Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Transcript 2021-Q1

[Melanie Carpenter]

Okay. Ladies and gentlemen, we're going to get started. So let me say good day, and welcome to all of you to GIS' First Quarter 2021 Earnings Conference Call. Joining me today is the Chief Operating Officer, Mr. Jorge Garza; GIS' Chief Financial Officer; Mr. Saul Castaneda, and GIS' Investor Relations Manager, Mr. David Sandoval. Please be advised this call for investors and analysts Homeland.

During the call, they'll be discussing GIS' performance as per the earnings release that we issued on Thursday. If you didn't receive a report, it's now available on their website at gis.com.mx in the Investor Relations section, and we encourage you to follow along with this on screen presentation.

[Operator Instructions]

Let me just remind you that forward-looking statements may be made during this call. So those are based on information that's currently available. It's subject to change due to a variety of factors. For more details and the complete disclaimer, we ask that you please refer to the earnings release.

And also all the figures that are going to be discussed today are in U.S. dollars unless otherwise known.

And it's now my pleasure to introduce GIS' team, and we're going to begin with Mr. Saul Castaneda, the CFO, to begin the conference call. So please go ahead, Saul.

[SaúlCastañeda de Hoyos, executive]

Thank you very much, Melanie, and thank you all for joining us today. On behalf of GIS, we hope that you and your families are in good health.

First quarter results proved a solid trend of sustainable and profitable growth across all GIS business units, strengthening the recovery seen during the second half of 2020.

Our consolidated EBITDA was $42 million, a 35% increase year-over-year, with a strong 17% margin. This operating performance allow us to reach our third consecutive quarter of EBITDA growth. Higher volumes, a better mix and important cost savings through our operational efficiency initiatives, offset most of the broad upswing in commodity prices.

Regarding sales performance, Draxton continues recovering volumes across all regions for it's ECAS operations. In the first quarter of 2021, Draxton sales rose 18% year-over-year. Vitromex attained its highest sales level for a quarter since 1Q '17 due to the dynamic remodeling sector in Mexico, successful product launches and better mix. Cinsa top line grew 43% year-over-year, measured in Mexican pesos, achieving the highest first quarter sales in its history, mainly driven by significant growth on exports and e-commerce channels.

On a consolidated basis, GIS revenue was the highest since second quarter 2018. This level validates the dynamism in all regions where we operate. For the upcoming quarters, we remain optimistic about the pace of the consolidated top line.

Regarding debt, we shall highlight there are no relevant maturities until 2023. And our debt average life is 4 years as a result of the refinancing strategy carried out during 2019. The thus, we're benefiting from our financial flexibility to evaluate the strategic alternatives to increase shareholder value.

GIS maintain its solid financial position with a net debt-to-EBITDA ratio of 1.6x, which is even lower than last quarter revenue.

We continue to expect that, by the end of the second quarter of the year, it will be below 1.4x. I will now pass the presentation over to Jorge.

[Jorge Garza, executive]

Thank you, Saul, and good morning to everyone. I hope you and your families are staying safe and are in good health.

In the first quarter of the year, we continue to see revenue growth and margin expansion in our 3 business units. Improvement across regions where GIS operates was highly influenced by economic recovery, government stimulate and vaccination rollout. We have been able to capitalize on this recovery due to our flexibility to serve higher demand of our cost -- products and improving profitability through efficiency programs in all plants.

During the first quarter of the year, China's economy continued to recover from the pandemic. The world's second largest economy grew more than 18% year-over-year, setting a new record for the country. This growth supports 2021 GDP forecast of nearly 12% increase over the fourth quarter of 2019.

Even though the pandemic continued to be top of mind of the U.S. government during the first quarter 2021, the economic recovery gain speed, supported by the stimulus programs, which increased consumer disposable income, also the low interest rates and the optimism generated by the steady vaccination rollout.

The U.S. economy has almost returned to pre-COVID levels during the first quarter. Europe's economic rebound was slowed down by a new pandemic wave and log downs in several European countries. We expect a gradual recovery throughout 2021 coming back to pre-pandemic levels by the end of the year.

Mexico's growth forecast for 2021 has been revised upward due to a positive impact on demand fueled by U.S. performance during the quarter. Analysts expect that Mexico might return to pre-COVID levels by the first half of 2022.

During the quarter, the economic rebound seen around the world has led to a significant increase in commodities prices. However, at GIS, due to successful negotiations with our suppliers, higher volumes and efficiency programs implemented across all our business units, we were able to offset this impact. The Purchasing Managers Index shows how economic activity is accelerating mainly in the U.S. and Europe. This is a positive outlook for GIS and the regions in which we operate.

I will now turn to the automotive industry. In North America, sales continued to improve with a 4% year-over-year increase. The industry is expected to recover from the semiconductor shortage in the coming quarters. And OEMs have announced that they will reduce normal summer shutdowns in order to increase the levels of inventory.

Even though production and vehicle sales continue to recover at a slower pace than in other regions, some governments in Europe have offered incentives and stimulus packages to promote electric vehicle sales. Volumes in Europe continued to benefit from the export of vehicles to different countries as a trend that has been seen since the fourth quarter of 2020.

In China, we saw a 70% increase in vehicle production year-over-year and a 76% increase in sales since last year's first quarter. Volumes were hardly hit by the lockdowns at the start of the pandemic in China.

The strong demand for vehicles this year was mainly due to a positive economic outlook, government subsidies and optimal control of the pandemic.

Moving on to Draxton's performance. During the first quarter, our global foundry volume increased 12% year-over-year due to the recovery in the main markets where we operate, and the ramp-up of recently launched programs.

For North America, the growth was 9% as demand in the U.S. spiked, and it was 14% for our units in Europe and Asia, mainly driven by the Chinese market. We reported global sales of $175 million, an 18% increase year-over-year due to higher volumes and also indexation of scrap iron prices, which continued their upward trend from last year.

The global semiconductor shortage continues and is affecting the automotive industry, among others. So far, we've only been affected by a 2% production loss across the 3 regions where we operate. And we are expecting general industry recovery during the year as the regular summary shutdowns will be shortened.

EBITDA closed at $35 million, 8% higher than in the first quarter of 2020 for a 20% EBITDA margin. The majority of the onetime metal lag generated by the indexation formulas of our prices based on scrap iron indices was offset, thanks to the higher volume, negotiations with suppliers and the efficiency and productivity improvement programs we have been implementing since before the pandemic.

As scrap iron prices stabilize in the next few months, we expect no further major impacts from indexation.

During the first quarter of 2021, Draxton won new contracts for 30,000 tons, most of them in the brake system, which confirms our highly compatible portfolio with hybrid and electric vehicles. With this, our products under development have increased to 300, which, considering the natural phase out of some existing programs, will represent a 10% sales increase versus pre-pandemic levels. We are expecting growth in Mexico in the next coming years due to the USMCA.

We will be prepared to take advantage of new opportunities, especially in braking components, continuing to launch products fully compatible with electric vehicles.

Moving on to Vitromex. Revenue rose 21% year-over-year, attaining the highest level of sales for a quarter since the first quarter of 2017. Vitromex's team has been working on consolidating the operation system through which the business was able to reduce production costs by 5% as well as improving the sales and operations planning process, which allowed the business to capture incremental volumes.

Efficient management of working capital generated MXN 119 million in cash flow in the first quarter of 2021. Our implemented strategies resulted in an EBITDA of MXN 128 million and a 13% EBITDA margin, which is the highest margin over the last 10 years.

In Mexico, we continue to see an extraordinary level of demand, which we were able to capitalize on during the quarter, thanks to our better market position. This was derived from the new strategies focusing on proximity to clients and to improving our service levels. We have received the first orders from key customers in the U.S., and in South America, the opening of market has allowed us to win new customers.

Regarding Cinsa, the business set a sales record for the first quarter with total sales of MXN 400 million, and it continues with a steady upward trend. Sales growth was mainly driven by exports, which grew 5x for the U.S. and 2x for other countries.

We also saw an important recovery on 2 of our main channels, traditional and modern. And we achieved exponential growth in the e-commerce channel. Higher volumes, a better product mix and prices aligned with each segment as well as efficiency measures across plants enable Cinsa to offset the majority of the price increase of cold-rolled steel, and thus, we reached an EBITDA margin of 10% during the quarter.

This concludes my remarks for today. Thank you for your attention, Melanie. Please begin the Q&A session.

[Melanie Carpenter]

[Operator Instructions]

[Jorge Garza, executive]

Melanie, I think we have our first one from Alejandro Azar.

[Melanie Carpenter]

Okay. Excellent. Alejandro, can you enable your audio, please?

[Alejandro Azar Wabi, analyst]

Congratulations on the results. First, on Draxton. If you can -- I was having problems with the Zoom. I don't know if you commented on the semiconductor shortage. I understand that the OEMs have announced that they are going to use the summer shutdowns, but what are you seeing -- did you see any troubles in the first quarter?

Are you seeing something in April? Because there's too much noise around the industry about plant shutdowns and your results are really strong. So I just want to understand if you are seeing something for the second quarter or maybe the third?

That would be my first one on Draxton. And the second one on Draxton would be, with your incremental volumes, with your incremental contracts, how is your your mix by component going to change? Are you estimating that your percentage of sales from the brakes are going to grow? Or what are you seeing on that front?

[Jorge Garza, executive]

Yes. Thank you, Alejandro. Nice to talk to you. Well, the first question, it's a little bit difficult to predict at this moment what is going to happen in the next months.

However, I can tell you that, in the first quarter, we were not hardly hit yet. We are seeing still the problem exists, and we have read a lot of articles and a lot of experts talking about it that maybe will continue for the rest of the year. The impact is not going to be tremendous as our sources are telling us. We think that it's going to be between 2%, 3% of the total output worldwide.

So it sounds a little bit too much noise in the industry, but the volumes don't seem to be going -- I mean, to be affected by more than 3%, okay? The customers also, the OEMs are privileging or focusing or not stopping the products that are highly sold in the market with more preferred by the customers.

And fortunately, Draxton is participating in the high-volume platforms, especially in the U.S., where we are more dedicated to SUVs and pickup trucks. That is another reason why we might not be affected as much as other platforms or other suppliers that are focusing on other kind of vehicles, okay?

So this is what we have seen today. We are following up almost on a daily basis what is happening in the industry. And we continue to see that the situation will continue for the rest of the year. But as I said at the beginning, the impact seems to be no more than 2%, 3% of the total output globally.

Okay. Regarding the -- I mean the second question was about the?

[Alejandro Azar Wabi, analyst]

If breakdown of your sales channel, are they going to change drastically?

[Jorge Garza, executive]

Well, not drastically, but definitely, we have a trend that has been started a few years ago, in which we are selling -- or gaining a lot of market share on the brakes components.

At the moment, we are more or less about 50% of our global output related to brakes. And this is going to continue growing probably to 60% in the next years, okay?

At the moment, the Draxton portfolio is very close to 80% compatible with hybrid and electric vehicles. That's why we are very optimistic that if we continue with this kind of trend and activities commercially, we will be very much -- very strong participant in the electrification of the industry.

[Alejandro Azar Wabi, analyst]

Okay. Okay. One more question or 2 more on Draxton. Are you currently manufacturing EV components? Or you are in the face of designing them? Do you already have a contract to manufacture a differential case?

[Jorge Garza, executive]

Sure, sure. Yes. We are, for example, in Europe, we are producing differential cases for 2 electric platforms through a Tier 1 customer. We are casting them, and we are machining them. And we have implemented a team that is fully dedicated to differential case design and machining. So we are trying to be the leader in the market for these kind of components for the electrification.

In addition to that, we are already producing other components for electric vehicles that are also part of the powertrain, and that is called the starter stator carrier, or the stator is part of the motor, actually, the electric motor, and we are producing already some components in Europe.

Remember that the electrification is going faster in Europe. That's why I mentioned more Europe than North America. But that's the way it is. I mean, we want to focus more on electrification. It would start in China and then continue together with Europe.

At the end, it will come to the U.S. and we expect that when this trend reaches the U.S., we will also be taking advantage of this trend. But definitely, we are participating, not only in brakes, but also in other components.

I can tell you also for the heavy trucks, we recently were awarded a product that -- a program that is going to be for a truck and it's related to protection of the batteries, okay? And this is made of iron. So -- and there is a lot of weight that is going to be in 1 truck.

So this is another area of opportunity that we are exploring, diversifying also for heavy trucks in electric in electric powertrains for trucks.

So definitely, we are taking advantage of this electrification trend and gaining a lot of new contracts, and we are fully prepared to take advantage of it.

[Alejandro Azar Wabi, analyst]

And one more, if I may, Jorge, on Draxton. Out of your total operations, is there a percentage where you don't pass the cost of metal to the clients? I remember you had some clients in Europe or in China where you didn't do the pass-through.

[Jorge Garza, executive]

That is a small percentage of customers in China only, where some -- the prices are set with a reference price, and then you continue for several years. But all the new programs, when you get the new product or even the replacement of the existing one, you are -- you have the possibility to adjust the prices to the new levels of the market.

So almost, I would say, 90% or more than 90% of the volume in Draxton is -- more than 90% because China is only 10% of the total output of Draxton. And only a portion of China is not fully hedged, I would say, or indexed, okay? So it's a very small portion.

[Alejandro Azar Wabi, analyst]

And just one in Vitromex. You mentioned the key customers in the U.S. Is there any way you can give us some color on what are you targeting in terms of sales when you bring in those customers only from the U.S.?

[Jorge Garza, executive]

You mean in terms of...?

[Alejandro Azar Wabi, analyst]

Export sales in Vitromex? Yes.

[Jorge Garza, executive]

Yes. Well, we are targeting -- I mean in the past, we were selling several million square meters a year. Our target this year is going to be more, let's say, modest. We are trying to reach levels of 1 million to 2 million square meters per year, okay?

But in the long term, we are seeing or targeting the U.S. market as a main market for us. That's why the whole organization in it is committed to regain the market share that we used to have in the U.S. and we are implementing a new strategy where we are developing new customers, customers that are being very successful in the market, and we are developing new products for them.

So it takes time because these customers are asking us for new designs that we are validating with them. Once we get the validation, we will start the ramp-up. And we would like to see this ramp-up start in the second half of this year.

[Melanie Carpenter]

Okay. Next, we're going to take a question from the webinar. We have a question from Carlos Alcaraz from [indiscernible], and he's asking, first, due to the shortage of semiconductors and its effect on the automotive industry, do you consider that it will significantly affect retaining of new contracts during the rest of the year?

And second, given the good first quarter cash flow results, will the target level of leverage remain 1.4x, or has that been adjusted?

[Jorge Garza, executive]

Okay. You want to talk about the leverage first, Saul?

[SaúlCastañeda de Hoyos, executive]

Sure, let me answer that, Jorge, of course. Thank you for the question. It is a good one. We shall remind that in this formula, measured at the second quarter of 2021, we are excluding the loss at EBITDA level of around $10 million.

So we are going to have great number of EBITDA last in 12 months from third quarter 2020 to second quarter '21. And on the other hand, this target of 1.4x, it has already considering the cash flow performance of first quarter 2021 that was excellent. And it is important to remind also that in April, we had a dividend payment of around $32 million. And this 1.4x target, it's also including that.

So it's our best number so far, including the dividend and the cash flow project.

I don't know, you want to take the other part, Jorge?

[Jorge Garza, executive]

Yes, sure. Regarding the semiconductor shortage, we are not seeing any impact on new programs. What we are seeing is just like a small releases or forecasts on existing programs. That are already in production.

But we haven't seen any kind of delay on decision-making from our customers on new programs. I think I understood understood the question was related to new programs. If I am -- I didn't understand it correctly, please correct me.

[SaúlCastañeda de Hoyos, executive]

I understand like you, and it was mainly thinking about obtaining new contracts, Jorge.

[Jorge Garza, executive]

We haven't seen any kind of impact. And actually, we are very active this year on commercial negotiations with customers, and we expect a very good year in terms of new programs negotiation with customers.

[Melanie Carpenter]

[Operator Instructions] It appears we have a follow-up from Alejandro Azar.

[Alejandro Azar Wabi, analyst]

Just one more question, more on the strategic front. With your new balance sheet, how should we think about Draxton? You mentioned growing on EVs, growing on the caliper bracket front. Do you -- are you seeing a consolidation in the upcoming years? Maybe you looking out to vertically integrating towards break disks?

[Jorge Garza, executive]

Well, very good question, Alejandro. Well, with the industry that is relatively mature, I'm not talking about the foundry industry, actually it's related to the products we make.

We are -- at the moment, we don't have anything firm or any opportunity available that we are pursuing. But definitely, these kind of industries, we know it from the history, normally go through a consolidation phase, let's say, a trend.

So we are -- I would say that based on all the skills that we have developed in the last years to integrate companies that we have acquired in the past 5 years and growing also organically by adding machining and additional lines like in Americas we are very well prepared to participate in the consolidation of this industry.

So definitely, this is 1 of the strategic, let's say, lines that we are following. At the moment, I can tell you there is nothing on hand, okay?

Definitely, in terms of investments, we -- one of the strategies is to continue growing on machining and machining requires additional capacity. Not many of the iron foundries have been able to add successfully machining operations.

We think that by machining our products, we are going to be adding more value to the customers. We continue to grow and gain more loyalty from the customers because once they give you the machining, the contract is going to stay there for longer times.

As I said before, we have developed a complete team dedicated for -- to machining worldwide. And from Europe, from Spain, we are supporting all the regions. In terms of technology for machining. So that's another trend that we are following. Also, we are expanding operations in several places.

We are improving our efficiency in the plants. And in Mexico, for example, with marginal investments, we are going to be able to absorb higher demand. And eventually, we might be in the need to add additional foundry capacity. Once we have decided that in the future, we will announce it properly in time. But we see that with the USMCA, most probably, there will be a need to add capacity in Mexico.

[Melanie Carpenter]

Ladies and gentlemen, it doesn't appear that we have any more questions. So I'll turn it back to management for some closing remarks.

[Jorge Garza, executive]

Saul?

[SaúlCastañeda de Hoyos, executive]

Sure. Thank you, Melanie, and thank you once again for your interest in GIS. Please don't hesitate to contact us if you have further questions, and we hope you stay healthy and safe. Have a nice day.

[Jorge Garza, executive]

Thank you very much.

[SaúlCastañeda de Hoyos, executive]

Thank you.

[Melanie Carpenter]

Thank you, everyone. That concludes the event, and we'll see you next quarter.