentioning, just so that we are clear on the referential and we are not underestimating the potential in the company.
Patrick?
Patrick Koller
Thank you, Olivier. Review. So in a nutshell, what happened in the first half, more than €15 billion of order intake perfectly aligned with our strategic priorities. We are the first automotive company and the first French company having achieved through STBi the net zero target. We also have, we will have, sorry, 100% of our sites worldwide at the end of this year being assessed from a biodiversity point of view and we will be able until the end of the year to define our action plans site by site. We are the first to the market, we will be. We have decarbonized steel production in Europe through GravitHy and through our Scandinavian contracts. We have launched 135 programs in the first half without any issue and I think that this is important. And of course we are continuing to work on partnerships in order to reinforce our ecosystem.
What is our new our new normal environment? So clearly what we have to take into account our climate change. This is a big parameter. It means that we will have some climate related events which might perpetuate our operations, the global automotive economy and the material flows. We are working here on new materials. We are working here on new architectures for our products. We are working on energy saving and all our activities are now clearly focused on the CO2 targets.
We are also seeing a more regionalized world with some decoupling, especially in the electronic and in the software fields, which we have to take into account. We are coming from a planned world to an event-driven world. What does it mean? It means that you need to have a clear target and midterm target, and you have to stick to it, but the way to go, there has to be much more dynamic than it was the case before. So some of our management tools are becoming obsolete. They are no more working. We spoke about at the Metaverse in order to have sophisticated simulation tools for our management, which we are considering and which we will apply in the months to come.
Technology, we are living in a technology-driven world. It’s very important to invest in innovation, but not any kind of innovation, innovation that matter to people and I think that this is very important. We have to integrate in our business model and marketing responsibility. Inflation for a while we see it and we have to get adjusted to this new financial environment. We are doing it. Our target is to have passed through inflation, which started in the second half of 2020, including 2023 at the end of 2023. So we have a delay. We are in a B2B business, not in a B2C business, but we will make this happen. And clearly, because of the significant growth we have in front of us, we have to work on attractiveness in order to be able to have the talents, to interest the talents, which are needed to feed them our growth.
On each of these six elements, we have action plans. So we have made — and status. We have collected all the data available in order to try to understand what is this new environment and we have decided on action plans in order to mitigate the impacts. This is clearly related to the four priorities I spoke about at the beginning of the presentation. We want to deleverage the Group as quickly as possible. This is why we maintain the one-time net-debt-to-EBITDA in 2025. This is also why we have increased our targets in terms of the disposals, sorry. We are working on an accelerated way on the integration and the execution of synergies and it is possible related to the legal form of HELLA.
We are enhancing resilience and we spoke about our cash program, which is now deployed in all the departments of our Group, on the HELLA side, as much as on the Faurecia side. We are working on lowering the breakeven point because of the uncertainty, which is becoming part of the new normal and we are considering, optimizing cash versus growth. We will be more selective in the second half, but we are considering to go one step further down this road for 2020 frame.
So this was in brief how we see this first half, how we see the second half, and now we are open to your questions.
Question-and-Answer Session
Q – Unidentified Analyst
Yes, hey, thank you, [indiscernible]. I would have three questions, two on free cash flow and one on goodwill from the HELLA deal. The free cash flow trends back in August last year were very aggressive and ambitious going forward for the deleveraging and when do you think you might be back on a track of generating above €1 billion in free cash flow per annum? Is 2023 to early, or is it still on the table? First question, second one on the factoring, strong tailwind in first half, any further tailwind expected in the second half from the HELLA integration? And last on the goodwill from the HELLA deal, could you please elaborate on the absolute amount was in excess of €4 billion for 100%, if I remember correctly and do you see any risk of depreciation looming on that one? Thank you.
Patrick Koller
Olivier, do you want to take the questions?
Olivier Durand
Free cash flow of 2023, we will come back during the investor — the Investor Day with the profile of evolution of cash flow, but clearly the objective of next year is a sizable level up to a €1 billion that we will see, but a sizable level that’s very clear. On the factoring, we have increased the factoring to €1.3 billion total. This represents a bit more than 5% of our sales, so still a low level. However, the forecast that I’m showing you, do not include any increase of factoring in the second half and this is not the intent. On the goodwill, I think it’s more, is specifically is more €2.7 billion, excluding the specific assets, we do not anticipate any impairment of goodwill of a company that we just acquired.
Patrick Koller
You remember on the factoring that we for Faurecia kept it at €1 billion. Our new cap with HELLA together is €1.3 billion.
Unidentified Analyst
[Indiscernible] I also have three questions, please. I think the first is, in two work units, I think related your Seating operating performance versus Interiors is surprisingly weak and your North American operating performance is also very weak when we take into account the organic growth. Can you maybe give us more details on what you’ve mentioned about some of the Stop & Gos execution issues in Seating to help us understanding why it’s that way? Because when we add back the Michigan, what I’m, we still get to a weak figure for both North America and Seating and I guess it’s connected.
Second question, you’ve mentioned the €282 million of net interest charge is not normal first semester, hopefully effectively that’s good. Can you give us an idea of where we should land in a normal year, say in 2023 excluding as a possible benefits of any disposal? And thirdly, you’ve decided to stay very cautious on production and I agree visibility is still low. Has it improved in any way with June and the trend you see in July or do you believe, you’re probably overly cautious maybe with flatly controlled production or do you think it’s really the right management approach?
And then can you make comments by region on your degree of confidence on production, if there is a greater degree somewhere? Thank you very much.
Patrick Koller
I’ll take the first and the last, you take the second one. About Seating in North America, so Seating first of all is our activity which is mostly impacted by just in time businesses for which we have two issues, the wages it’s an added value business and the Stop & Gos. And on the Stop & Gos, there’s nothing you can do when you have contractually and capacity to deliver. And this is a big problem and it costs us a fortune in terms of Stop & Gos when I take more specifically North America. When you — when we think about Highland Park’s or WS and Stellantis business, we said last year that we would have still €30 million of execution issues in this first half. We sticked to it, but we have a problem with the Stop & Gos.
We are committed to 110,000 vehicles where we see that we are below 80,000 vehicles during the full semester. So we are negotiating with Stellantis in the moment, I will have a meeting tomorrow in order to make it clear that we cannot stay at 110, but we have to readjust us on the 80, so that we can flex all our costs and that we can also adjust the PPAs, so the depreciation of CapEx and R&D to this new amount of this new volume, which is a real volume.
What we will also do in the second half is to transfer some components to Mexico in order to support the activity in an environment where people turnover is very high and wages in America have inflated very much, especially in the Michigan area. So that we feel confident that we will be able from a pure execution point of view achieve the breakeven situation as planned, and that we have to find a solution together with Stellantis to deal with the Stop & Gos better said with a new adjustments — adjustment to the volumes.
We also have an issue with the integration level. We are less integrated in America than our competitors, so this is reducing, in fact, our content per vehicle on the complete seat activities. There are possibilities in North America, which is to consider partnering with minority players. In other words, now you make a joint venture with a minority representative who will take the majority of the joint venture, which allows you to deconsolidate the business and you keep the volumes on the components. Okay?
So we are in the process to deal with this because effectively on the GIT businesses, there is a new structural change we have to consider. When you look at Seating globally, we are smaller than the big ones. So we are number three on the complete seats. So it means that we should be less impacted by this.
The last one is related to June and July. So we see an improvement in June and July, especially in China. The last figure, I received during the weekend about China is showing that China is in July at the level of June, which is an interesting recovery. When we look forward, what do we see? We believe that in Europe, we might have some gas supply restrictions and we are working on this. We are trying to protect us through additional inventories, safety stocks, but also alternative supplies on an international basis. We might have social tensions in Europe in the second half, and we might have potentially a recession of the economy in the second half.
In North America, it’s more the recession, which might be an issue and the cost of money. In China, we still have the risk of Omicron and we have currently new lockdowns in the Chengdu area for example, and so it’s not over. So the risk is persistent and at least until October and it will remain. In October we will have an important session at the Communist Party in China and maybe the policy might be adjusted to the context.
Semiconductors, we will still have shortages on semiconductors and I said it before, and even if we see a slight improvement, we will have restrictions until the end of 2023. And cost of money will not help, cost of money plus inflation for the consumers might become an issue and we might see some impact, sorry on the demand. This said, I do believe that we are prudent with our €37 million in the second half and this is okay. We are managing on this level. If we have more volumes, we will of course benefit from that.
Olivier Durand
And to answer the second question, you can consider that there is around €40 million of non-recurring inside the financial expense collected through foreign exchange swap and hedges. So €240 is more a recurrent one. And going forward that will decrease with repayment of some of the debt, knowing that on our interest rates, the vast majority is fixed but step-by-step.
Patrick Koller
Maybe question? By phone, do we have questions Mark? We don’t have them on the screen so far.
Operator
All right, thank you. We’ll now take the question from the audio participants. We’ll take the first question from Christoph Laskawi of Deutsche Bank. Your line is open. Please go ahead.
Christoph Laskawi
Good morning and thank you for taking my questions as well. And the first one on HELLA and accounting, you’ve highlighted that HELLA has a lower capitalization share of R&D and it seems that there has been no change since you consolidated it. Is it fair to assume that going forward you will stick to that type of accounting or should we assume an uptick in capitalization of R&D for that matter?
Then on the free cash flow in H2, if we consider the improving earnings and the overall, hopefully a bit more stable situation in H2, could you just give a comment again on why it should be negative outside of, or breakeven outside of the €100 million additional stock that you want to be secure? Is it just other working capital or higher CapEx rates that will be much appreciated? And then in the end on the Michigan problems you have, it will require a bit on breakeven in H2, that is, I guess, not including these Stop & Gos, right? So if the Stop & Gos continue to be a problem then the plant will likely have a negative impact in H2. Thank you.
Patrick Koller
Okay. So here again, I take the first one and the last one Olivier. So about R&D and amortization so, you know that we were in a clear trend to reduce our depreciation of R&D. Pardon?
Olivier Durand
And capitalization panel.
Patrick Koller
Capitalization panel of R&D. HELLA is in fact allowing us to accelerate this reduced capitalization and we will, of course stick to this. We will even continue to reduce our part. So the Faurecia part in terms of capitalization. On H2 you are right, we are considering to be at breakeven in the second half. This is not considering the Stop & Gos, but I’m — I believe strongly that we will find a way with Stellantis because our requests are perfectly legitimate and we have to solve this issue. We cannot continue to have a significant gap between EDIs and call offs on a day-to-day basis. So I’m confident that we will solve this issue in the few weeks to come.
Olivier Durand
And related to free cash flow H2 question, I agree that we are prudent with maintaining only the breakeven. We want to make sure first of all to have the reserve for the safety stock and depending upon the way the H2 is shaping in terms of Stop & Gos and so on, the cash impact can be different. If you have a lot of Stop & Gos in the middle of the semester, inventory will be impacted and so on. So, but I agree with you, this is prudent, and this is not my personal objective.
Patrick Koller
Maybe back to give you some confidence about Highland Park. Our H1 exit point is very close to our convergence curve. So it means that we have considerably improved our costs during the first half, which is making us confident that we will be able to make the remaining part of the convergence. Also what I said about transferring components to Mexico, this will really have a significant impact next year and a relative impact in the second half.
Christoph Laskawi
Thank you.
Operator
Thank you. We’ll now take our next question from Tom Narayan of RBC. Your line is open. Please go ahead.
Tom Narayan
Hi, it’s Tom Narayan, RBC. Thanks for taking the questions and I start here from you Olivier. The first one has to do with the inventory building that you are doing in anticipation of potential energy rationing. So what level of global auto production would this satisfy, user calling for 74 million for the full year? What if this drops to 72 million, would that be sufficient? And then secondly, on the divestitures, just curious as to how this relates to overall strategy, is it more to do with liquidity concerns or are these businesses you’ve always been planning on and exiting and just in the context of the markets that we’re entering, is it a good idea to be divesting assets now where you may not be getting the best pricing? And then just as a follow up to divestitures, does the net cash flow at breakeven guidance include divestitures? Thank you.
Patrick Koller
[Indiscernible] with the inventory Olivier, what is our fear? Our fear is that during the winter period, the next winter period, and probably not in this year, but beginning of next year in February, we might have some restrictions in supplies, but these restrictions of supplies will only last for a few weeks. So we do not have to cover and very long period of time with huge volumes. But we are buying some glass for example; we are buying some components which are produced with high energy intensity. So we need to protect ourselves, so this is why we are building safety stocks. And if we believe that it might be an issue for a little bit longer, we are considering alternative sourcing outside of Europe. So this is also why we believe that with the €100 million we have considered, we are well, we will be able to protect us very well.
It’s not us. We are not an intensive company in energy consumption. We spoke about this. We are buying about €20 million of gas per year, and about €100 million, €110 million and this is for Asia, sorry, and €100 million, €110 million of electricity. And when you look at HELLA it’s proportionally about the same ratios, so we are not considering this as being a longer issue. We might after, get prepared for the next winter period, which might be even more difficult from an energy supply, but we are first of all dealing with what we have in front of us.
The divestments, what I would like to say is that we are considering the complexity of the company. We will be with including the impact of the divestments in any case above €30 billion of sales in 2025. So we have scanned the full portfolio and we have identified some activities which are not strategic with which we will not be able to achieve and leading position globally. Number one, number two, or number three at least. Okay?
And we have identified more than, what we have communicated, because of course, if the economic equation, if the divestment interest from a financial point would not materialize, we would consider other options we have. Yes? So this is why here again we feel confident with the €1 billion. We are not speaking about more than €1 billion despite the options we have because we want to secure the €1 billion with good conditions.
Olivier Durand
And on your last question about disposal, there is no disposal proceeds in the net cash flow and so the breakeven is excluding any impact of this. And on the net debt, the 3 is actually not considering cash proceeds from any disposal. I’m hoping that we can have one, but it will depend on signature and antitrust, so it’s not considering, and it will improve this number if it happens by the end of the year.
Tom Narayan
Okay, thank you.
Olivier Durand
Do you want that? We take one question on the line, no sorry, go ahead.
Operator
Go ahead; go ahead, if you have a question
Patrick Koller
No, please go ahead if you have still questions on the phone.
Operator
Thank you very much. We’ll now take our next question from Jose of JPMorgan. Your line is open. Please go ahead.
Jose Asumendi
Thank you much. Jose from JPMorgan. Three questions, please. Can you talk please about the level of competitive SG&A as a percentage of sales, do you like to pursue in the next two years? Second, can you talk about the drivers to improve the profitability of Clarion? And three, when it comes to free cash flow, should we think about 2023 as a similar year to 2016, where you managed to deliver the balance sheet substantially, thanks to a mid-cycle margin generation for the company plus asset disposals? Would that be a fair comparison maybe 2023 versus 2016? And then final one, sorry for all the questions, just final one Patrick, how do you think about the remaining stake in HELLA and do you want to control a 100% of the assets? Thank you.
Patrick Koller
About SG&As and I’ll let you take over Olivier.
Olivier Durand
Yes, okay.
Patrick Koller
We believe that the right target is below 4.5%, so closer to 4% went to the 4.5%, which was our level of SG&As. We have in the SG&As also our program management, some of our program management activities, and we believe that here we can significantly improve the situation. So this is the target we have. I’m taking also immediately, the last one and then I’ll let you Olivier. About the stake, it is very clear that the time is not favorable to buy out the remaining shares. We have and set up and legal setup, which is allowing us to run operations in the way we would like protecting of course the minority interests, but we are able to manage the main synergies. And we will see in the second step what the possibilities will be, but this would request a significant improvement of the market conditions. And I said it before, our main priority is deleveraging the Group not to add debt to the Group.
Olivier Durand
So, Patrick I agree with you on the target of 4% on SG&A. I think it’s — this is what we should achieve and this is what is in line with the synergy aspects of the combination. On the profitability for Clarion Electronics, clearly we have an organization that is not geared for less for around €1 billion in revenue. The goals this year is one so what is — what was planned, not because we are lacking others, but because the bottlenecks of the lack of semiconductors. So progressively maybe not so much next two, but progressively it will happen.
The second is on the cost structure. The cost structure was in fact still with a significant level in high cost. This is now resolved. The [indiscernible] action have been done. We are sitting up stronger in centers in India, in China. So in India, we have now a center of 300 people. In China we are opening a new one in autonomous driving in Wuhan, so we are doing the part. And the last one is R&D intensity compared to level of activity. It’s about standardization and here, the combination with HELLA and particularly HELLA Electronics is accelerating the move to standout R&D, modular R&D, so that you don’t rebuild every time you have a new contract. So those are the key factors in fact to do the turnaround for Asia Clarion Electronics.
On cash flow profile 2023 comparison to 2016 pre-COVID for Asia, difficult to do. What I can say is that we have the element to ensure that working capital be not whole. So increase of revenues has no impact on the cash flow. On CapEx, we have potential of synergies. You saw some of the numbers is showing clearly capacity to do it. And the third is about what Patrick mentioned, order selectivity and ratio of new orders versus additional CapEx, additional R&D. Those factors combined will improve the number on top of volume and the repricing.
Patrick Koller
I would like to say one additional word about electronics. It’s the manufacturing setup. We are optimizing our manufacturing footprint. And if I take as an example, China, we were at 5.5 plants smaller one. And we will move at the beginning of 2023 to three plants while then having two big plants, one in Shanghai belonging to HELLA or in the HELLA parameter, and one in the south of China belonging to in the Clarion parameter. This will change completely the setup. And it’s also the case in Europe with our plant in Hungary.
The last point, I would like also to share with you is that one of the key characteristics of HELLA’s Electronics is that they take a significant order and based on this order and the next one, they design the platform. While in many cases, and it was also the case of Clarion, we started Xneal [ph] or to work on a platform which is always difficult, but because when you are confronted to the reality of a vehicle program to stick to your standard is complex. So the approach of HELLA is from my point of view, much more efficient and HELLA in order to do this has a software house with the standards, with all the rules which are needed which we do not have to reinvent. In fact, we are just taking over all these assets and these know-hows.
Jose Asumendi
Thank you very much Patrick and Olivier. Thank you.
Patrick Koller
Any other question on the phone?
Operator
Yes. We’ll now take our last question from [indiscernible] of BNP Paribas Exane. Your line is open. Please go ahead.
Unidentified Analyst
Hi, thanks for taking my question. The first one is on inflation; you’re guiding for net impact in H2 lower than H1, which I guess implies about 80% coverage with compensation. Is there a component within that level that refers to H1? So is that a one-off component related to H1, or should we think that above 80% is a sustainable level going forward? Then on the order intake, can you give us an idea of how much of the €4.7 billion of orders on EVs were linked to battery and thermal management solutions and maybe also the average level of content you see on EVs as compared to ICEs maybe on a normalized mix level? Thank you.
Patrick Koller
Okay. So inflation H1 versus H2, we have about the same level of inflation in H2 versus H1, but we might not have the same mix in inflation if I may say so. I think that on the material side we will have less because we are contracted on a longer basis, but also because we see some of the raw materials going down, but we might have some additional inflation on especially the wages and maybe also on some transportation. So it will not be exactly the same thing. It will be with a different mix. But here again, I think that in our assumptions, we might have been a little bit prudent, but related to the current uncertainty, I think it makes sense.
Olivier Durand
On the ratio of coverage, we anticipate better ratio coverage more 90% than 80%. And the reason is….
Patrick Koller
On the raw materials.
Olivier Durand
On the raw materials and the reason is related to the time lag that I mentioned on the indexation close. Many raw materials have increased a lot, but they are plateauing since May. So let’s say the lag effect will be not there in H2.
Patrick Koller
I’m sorry, but about the order intake I’ve not understood. Could you please rephrase your question?
Unidentified Analyst
Sure. It’s it refers to the €4.7 billion of orders on EVs, I was wondering how much of that is linked to battery and thermal management solutions? And also I wanted to know if you could give us an idea of the level of content you see on EVs compared to ICE?
Patrick Koller
So it’s very clear that on the EVs we have significant higher content on the electronic and software side about 35% for a vehicle versus 17% to 18% for a ICE vehicle and we are following this. When we speak about €4.7 billion, in fact we are speaking not only about pure products which are related to the management of the batteries or the electric power train. We are also speaking about pure electric vehicle, vehicles in which we have other contents, contents which are not directly related to electric vehicles. But what I, you know I spoke about the content per vehicle, the content per vehicle has significantly increased during this year by more than 20%.
Unidentified Analyst
Yes, also on the guidance, can you give us an idea what’s the operating leverage that we should expect on any higher revenue if the market does indeed grow more aligned with what expect rather than what you would expect? I think in the past, you said 20%, but can you maybe confirm that?
Patrick Koller
I’m speaking on the year control 1 million vehicles are corresponding in terms of sales at around €270 million, €280 million and the fall through of this is about €30 million, something like that.
Olivier Durand
Yes, I think you, if you take 12% to 15%; you are — given the aspect of lag in inflation coverage I think is a prudent one, if it can be better, of course this is — this will be good.
Unidentified Analyst
That’s pretty useful. Thank you.
Patrick Koller
We have a question here on the screen, which is asking us, what is the long-term operating margin target better than before 2020? So, we stick to our target for 2025, which is above 8.5%. Yes, there’s no change on this. This is of course related to the new mix and collaboration with HELLA together it’s FORVIA.
Olivier Durand
So the rational is different historical of profitability of the two companies, plus close to one point of synergies.
Patrick Koller
The other question is asked by Reuters, can you update us on planned closures and asset sales within the company? No, we can’t. We are committed to the €1 billion. I said it before, we have options, but we want to stick to the €1 billion with the right conditions.
The next one is related to — is a similar question. Can you update on the divestment program and on potential ongoing discussions taking place with buyers? Thank you. If we say that we want to have it closed, cashed in, in 2023, and when you take into account the antitrust regulations, it’s pretty easy to understand that to stick to this timing we have started and the different divestment processes.
Is the Stop & Gos phenomenon improving in Q3? You’ve seen, I think you’ve seen, the graph Olivier has shown, so yes, it’s — it was improving in June. It looks like, it’s kept in July, but I do not have more information about that. So we do not have visibility of what is happening. The belief, that we will no more have shortages related to semiconductors is wrong. Yes? We because the content per vehicle has related to the actual mix of vehicle we have, has significantly increased. Before the crisis, before 2020, the automotive industry represented about even a little bit less than 4% of the world consumption of semiconductors. We are currently above 7%. So we have doubled in a very short period of time the content per vehicle on semiconductors. And this is related to the specific focus on battery electric vehicles and on hybrid vehicles. Just to — I’m telling you this, because it — we have to be careful. We are improving. We have capacity which are starting, but on the same time, we have a level of demand which is increasing.
So to close maybe this, this session I would like to inform you about first of all the Capital Market Day, which will happen on November the 3rd and which will be followed the day after November the 4th, by our Sustainability Day, where we will present to you in many more details, what we are doing on the ESG subjects. What I also would like to inform you is that we will be present at the CES 2023 and that we will very happy to see you there and to have the opportunity to present to you all our common innovations, FORVIA innovations.
With this, thank you very much and hope to you see soon after the break.
Olivier Durand
Thank you very much.
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