Dear Shareholders,
during the year 2016, the sales revenues of the Sogefi Group amounted to Euro 1,574.1 million, showing a growth of 5% compared to Euro 1,499.1 million in 2015 (9.8% at constant exchange rates).
With regard to the overall performance of world automotive markets, in 2016 the production of cars and light commercial vehicles increased by 4.8%, with a growth of 13.3% in Asia and a positive evolution in Europe (+3.5%) and North America (+2%). In South America the market remained in recession (-8.7%), although the fourth quarter, with a 7% growth of the production, seems to show an inversion of the trend.
The Air & Cooling sector, which reported a 15.6% sales increase (+18.4% at constant exchange rates) contributed largely to the progress of the group.
The revenues of the other two business units were affected by the evolution of exchange rates: the Suspensions sector reported revenue growth of 0.9% (+6.2% at constant exchange rates) and Filtration reported a 1% increase (+6.7% at constant exchange rates).
The table below shows the performance of the divisions:
| (in millions of Euro) | 2016 | 2015 | ||
|---|---|---|---|---|
| Amount | % | Amount | % | |
| Suspensions | 562.8 | 35.8 | 558.0 | 37.2 |
| Filtration | 535.1 | 34.0 | 529.7 | 35.3 |
| Air&Cooling | 480.2 | 30.5 | 415.3 | 27.7 |
| Intercompany eliminations | (4.0) | (0.3) | (3.9) | (0.2) |
| TOTAL | 1,574.1 | 100.0 | 1,499.1 | 100.0 |
The growth in revenues was driven by significant development in North America (+16.9%) and in Asia (+25.6%) while Europe reported an increase of 1.4%. Revenues in South America, however, declined by 7.1% (+15.8% at constant exchange rates), but grew by 13.9% in the fourth quarter thanks to the first signs of market recovery.
The table below shows a breakdown of sales by key markets.
| (in millions of Euro) | 2016 | 2015 | ||
|---|---|---|---|---|
| Amount | % | Amount | % | |
| Europe | 957.2 | 60.8 | 943.8 | 63.0 |
| Mercosur | 162.2 | 10.3 | 174.5 | 11.6 |
| NAFTA | 308.7 | 19.6 | 264.1 | 17.6 |
| Asia | 139.6 | 8.9 | 111.1 | 7.4 |
| Rest of the world | 6.4 | 0.4 | 5.6 | 0.4 |
| TOTAL | 1,574.1 | 100.0 | 1,499.1 | 100.0 |
Sogefi's key customers are Ford, Renault/Nissan, FCA, PSA, GM and Daimler. Together, they account for 64.3% of the Group’s sales revenues as compared to the 63.8% in 2015.
| (in millions of Euro) | 2016 | 2015 | ||
|---|---|---|---|---|
| Group | Amount | % | Amount | % |
| Ford | 198.0 | 12.6 | 200.3 | 13.4 |
| Renault/Nissan | 180.6 | 11.5 | 175.3 | 11.7 |
| FCA/CNH Industrial | 177.5 | 11.3 | 179.6 | 12.0 |
| PSA | 169.7 | 10.8 | 166.4 | 11.1 |
| GM | 157.6 | 10.0 | 116.2 | 7.8 |
| Daimler | 127.2 | 8.1 | 116.5 | 7.8 |
| Volkswagen/Audi | 47.8 | 3.0 | 51.8 | 3.5 |
| BMW | 45.4 | 2.9 | 42.9 | 2.9 |
| Toyota | 43.5 | 2.8 | 33.3 | 2.2 |
| Other (including the Aftermarket) | 426.8 | 27.0 | 416.8 | 27.6 |
| TOTAL | 1,574.1 | 100.0 | 1,499.1 | 100.0 |
The following table provides comparative figures of the Income statement for 2016 and the previous year.
| (in millions of Euro) | 2016 | 2015 | ||
|---|---|---|---|---|
| Amount | % | Amount | % | |
| Sales revenues | 1,574.1 | 100.0 | 1,499.1 | 100.0 |
| Variable cost of sales | 1,120.2 | 71.2 | 1,079.1 | 72.0 |
| CONTRIBUTION MARGIN | 453.9 | 28.8 | 420.0 | 28.0 |
| Manufacturing and R&D overheads | 147.5 | 9.3 | 146.1 | 9.7 |
| Depreciation and amortization | 68.8 | 4.4 | 64.4 | 4.3 |
| Distribution and sales fixed expenses | 44.9 | 2.9 | 45.2 | 3.0 |
| Administrative and general expenses | 85.1 | 5.4 | 84.2 | 5.6 |
| Restructuring costs | 5.3 | 0.3 | 7.3 | 0.5 |
| Losses (gains) on disposal | (0.7) | - | (1.6) | (0.1) |
| Exchange (gains) losses | 1.8 | 0.1 | 3.6 | 0.2 |
|
Others non-operating expenses (income) - of which not ordinary |
26.7 10.2 |
1.7 |
20.1 15.7 |
1.4 |
| EBIT | 74.5 | 4.7 | 50.7 | 3.4 |
| Financial expenses (income), net | 31.5 | 2.0 | 32.8 | 2.2 |
| - of which fair value of the embedded derivative (convertible bond) | - | (1.5) | ||
| - of which other net financial expenses (income) | 31.5 | 34.3 | ||
| Losses (gains) from equity investments | (3.6) | (0.2) | - | - |
| RESULT BEFORE TAXES AND NON-CONTROLLING INTERESTS | 46.6 | 2.9 | 17.9 | 1.2 |
| Income taxes | 32.6 | 2.1 | 12.9 | 0.9 |
| NET RESULT BEFORE NON-CONTROLLING INTERESTS | 14.0 | 0.8 | 5.0 | 0.3 |
| Interests | (4.7) | (0.2) | (3.9) | (0.2) |
| GROUP NET RESULT | 9.3 | 0.6 | 1.1 | 0.1 |
EBITDA in 2016 grew by Euro 37.2 million to Euro 152.7 million, representing a +32.2% increase compared to Euro 115.5 million in 2015. The increase benefited from revenue growth and from the improvement in profitability which increased to 9.7% from 7.7% in 2015.
The increase in profitability was due to a slight improvement in the gross margin and to the reduced impact of indirect costs. In particular, the ratio of total labour costs to revenues declined from 22.1% in 2015 to 21.4% in 2016.
Regarding the risks resulting from the claims made against the company Sogefi Air & Refroidissement France S.A.S. (formerly Systèmes Moteurs S.A.S.), in 2016 there were no developments in the “product guarantee” issue that warranted a change in the provision made at December 31 2015.
As for the recovery of damages from Dayco, the vendor of Systèmes Moteurs S.A.S. to Sogefi in 2011, in May the arbitration process ended with Dayco being sentenced to pay Sogefi Euro 9.4 million for the claims already settled. The whole amount was received during the second half of 2016. The arbitration decision, however, reduced the amount expected to be recovered by Sogefi by Euro 4 million, with a negative impact of the same amount on the accounts booked in June 2016.
Sogefi appealed against the decision which stipulated that any payments for claims relating to production that took place after the acquisition will be borne by Sogefi; Dayco appealed against the award for the part which confirmed the validity of the compensation to Sogefi included in the acquisition contract. In this regard, the validity of the compensation has been confirmed both by the arbitration award, and, preliminarily, in a decision by the Milan Court of Appeal which rejected a Dayco request to suspend the enforceability of the award.
EBIT increased by 46.8% to Euro 74.5 million compared to Euro 50.7 million in 2015.
The result before taxes and minority interests was a positive Euro 46.6 million (Euro 17.9 million in 2015), benefiting also from non-recurring financial income of Euro 6 million.
The net result was a positive Euro 9.3 million (Euro 1.1 million in 2015) after tax expense of Euro 32.6 million in 2016 (versus Euro 12.9 million in 2015), as an effect of the higher pre-tax result and non-recurring taxes of Euro 10.2 million.
As at 31 December 2016, the Sogefi Group's workforce was 6,801 (6,702 as at 31 December 2015).
| 12.31.2016 | 12.31.2015 | |||
|---|---|---|---|---|
| Number | % | Number | % | |
| Suspensions | 2,625 | 38.6 | 2,663 | 39.7 |
| Filtration | 2,735 | 40.2 | 2,629 | 39.3 |
| Air&Cooling | 1,381 | 20.3 | 1,350 | 20.1 |
| Other | 59 | 0.9 | 60 | 0.9 |
| TOTAL | 6,801 | 100.0 | 6,702 | 100.0 |
Breakdown by category is provided below:
| 12.31.2016 | 12.31.2015 | |||
|---|---|---|---|---|
| Number | % | Number | % | |
| Managers | 106 | 1.6 | 98 | 1.5 |
| Clerical staff | 1,874 | 27.5 | 1,866 | 27.8 |
| Blue collar workers | 4,821 | 70.9 | 4,738 | 70.7 |
| TOTAL | 6,801 | 100.0 | 6,702 | 100.0 |
Net financial debt stood at Euro 299 million at December 31 2016 showing a Euro 23.3 million improvement on December 31 2015 (Euro 322.3 million) and a Euro 15.1 million improvement on September 30 2016 (Euro 314.1 million).
The following table provides a breakdown of indebtedness as at 31 December 2016:
| (in millions of Euro) | 12.31.2016 | 12.31.2015 |
|---|---|---|
| Cash, banks, financial receivables and securities held for trading | 99.6 | 128.2 |
| Medium/long-term financial receivables | 15.8 | 13.2 |
| Short-term financial debts (*) | (148.6) | (92.6) |
| Medium/long-term financial debts | (265.8) | (371.1) |
| NET FINANCIAL POSITION | (299.0) | (322.3) |
(*) Including current portions of medium and long-term financial debts.
Free Cash Flow in 2016 amounted to a positive Euro 31.2 million, compared to Euro 24.8 million of cash absorption in 2015 which included Euro 20.3 of quality costs (out of which Euro 18 million of payment related to Systèmes Moteurs warranty claims). The improvement came with an increase in tangible asset expenditure to Euro 58.8 million (Euro 51.3 million in 2015).
Without items of non-ordinary nature, Free Cash Flow amounted to Euro 21.9 million in 2016.
The table below shows changes in cash flows during the year:
| (in millions of Euro) | Note(*) | 2016 | 2015 |
|---|---|---|---|
| SELF-FINANCING | (f) | 109.1 | 53.4 |
| Change in net working capital | (2.1) | (4.2) | |
| Other medium/long-term assets/liabilities | (g) | 17.5 | 4.8 |
| CASH FLOW GENERATED BY OPERATIONS | 124.5 | 54.0 | |
| Sale of equity investments | (h) | - | - |
| Net decrease from sale of fixed assets | (i) | 0.3 | 1.0 |
| TOTAL SOURCE | 124.8 | 55.0 | |
| Increase in intangible assets | 30.3 | 30.4 | |
| Purchase of tangible assets | 58.8 | 51.3 | |
| TOTAL APPLICATION OF FUNDS | 89.1 | 81.7 | |
| Exchange differences on assets/liabilities and equity | (l) | (4.5) | 1.9 |
| FREE CASH FLOW | 31.2 | (24.8) | |
| Holding Company increases in capital | 0.8 | 0.1 | |
| Increases in share capital of consolidated subsidiaries | 0.2 | 0.1 | |
| Dividents paid by subsidiaries to non-controlling interests | (8.2) | (4.3) | |
| Change in fair value derivative instruments | (0.7) | 10.9 | |
| CHANGES IN SHAREOLDERS' EQUITY | (7.9) | 6.8 | |
| Change in net financial position | (m) | 23.3 | (18.0) |
| Opening net financial position | (m) | (322.3) | (304.3) |
| CLOSING NET FINANCIAL POSITION | (m) | (299.0) | (322.3) |
(*) See the notes at the end of this report for a detailed explanation of the reason for the reclassifications that we have made.
At December 31 2016 shareholders’ equity excluding minority interests amounted to Euro 172.9 million (compared to Euro 170.8 million as at 31 December 2015), as illustrated in the table below.
| (in millions of Euro) | Note (*) | 12.31.2016 | 12.31.2015 | ||
|---|---|---|---|---|---|
| Amount | % | Amount | % | ||
| Short-term operating assets | (a) | 358.1 | 341.8 | ||
| Short-term operating liabilities | (b) | (356.0) | (341.2) | ||
| Net working capital | 2.1 | 0.4 | 0.6 | 0.1 | |
| Equity investments | (c) | - | - | 0.4 | 0.1 |
| Intangible. tangible fixed assets and other medium and long-term assets | (d) | 634.2 | 130.0 | 636.4 | 124.1 |
| CAPITAL INVESTED | 636.3 | 130.4 | 637.4 | 124.3 | |
| Other medium and long-term liabilities | (e) | (148.3) | (30.4) | (124,7) | (24,3) |
| NET CAPITAL INVESTED | 488.0 | 100.0 | 512.7 | 100.0 | |
| Net financial indebtedness | 299.0 | 61.3 | 322.3 | 62.9 | |
| Non-controlling interests | 16.1 | 3.3 | 19.6 | 3.8 | |
| Consolidates equity of the Group | 172.9 | 35.4 | 170.8 | 33.3 | |
| TOTAL | 488.0 | 100.0 | 512.7 | 100.0 | |
(*) See the notes at the end of this report for a detailed explanation of the reasons for the reclassifictions that we have made.
Outlined below are a few indicators as at 2016 year end:
- gearing (net financial position/total equity ratio) amounted to 1.58 at the end of 2016 (1.69 at the end of 2015);
- ROI (Return on Investment, calculated as the ratio of EBIT to average net capital invested) increased from 10.2% in 2015 to 14.9% in 2016;
- ROE (Return on Equity) was 5.4% at the end of 2016 (0.7% in 2015).
INVESTMENTS AND RESEARCH & DEVELOPMENT ACTIVITIES
Investment in tangible fixed assets increased from Euro 51.3 million in 2015 to Euro 58.8 million in 2016 and were mainly oriented at building the new plant in Mexico, enhancing production capacity in China, engineering new products, extraordinary maintenance operations, improving industrial processes, and increasing productivity.
Research and development expenses amounted to Euro 38.1 million, slightly up compared to Euro 35.5 million in 2015, and were mostly focused on product's innovation.