Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Transcript 2021-Q2

[Melanie Carpenter]

Okay. We're going to begin our program. Thank you, and welcome, everyone. Good day, everyone, and welcome to GIS' Second Quarter 2021 Earnings Conference Call. Joining us today is GIS' 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 is for investors and analysts only. During this call, they will be discussing GIS' performance as per the earnings release that we just issued yesterday. If you didn't receive the report, it's now available on the website, gis.com.mx in the Investor Relations section. We encourage you to follow along with the on-screen presentation. [Operator Instructions]

Let me just remind you that forward-looking statements may be made during this call, and they're based on information that's currently available. That information may be subject to change due to a variety of factors. For more detail and a complete disclaimer, we ask that you please refer to the earnings release. Also, all the figures discussed today are going to be in U.S. dollars unless otherwise noted.

It's now my pleasure to introduce the GIS team. Mr. Jorge Garza, will begin the call. So please go ahead, Jorge.

[Jorge Garza, executive]

Thank you, Melanie, and thank you all for joining us today. On behalf of GIS, we hope that you and your families are in very good health. We would like to start today's call by sharing with you very good news. The higher regional content required by the USMCA has increased the demand for iron components. This trend, in addition to a better outlook for the automotive industry has favored Draxton's order book, which shows an optimistic volume growth in the next years.

Based on this, we made an important announcement in yesterday's earnings release. An investment project for capacity expansion in Draxton Mexico. The investment in San Luis Potosi plant will amount $30 million. And with this project, we will add 30,000 tons of capacity for castings per year. This will lead Draxton's annual capacity globally up to 620,000 tons.

The new ductile iron casting line will focus mainly on the production of brackets and calipers used in automotive bracket systems -- brake systems fully compatible with hybrid and electric vehicles. The start of production is expected for the last quarter of 2022, aligned to the industry gradual recovery path, strengthening our leadership in the manufacturing of components for brake systems.

Regarding the second quarter results and its highlights, I would like to share with you that despite the short-term limitations in vehicle production due to the shortage of semiconductors, vehicle demand remains strong. And based on Draxton competitiveness, we have been awarded new programs for 80,000 tons globally during the year. Mainly for brake systems that, as I previously mentioned, are fully compatible with hybrid and electric vehicles.

Without major investments required, Vitromex took actions to boost capacity by approximately 10% by upgrading several manufacturing processes. However, these measures impacted production volume and sales during the quarter. We carried out these improvements with a long-term mindset to produce higher volumes and serve expected demand.

Revenues at Cinsa continue to be dynamic. During the quarter, sales grew 9% in the domestic market and 11% in exports quarter-over-quarter. We increased efficiency at Cinsa through important rightsizing efforts, which offset the majority of the increase in the price of the cold rolled steel.

I will now pass the presentation over to Saul Castaneda, our CFO.

[SaúlCastañeda de Hoyos, executive]

Thank you, Jorge, and good morning, everyone. I hope you and your families are staying healthy and safe. The dynamism in all regions where we operate continues confirming the trend towards $1 billion in annual sales.

During the second quarter, despite the semiconductor shortage, and the impact of actions taken to increase Vitromex capacity, revenues at GIS were $250 million, which maintains our sustained growth in the industries where we participate.

Regardless of the significant challenges in the automotive industry and increases in raw material prices, such as scrap iron, and cold rolled steel, GIS posts a solid performance with an EBITDA of $35 million during the second quarter.

I must emphasize last 12 months EBITDA figure that reached $153 million, an outstanding level. At the end of June, we executed the refinancing of Evercast loan, improving maturity profile with a reduction in the interest rate. Moreover, on July 15, we made an early payment on our syndicated loan for $14 million. On the left-hand side, you can see the debt maturity profile before both events, the refinancing and the early payment.

On the right-hand side, you can see an improved debt maturity profile for the upcoming years, considering the early payment on a pro forma basis. As you can see, virtually, GIS will not have debt payments for 2021 and 2022, strengthening our financial position to support San Luis Potosi expansion project and other working capital investment requirements.

GIS maintains its solid financial position and continues to reduce its net leverage ratio, which, by the end of the quarter was 1.2x. This level was achieved based on the consistent financial results in each of our businesses as well as the financial strategy mentioned before. As a result, GIS gains financial flexibility to explore strategic opportunities for growth and value creation for our shareholders.

I will now hand the presentation back over to Jorge Garza.

[Jorge Garza, executive]

Thank you, Saul. In the second quarter of this year, improvement across regions where GIS operates was highly influenced by better vaccination rollout, stimulus packages and the faster reopening schedule. The U.S. and China are recovering at a faster pace. And by the end of this year, we will have exceeded the prepandemic economic activity by 5% and 10%, respectively. On the other hand, the pace of recovery in Europe and Mexico is lower and the economies are expected to reach prepandemic levels by the end of 2021.

[SaúlCastañeda de Hoyos, executive]

Jorge, do you want that I take control from here just for a moment?

[Jorge Garza, executive]

I'm fine. Thank you. However, the economic rebound continued to pressure supply chains and increased commodity prices such as cold rolled steel and in scrap iron. Regarding steel prices, we have been seeing an increase of more than 2x during 2021. Scrap iron prices have risen more than 50% in the first half of the year, which will be indexed in our prices during the next months.

At GIS, we have been able to partially offset these impacts through operating efficiencies, productivity and the optimization of our purchasing processes. We expect supply chains -- supply prices to normalize in the second half of the year.

Now I will turn to the automotive industry. In North America, vehicle demand is approaching prepandemic levels. The global shortage of semiconductors has limited the production of vehicles, which has caused pent-up demand as dealers face low inventory levels.

In order to meet demand and replenish inventory levels, OEMs will focus on increasing their production in the second half of the year. During the second quarter of '21, sales in Europe increased by 69% year-over-year. Some markets have created incentive programs, mainly for electric vehicles to continue with the industry recovery.

In China, although vehicle sales showed a 2% reduction against the second quarter of 2020, accumulated sales grew at 24% year-over-year. Strong demand for vehicles is expected for the second half of the year.

Moving on to Draxton's performance. During the second quarter, our global casting volume increased 172% year-over-year as the second -- as the industry was heavily affected during the second quarter of 2020 due to the general shutdowns. For Europe and Asia, the growth was 139% as demand for commercial vehicles increased in Europe, while China's market is getting stronger.

As a result of our strategy to grow in machining, during the second quarter, we recorded the highest sales at our facility in Lleida in Spain. Our global sales have recovered to prepandemic levels, and we recorded sales of $177 million, which is a 211% increase year-over-year, mainly due to volume increases and indexation of scrap iron prices.

EBITDA closed at $30 million, impacted by limited volume related to semiconductor shortage and the $4.4 million effect of scrap iron price increase. Additionally, we saw higher electricity prices mainly in Europe, which also pressured margins. The implementation of efficiency and productivity improvement programs partially mitigated these challenges.

During the second quarter of 2021, Draxton won new contracts for 50,000 tons per year, which, in addition to the contracts awarded during the first quarter amounts to 80,000 tons per year to be launched in the coming 2 years.

One of these contracts, which I would like to particularly mention or highlight for you, is a control arm that will be assembled in a new electric vehicle for a leading manufacturer of electric vehicles. Among more than 4,200 automotive suppliers, Draxton Irapuato received the 2020 Supplier Quality Excellence Award from our customer General Motors in recognition of its excellent performance in quality and service during 2020.

Now moving on to Vitromex. Vitromex's revenues rose 46% year-over-year and reached similar levels to the first quarter of 2021. Vitromex has thus confirmed the solid trend towards profitability recovery with another double-digit EBITDA margin for a quarter. Vitromex's ability to capture benefits from the extraordinary demand and sustained cost reduction efforts lead the business to obtain an EBITDA of MXN 417 million on a last 12-month basis.

A positive trend in revenue was supported by a dynamic domestic demand, rising orders from key customers in the U.S. and the normalization of operations in South America. During the second quarter, our production was limited due to several actions taken in order to improve our capacity.

We think it is important to focus on the long-term strength of our business and to ensure future flexibility. The increase of our capacity by approximately 10% will enable us to satisfy the demand from both the domestic and the export market. EBITDA performance confirms the success of the turnaround process launched by Vitromex in 2019, reaching MXN 128 million or 11% margin for the second quarter of 2021.

We continue to roll out our commercial strategy in the U.S. Our exports have increased continuously over the last several quarters, up to 78% compared versus fourth quarter of 2020 or 35% versus last quarter. We believe this trend will help us meet the objectives that we have established for the business for the second half of the year.

Now regarding Cinsa, the business is showing sustained sales growth with MXN 524 million in the second quarter, 2x the second quarter of 2020 level and 63% higher than prepandemic levels. The trend for the cookware business remains positive. We were able to partially compensate higher cold rolled steel prices, and we reached an EBITDA of MXN 45 million or 9% margin.

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

[Melanie Carpenter]

Excellent. Thank you, Jorge [Operator Instructions] We have a question from Mario. [Operator Instructions]

[Alejandro Azar Wabi, analyst]

This is Alejandro Azar from GBM. I have 3 questions. The first one is on your new flexibility or improved flexibility to analyze growth opportunities. I just want to get a sense of where are you analyzing this? Is it across your 3 business units? Or is it only Draxton? That would be the first one. The second one also in the auto parts business. With your current contracts on hand and this new expansion that you mentioned, would you say that you feel comfortable with the capacity of Draxton at least until 2024? And the third one is on Vitromex. You say growing exports to the U.S. and Central America in the upcoming quarters or maybe 2022. If we were to take 2020 exports levels, what growth would we be expecting for, I don't know, 2021 or maybe 2022? Those would be my 3 questions.

[Jorge Garza, executive]

Well, in terms of strategy or possibilities to expand our business, definitely, we are very, very confident that with the financial position that we have today and the solid numbers in our balance sheet, we are able to continue or we are in a position to continue doing some progress.

Remember that we made some -- 2 important acquisitions in 2015 and 2016, and we expanded Draxton globally. So in the automotive industry, we think that there will be some opportunities to continue growing organically and inorganically.

Organically, for example, we are announcing today or yesterday, we made an announcement of an investment in Mexico. And we think that not only organic growth is possible, but we can also imagine that in the future, we can participate in the consolidation of the industry. This is a very dynamic industry, and we think that we have some opportunities not only in Mexico, but also in other continents.

Regarding Vitromex, we think that we -- I mean, in addition to the capacity that we released, let's say, by making some actions in Mexico, it might be possible that we have to continue increasing capacity because we see very strong demand, and we are seeing very positive perspectives for our volumes in the U.S. and Central and Latin America. That's why we are very optimistic also about the future of Vitromex.

Regarding the capacity for Draxton, the new investment that we will put in San Luis Potosi, we will start production by the end of next year. So we are confident that this capacity will be utilized almost immediately. Actually, we will have to rush because we have programs awarded, and we have contracts for the long term. It means that we are very confident that this investment will be very, very successful. Depending on the dynamic of the industry, this might not be enough, okay?

And maybe that was your question, if the capacity will be sufficient to attend the demands of the industry. At the moment, this is what we have in the, let's say, in our medium-term vision, but we will be alert and we will be always watching what are the needs of our customers in the industry, and we will be in a position to capture these opportunities.

Regarding Vitromex and U.S. and Central America, I think I mentioned a little bit in my -- in the first part of my answer, that we see very optimistic perspectives and we feel that the volumes will grow and our quality, our service level and the productivity that we have achieved recently.

And our strategy for commercial, let's say, for attacking the U.S. market, in our opinion, we feel very comfortable that we are doing. We have very important key customers that we are developing, and we feel very optimistic that in the next years, we will have very good volumes back in the U.S. as we used to have in the past.

[Melanie Carpenter]

So we're now going to take a question from the webcast. We have Carlos Alcaraz is asking for -- regarding Vitromex, if you have any forecast for year-end EBITDA that you can share with him.

[Jorge Garza, executive]

Saul, you would like to take that one?

[SaúlCastañeda de Hoyos, executive]

Sure. I can take this one, Jorge. Carlos, thank you for your question. We do not provide guidance as an official metric or a reference for the market. But we are -- we believe the annualized for last 12 months figure that we mentioned, it's a pretty good reference for -- to measure the capabilities of Vitromex team, as Jorge mentioned. The volumes that we achieved and also the cost reduction give us -- gave us a great performance on Vitromex.

So we don't have, as I mentioned, a guidance policy. But I can say the last 12 months figure is a pretty good reference. But let me also add that we are not at the end or in our goal. We definitely -- our target for Vitromex is double digit, high double-digit EBITDA margin. It is important to emphasize that, Carlos.

[Jorge Garza, executive]

Yes. Maybe I can add that there are a lot of opportunities in the operations. Actually, we have a very committed team, very capable, and they are making a lot of improvements in the processes, improving costs, productivity. And the volumes, of course, will grow. So our expectation is that you will be seeing better numbers as we go along with the quarters over the year.

[Melanie Carpenter]

Excellent, gentlemen. [Operator Instructions] Yes, I believe Carlos has raised his hand, we're going to enable his audio.

[Carlos Alcaraz Pineda, analyst]

I have some troubles with my microphone. Can you hear me?

[Jorge Garza, executive]

Yes. Yes. Very well, very well, Carlos, no problem.

[SaúlCastañeda de Hoyos, executive]

No worries.

[Carlos Alcaraz Pineda, analyst]

I have just one more question. It's about Cinsa. Given the growth in aluminum prices, will we see changes in the Cinsa's strategy going forward?

[Jorge Garza, executive]

What -- I mean can you elaborate a little bit more on your question?

[Carlos Alcaraz Pineda, analyst]

Given the growth in the aluminum prices, will we see changes in the Cinsa strategy going forward. What is your forecast about this aluminum prices change?

[Jorge Garza, executive]

Okay. Well, we have aluminum, and we have also steel, okay? The products are made -- we have products in aluminum and products in steel. The commodities have increased their prices significantly in the last months. We don't think that this is sustainable, okay? So we are working very strongly on productivity efficiencies. And this has enabled us to offset the majority of these cost increases. So we don't see that this is going to be a permanent effect on us, and it's affecting the whole industry, all the competitors and the companies that are producing the same kind of, let's say, products are facing the same situation.

So we have been able to transfer part of this to the market because this is normal, okay? When the cost or the inflation is there, companies absorb a portion, offset portion and some others have to be passed to the market, okay?

We have to be very, very careful just to make sure that we don't exceed prices. And we -- I mean don't affect our market shares or preference from the customers. But we don't see a dramatic change in strategy based on this, especially because we don't see this to be a permanent situation. This is -- it was created by the reopening of the economies, and some commodities have an extremely high price that is not sustainable in the future.

[Melanie Carpenter]

[Operator Instructions] All right. It looks like we have no more questions at this time. So I will turn it back to Saul for some closing remarks.

[SaúlCastañeda de Hoyos, executive]

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.

[Melanie Carpenter]

That concludes the event, and you may now disconnect. Thank you, everyone.