Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Transcript 2022-Q4

[Operator]

Good day, everyone, and welcome to GIS Fourth Quarter 2022 Earnings Conference Call. Joining us today is 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 for investors and analysts 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 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 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]

Good morning, and thank you all for joining us today. We closed 2022 with strong results, achieving double-digit revenue growth and consolidating uninterrupted sequential EBITDA growth despite persistent economic headwinds and supply chain constraints. This performance was largely attributed to Draxton's steady pace in successfully launching major production programs, improving Vitromex' product mix by incorporating large-sized items and implementing initiatives to protect margins. On the last point, our commercial strategy, alongside a tighter cost control and greater operational efficiencies helped to mitigate the negative impacts of rising energy costs, particularly in Europe and raw material prices. The advancing global vehicle production supported by the gradual normalization of semiconductor supply and the production ramp-up of newly secured programs allow Draxton to reach record annual volumes of over 430,000 tons.

The foregoing is driven by our competitive standing and the capital deployment oriented to the expansion of our installed capacity alongside the incorporation of higher value-added processes. In this regard, our strategic growth projects will continue as planned over 2023, highlighting the operational kickoff of our new casting machining and plating facilities, which are part of the strategic investments of over $140 million initiated in 2021. New contracts were won in 2022, equivalent to approximately $180 million of annual revenue within a more positive auto industry outlook for 2023 that we expect will help to maintain our growth and profitability. Our investments in capacity expansion bear fruit. We also anticipate to further capitalize on the near-shoring trend in North America and improving industry dynamics with increasing vehicle production forecasts. The latter, considering that inventories are still low and that pent-up demand is yet to be met.

On another positive development, the antitrust authorities approved the sale of Vitromex to Mohawk industries expected to be concluded as soon as the remaining customary closing conditions are fulfilled. This transaction will allow us to channel resources and efforts to our auto parts business, which has shown a solid profitability and encouraging growth perspectives.

In conclusion, our year-end results and investments progress underscore GIS' resilience, the talent of our team as well as the soundness of our strategic approach and capacity of execution at the midst of what continues to be a challenging environment. Throughout 2023, we will continue to work diligently on optimizing Cinsa's product portfolio and bringing Draxton's asset investment into operation to service new programs won and develop further value-added processes with a view to effectively and timely meet the changing needs of the markets we serve. I will now hand the presentation over to Saul.

[SaúlCastañeda de Hoyos, executive]

Thank you, Jorge, and good morning, everyone. The company's financial results maintain their upward trend, mainly driven by record volumes achieved at Draxton, given the production ramp-up of new programs and enhanced vehicle production from customers across all regions, alongside the effect of raw material and energy cost inflation on sales prices. Revenue for the fourth quarter totaled $301 million, up 20% year-over-year, mostly driven by Draxton strong volume, higher raw material and energy costs reflected in prices and a greater contribution from the improved product mix at Vitromex. For the full year, revenue increased 21% to beat the $1.2 billion mark. EBITDA for the fourth quarter climbed 93% year-over-year, amounting to $40 million and marking a full year of a interrupt sequential growth.

This performance was supported by higher volumes in combination with the adoption of cost control initiatives and greater operating efficiencies to protect our margins, which went from 8% in fourth quarter 2021 to 13% this period. For the full year, EBITDA was $145 million, 22% higher than 2021 with margins remaining at 12%. As of December 31, 2022, net debt was $254 million, and net leverage ratio stood at 1.8x, remaining flat versus the last quarter and reflecting a stronger EBITDA generation in the last 12 months as well as suitable liquidity that would improve significantly with the resources from Vitromex's divestiture. It is worth noting that the company's net debt would stand below 1x once this transaction is completed.

Moving to CapEx. The company deployed several capacity expansion projects including the 2 casting lines at our San Luis Potosi plant -- tripling machining capacity in North America and the development of plating processes. Machining capacity in Europe will also increase significantly. These projects will allow us to further capture major production programs and capitalize on the ongoing recovery of the industry. Draxton will focus on the start of operation of these expansions alongside the development of value-added processes and materials that will enhance Draxton's positioning, particularly in the electromobility segment. I will now hand the presentation back over to Jorge.

[Jorge Garza, executive]

Thank you, Saul. Regarding the automotive industry developments. In North America, vehicle production and sales for the quarter increased 7.8% and 9.1% year-over-year, respectively, reflecting the recovery of inventories and easing of semiconductor supply constraints. For the full year, vehicle production climbed 9.7% year-over-year in the midst of semiconductor and labor shortages and leading inventory levels to rebound. In this context, 2022 vehicle sales were down 7.2% year-over-year due to the limited availability of new vehicles and surge in inflation. As for Europe, vehicle production and sales for the quarter increased 3.9% and 4.3% on an annual basis, respectively, making its best period since the onset of the semiconductor prices, thanks to the improving of supply chain conditions.

2022 vehicle sales contracted 11.2% year-over-year due to a softer economic environment and reduced availability of new vehicles for the semiconductor shortage. Full year vehicle production decreased 1.3% year-over-year as advancing production in the region was not enough to offset the lower production in Russia and limitations brought by the semiconductor shortages. In China, quarterly vehicle production in sales dropped [ 6.2% and 7.1% ] year-over-year largely explained by the prolonged lockdown of manufacturing activities at major cities with the implementation of the Zero Covid policy, which was lifted last December. 2022 vehicle production and sales rose 1% and 6.1% year-over-year, respectively, despite the implementation of extreme measures to contain the search of COVID-19.

Moving on to Draxton's performance. Draxton's casting and machining volumes for the quarter increased 18% and 38% year-over-year, respectively, achieving uninterrupted sequential growth through the year and outpacing the industry. Full year casting and machining volumes rose 10% and 24% year-over-year, respectively, reaching all-time highs on the back of a faster pace in securing new contracts. By region in North America, fourth quarter last year and 2022 volumes benefited from the ongoing incorporation of value-added processes. Meanwhile, in Europe and Asia, quarterly and full year volume growth was driven by the new contracts won to supply components of commercial vehicles. It is relevant to emphasize that the completion of the strategic investments announced in 2021 and 2022 expected to be operational in this year will [indiscernible] Draxton, and additional casting and machine and installed capacity to keep up with the pace of new programs and tap into the ongoing recovery of the light and commercial vehicle industries.

Draxton's revenues for the quarter and full year increased 25% and 26% year-over-year, respectively, to reach $210 million and $868 million, boosted by volume contribution for -- from new programs launched and the effects on prices of higher raw materials and energy costs.

EBITDA for the quarter was $33 million compared to $14 million in the fourth quarter of 2022 -- 2021, sorry, driven by the incremental volume. Incorporation of value-added processes and initiatives to soften the impact of rising raw material and energy prices. 2022 EBITDA increased 25% year-over-year to reach $121 million. During the quarter, Draxton captured programs worth approximately $27 million in annual revenue, bringing the full year figure to $180 million, out of which around 85% are compatible with hybrid platforms and all electric vehicles.

Moving on to Vitromex. Quarterly revenue increased 13% year-over-year to reach MXN 1,252 million as the improved product mix from large-sized items more than offset the softer consumption dynamics. For the full year, revenue increased 15% to reach [ MXN 4,146 million ].

Fourth quarter '22 EBITDA amounted to MXN 205 million, up 23% year-over-year, driven by the enhanced product mix and operational kickoff of capacity expansions. 2022 EBITDA was MXN 596 million, 14% higher than 2021.

Now regarding Cinsa. Fourth quarter '22 revenue decreased 4% year-over-year to MXN 537 million, given the slowdown of domestic consumption, especially household goods for the year, since reached MXN 2,023 million. Quarterly EBITDA was MXN 46 million, 3% lower year-over-year. This performance was supported by the adoption of a pricing strategy better adjusted to current market and economic trends. The development of new products and enhanced customer service, which more than offset the dampen household spending and increased raw material prices. 2022 EBITDA was up 6% year-over-year, reaching MXN 184 million. For 2023, we will move forward with Cinsa's geographic diversification by accelerating its market penetration to other countries, primarily the United States with proprietary brands and Graniteware. Hand in hand with the marketing and promotion of innovative products while continue gaining participation in our current markets.

At the same time, efforts to consolidate the e-commerce platform will continue to bolster volume and capitalize on the major digital trends brought by COVID-19. With this, I conclude my remarks for today. Thank you all for your attention. Now we can start with the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Alex Azar.

[Alejandro Azar Wabi, analyst]

Saul, Jorge and Arturo. Quick ones. First, Saul, when you see the -- some of the EBITDA of the companies and then subtract the consolidated results or the eliminations. There's a $15 million impact during the year. It seems a little bit high. Could you just tell us what you guys saw? If this is a figure that we should see going forward? Or what are you guys seeing there in the upcoming years when you take out Vitromex? And on the other -- and for you, Jorge, you mentioned nearshoring and we've seen GISSA growing capacity, grown volumes and EBITDA is close to record levels. But my question is more on the strategic side. The company only has footprint in Mexico. When you think a strategic or maybe cost-wise -- does it make sense to have capacity in the United States? Or do you see GISSA continuing to be a Mexican footprint company that exports probably 99% of its products.

[Jorge Garza, executive]

Thank you, Alex. Excellent question. I would say that the difference between GIS consolidated EBITDA and the sum of the parts of each segment, it's related to central or headquarter expenses. And it is important to mention, as you already mentioned that this is an extraordinary amount. I would say it's higher than average yearly amount -- and more importantly, we are moving forward to optimize that [ amount ] that figure. During the year, we had some projects and some extraordinary events that increase that amount. But definitely, we are moving forward to decrease and optimize that figure, especially with the divestiture of Vitromex.

Okay. And regarding the strategic vision of Draxton in this case, in terms of North American footprint. Well, the nearshoring is definitely benefiting Mexico in this case we probably see a lot of investments coming to the country. And a lot of our customers are increasing their capacity in Mexico -- our products normally don't travel much. It means that if we want to deliver products from, for example, San Luis Potosi all the way to the Midwest in the U.S. It's not so easy because it will be difficult to compete with companies that are located directly there in the Midwest. So we need to be attentive -- I mean, to pay attention to what are the opportunities of Draxton in the U.S., we cannot discard that possibility. At the moment, we are very focused on growing in Mexico because our capacity is, let's say, growing based on our customers' capacity in Mexico. However, we cannot say that the U.S. is not an option, okay? So to answer in summary of your questions. At the moment, we don't have any plan, any firm plan to go to the U.S. and at capacity, but we cannot discard that possibility.

[Alejandro Azar Wabi, analyst]

And one more, if I may, Jorge and Saul. You guys reached at least in the second half of the year, the EBITDA per ton above $300 that you were targeting. But you are investing in new value-added processes. So what is our range that we should expect going forward in terms of EBITDA per ton, I don't know, [ $300, $250 million ]. Could you share a bit more color on that?

[Jorge Garza, executive]

Well, it depends -- you will -- we will have to go case by case because it depends if it is just machining or if it is a machining and plating, that can go as high as [ $400 million ] for example. So...

[Alejandro Azar Wabi, analyst]

But I mean consolidated...

[Jorge Garza, executive]

Consolidated is going to be difficult to give you a figure, but you try to make an average of something between [ $350 and $400 million ], something like that. But you will see that number increase starting next year when we have fully operational the additional capacity in machining and additional capacity in plating in Mexico. And also, we will improve or add more capacity -- we are adding more capacity in Europe. So you will start to see those numbers grow definitely next year.

[Alejandro Azar Wabi, analyst]

I agree.

[Jorge Garza, executive]

There is an upside there, Alex. Absolutely.

[Operator]

Our next question comes from Carlos Alcaraz.

[Carlos Alcaraz Pineda, analyst]

Jorge and Saul. Taking my questions. I have 2 of them. The first one is about the expected growth given the investments in Europe and North America. What is your estimate of growth in revenue and EBITDA for 2023? And the second one is about the cash coming from the sale of Vitromex. Will you look for an acquisition with the cash available? Or will keep it in cash, given the, I guess, interest rates?

[Jorge Garza, executive]

I can take the second one, and we can go back to the first, even with you or myself -- thank you, Carlos, for your question. So I will start with your second one, and I will remind our audience that transaction has been valued at $290 million -- and as you know, [ amount ] is subject to customary adjustments for this type of transaction. And we also released last year that the estimated net proceeds will amount approximately $260 million. And it is important to highlight, as we mentioned in our previous quarter that regardless of current GIS healthy leverage ratio, we foresee the leverage the company with a portion of the net proceeds as some of our debt will require some payments. In addition, we will allocate resources into our growth strategies. As you know, we have -- we need to fund our relevant CapEx program, but also to be prepared to pursue M&A opportunities.

So summarizing, I will say, we want to deleverage funding on our ongoing CapEx programs and also to be prepared to pursue any M&A opportunities. I don't know if you would like to add something regarding that, okay?

[SaúlCastañeda de Hoyos, executive]

And regarding the first question, probably I can give you some ideas. As you know, Carlos, we don't provide a guidance, but we can give you some reference, probably, as you know, we are adding 60,000 metric tons of capacity. Our volume sold during 2022 reached 438,000 tons around 440,000. Thank you, Jorge. And probably you can have like a reference of I will say, 15% of growth will be a reasonable or a fair reference. I don't know if you agree Jorge.

[Jorge Garza, executive]

Have questions. Yes. However, it's very important to mention that 2023 -- and the question from Carlos is for this year for 2023. But this capacity is being launched as we speak. It means now we are starting to launch the Line #6 and Line #7 in some policy because it's the sixth one in San Luis Potosi. And the Line #7 in San Luis Potosi is going to be launched in the second semester of this year. So you will not see the full results of this additional capacity in 2023. What you will see is the start of production of these lines. Additionally, you will see the start the production of machining and plating in Irapuato, -- and then the full numbers, they all start to see a big change or a big jump in EBITDA next year that's what in our reports -- earnings report, we are saying that this year is a transition year for us for 2 reasons. One is because we are, let's say, divesting Vitromex, and we are going to concentrate on the growth of Draxton.

So this year is a transition year. And next year, you will see a relatively high jump in the volume and EBITDA of Draxton. Thank you for the remarks. It's going to be in the 2024 result CapEx.

[Operator]

Our next question is coming from Laisha Zaack.

[Unknown Analyst]

It has to -- my question is related to the middle left. Last quarter, you mentioned that there might have been like a normalization of commodities prices, but it seems like they have kept the [indiscernible] trend. Can you give us more color on that? If there was any impact during the last quarter of the year? And how do you see the behavior of these commodities going forward?

[Jorge Garza, executive]

Sure. We saw in the last quarter of last year, a small decrease of the prices of the scrap. However, the prices of the scrap are going up again. So we don't see a big fluctuation quarter-to-quarter during the year. And the prices, in our opinion, will stay high for a relatively longer time. The reason is that the steel makers are increasing their capacity in North America, for example. And they are adding capacity for electric arc furnaces that requires scrap. And so the demand for scrap is growing in North America. That means that the price of the scrap is going to continue high. So if it continues in the same levels as today, we will not see [indiscernible] or issues with the metal lag during the year, okay? It's important to mention that our scrap or prices have indexation of the metal, 100% in all the customers, all the volumes. And we are working on trying to reduce the lag in terms of -- for example, the typical role in the industry was to adjust prices every 3 months.

Now we are talking to our customers to try to adjust this to 1 month, I mean, to have a shorter lag. So if we can achieve that with the customers and change the industry standards, then the future impacts of metal lag will be less. And this is what we are working on at this moment.

[Operator]

[Operator Instructions]

[Unknown Executive]

Jorge, just you just realize that we have a question on the chat. Basically, it was related with the Vitromex net proceeds, the use of proceeds.

[Jorge Garza, executive]

I can summarize just to make it clear. We would like to -- we are analyzing the exactly amounts that we are going to allocate in each of these categories. But I would say we will go first as a priority to deleverage then to support an expanding our CapEx ongoing program and also to be prepared and aligned to pursue any M&A opportunity. And in the question, there also as this person, I don't have the name, but he also asked about dividends. I would say dividends is definitely a subject on the table that we are analyzing and we will have a resolution in [indiscernible]. But one of the questions about the dividends is why do we do it in pesos. So this is something that -- because the company traditionally was a Mexican company operating basically in Mexico with -- actually in the pile, we have more businesses that were peso based. However, now with basically 90% of the group is going to be Draxton and Draxton is a dollar-based company. We will consider -- we are considering at the moment not to change that for next year to start declaring our dividends in dollars.

[Unknown Executive]

There were 2 questions. The second one is that you already mentioned. And yes, it is a subject that we are already taking in a deeper analysis, but we are considering that moving from pesos to pay dividends in U.S. dollars. I think there are the whole questions on -- at least on the chat there. It seems there is -- I don't know, probably regarding Cinsa, Jorge, we have a question regarding the opportunity that the U.S. market represents to our business. Probably, we can say that we are growing a lot in the U.S. Probably you can remind that regarding [ Graniteware ] brand and all the e-commerce strategies that we deploy. We have been growing a lot. Definitely, we know and we believe that there is still opportunities down there, but I don't know Jorge probably our priorities will stand there in that.

[Jorge Garza, executive]

No. There are, for example, in the enamel steel products, we have a brand that we licensed that is Graniteware and this is a brand that is very well known in the states. We are producing everything in our plants in Saltillo, Mexico, and we are using different channels. One of those is Amazon. We use marketplace platforms we approach the public or the audiences locally in their homes, right? Because this is for home. And also, we use supermarkets and local chains. So we think that there is still potential growth. Inflation has affected and also transportation cost is affecting because we need to consider that the state is -- the U.S. is a very large country. So we need to consider all the transportation and logistics costs in our prices, and it's a very competitive market. So definitely, yes, Mexico is not the only market we are looking for. We expect that the U.S. can continue growing in our portfolio. And yes, we have plans for Cinsa definitely. We will improve our productivity by investing more in automation in our plants in Saltillo. So definitely, you will see more from Cinsa in the next years.

[Operator]

With no more questions in the queue, I would like to return the call to the management.

[Jorge Garza, executive]

Thank you, and thank you, everyone, once again for your interest in GIS. Please don't hesitate to contact us if you have further questions, and have a nice day.

[Operator]

You may disconnect. Have a great day.