Nemak SAB de CV
BMV:NEMAKA
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Nemak SAB de CV
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Good morning, everyone, and welcome to Nemak's Third Quarter 2020 Earnings Call. Armando Tamez, Nemak's CEO; Alberto Sada, CFO; and Adrian Althoff, Investor Relations Officer, are here this morning to discuss the company's performance and answer any questions you may have. As a reminder, today's conference is being recorded and will be available on the company's Investor Relations website.
I will now turn the call over to Adrian Althoff.
Thank you, operator. Good morning and welcome, everyone. We very much appreciate your participation. Armando Tamez, our CEO, lead off today's call by providing an overview of business and financial highlights for the quarter as well as an update on our outlook for the remainder of the year. Alberto Sada, our CFO, will then discuss our financial results in more detail. Afterwards, we will open up for a Q&A session.
Please also note that we are accompanying our opening remarks today with a live webcast presentation. To view the slides, just click on the webcast link available in our earnings call invitation, or on the homepage of our Investor Relations website.
Before we get started, let me remind you that information discussed on today's call may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to risks and uncertainties.
Actual results may differ materially, and the company cautions not to place undue reliance on these forward-looking statements. Nemak undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
I will now turn the call over to Armando Tamez.
Thank you, Adrian. Hello, everyone, and welcome to Nemak's Third quarter 2020 conference call. As we mentioned in our earnings report issued yesterday, we saw sustained recovery in our business as well as the automotive industry in the period. In this regard, our rigorous implementation of preventive measures to keep our people safe proved essential.
Our follow through on the practices and principles outlined in our COVID-19 control plan, made it possible for us to normalize operations following the second quarter marked by widespread production shutdowns. Very difficult to predict the future cost of the pandemic, I am confident that we have the know-how required to continue to protect our people while adapting to meet the evolving needs of our customers in these extraordinary times.
During the third quarter, we capitalized on a more favorable industry backdrop, delivering consolidated volume in line with pre-COVID levels. Moreover, we successfully harnessed operational efficiencies linked to ongoing restructuring efforts, enabling us to achieve greatly improved financial results on a sequential basis. Despite seeing year-over-year reductions of 5% and 7% in volume and revenue, respectively, EBITDA finished 28% higher, with the resulting unitary EBITDA of $17.6 per equivalent unit, representing the best ever mark in our history.
In turn, the combination of efficiencies and volume, I just described, help us to generate sufficient cash flow to fund our business without having to tap into any additional funds from credit facilities in the period. Our progress in this regard also include the wind-down of our manufacturing operations in Canada in the quarter, which represented another important step towards enforcing the long-term sustainability of our business. As you may recall, this process has been reached [indiscernible] last year with the objective of further optimizing costs, amidst a decline in capacity utilization at the facility.
I am deeply grateful to our entire organization for contributing to making our operations leaner and more efficient. Going forward, I am confident that we're maintaining a relentless focus on cost reduction priorities across our P&L. We will remain well positioned to emerge post-pandemic as an even stronger company. I would also like to take this opportunity to reiterate our commitment to maintain a prudent approach to managing liquidity and our balance sheet. We have been pleased to see recognition of these efforts among the main rating agencies.
As you may already know, all of them ratified our existing credit rating during the quarter. Our recent focus on cash preservation has served us well, giving us greater flexibility to address funding needs amidst a period of increased uncertainty. By the same token, assuming industry conditions either remain stable or continue to improve, we intend to keep the focus as soon as possible towards potential measures aimed at accelerating the deleveraging process. Based on our current visibility, we believe it may be possible to bring our net debt-to-EBITDA ratio back down to 2019 levels by mid-2021.
Turning to corporate matters. This past August, our parent company, Alfa, announced that its shareholders have approved a proposal to transfer its entire share ownership in Nemak to a newly created entity to be listed on the Mexican Stock Exchange. This transaction is subject to customary, legal and regulatory approvals, which they are in the process of obtaining. I would like to take this opportunity to reiterate that we see this transaction as a positive next step in our growth and transformation journey. To becoming a fully independent company, we believe that we will be in an even better position to drive long-term value creation for Nemak stakeholders.
I will now like to move on to provide an overview of recent highlights in the implementation of our 2025 strategy, which have included progress towards the launch of new products for e-mobility and structural applications as well as an incremental growth in our backlog of awarded business in this segment.
I am pleased to share that earlier this month, we reached a new milestone in our efforts to support our customer chips towards electrification, initiating series production of battery housings for the full electric Ford Mustang Mach-E at our new electric mobility center in Monterrey, Mexico. For these parts, we are leveraging a state-of-the-art robotic joining and assembly technology to support crash safety, battery cooling and design tolerance management as well as the integration of the battery pack into the chassis of the vehicle among other requirements.
Moreover, with a pipeline of additional new product launches scheduled over the next 12 to 24 months, the facility is poised to become a hub of Nemak production for the growing EV market into the future. Today, our production of e-mobility and structural applications spans a total of 7 sites globally. In addition to Monterrey, it consists of 2 sites in the U.S. and 1 each in Germany, Poland, Slovakia and China.
Moving on to sales and marketing activities. We made further inroads in growth opportunities linked to electric vehicles in the quarter, winning a new contract to deliver battery housings for the full electric applications of a leading Europe-based manufacturer of commercial vehicles. We will be tapping into existing capacity to produce these parts. Additionally, I would like to highlight that we will be supplying up to 23 battery housings per commercial vehicle, reflecting the considerable size and battery capacity requirements of these vehicles.
The project offers yet another reminder of the role of government regulation in facilitating the advance of electrification in our industry. While these are still early days, the adoption of more stringent emission reduction target has already served as a catalyst for vehicle manufacturers to make electrified offerings central to the long-term production plans. What's more, such measures are supporting not only the outlook without impacting their vehicles, which have been the main priority up until now in terms of electrification, for increasingly, commercial vehicles as well, including light, medium and heavy duty trucks.
Given the versatility and flexibility of our technology portfolio across castings as well as joining an assembly processes, I am confident that going forward, we are well positioned to continue to capitalize on what we see as a growing addressable market for our lightweighting solutions amidst the electrification trend, both in terms of light vehicle and commercial vehicle segments.
For the third quarter, we won new contracts in our main product lines worth a total of approximately $230 million in annual revenue, 1/4 of which represented incremental business. Taking into account the new business in battery housings, as just described, our total order book in e-mobility and structural applications stands today at around $850 million in annual revenue. Given our continued progress in this regard, I am confident that we will remain on track to surpass our goal of capturing contracts in this segment worth $1 billion in annual revenue by 2022.
With that, I will hand off the call to Alberto, Nemak's CFO.
Thank you, Armando, and good morning, everyone. I will share some additional information on our performance during the quarter and expand on Armando's comments regarding industry trends and financial results. Light vehicle sales and production across North America and Europe, our main markets showed an overall recovery trend in the quarter, aided by the release of pent-up demand and better general economic conditions compared to the last quarter.
Regarding North America, annualized U.S. light vehicle sales SAAR were up substantially from the previous period, reflecting the sequential improvement I just described, but we're still 9% lower year-over-year. Light vehicle production in the region showed an even greater turnaround on a sequential basis than light vehicle sales. The former finished at pre-COVID levels aided by the ramp-up of post lockdown restocking initiatives among certain automakers.
Turning to Europe, the industry trends were generally positive compared to the previous period, largely on the easing of lockdown measures as was the case in North America. Additionally, certain countries implemented targeted stimulus measures, which provided further support for sales, particularly in the electric vehicle segment. Nonetheless, light vehicle sales and productions were 11% and 15% lower year-over-year, respectively.
Meanwhile, the Rest of the World region saw, on the one hand, higher light vehicle sales and production in China for the second consecutive quarter, while on the other hand, Brazil still lagged behind as effects of the pandemic continued to weigh on the industry.
Nemak's volumes also recovered sequentially to levels aligned to our guidance, finishing 6% lower year-on-year in North America and Europe. As you may recall, our initial guidance issued last February assumed the effects related to lower customer productions as well as a reduction in export from North America to China. In contrast, Rest of the World posted a 10% increase in volume, mainly on the back of improved sales in China. In turn, lower volume and to a lesser extent, aluminum prices yielded a year-over-year decrease of 7% in revenue at the consolidated level.
Moving on to our results. During the quarter, we delivered improved financial performance, largely on the back of recent cost reduction initiatives. Following the completion of a thorough assessment of potential opportunity in this regard, we made a difficult decision to reduce our workforce, while at the same time, working to minimize all operating costs and discretionary spending. We achieved this in part through the implementation of flexible production schemes and maintaining discipline in containing our salaried structure.
Additionally, we continued to minimize expenses on maintenance, brands, contracted services and travel, among others. As a result, we delivered year-over-year reductions of 9% in cost of goods sold and 28% in SG&A. This outcome was in line with our initial goal for the period, reflecting a total of around $60 million in cost savings, which we were able to hold on onto from the second into the third quarter. This experience helps us to reinforce our expectations that most of our recent efficiencies will be sustainable over the medium and long term.
Rounding out our consolidated results, EBITDA was $178 million, 28% higher year-over-year, reflecting the factors I just described. In turn, we reported our best ever unitary EBITDA in our history of $17.6 per equivalent unit. Operating income was $57 million higher year-over-year, driven in part by the factors supporting EBITDA. Additionally, there was a comparison effect in the same period last year, but we recorded a nonrecurring noncash asset impairment charge related to the wind-down of our manufacturing operations in Canada. Meanwhile, net income was $92 million higher than a year ago.
In addition to the factors I just described, it benefited from noncash exchange rate effects on financial expenses and taxes.
During the third quarter, positive free cash flow generation enabled us to reduce net debt from $1.5 billion to $1.4 billion, while keeping cash levels nearly unchanged. In addition to the positive developments I just described in our business, our disciplined approach to capital allocation made a difference in this regard as we recorded a CapEx of $49 million, which was more than $25 million below our original expectations for the period.
In line with our ongoing focus on prudent financial management, we repaid $110 million of the medium-term committed credit lines we had drawn earlier this year. At the close of the third quarter, our net debt-to-EBITDA ratio stood at 3.4x. However, adjusting for the impact of the severance payments we announced in the second quarter, this figure would have been 3.1x.
Assuming that industry conditions remain stable, we will continue our deleveraging efforts in coming periods. To this end, we'll move first towards prepaying our committed credit lines, enabling us to maintain flexibility in case the need arises to tap into further liquidity again in the future.
At the close of the third quarter, we have altogether more than $200 million in unutilized committed and uncommitted credit lines available.
I would like to conclude by summarizing our regional results. As we already discussed, the combination of restructuring efforts and sequentially higher volume represented the main catalyst of our consolidated EBITDA.
In North America, our EBITDA was 15% higher than last year, despite the fact that volume was 6% lower. And in Europe, our EBITDA finished up 62%, reflecting efficiencies, exchange rate effects and a positive effect associated with increased production to replenish our inventories of products.
Regarding Rest of the World, even though Brazil saw softer volume than other regions, mainly on COVID-related effects, we saw continued strength in our China volume, helped drive increase of 21% and 11% in revenue and EBITDA, respectively.
With that, I would like -- I would now like to hand over the call back to Armando.
Thank you, Alberto. We like now like to provide an update on our outlook for the rest of 2020. Given the improved conditions that we have seen in our industry, along with our continued implementation of measures to make our business more efficient and resilient, we believe that we are now in a good position to produce reliable estimates on our full year results. Our revised 2020 guidance is as follows: volume of [ 25 ] million equivalent units, revenue of $3.1 billion, EBITDA of $425 million, and CapEx of $250 million.
Please note that these estimates assume no further impact from COVID-related production stoppages through year-end.
With that, we conclude our presentation, and we will open the call for Q&A. Operator, can you please instruct the participants on how to place the questions?
[Operator Instructions] Your first question comes from the line of Alejandro Chavelas with Crédit Suisse.
Congratulations on the great results. Two questions from my side. The first one, could you repeat the EBITDA guidance for 2020? I didn't catch it. The second one was regarding the enactment of the new USMCA Treaty this year, obviously, content -- regional content will have to increase significantly in the next 2 or 3 years. Do you think this could be a tailwind for your volumes? And have Asian or European OEMs approach you to find ways to collaborate on this process?
Yes. Thank you, Alejandro. Let me repeat for the benefit of everybody our guidance. Our guidance related to volume is estimated at [ 25 ] million equivalent units, revenues of $3.1 billion, EBITDA of $425 million, and CapEx, $250 million. Those are the figures that we are assuming for the entire 2020.
On the second question, Alejandro, yes, we believe that now that the USMCA is affected and in place that, that would mean that OEMs will need to increase content from 62.5% to 75%, the content of the vehicle that needs to be produced in North America. And I think that will be beneficial. There is a lot of parts that today are imported mainly from Asia, some also from Europe. And we believe that there will be more integration. And as we speak, we have been approached already by some European as well as Asian potential customers, and we are in conversation with them.
So we see a positive trend with the signature of the new trade agreement with the U.S., Mexico and Canada.
And as a follow-up question, could you perhaps quantify the size of this opportunities coming for your products, in particular, from this new sharing trend? How much of the market do you think is currently from the imports from Asia or in Europe to North America? Or looking at your global platform, what do you think the size of the opportunity is in that case?
Yes. I think there will be certain [indiscernible] that will be benefited by this trend. Mainly, I would say, on the powertrain side, some of the European customers are exporting engines as well as the Asian are exporting engines and transmissions from Asia or Europe to North America. So we will see a benefit. I think it's a little bit too early to tell exactly what is going to be the benefits. But certainly, once we have more clarity, we will share those with you and the rest of the analysts.
Your next question comes from the line of Luis Yance with Compass.
Congratulations on the quarter. Two questions on my side. Just looking at the recent guidance you just gave, it suggests a sequential decline on an EBITDA basis. Just wondering if you could comment about what's driving that? Is it seasonality? Is it some onetime benefits that you saw in the third quarter that won't be recurring in the fourth quarter? Any color there would be helpful.
And then the second question kind of more long term. As you spin-off, as you get out of the parent company, I guess, what should we expect that could change in terms of your strategy in general terms? Or would it remain the same? And then the last question, more in the short term is once Nemak Holding gets listed, is it fair to assume that merging the 2 entities, Nemak and Nemak Holdings, would be done relatively quick? Or is there something that could delay that process?
Thanks for your question, Luis. This is Alberto. Related to your first question on the assumption for the guidance and the implicit fourth quarter results correctly, as you highlight, there is a sequential drop in EBITDA and that's consistent with the seasonality of our yearly results. Normally, on the fourth quarter, we have the scheduled stoppages of operations in the month of December, both for holidays as well as for eventual retooling. But mostly, we do certain levels of maintenance that we don't do during the year.
So the level of, let's say, expenses in that regard is slightly higher on the fourth quarter than any other part of the year. So that's incorporated in our view for the full year as well as some of the extraordinary aspects that we had on the third quarter that won't be recurring next one, in particular, the increment in inventories that had a mid-single-digit effect on the third quarter results.
Taking the second portion of your question, Luis, related to the strategy, we don't see that we will change the strategy. I think we are totally aligned, and we set the 2030 strategy already in place, which is basically to continue improving our core business, which is on the powertrain side and also looking for opportunities on the EV side on electric vehicles, where we see a lot of opportunities to capture new and profitable business as well as on the structural side.
I think that it will be very positive, at least in our view, and also from the Alfa perspective that Nemak will become independent. That will give us opportunity to potentially look for additional opportunities, we may look at, perhaps, in the future, look for other opportunities that today we were not able to, let's say, get based on the high dividends that we were paying. But certainly, that will be needed to approve by the Board of Directors as well as by the shareholders' meeting.
So basically, we believe that the company is ready and matured to be completely independent, and we are looking forward for that. Related to, for instance, the potential merge of Nemak and Controladora Nemak, definitely, that's a possibility. And it's going to be a matter of the shareholders to define when these 2 entities will merge, but most likely, it will be sooner than later.
Your next question comes from the line of Alejandro Azar with GBM.
Congratulations on the results. I have 3 quick ones. The first one is related to the inventory effects you mentioned in Europe, Alberto. I don't recall if you mentioned mid-single-digit effects. Would that explain $5 million EBITDA? Or what do you mean by that? The second one is, Armando, if you can mention the figure of your current quotation pipeline on your structural and electric vehicle business? And the last one, regarding your new cost structure, if it would be fair to say that EBITDA per unit post-COVID should be around 25% above your EBITDA per unit pre-COVID?
Yes, Alex, related to that question on the inventory effect, this is -- as I explained earlier, this has to do with our operations, replenishing our own inventory that was depleted in the previous quarters. So when you have that, there is a corresponding cost that is assigned to the balance sheet. So there's a cost absorption, and that's -- as you correctly highlight, that's mid-single-digit. So around the figures that you just mentioned.
Yes. Alejandro related to the quotation pipeline, today, we have in front of us approximately about $1.2 billion of potential business opportunities. I will say that about 75% to 80% of that comes from EV components. We are very well positioned just to also provide more information to the benefit of everybody. We are seeing a significant increase in demand for glowing hybrid components. There is, as everybody knows, strict regulations, mainly in Europe, that is forcing OEMs to increase significantly the demand for electric vehicles, and those are mainly hybrids.
There are a lot of incentives that the European Union is providing to customers of new electric vehicles. That includes certainly hybrids. So we have seen, as we speak, a significant increase in the demand. And certainly, we see this pipeline as a great opportunity for us. And that's why when I was mentioning in my speech, we are very confident to not even meet surpass the $1 billion goal that we set for 2022. And we truly believe that we will achieve that earlier than 2022.
And Alex, related to your last question about the improvement in costs, certainly, the big efforts that we're doing are paying off, as we said, and we are assuming that we'll continue with this cost performance improvement in the future. So that effectively has a direct effect on our profitability. And certainly, we're seeing around effect on EBITDA per unit, which is consistently higher in next year than what we have achieved pre-COVID. So we expect a big portion of those cost reductions to continue in the same fashion as what we experienced in the third quarter.
Excellent. And just a quick follow-up on the $1 billion target for 2022. And just to clarify this, you guys mean $1 billion in sales or $1 billion in backlog?
Yes. It's $1 billion in backlog, Alex. It will take a little bit longer to get, let's say, the product online, but we're estimating that by 2023, 20% of our revenues will come out of the electric vehicle components as well as structural parts.
Your next question comes from the line of Gilberto Garcia with Barclays.
Another follow-up on your EBITDA per unit. I know you usually give guidance for the next year until after you report fourth quarter numbers. But do you have any early estimates of what your EBITDA per unit could be on an annualized basis in 2021? And do you have any color you can share on volume growth for next year?
Thanks for the question, Gilberto. As we speak, we are going through our budgeting process. So certainly, we're doing a very thorough exercise on our plans for next year. We will be sharing -- unfortunately, we cannot give any guidance at this point. But we'll certainly share that on our next conference call. But certainly, our expectation is that our cost reductions will continue in the same fashion as what we have. So we should be seeing better margins.
[Operator Instructions] Your next question comes from the line of [indiscernible].
I would like to know if you could provide more color on what the asset allocation strategy is going forward? I mean, I think consensus is that lower dividend payout ratio. But I mean, it's also been a while since you did last acquisition. And my second question would be regarding the EV and structural compliance for mobility solutions. It looks like the market share of this -- of the electrical vehicles is growing faster in Europe than it is in North America. How -- my question is, how is...
It looks like [ Horacio ] has disconnected. We'll wait for his line to jump back in. For the meantime, your next question comes from the line of Marcelo Motta with JPMorgan.
Two quick questions. I mean, first, if you could comment on how much EV and structural components represented of third quarter revenues? So just for us to understand the contribution that this is having to the business today. And also, if you could comment a little bit about the evolution of volumes during the quarter, right? I mean, I guess, probably July was much weaker then it started to improve on August and September was a much better month. So just trying to understand somehow how was the running rate, it could be the capacity utilization or level of volumes or revenues? I mean, just to understand how the pickup in the sector happened during the months of the third quarter?
Sure, Marcelo. Thanks for your question. Certainly, we have been seeing good developments on the EV and structural component segment, but certainly also, they have been affected by the effects of the COVID. On a full year basis, we're expecting that the revenue on this segment should be around the $200 million revenue mark. So again, that is a result of the situation that we saw on the second quarter. And gradually, the OEMs resuming their operations and launches of their components. And gradually, that should continue to be increasing and resuming to the original expectations that we saw. I hope this answers your question.
[Operator Instructions] At this time, there are no further questions. And I'd like to turn the conference over back to Mr. Althoff for any additional or concluding remarks. Sir?
Yes. Let me just -- before we move into Adrian, try to answer the question that [ Horacio ] made. Hopefully, he's on the call. [ Horacio ], related to capital allocation, certainly, we would be very sensitive to capital allocation, try to optimize our CapEx use, our existing capacity that we have across the work. Today, we're operating at about 60% capacity utilization. And our target has been to try to reuse existing assets. And certainly, we will invest in projects that we believe, first, will make strategic sense and second, economic sense. They need to meet both criteria for us to invest and confirm contracts with customers.
And related to emissions, certainly today, Europe has more strict standards than anywhere in the world. And the European community is pushing very, very hard to reduce CO2 emissions and, of course, electric vehicles as well as hybrids will play an important role.
In the U.S. market, under President Obama, he set tougher regulations. After Mr. Trump took office, they went back to reduce the miles per gallon or the CAFE regulations. We don't know the outcome of the U.S. election. And eventually, we may have a change. We don't know yet. But certainly, Nemak is prepared, is prepared in both sides, either to continue strong on the powertrain side or move forward with the electrification strategy, what we have set in place over the last few years. Hopefully, that will answer the question that [ Horacio ] made.
And with that, I will pass the microphone to Adrian.
Thank you very much, Armando. I would just like to thank everyone for participating in today's call. And please feel free to contact us if you have any follow-up questions or comments. Have a good day.
Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.