Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone, and welcome to GIS' Third Quarter 2024 Earnings Conference Call. Joining us today, we have GIS Chief Executive Officer; 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 meant for investors and analysts only.

During this call, the management 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 on-screen presentation. [Operator Instructions]

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 subject to change due to a variety of factors. For more details 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 GIS management team. Mr. Jorge Rada will lead the call.

[Jorge Garza, executive]

Good morning, everyone, and thank you for joining us today. I'm pleased to report that our sequential improvements in key operational indicators continue to strengthen our profitability through this quarter despite a challenging landscape. This positive trend is especially notable amid the lower volumes in Europe, which were offset by our solid performance in North America driven by enhanced operational metrics, commercial efforts and the capacity expansions installed in previous quarters.

We are on schedule with the machining expansions at Evercast and construction of the new GIS Ederlan facility. These projects will further enhance our manufacturing capabilities and product diversification, helping us to maintain and secure new contracts and widen our portfolio.

In fact, in 2024, we have secured $130 million in new contracts, mostly for components agnostic to electrification. This aligns our strategic focus on business segments favored by current market dynamics and enhance our production capacities. In this context, I would like to highlight that our order book remains strong with a firm customer retention, thanks to our constant efforts towards innovation, customer satisfaction and product quality.

Turning to our sustainability initiatives, we continue to make significant strides in our green energy strategy. Across our Draxton facilities in Europe and China, we are advancing in the installation of solar panels, an initiative that not only helps optimize energy costs but also enhances our operation sustainability. While the impact on our overall energy consumption is still incipient, these efforts align our commitment to reducing our environmental footprint and enhancing our long-term sustainability profile. In this regard, our plant in China achieved the high-tech and green factory certifications.

Looking at the broader industry landscape, the automotive sector continues to face complex conditions globally. In North America, vehicle production contracted 6% year-over-year due to inventory corrections, which are expected to continue towards year-end. Although the light vehicle sales remained steady compared to the same period last year, showing a slight growth of 0.2% year-over-year as we observed that demand continues to be pressured by affordability factors despite improvements in inventory levels and incentives.

In Europe, vehicle production maintained its downward trend, decreasing 7% year-over-year affected by Chinese EV imports and anticipation of new CO2 regulation in 2025. In line with production, light vehicle sales fell by 2% on an annual basis impacted by economic challenges.

In China, production dropped 4% compared to the previous year, largely due to softer demand that has dampened production prospects offsetting the growth of Chinese exports and EVs. Replicating the performance of the previous quarter, sales declined 5% year-over-year as government incentives and aggressive price competition were insufficient to drive demand.

During -- turning to Draxton's performance, consolidated casting volume decreased 5% year-over-year, while machining volume sourced 18% year-over-year. Our North American operations delivered their strongest quarterly performance of the year, offsetting softer volumes in Europe. Regionally, North America casting volume remained stable, while machining volume increased by 30% year-over-year. While 2023 was favorable with an extraordinary demand, contributions from Line 6 and 7 at our San Luis Potosi plant supported volume in third quarter 2024.

Additionally, capacity utilization improvements on Evercast by plating line with the second line operational this quarter, further contributed to the quarterly performance. We still see a room for further margin expansion into next year, driven by continued capacity consolidation and operational improvements. In Europe and Asia, casting and machining volumes decreased by 12% and 6% year-over-year, respectively, reflecting specific regional headwinds, as previously explained, partially offset by the implementation of a commercial diversification strategy focused on new components and industry segments.

In Europe, this situation will continue for the rest of the year, although we remain close to our customers to try and reduce the impact on our volumes. In order to sustain margin stability in this region, we will focus on managing cost structures, operational efficiencies and improving key operational metrics.

During the third quarter, Draxton sales decreased by 5% year-over-year, amounting to $220 million, mainly due to lower indexed raw material and energy prices and reduced casting volumes mainly in Europe, which was partially offset by a higher volume of value-added products and improved product mix and significant progress in commercial negotiations.

EBITDA rose by 75% year-over-year, amounting to $29 million, primarily driven by operational improvements and the ramp-up of volumes of our strategic investments across all the regions, which are also reaching operational stability, thus improving their profitability performance. We believe that we can continue to capture value for our current preparations, even through mixed market dynamics, sector-specific challenges and amid uncertainties surrounding EV adoption as our product portfolio is mostly agnostic, which means it is compatible with the electrification trends and internal combustion engines.

Notably, EBITDA per ton reached $251 million this quarter increasing 91% compared to the same period last year. We expect this metric to continue improving in tandem with the ongoing ramp-up of our capacity investments in higher value-added processes and components.

GIS Ederlan, our JV with Fagor Ederlan delivered steady performance this quarter, with revenues increasing by 14% year-over-year. Expansion efforts are progressing as scheduled, aiming to be concluded by year-end. We have secured programs to fill over 50% of new capacity, thus strengthening our value proposition in North America. Now I will hand over to our CFO, Saul Castaneda, to dive deeper into our financial results. Saul, over to you.

[SaúlCastañeda de Hoyos, executive]

Thank you, Jorge. Good morning, everyone, and thank you for joining us today. This quarter shows not all resilience in our financial performance, underscoring the strength and adaptability of our strategies, particularly in Draxton. Consolidated revenues were $243 million, down 5% compared to the same period last year. And although volumes declined in Europe, our North American operations achieved their best quarter of the year in both productivity and profitability, having a substantial contribution from the additional capacity.

Consolidated EBITDA reached $29 million, the highest EBITDA in the year and up 66% on an annual basis. Profitability continued to benefit from sequential enhancements across core metrics, particularly in North America, primarily driven by recent production ramp-ups and strategic cost saving initiatives.

Additionally, EBITDA margin increased to 12% from 7% in the same period last year. The strategic emphasis on higher-value products and services underscores our commitment to long-term margin expansion and sustainable profitability, both critical as we navigate evolving market conditions in the automotive sector. We expect these positive impacts on our financials to continue and even gain further momentum as we advance our operational initiatives and ensure that our strategic focus on electrification agnostic parts and value-added processes provide a buffer against varying production recalibrations in the industry.

As of quarter end, net debt stood at approximately $244 million, reflecting the closing of two syndicated loans arranged to refinance debt during the second quarter of this year, which led to a significant improvement in our maturity profile, as you may recall. Despite higher debt levels, our net leverage ratio stood at 2.3x at quarter end as we incorporate a higher EBITDA throughout the year. This effect should continue to bring flexibility to the company's financials.

As of the end of the third quarter, CapEx was approximately $55 million aligned with expectations and encompassing the full investment for the competition of our planned expansions by year-end. I would also like to note that the second installment of the dividend approved in the Annual General Shareholders Meeting for $0.03 per share will be paid on November 14 after the resolution of the Board of Directors who were empowered by the Annual General Meeting to assess and decide regarding this second installment.

Thank you for your attention. I will now hand the presentation back over to Jorge.

[Jorge Garza, executive]

Thank you, Saul. To conclude, we remain well positioned to face the challenges of the global automotive industry, growing from our operational enhancements, strategic expansions and a high-value and electrification agnostic components orientation. We will continue to focus on strengthening profitability while preparing for future growth, always keeping a close eye on market dynamics and external pressures. We will take advantage of our competitive advantages within the different regions to be a reliable partner for our customers and help each other navigate through the tough [indiscernible] profitability.

With this, I conclude my remarks for today. Thank you all for your attention and continued support. We can start now the Q&A session, please.

[Operator]

Thank you. At this time, we will open the floor for your questions. [Operator Instructions]

Our first question comes from Carlos Alcaraz from Apalache Research.

[Carlos Alcaraz Pineda, analyst]

Congratulations for the results. I have two specific questions. My first question is about the machining volume in North America. What total capacity will you reach with the expansions? And my second question is about the EBITDA margin. Do you have any range for the next year that you will share with us?

[SaúlCastañeda de Hoyos, executive]

Would you like to start with the machine?

[Jorge Garza, executive]

Yes. At the moment, we are -- gosh, I don't remember exactly because we have the GIS Ederlan and Evercast. And I think it's going to be about 18 million pieces or brackets per year. We are, in this moment, about 13 million per year. And we are adding more and more capacity, and we are still discussing possibilities to continue growing our capacity in machining. So you will hear more from that from us in the future for additional capacity in machining, and especially in Evercast.

[SaúlCastañeda de Hoyos, executive]

And thank you, Carlos, for your questions. And let me go to the second one. As you know, we don't provide guidance. But nevertheless, I would like to emphasize, as I already mentioned during my previous intervention that our EBITDA margin in this quarter expanding very well and very strong way. We are very confident that we can go even further than that. I wouldn't say in a specific target. We have our targets internally but I would say a double-digit margin, probably low double digit or mid-double digits will be a very good target for us.

As we mentioned, we have more volume and it would provide it or given our recent installed capacity expansions, but also we are going to be -- we're going to have stronger margins related to our value-added processes, as Jorge just mentioned with the machining and plating and also regarding our cost-saving initiatives. So we are very confident that we can go further than we achieved in this quarter.

[Operator]

Our next question comes from Bernardo [indiscernible]

[Unknown Analyst]

My question is a bit more on the macroeconomic side, political side. If Trump were to win the presidential elections in the U.S., what is your take on the risk of increased tariffs? And could there be a potential impact of those tariffs on your operations?

[Jorge Garza, executive]

Well, we have USMCA already in place and that -- if he wants to do something different from that, then it has to be a renegotiation of the USMCA. So we don't expect that to happen at least if he wins -- immediately when he takes power right in the office. However, in the future, the USMCA will be negotiated and for sure, there will be different terms in the negotiation for the future. But we still see that there is a lot of investment of North American companies in Mexico producing for the region.

So in our opinion, we should not be so much afraid of that. But what we can see is that maybe there will be a lot of, let's say, restrictions for companies with -- that are from Chinese capital to, let's say, enter into the North American market, especially the U.S. and that will be beneficial for us.

[Operator]

[Operator Instructions] Our next question comes from Alex Azar from GBM.

[Alejandro Azar Wabi, analyst]

Do you hear me, Saul and Jorge?

[Jorge Garza, executive]

Very well, Alex.

[SaúlCastañeda de Hoyos, executive]

Loud and clear, Alex.

[Alejandro Azar Wabi, analyst]

This is a follow-up from Bernardo. Just to understand if you can remind us on your main products, let's say, calipers, brackets in North America. What's your market share? And if out of those products, how would you say the production is across North America because what I'm trying to understand is that most of the production of calipers and brackets might be in Mexico. So forget about tariffs, but it seems impossible that he wants to fight with Mexican producers when no one produces in the U.S. So that would be my first question.

My second one is on derivatives. I understand that you're doing a hedging strategy and probably that hedging strategy, it's hurting the results today. Once the hedging strategy, let's say, finishes and if the FX base at around MXN 19, MXN 20. Can we see an impact on results benefit in the next 12, 18 months? How much would that benefit would be?

And my third one is more on the medium and longer term, how do you see your operations from going into the medium term? And I mean how do you see volumes evolving, how do you see the margins evolving?

[Jorge Garza, executive]

Sure. Thank you, Alex. Well, for the first question, as you said it's like a follow-up question from Bernardo. The product that we make, especially for the brakes are not exported directly. They are exported indirectly because they go through suppliers that are already installed in Mexico and they produce the brake, the complete break, okay? So -- and there are several companies. Actually, I would say all the companies that produce brakes are already operating in Mexico and they really localized production in the past to Mexico. So if they start to do something to block, for example, exports of brakes to the U.S. for Mexico then, as you said, they will affect the whole U.S. industry, the automotive industry because almost everybody is producing brakes in Mexico and less and less production of brakes is on in the U.S. So you are right. That's why we are confident that in that regard, there is not going to be much impact, okay?

Regarding the derivatives, I would ask -- I would like Saul to answer that question.

[SaúlCastañeda de Hoyos, executive]

Sure, Jorge. Thank you, Alex, for your questions. Sure. We -- let me start with this. With the FX hedge, I will say, it is important to highlight that we did not pursue speculative gains. It is an important aspect. We have a clear and detailed policy, we validate our strategy with the Board of Directors. We are constantly validating our perspectives and our actions. So we closed that FX hedges with a level that we feel comfortable for -- to settle and to have certainty of our operations.

So as you mentioned, regarding volatility, we closed some of those FX hedges that happens to be that we have lower FX flows that market at this moment. But as I mentioned, it's very important for us to remind you or everyone that we don't pursue any speculative effects on those. I will say that this accomplishment of this strategy that we, as I mentioned, validate very often with our Board of Directors, we already have some hedges for 2025, not of all closed. We have some room or space. We are going to wait and see to this more volatility that will appear on markets but I will say that we do expect a benefit regarding the difference of FX close or settled for 2025 against 2024, probably around $2 million to $4 million, I will say, regarding that -- in that range, Alex.

[Alejandro Azar Wabi, analyst]

So Saul, there is a portion of the operations that it's still going to be hedged in order for you to have visibility in 2025. Can you share with us the percentage of the coverage?

[SaúlCastañeda de Hoyos, executive]

Sure. Probably, we have a little bit more than 50% of our Mexican peso cost and expenses needs for 2025. I will say around 50% to 60% of our needs of 2025. And as I already mentioned, we can settle more FX hedges, but we are not in a hurry. We would like to wait and see what is coming, the volatility and -- but as I already mentioned, the -- all the actions and executions are very aligned to this strategy, Alex.

[Alejandro Azar Wabi, analyst]

Okay. Yes, I understand. It's for you to have visibility. I just want to understand if there is upside in case those -- when those let's -- if the FX stays at MXN 20 and the 2025 hedges finalized, your 2026 results should improve. Am I correct?

[SaúlCastañeda de Hoyos, executive]

Yes, absolutely. You're correct. And I would say because of two important aspects: one, a better FX hedge -- FX level of 2025 against 2024, but also because of the -- that we have room, we don't close or settle all our positions. And also, as you know, the 100% of our revenue is dollarized. So at bottom line, yes, we will see a benefit in 2025.

[Jorge Garza, executive]

Yes. And Alex, regarding the long term or the future, we are still -- we are very optimistic because in North America, we installed the capacity. We have a solid order book. And we are still negotiating additional potential programs to continue growing, relocalizing some production from the U.S. to Mexico. For example, we announced today the acquisition of $130 million of new programs during the year -- I mean, this year up to September, we have gained new contracts globally for that amount. So at this moment, what we see is that Europe has been losing production of vehicles, but we are, since several years implementing a strategy for diversification to the commercial vehicle market and now we have, for example, 30%, 35% of the production that we have in Europe is going now to commercial vehicles and this product that we produce for commercial vehicles are more complex and they are with value-added.

So we are still very optimistic even the turmoil of Europe at this moment that the situation will be, let's say, positive, and we will continue growing. We have capacity already installed. We haven't let's say, filled it off completely. We still have some room for improving. And additionally, we are making some additional improvement in productivity that will -- with minor or marginal investments, we can, let's say, release more capacity and that will allow us to gain more market share.

[Alejandro Azar Wabi, analyst]

Okay. Jorge. And if I may, one last one. CapEx has been on the higher side due to expansions on your plans, but is there any approximate you can give us on CapEx for 2025. Should we think on a lower CapEx versus 2024, if you cannot say an approximate?

[Jorge Garza, executive]

Go ahead, go ahead.

[SaúlCastañeda de Hoyos, executive]

Thank you, Jorge. Sure. It is important question, Alex. Let me begin with even the fourth quarter perspective of CapEx, and then I will move to 2025. As we mentioned and disclosing our earnings release, we are foreseeing around $100 million CapEx during this year. Probably, we see some room for savings on CapEx on this year, and we'll have probably more something like $90 million or even a little bit less than that. And absolutely for 2025, even when we have our financial projections and we'll be completing our budget in the next few weeks.

I will say that probably we see something more than 75% to 80%, that will be probably a target for us. And because we also know that we would like to improve our cash flow generation. So probably we need to double check our CapEx projects and initiatives both giving the operations the appropriate amounts and projects that the operations needs, but also saving the money to have a stronger cash flow generation for 2025.

[Operator]

[Operator Instructions] Our next question comes from Emilio Fuentes from GBM.

[Emilio Fuentes, analyst]

I wanted to know if you could give us a little more detail around your commercial negotiation efforts. Are these all recurring? Are there some onetime? And if so, could you share the percentage of which are expected to be recurring in one time?

[Jorge Garza, executive]

Thank you, Emilio. Well, what we tried to do were two things. One, for example, some several months ago, we started negotiating indexations of things that were not indexed in the past that were not standard in the industry. So we concluded all these negotiations for indexation of raw materials, energy and some additional material that we consider that was important to index. And then several months ago, we started also a process of setting new price levels because of inflation -- as you know, inflation has been very, very stubborn in the last couple of years. And we demonstrated to the customers that it was really necessary for the whole supply chain to give some relief in terms of pricing.

So we already concluded negotiations and the negotiations are not a onetime, let's say, payment or a long-term payment for let's say, price increase or something, but we are setting new price levels. And those prices are remaining, let's say, I hope I'm explaining myself well, that it's not just that we got $1 million or $2 million or $5 million onetime, but we are -- I mean, the prices are new, and they are staying like that. And if it becomes necessary again to -- because of the inflation to go again and renegotiate, we feel confident that we can do it because the supply chain, the OEMs and the Tier 1s are more, let's say, sensitive and they understand more -- it's never easy. It will never be easy. But at the end, it was really necessary for the benefit of all the supply chain.

[Operator]

With no further questions in the queue, I would like to turn the call to the management for the close of this conference.

[SaúlCastañeda de Hoyos, executive]

Thank you, Antonio, and thank you, everyone, once again for your interest in GIS. Please do not hesitate to touch base if you have further questions. Have a nice day.

[Jorge Garza, executive]

Thank you.

[Operator]

Thank you. This will conclude our conference. You may disconnect.