Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Transcript 2022-Q2

[Operator]

Good day, everyone, and welcome to GIS Second Quarter 2022 Earnings Conference Call. Joining us today is GIS President, Mr. Jorge Rada; GIS Chief Financial Officer, Mr. Saul Castaneda; and GIS Investor Relations Manager, Mr. Arturo Morales. Please be advised that this call is for investors and analyst only.

During this call, they will be discussing GIS performance as per the earnings release issued on Thursday. If you did not receive the report, it is available at www.gis.com.mx in the Investor Relations section. We encourage you to follow along with the onscreen presentation. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session after the speakers' opening remarks and instructions will be given at that time.

Let me remind you that forward-looking statements may be made during this conference call. These are based on information that is currently available and is subject to change due to a variety of factors. For more detail and a complete disclaimer, please refer to the earnings release. Also, all figures discussed are in U.S. dollars, unless otherwise stated.

It is now my pleasure to introduce the GIS team. Mr. Jorge Rada will lead off the call.

[Jorge Garza, executive]

Thank you. Good morning, and thank you all for joining us today. On behalf of GIS, we hope that you and your families are in good health. As we announced before, on June 3, we reached an agreement with Mohawk Industries for the divestment of our ceramic tile business, Vitromex. This transaction has been valued at $293 million and is still subject to obtaining customary approvals. For Vitromex, this represents an opportunity to join one of the main players in the industry worldwide and accelerate the current capacity expansion plans.

In the earning release issued yesterday, we included a consolidated analysis that includes Vitromex figures as the business is still a part of GIS until the transaction closes. We will follow the same structure in this call.

In the second quarter of 2022, a number of programs won in recent years started production in boosted Draxton's volume, more than offsetting the impact of semiconductor shortages. The commercial trend of 2021 continues. Year-to-date, Draxton has won new contracts worth approximately $120 million in annual sales, most of them being compatible with hybrid and electric vehicle platforms. The expected demand for vehicles, the gradual recovery of semiconductor supply, coupled with Draxton's commercial performance, will continue to drive growth and validate the rationale for ongoing investments, which will increase our capacity by the fourth quarter of this year.

The previously announced plans to increase capacity valued in more than $150 million are moving forward as planned.

I will now hand the presentation over to Saul Castaneda, our CFO. Go ahead, Saul.

[SaúlCastañeda de Hoyos, executive]

Thank you, Jorge, and good morning, everyone. I hope you and your families are healthy and safe. Revenues for the quarter reached $303 million, 21% higher than second quarter '21, mainly driven by higher volume, a more favorable product mix and the indexation effect of raw material and energy prices at Draxton. Vitromex and Cinsa also maintained a positive trend.

EBITDA for the quarter was $36 million, 13% higher quarter-over-quarter, confirming an important shift in the profitability trend observed in the second semester of 2021. This figure was 3% higher than second quarter '21. The benefits from higher volumes and the strategies to tie energy and raw material costs to pricing have partially offset the volatility in input prices and supply chain constraints observed in the market.

We closed the quarter with a net leverage ratio of 1.9x. The impact of the last 2 quarters of 2021 into the net leverage formula has stressed the indicator, which should stabilize as the profitability trend observed during 2022 keep up the pace. Recently, Fitch Ratings ratified GIS credit rating at AA- and upgraded its outlook from stable to positive after analyzing the potential divestiture of Vitromex and the use of proceeds to deleverage the company and support expansion plans.

Once the transaction is completed, GIS will have a strong balance to boost organic and inorganic growth for Draxton, enhancing its positioning in the industry.

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

[Jorge Garza, executive]

Thank you, Saul. Shifting now to the automotive industry. In North America, vehicle production grew 11.8% in the quarter when compared to the -- 2021, still hampered by logistic constraints and semiconductor shortages. The low inventory levels and the gradual improvement of the semiconductor supply will help maintain the upward trend in vehicle production and sales.

Europe continues showing impacts from volatility brought by the Eastern Europe conflict. Vehicle production during the quarter fell 3.8% versus previous year. Vehicle production is expected to increase 4% by the end of the year. This will boost vehicle inventory availability and sales.

China was heavily impacted by its zero COVID-19 policy, which is very likely to stay in place. The production in the region is forecasted to finish the year only 1% below 2021.

Moving on to Draxton's performance. Draxton was able to offset the impact of semiconductor shortages as well as other supply chain disruptions, driven by the ramp-up of the programs won in recent years. North America's casting volume grew 10% while positioned in the market benefited by near shoring. Machining volume grew 12%, adding to our strategy of incorporating more value-added products. The additional capacity that is currently being installed will help us to capture further growth opportunities to be prepared for the expected vehicle demand and the gradual recovery of semiconductor supply.

Second quarter sales were up 23% versus the previous year, mainly due to the higher volumes, the effect of indexation formulas and an improved product mix. In the quarter, Draxton reached an EBITDA of $29 million, in line with last year's figure. This figure confirms a positive recovery trend that is supported by productivity in our operations and the result of different indexation strategies that help the business tie energy and raw material costs to product pricing. These strategies have given stability to our operations. We will continue to work to shorten the time lag in the indexation with the purpose of mitigating the temporary effects often observed in the formulas.

The commercial performance is still strong. And during the first 6 months of the year, Draxton has achieved new contracts that represent sales of $120 million annually.

Moving on to Vitromex. Vitromex revenues grew by 22% on a year-over-year basis as the domestic market continues a positive dynamism. In addition, the inclusion of large-size format products have enhanced the business product mix. EBITDA for the quarter totaled MXN 131 million, a 20% increase year-over-year. The reconfiguration of our plants, together with the additional capacity expansions previously announced, will continue improving the business profitability.

Regarding Cinsa, top line grew 3% in the second quarter versus the previous year as the product mix continues to improve. Sales are showing more stable behavior following a softer consumption environment and lower demand in export markets. EBITDA for the period was MXN 77 million, a 14% margin, supported by price adjustments, new product development and improved customer service.

With this, I conclude my remarks for today. Thank you all for your attention, and now we can begin the Q&A session.

[Operator]

Thank you. At this time, we will open the floor for your questions. [Operator Instructions] Our first question comes from Carlos Alcaraz.

[Carlos Alcaraz Pineda, analyst]

Congratulations on the results. I have 2 questions. The first one is if the United States economy goes into a recession, will they use the money from the sale of Vitromex to pay down debt? Or will they expand their installed capacity at Draxton? And my last question is considering the expansion at the San Luis Potosi plant, how many tons do you expect to add to your portfolio over the next 6 months?

[SaúlCastañeda de Hoyos, executive]

Okay. Thank you, Carlos, for your question. We are already analyzing use of proceeds. Nevertheless, we have a reasonable net leverage ratio and appropriate maturity profile. Our first priority will be deleverage of the company. So definitely, we are -- our first priority and first use of proceeds will be deleverage the company even though -- or regardless the economic situation of our country or U.S. I don't know if you would like to...

[Jorge Garza, executive]

Yes. If there is a recession in the U.S., what we believe is that the automotive market, at least the production of vehicles, will not suffer dramatically. It will be a mild reduction in the economy. And the production of cars, we believe is going to continue to be relatively strong because the current levels of production at the moment are relatively low. Inventory levels at the dealers are relatively low -- or very, very low actually, and OEMs will have to continue producing to fill up the pipeline. So we don't expect a very strong impact on our volumes because the production of cars will continue strong. And definitely, we will have to continue with the investment commitments that we already made in Draxton.

And coming back to the second question, this is -- in the San Luis Potosi plant, we are installing 2 lines. And each line will add 30,000 tons of capacity. The first one will start by the end of this year, and it will be a gradual ramp-up of production from, I would say, November, December this year, and then we will continue with the ramp-up until the end of the next year.

The second line will add another 30,000 tons of capacity and the ramp-up will start in the second semester of the second -- the following year, 2023. So once the 2 lines are up and running and at full capacity, we will have 60,000 tons of additional capacity in the system in North America. Well, I don't know, Carlos, if this answers your question.

[Carlos Alcaraz Pineda, analyst]

Yes, that's clear.

[Operator]

[Operator Instructions] With no further questions, I would like to return the call to the management for the close of the conference.

[Unknown Executive]

Thank you, everyone, for your interest in GIS. Please don't hesitate to contact us if you have further questions. We hope you stay healthy and say. Have a nice day.

[Jorge Garza, executive]

Thank you.

[SaúlCastañeda de Hoyos, executive]

Thank you.

[Operator]

Ladies and gentlemen, with this, we conclude the conference of the day. You can disconnect.