Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Analysis

A Path of Profitability and Margin Recovery

With a stronger finish in 2023, the company showed sequential improvement in its quarterly performance, demonstrating resilience and a commitment to enhancing profitability and recovering margins.

Stable Contracts and Capacity Expansion

The company has maintained a consistent flow of contracts, valued around $180 million annually, supporting strategic decisions to upscale both casting and machining capacities to meet demand.

Optimized Operations and Increased Production

Operations have achieved considerable milestones with Line 6 in San Luis Potosi reaching 70% capacity utilization, and expectations to fully utilize the latest expansion project, Line 7, by the end of the current year. Within North America, a significant production boost of approximately 60,000 tonnes of iron castings is forecasted, signifying a 20% increase in regional capacity.

Tripled Machining Capacity and Clean Energy Initiatives

In anticipation of growing demand, the company is tripling its machining capacity in North America and focusing on sustainability by ensuring a 70% clean energy mix starting in 2024.

Growth Amidst Global Automotive Market Challenges

Despite vehicle affordability issues, vehicle production and sales have shown positive trends across major markets, with a 3% increase in production and a 9% rise in sales year-over-year in North America, and growth in Europe and China representing healthy market dynamics.

Record Volumes in Casting and Machining

The casting and machining segments have displayed robust annual growth, with an increase of 12% and 64% in volumes, respectively. These record levels were reached through strategic expansion efforts and securing new contracts.

Draxton's Revenue Growth and EBITDA Improvement

Draxton's revenues and EBITDA have grown by 3% and 7% respectively over the quarter and full year. The fourth quarter EBITDA stood at $22 million, marking a growth despite currency headwinds. This success indicates effective volume management and expansion influence.

Projected EBITDA Improvements

With new capacities coming online and commercial mitigation efforts, EBITDA is expected to improve. The focus remains on operational excellence and securing additional contracts for electric vehicle (EV) and internal combustion engine (ICE) applications.

Machining Plant's Expansion and High Demand

A specialized machining plant's production capacity expansion aligns with Draxton's increasing machining needs, with the plant achieving over $67 million in sales highlighting attractive margins.

Overall Revenue and EBITDA Growth

The parent company recorded a revenue of $244 million for the quarter, a 3% year-over-year growth, and a revenue increase to $1 billion for the year. EBITDA for the quarter showed an 18% growth quarter-over-quarter, evidencing a solid improvement.

Solid Financial Position and Debt Management

Despite a marginal increase in net leverage, the company's financial position is stable with a net debt of $171 million and a leverage ratio of 2.2x. Plans to refinance in 2024 are underway to improve the company's debt profile and strengthen the balance sheet.

Forecasted Capital Expenditures for 2024

Given the automotive industry's changing landscape, the company plans to allocate approximately $100 million in capital expenditures (CapEx) for 2024 to further enhance its installed capacity .

Earnings Call Transcript 2023-Q4

[Operator]

Good day, everyone, and welcome to GIS Fourth Quarter 2023 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, 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 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 2023 with a sequential improved quarterly performance, continuing our path of profitability and margin recovery. This progress is accompanied by the steady advancements in our casting and machining capacity expansion programs, aligned to the ongoing post-pandemic recovery of global vehicle production. Draxton's enhanced operational execution and inventories efficiently returning to the optimal levels contributed to our results. This breakthrough is particularly notable as it matches the above industry production base of the OEMs in a year with disruptions in production like the UAW strike, high inflation and interest rates.

On the commercial front, by year-end, we secured contracts totaling approximately $180 million annually, figure consistent with the previous year following an effective commercial strategy, thus supporting our decision to increase our casting and machining capacity. It is important to highlight that building a high value-added global order book remains a core component of our growth strategy. While recognizing that considerable growth potential of components for electric vehicles, we are also increasing our market share of components for commercial business.

During the fourth quarter, we made solid progress in our strategic investment endeavors. The ramp-up of Line 6 in San Luis Potosi ended 2023 at a 70% capacity utilization. Meanwhile, the second phase of the expansion, Line #7, began production validation in the fourth quarter 2023, expecting to reach peak capacity utilization by the end of this year. Once these expansions become fully operational, our production in North America is expected to increase by approximately 60,000 tonnes of iron castings per year, which represents around 20% of this region's [ scoring ] capacity. Additionally, the significant boost at our machining and plating capacity in Evercast will solidify our position and enable us to continue to secure more value-added programs.

In our joint venture with ZF, Evercast, we successfully completed the new machining plant, which is set to triple our machining capacity in North America. Additionally, we installed the first plating line, which is already fully operational. The second plating line will start operations in the second half of 2024.

In China, we were very proud to receive recognition by our customer, Volkswagen Dalian with the Best Quality Performance Award in 2022. Also in this plant, solar panels have been installed for clean energy consumption, which, together with the green energy supply contract, guarantees a mix of 70% clean energy starting 2024.

Moving on to the developments in the automotive industry. In North America, vehicle production increased 3% year-over-year in the quarter, primarily driven by extraordinary inventory restocking by the 3 major Detroit-based North American automakers in anticipation of the UAW strike last year. Vehicle sales in the region grew by 9% year-over-year, indicating resilient demand despite ongoing vehicle affordability challenges. For the full year, vehicle production and sales in North America rose 9% and 13% year-over-year, respectively. This growth was supported by easing supply chain conditions, especially semiconductors.

In Europe, vehicle production for the fourth quarter recorded a 7% year-over-year growth, coupled with a 10% annual increase in sales, reflecting an improved supply chain. For the full year, light vehicle sales in Europe grew 18%, while production grew by 13% compared to 2022. This marks Europe as the region with the highest growth performance attributed to supply chain improvements and stabilization of the conflicts between Russia and Ukraine.

Turning to China. Vehicle production for the fourth quarter increased 18% year-over-year, mainly bolstered by surging exports. Vehicle sales also grew by 18% year-over-year, supported by government incentives. For the full year, vehicle production and sales in China increased 10% and 6% year-over-year, respectively. This growth was largely driven by the strong performance reported in the fourth quarter.

Moving on to Draxton's performance. Casting and machining volumes continued their upward trend, achieving annual growth of 6% and 57%, respectively. This increase is primarily due to a rise in demand from our customers across all regions, same that we successfully met through strategic expansion efforts in foundry and value-added processes. For the full year, casting and machining volumes grew by 12% and 64%, respectively, reaching record levels. This performance was fueled by a steady pace and securing new contracts and the deployment of the expansion projects in the second half of 2023.

By region, the North America casting and machining volumes increased 9% and 98% year-over-year, respectively, as a direct result of our ongoing pension projects, which enabled us to meet an increase in demand. In Europe and Asia, we achieved incremental casting volumes of 17% and machining volumes of 27%, thanks to our product diversification into commercial vehicle platforms mainly in Europe and a number of new products launched in China.

Draxton revenues for the quarter and full year increased 3% and 7% year-over-year, respectively, reaching $217 million and $932 million. This growth was mainly driven by volume contributions from newly launched programs, expansion projects and new value-added solutions. Notably, this growth occurred in an environment featured by lower raw material and energy costs as well as a less favorable exchange rate compared to the end of 2022 in Mexico. EBITDA for the fourth quarter was $22 million, marking 2 consecutive quarters of sequential growth despite the appreciation of the Mexican peso and transitional cost pressures related to our strategic programs and product launching.

We expect EBITDA to gradually improve in tandem with the ramp-up of our new installed capacity and with the progress in commercial negotiations to mitigate inflation and foreign exchange impacts. Draxton will remain committed to continuous operational improvement drawing on the development of the new projects, capacity expansions and obtention of new contracts for both EV and ICE applications.

In 2023, GISEderlan, our JV with FagorEderlan, which specializes in machining of iron components for the automotive sector, machined over 3 million parts. This volume translates to more than $67 million in sales with double-digit margins. For this plant, we have approved an expansion of its production facility, increasing machining capacity and castings demand for Draxton in North America.

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

[SaúlCastañeda de Hoyos, executive]

Thank you, Jorge, and good morning to everyone. During the fourth quarter, our company's final performance continued to show a positive trend in sales on an annual basis. This growth was primarily driven by increased casting and machining volumes, booked by the successful implementation of new programs that enhance our production capabilities and the increasing demand from our global customer base. Revenue for the quarter totaled $244 million, marking a 3% year-over-year growth, largely attributed to the record volumes achieved at Draxton. For the full year, revenue rose by 6%, reaching $1 billion. In the fourth quarter 2023, GIS reported an EBITDA of $20 million, showing a sequential improvement and 18% of growth quarter-over-quarter.

EBITDA performance throughout the year reflects the costs associated to product launches and establishing of new manufacturing lines, coupled with the negative effects of the Mexican peso appreciation. For the full year, EBITDA was $79 million with a margin of 8%. By the end of 2023, GIS CapEx reached over $120 million. The new contracts secured throughout the year position us to target $180 million in annual revenues, which are expected to be realized within the next 18 to 24 months, aligning to our ongoing expansion in casting, machining and plating capabilities.

Given the evolving dynamics within the automotive industry, we forecast a 2024 CapEx of around $100 million, which includes payments of some of the investments on ramp-up enabling us to remain capturing new production programs and consolidate our increased installed capacity.

As proof of our commitment to optimizing cash flow as of December 31, 2023, our net debt stood at $171 million, with a net leverage ratio of 2.2x. Although the leverage ratio increased compared to last quarter primarily due to a lower last 12 months EBITDA figure, our financial position remains solid. We expect this indicator to further strengthen aligned with the projected profitability enhancement for next periods. Last, but not least, we are moving forward on refinancing options in 2024 to further improve our debt maturity profile and having a strong balance sheet.

I will now hand the presentation back over to Jorge.

[Jorge Garza, executive]

Thank you, Saul. In conclusion, looking ahead to 2024, we maintain an optimistic outlook sustained by our enhanced production capacity and product portfolio, which are certainly aimed to increase our market share. In this sense, we are well positioned to capitalize on industry relevant trends, such as the nearshoring in Mexico and the ongoing global [indiscernible]. Concurrently, we are committed to expand our productivity and efficiency initiatives to advance in a path of profitable growth.

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

[Operator]

[Operator Instructions] Our first question comes from Carlos Alcaraz from Apalache Research.

[Unknown Analyst]

This is Andre from Apalache Research. The first one is regarding expectations. In what range do you estimate EBITDA to the [ entry in ] 2024? And in the report you mentioned expansion in machining productions for JV, how much do you expect to invest in the [ expansion ]?

[SaúlCastañeda de Hoyos, executive]

Okay, I will start. Thank you for your question. I'm glad to having you here. As you know, we do not provide any guidance. But we can say that we are confident about a major improvement in our EBITDA levels. I will say we are forcing a double-digit EBITDA margin during 2024, mainly driven by higher volumes, price increases, value-added processes and efficiency and productivity.

I don't know if you want to add something, Jorge?

[Jorge Garza, executive]

I think that's clear for the EBITDA, but I didn't get the second question well.

[SaúlCastañeda de Hoyos, executive]

Can you repeat, please, the second part of your question regarding machining processes?

[Unknown Analyst]

Sure. No problem. You mentioned in the report an expansion in machinery production for the JV, how much do you expect to invest in the expansion?

[Jorge Garza, executive]

You're talking our JV with -- in GISEderlan, right?

[Unknown Analyst]

Yes.

[Jorge Garza, executive]

Okay. Look, we are now in the middle of the construction of the expansion of the plant. Now if you go to the site, you will see that the building is going to be finished by the end of April. So we are planning to invest there in approximately, maybe correct me, but it was [ $50 ] million or something that in different projects. We already have the order book sufficient to fill out 50% of that expansion. So you have to make an expansion and the building is going to be filled out gradually according to your order book.

So we have secured orders already up to 50% of that expansion. So we are very happy for that. And that company is going to be selling more than $100 million already with the [ installation ] of projects, and the margins are, let's say, double-digit margins. So pretty good. We don't consolidate that business because we are owners of 50% of that JV. Our partner doesn't consolidate the company either. But you can see the results of that company in our numbers in our books because it's shown there, right?

[SaúlCastañeda de Hoyos, executive]

Exactly. And I will just add that this CapEx investments are made through phases. We do not deploy all the CapEx on one -- I will say, a one-shot CapEx. It's deployed in different phases. And it has been a very profitable operation, GISEderlan or [indiscernible] Ederlan. So we are very confident to have this projection during 2024 also.

[Operator]

Next question from Gonzalo Uribe.

[Unknown Analyst]

I have 3 actually. So could you guys provide some color on the company's free cash flow outlook and the strategies in place to optimize it, particularly considering the recent CapEx investments? Secondly, with cost inflation and FX headwinds impacting margins, are there any plans to renegotiate supplier contracts or adjust pricing strategies in the first half of '24? And lastly, could you give me some color as to when exactly the 2023 FX impact took place?

[Jorge Garza, executive]

Sure. Thank you for your questions. And...

[SaúlCastañeda de Hoyos, executive]

Jorge, if I may, I can start?

[Jorge Garza, executive]

Yes, sure.

[SaúlCastañeda de Hoyos, executive]

Sure. It's important one, the first one, mainly, I will say that during 2024, we will [ strengthen ] our cash flow generation, mainly driven by a higher EBITDA. I will say that is the most important part of our 2024 cash flow projection. And another important aspect is that we are going to execute the refinancing during the first semester of 2024, and with this resources, we are going to improve our debt maturity profile and also to have new money to face the face payments that we are foreseeing during 2024. And also, I will emphasize that regarding working capital, we are not foreseeing an investment. We had a major investment, I will say, during the last couple of years that we are not foreseeing a major increase on working capital during the next year. So I will say, 2024 will be a much better cash flow year for GIS.

[Jorge Garza, executive]

Then regarding the negotiations. I imagine that you are talking about our prices with our customers, right? So if that is the case, we have been negotiating price adjustments to transfer cost impacts to the customers as everybody in this industry is doing all the companies operating in Mexico and had to do that because we have received a lot of impacts from inflation and exchange rate. So we are very advanced in these negotiations, and we think that the last negotiations will finish in the first quarter. And we are already in 2024 applying new prices from a number of products. And second quarter this year, most -- I'm pretty sure that we will finish all these negotiations. And based on that and additional volumes and additional productivity improvements, we will definitely, as Saul was saying, we will have a big boost in our EBITDA margins.

[SaúlCastañeda de Hoyos, executive]

And for your last question, I would say that during 2023, our FX exchange rate impact was around $10 million. And I will say it was basically the same amount for each quarter. So I will say around $2.5 million to $3 million per quarter. In that order, I think, for a total impact of on the year of around $10 million.

[Operator]

[Operator Instructions] 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, and thank you, everyone, once again for your interest in GIS. Please do not hesitate to touch base if you have further questions.

[Operator]

With this, we conclude our conference. You may now disconnect.