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 Fourth Quarter 2019 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 I will be available on the company's Investor website.
I will now turn the conference call over to Adrian Althoff.
Thank you, operator. Good morning, and welcome, everyone. We very much appreciate your participation. Armando Tamez, our CEO, will lead off today's call by providing an overview of business and financial highlights from 2019 as well as our outlook on 2020. Alberto Sada, our CFO, will then discuss our financial results in more detail. Afterwards, we will open up for a Q&A session.
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 Fourth Quarter 2019 Conference Call. I would like to begin with an overview of 2019 results and initiatives before moving on to our 2020 guidance and related considerations going forward.
In 2019, we made good progress on the strategy execution. Delivering higher value-added solutions to our customers, we have continued to drive long-term value creation across powertrain, e-mobility and structural applications. At the same time, we demonstrated resiliency in the face of softer-than-expected industry conditions in most of our markets, successfully tapping into efficiency initiatives to deliver results in line with guidance.
In North America, we saw a reduction in volumes due mainly to light vehicle production costs among certain customers in the region. A 6-week strike at the GM facilities in the U.S. proved especially relevant, resulting in lower-than-expected shipments to the customers in the fourth quarter.
Turning to other regions. For the most part, we saw less stable industry and macroeconomic conditions than initially anticipated, particularly in Europe and China, with light vehicle production finished down 6% and 8%, respectively. Notwithstanding such headwinds to volume, we met guidance for EBITDA, thanks mainly to the progress on efficiencies I just mentioned.
At the same time, we reinforced our position in new fast-growing product lines, harnessing our innovation capabilities to support our customer efforts to deliver sustainable mobility solutions. This included winning contracts to supply structural and electric vehicle components worth a total of approximately $280 million in annual revenues, around 55% of which represented incremental business. With this, our total order book to date in this segment stands today at approximately $750 million in annual revenue.
The main highlights from the fourth quarter were contract to supply complex battery housings, electric motor housings and structural parts for a combination of fully electric SUVs and pickup trucks in North America; and to design, develop and produce in China structural parts for an electric mid-volume sports car of a Chinese global OEM.
During the year, we also advanced with more than a dozen new product launches across our regions in our structural and electric vehicle component segment alone. These included battery housings for 2 new electric vehicles to be produced in North America starting this year, the BMW X5 hybrid SUV and the Ford Mustang Mach-E all-electric SUV; battery housings and electric motor housings for a variety of premium vehicles to be produced in Europe starting in 2020 and '21; and structural components for a nonelectric Volvo sedan to be produced in China starting this year.
I am also pleased to share that we were recently recognized by Audi for superior performance in supply and structural components, representing an important step towards reinforcing our operational track record in this segment. To date, we have produced more than 1 million such parts for the Q5 platform with 0 defects.
As we have communicated previously, we are making extensive use of existing assets to support growth in structural and EV components. Where appropriate, we're also building new, flexible capacity that can be scaled up, depending on customer requirements. Taking into account recent progress in discussions with our customers, we believe that we are well positioned to continue to capture new business to produce these type of parts in the coming months. As of today, our pipeline of sales prospects in the structural and EV segment stands at approximately $1.3 billion in terms of annual revenues.
We also had a good year on the sales and marketing side in our powertrain business, winning contracts in cylinder heads, engine blocks and transmission housings worth all together more than $700 million in annual revenue. In turn, the full year total for all product lines was just over $1 billion.
I would also like to highlight our progress in 2019 towards strengthening our performance against globally recognized benchmarks for environmental, social and governance performance. This includes providing continued support for the sustainable development goals set by the United Nations with a focus on areas of quality location, industry, innovation and infrastructure, responsible consumption and production and climate action. In recognition of these efforts, we were selected to join 2 stock indexes comprised of companies with leading sustainability-related practices: the Dow Jones Sustainability MILA Pacific Alliance Index and the London Stock Exchange FTSE4Good Index Series.
I would now like to move on to our outlook for the present year. We will see a combination of risks and opportunities in the markets we serve. The revenue strategy execution, we see several key milestones within reach, including the start of production of most of our backlog of awarded business to date in the structural and EV components; the ramp-up of a new facility in North America, completely dedicated to electric mobility applications; and the launch of a new, more complex powertrain applications in South America and Asia. At the same time, we see a substantial risk that the evolving industry conditions may create a temporary headwinds to volume, potentially putting a damper on our results.
As you may have seen in our guidance announcement issued earlier this morning, we expect a reduction in volume with the corresponding effect on revenue and EBITDA. In particular, we anticipate effects of a long industry cycle and lower light vehicle production in certain markets, together with continued headwinds to our product mix as well as to our exports to China.
I want to emphasize that we will continue to work to mitigate the impact of such effects through the implementation of a variety of efficiency and business initiatives aimed at ensuring best-in-class quality, reinforcing best practices across our manufacturing operations and keeping our organization lean and agile. Additionally, we will maintain a flexible approach to investment, characterized by an intensive focus on existing assets to target select growth opportunities, expanding propulsion and vehicle structural applications.
Given our diversified product portfolio, our track record of technological innovation and our pipeline of new product launches linked to vehicle electrification, we are confident that we will further reinforce our leadership position in highly engineered lightweighting solutions in our industry while laying an even stronger groundwork for growth over the medium to long term.
With that, I will hand off the call to Alberto.
Thank you, Armando, and good morning, everyone. I will share some additional information on our performance during 2019 and expand on what Armando said regarding guidance for 2020.
During the fourth quarter, we saw overall softer industry conditions in most of the regions where we operate. In North America, light vehicle sales were affected by a tough comparison as certain customers saw less benefits from new vehicle launches. And light vehicle production saw a nearly 10 point decline, reflecting the impact of the General Motors strike in the U.S., along with the lower -- that of lower production at Ford, which continues to revamp its product lineup in the region.
Notwithstanding benefits of strong consumer spending and low interest rates in the U.S., these same factors weighted on the full year picture as well, causing light vehicle sales SAAR and Nemak customer light vehicle production to finish down 2% and 7%, respectively. In contrast, light vehicle sales in Europe increased 7% on the back of a favorable comparison with the same period last year, when implementation of new emissions testing standards weighted on the region. Nonetheless, light vehicle production was 6% lower due mainly to a combination of overall market softening as well as lower exports to other regions, particularly China.
Nemak's total volume finished down 11% year-over-year, mainly due to the combined effect of the headwinds I just described, together with the effect of engine downsizing and lower sales to certain customers in China as anticipated in our 2019 guidance. In turn, lower volume and aluminum prices caused a proportionate reduction in revenue. For the full year, volume and revenue followed a similar trend, finishing down 12% and 15%, respectively.
During the fourth quarter, EBITDA decreased 22% year-on-year. However, excluding the onetime income derived from a customer settlement last year, EBITDA decreased 18%, explained mainly by the lower volumes just described and the effect of the depreciation of the euro against the U.S. dollar. During the quarter, the General Motors strike caused a volume reduction of approximately 600,000 equivalent units. This had a negative effect on our results as its temporary nature limited our ability to adjust our costs. Given that, the total impact of the event to our EBITDA was approximately $15 million. In its absence, we would have likely surpassed our guidance by more substantial margin.
During the quarter, we recorded noncash extraordinary transactions of approximately $14 million, mainly associated with the impairment of assets of our manufacturing facility in Windsor, Canada, which as previously announced, is scheduled to close by mid-2020. This, together with the EBITDA effect, accounted for most of the $61 million reduction in consolidated operating income versus last year. Full year operating income reflected these same factors, finishing down 37%.
Regarding CapEx, we invested $344 million for the full year. We continue to focus our efforts on optimizing use of existing assets and fulfilling customer requirements for new product launches. This included an increased focus on our structural and electric vehicle components segment, which accounted for approximately 25% of total CapEx. During the year, we maintained a strong financial condition, marking our sixth consecutive year with a net debt-to-EBITDA ratio below 2x mark. This included a healthy free cash flow generation that allowed us to reduce our net debt by a total of $45 million, despite the top line headwinds I just described.
I would like to emphasize that efficiency initiatives represented a key lever for ensuring a prudent management of our cash flow as well as meeting our EBITDA guidance for the year. In this regard, we continue to implement a project management office-style approach across our regions, tapping into structure benchmarking exercises to reduce cost, improve quality and better adapt our organization to meet evolving customer needs.
Moving on to our regional results. Lower volume, combined with lower aluminum prices, caused our top line in North America and Europe to decrease by 19% and 13%, respectively. North America saw the greater impact to EBITDA in relative terms due to the nature of the GM strike effect as already explained. In contrast, revenue and EBITDA moved in tandem in Europe, excluding FX effects and a onetime income in the same period last year. Rest of the World also saw China volume headwinds, which were partly compensated by new product launches in Brazil. However, revenue finished higher on the back of a reclassification of tooling sales. EBITDA for the region was $4 million higher than last year, aided by a better product mix and efficiency.
Moving on to 2020. I would like to provide additional color on the assumptions behind our guidance. As Armando mentioned, most of the gap is explained by industry conditions, which are affecting our volume outlook in our main markets with the exception of Brazil. In particular, we expect to see effects on production for certain North American customers as they shift their vehicle lineups further towards the SUV and pickup truck markets; second, continued lower exports to China as we complete the wind-down of our operations in Canada; and third, a less favorable product mix in powertrain applications in North America.
In our other regions, we see a mix of trends, which may end up more or less balancing out in the year. Regarding tailwinds, these include the ramp-up of new structural and EV products, primarily in Europe, together with the new powertrain product launches in Brazil and China. But at the same time, we see general industry conditions in Europe continuing to weigh on our results. As additional context, I should mention that we have not embedded any effects related to the recent coronavirus situation into our guidance.
While our operations in China have remained idle since the Lunar New Year holiday, we have not yet seen any effect in many other regions. It is still too early to say what the ultimate effect might be. We continue to closely monitor the situation together with local stakeholders, including customers, employees and government agencies, with a focus on making sure our people and their families remain safe and on restarting our operations in China.
Taking into account a onetime benefit last year worth $8 million, we're looking at a $48 million reduction in EBITDA for the full year, most of which is related to volumes. I want to emphasize that we're taking proactive and prudent measures to address these fluctuations in demand, ensuring that we are prepared as an organization to improve our cost position while at the same time, working in tandem with our customers to capitalize on longer-term opportunities.
With that, I conclude my comments. I will now open the call for Q&A. Operator, please instruct the participants on how to place their questions.
[Operator Instructions] Our first question comes from Vanessa Quiroga with Crédit Suisse.
My question is regarding your guidance and the decline that you are expecting in EBITDA. Would that be mostly related to the legacy business declining significantly? What's your implied guidance for the business on electric vehicles and the structural parts included in that guidance?
Yes, Vanessa. Our guidance incorporates different effects as we discussed. On one side, we have positive effects of the ramp-up of structural components and EVs, particularly in Europe, as was indicated, but also the effects that I discussed related to industry. And some of those were already seen in 2019. So there are 3 major effects, most of them in North America, which account for the majority of the volume contractions that we're seeing for 2020. And they have to do with reduction in exports to China, with softer industry conditions overall and a mix change in the region, which is affecting the products that we're delivering. So all in all, we see negatives on the -- mainly on the powertrain side and positives on the new line of business.
Okay. And is the new business generating higher EBITDA per unit?
Yes. The new business is gradually ramping up. So that should be accretive to our EBITDA. But certainly, as we reach maturity and full volumes, those EBITDA margins of those new products will be -- our expectation is they're going to be a little bit higher than the traditional business.
Okay. So in the beginning, just to be clear, during the ramp-up of that business, is the margin lower than legacy, comparable or higher from the beginning? And also, is it possible to know the mix in the EBITDA that you are guiding? How much is coming from new business and how much from legacy?
Yes. We're not disclosing the different EBITDA impacts specifically between the ramp-up of the new business. This does mean that new business has launching expenses as any other products that we launch. So initially, those margins tend to be lower as we engage in those product launches. But ultimately, the margins even out to the expected level. And as I indicated on this new line of business, we expect higher-than-average margins going forward.
Our next question comes from Alejandro Chavelas with Crédit Suisse.
Just following up on Vanessa regarding what you expect from the new business line for 2020 in terms of percentage of sales or for percentage of volumes. Could you -- would you be prepared to disclose a number related to the structural and electric vehicle as a percentage of the total portfolio sales or something like that for 2020 or 2021?
Yes. Alejandro, this is Armando. We are expecting this year to reach revenues on EVs and structural components in the range of about $300 million, which would be approximately 8% of our total revenues. And this is almost double than what we have in the previous year. So we are ramping up. We ended last year with about $160 million worth of the new business and it's growing. We are not able to give you what is the figure for 2021. Later on, we will share it. We will have the Alfa and Nemak Day scheduled for March. And we will be able to share our forecast for the next 5 years.
Understood. And the second one is what positive benefit or what benefit in EBITDA are you expecting from the closure of Windsor for 2020 in your guidance? Or is it neutral for EBITDA?
Well, in 2020, we still are -- I mean that's the year where we will be shutting down the operations. So we -- that's a transition year phase. So it's already incorporated in our guidance, the different effect. It should be neutral. And certainly, from the asset side point of view, I mean this is what we are aiming to restructure our capacity.
Our next question comes from Ron Dadina with MUFG.
My question is mainly with regard to the impact of the coronavirus. So just a few related questions. Is your plant in China currently operational? And in a worst-case scenario, if the plant gets shut down for maybe a few weeks or a few months, what's the impact? And if required, can you source the same parts from other plants globally and supply in China? So if you can just explain the overall impact, I would appreciate it.
Thanks, Ron, for your question. Right now, the government in China ordered most of the auto suppliers as well as the OEMs to stop production for the situation that they are facing, the health situation that they are facing. We're expecting to restart next week as well as our customers. That, of course, may change. And we don't have, let's say, control over that. This is -- we're following, let's say, government orders. I think it's important also to remind you that our revenues in China represent only 5% of our total sales for the company. Related to some of the imports that we may have, it's limited to basically tooling, but it is not critical for us. We also buy from China for certain regions, certain imports like liners. But we have enough material at least to cover for the next 3 months. And at the same time, we have other sources in other regions that we will proceed in the event that this crisis takes a little bit longer.
Can you supply to the OEMs in China from other plants globally? And also, what would be the most likely impact on your EBITDA because of the current stop in production?
We have, in some instances, commonality with some global customers to make the same parts in different regions. But I believe that at the end of the day, our Chinese plants both -- one located in Nanjing and the other one in Chongqing, which is the way -- one is at about 600 kilometers and the other one is at about 900 kilometers from the critical area. I think that what we expect or what we are expecting is that eventually the OEMs will resume production and we will supply them locally. We don't expect that we will be the only supplier affected. I think this is a major issue. And in the event that this continues, it will basically drag down the entire automotive industry in that country.
Okay. And impact on EBITDA?
As I indicated, I think it's too early to estimate what will be the impact. Certainly, what we have seen -- because there are certain provinces that are still today selling vehicles, what we are expecting is that once the Chinese government gives the green light to start production to the OEMs and the auto part suppliers, that they will start at full speed to recover the inventory losses that they have unfortunately been experiencing due to this health situation.
Our next question comes from Marcelo Motta with JPMorgan.
Two questions as well. First, when you comment about China and you say it represents around 5% of total sales, I guess this is related to the Rest of the World operations. But you also mentioned that guidance and the fact that volumes in North America are down. It's consequence also of lower exports from U.S. to China. So just wondering how much your North America business is related to exports to China because it could possibly be higher than the 5%.
And the second question regarding CapEx. I mean there is a reduction on CapEx when we look at the guidance for 2020. Does it -- I mean just to understand where is the company cutting investments? If this is relevant for maybe you're cutting more on the powertrains or even if on the EV and structural component, there was a reduction of investments for 2020 as well.
Yes. Related -- Marcelo, related to your first question on China, you're correct. The China operations for us represent close to 5%. And that's embedded within the Rest of the World segment that we report, which is about half of that segment. But we also have an effect from China due to exports from the region. And as we highlighted also in 2019, 2020 represents roughly about 1% of our consolidated revenue or exposure from North America to China. And that's the one that we'll be phasing out due to the closure of the Canadian facility.
Marcelo, related to the CapEx that we're setting for the guidance for this year, we're expecting to invest approximately $290 million, which it will be approximately 30% dedicated to the new product lines, structural components as well as EVs. I would say more than 2/3 out of this 30% will be for EVs and 1/3 for structural parts. As I indicated during my presentation, we are trying to focus our efforts in reducing existing assets. We have capacity -- open capacity in almost every region. So we are taking advantage of that. And that's why we have been able to get new business and continue growing without making significant investments as we did several years ago.
Our next question comes from Alfonso Salazar with Scotiabank.
I have a question on the auto industry trends. And what I want is to separate the medium-term and the long-term trend and focus more on the medium term. Because the electric vehicle penetration is still low and there's an adjusted change in the speed at which EVs gain market share, we kind of see that at least for the next decade, a vast majority of cars will still use internal combustion engines. So when you and your key clients look at that period, that specific period, let's say, the next 10 years, then how likely and how reasonable is it to continue to invest in internal combustion efficiency to tackle stricter environmental regulations in a product that eventually may phase out?
And do you see different approaches to these questions across your client? If you can provide some color, for example, if you see some of your clients trying to move faster to EVs or some others considering the ICE efficiency is the way to go. If you can provide some color on this medium-term outlook for the industry, that would be very helpful.
Yes. No. I think that's a great question, Alfonso. First, I think, just to remind you, we have 3 different main markets. The first one and most important is North America, second is Europe and third, Rest of the World. And we see due to regulations, different requirements in every region. We have the highest or the toughest regulations today for CO2 emissions coming from Europe. And the second is in China. And we see the third, U.S. I think that we have mentioned already that under the previous administration in the U.S., they have higher requirements of fuel efficiency. With the current administration in the U.S., they have lowered that. So we will see significantly higher penetration in China as well as in Europe for electric vehicle components.
But related to your question, absolutely all customers have continued making improvements on the internal combustion engines to meet the new regulations. In Europe, I think they are investing. And as we speak, we are getting new orders for new internal combustion engines. We have just finalized a very detailed study from an external consultant with very high reputation in which we are having some different scenarios about how the electric vehicles will evolve over the next 10 years. And I think we are preparing our company to position ourselves as leaders, not only in internal combustion engine but also on the EV side, as more electric vehicles become more affordable and certainly customers start buying them. But we see significant more penetration, as I indicated, mainly due to regulation issues in China as well as Europe. We think we'll have significantly more details of what I was mentioning with specific figures during the Alfa Day.
Our next question comes from Travis Pascavis with HIMCO.
I was just wondering, could you share with us your capital distribution plans and expectations for 2020?
We will certainly -- we'll have our shareholder -- general shareholder assembly end of February. And that's where the dividend distributions will be approved and proposed. So right now, we cannot share it. But they will be done by -- within the next couple of weeks.
Got you. Any particular strategy that you think about in terms of how we should think about distributions relating to either net income or any other performance-based metrics?
No. As we have done in the past, remember that we have kept ourselves within a leverage ratio that stands within a band of 1.5 to 2.5 with a target to be more on the lower side of the band. So ultimately, that, together with the cash needs of the company from a strategic point of view, is what determines how much we will propose to distribute the dividends. But ultimately, it will be up to the general assembly to approve that -- those elements in the next couple of weeks.
Great. And just kind of turning to the performance. You -- can you refresh our memory of your top 5 customers kind of historically but then also given with the new product wins, how that may be evolving, meaning, are your new wins with new OEMs? Or are they with your sort of larger customers in the past?
Yes. Related to new customers, certainly we are, as we speak, gaining contracts with new customers, new OEMs as well as with the companies that we have been doing business for many, many years, including some new companies that are coming into the market, especially on the electric vehicle components. Companies that in the past, we didn't have relationships, I think we are building this type of trust and we are getting new orders.
Okay. And the guidance, you kind of laid out very nicely the 3 different components that are driving the North America weaker. I guess as I think about the mix change, does that imply that your penetration in light trucks is lower than in cars? Is that the way to think about that?
No. Related to that mix change effect, I mean that happens from time to time and depending on how the production schedules from our customer takes place. There could be situations where there could be higher production of vehicles, where we have a little bit less content than other ones. So it could be issues related to different types of transmissions or different powertrain that ultimately end up with less amount of parts per vehicle. So that's also an effect unfortunately we're seeing in 2020. But that's a temporary effect, and we see -- we don't see that permanent. So we see that most likely reversing going forward.
Okay, great. And if you can just indulge me with one last one, with the Ford changeover and phaseout of its vehicles, its passenger car, is that something that's going to -- behind you now, like, say, end in the first quarter? Or is that something that we should continue to see throughout 2020?
Yes. I think Ford is in the process of launching new products that will replace some of the vehicles that they decided to exit, especially on the small and mid-sized segment. And we're optimistic that eventually they will be successful and recover certain shares that they had before. And that applies not only to Ford but also to our main customers in North America, including GM as well as FCA.
[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I'd like to turn the conference back over to Mr. Althoff for any additional or concluding remarks. Sir?
Thank you, operator. I would just like to thank everyone for participating in today's call. Please feel free to contact us if you have any follow-up questions or comments, and have a good day.
Thank you. This concludes today's conference. All parties may disconnect. Have a great day.