Grupo Industrial Saltillo SAB de CV

BMV:GISSAA

Earnings Call Transcript

[Operator]

Good day, everyone, and welcome to GIS First Quarter 2025 Earnings Conference Call. Joining us today, we have GIS Chief Executive Officer, Mr. Jorge Rada; GIS Chief Financial Officer; Mr. Saul Castaneda; and GIS Treasury and IR Director, Mr. Arturo Morales. Please be advised that this call is meant for investors and analysts only.

During this call, the management will be discussing GIS performance as per the earnings release issued today. 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 onscreen present. [Operator Instructions]

Let me remind you that forward-looking statements may be made during this conference call. These are based on information that is currently available and subject to change due to a variety of factors. For more details and a complete disclaimer, please refer to the earnings release. Similarly, it is important to mention that all figures discussed herein are in American dollars, unless otherwise stated.

It is now my pleasure to introduce GIS management team. Mr. Jorge Rada will lead the call.

[Jorge Garza, executive]

Thank you, and good afternoon, everyone. We sincerely appreciate your time and continued interest in our company. During this quarter, we have remained steadfast in our commitment to operational and financial discipline, advancing on our path towards sustainable growth. Our ability to remain resilient and agile has allowed us to adapt effectively to a market shaped by geopolitical and commercial challenges, delivering a solid performance this quarter.

In this environment, Draxton's global footprint continues to be a key performance driver. In both North America and Europe, regions with distinct market dynamics, we have capitalized on our competitive strengths and commercial agility to fulfill customer commitments. This has enabled us to adapt our product portfolio, gain share in new segments and further enhance value creation across the supply chain.

During the quarter, Draxton secured new programs expected to generate over $45 million in revenue, reinforcing our strong commercial outlook. Equally important is the transformation underway at Cinsa. Through streamlined operations, accelerated automation and increased organizational autonomy, we have optimized our workforce structure, reduced costs and strengthened the brand's positioning for growth in both Mexico and the U.S. These efforts allow Cinsa to remain competitive even amid a soft consumer environment.

Turning to the global automotive sector. In North America, first quarter 2025 vehicle production declined by 7%, totaling 3.7 million units. This contraction reflects lingering uncertainties related to the USMCA content requirements affecting operations in Canada and Mexico. Nevertheless, vehicle sales increased by 2% to 4.6 million units as consumers brought forward purchases in anticipation of oncoming tariffs.

In Europe, vehicle production reached 4.2 million units during the quarter, representing a 9% year-over-year decrease. This was primarily due to weaker domestic demand for light vehicles and a rise in imports, mainly from China. As a result, vehicle sales fell by 5% to 4.5 million units, impacted by the expiration of government subsidies across the region.

In Mainland China, vehicle production rose by 8% to 6.8 million units, supported by sustained export growth and solid domestic demand. These factors also contributed to a 6% year-over-year increase in vehicle sales, reaching 5.9 million units. Amid this environment, Draxton's consolidated casting and machining volumes delivered a mixed performance for the quarter.

Casting volume declined by 7% year-over-year, totaling 118,000 tons, primarily due to lower volumes in Europe, where higher imports from China exerted pressure. Additionally, North America saw a slight impact stemming from ongoing geopolitical uncertainty. On the other hand, machining volume increased by 23% compared to the same period last year, reaching 5.5 million units. This growth was fueled by record performance in North America, where quarterly volumes surpassed 4 million units for the first time, more than offsetting volume adjustments in Europe and Asia.

Thanks to the investments deployed over the past 2 years, now nearing full utilization, we expect substantial improvements in plating and machining as our growth -- growing share of value-added products continues to enhance profitability.

Breaking down by region. In North America, casting volumes declined by 3% year-over-year to 63,000 tons, while machining volumes increased by 37% to 4.1 million units. Our first plating line has been running at full capacity for nearly a year, and our second line is expected to reach full utilization between the third and fourth quarter, in line with the launch of new programs. Additionally, machining capacity at Evercast primarily focused on braking components will continue ramping up throughout the year.

Despite the geopolitical concerns, order volumes remain healthy, and we have not observed any significant changes in our order book. However, we will monitor potential developments closely and remain ready to adapt swiftly if necessary. In Europe and Asia, casting and machining volumes declined by 11% and 6%, respectively, year-over-year.

In Europe, lower vehicle production and sales prompted us to shift volume towards replacement platforms and strengthen our presence in the commercial vehicle segment. Meanwhile, our Chinese plant delivered a solid casting performance and is onboarding new programs aimed at increasing the share of value-added components in our portfolio. Overall, we are encouraged by our swift execution, particularly in capturing incremental volumes with relatively short ramp-up times. Our market position remains resilient, underpinned by our value-added processes, which continue to strengthen our ability to navigate challenging industry conditions.

Turning to Draxton's P&L. Quarterly sales totaled $233 million, a 5% year-over-year decrease, primarily attributed to low raw material pass-through costs. This impact, coupled with slightly lower volumes was partially offset by the continued growth in value-added processes. First quarter EBITDA reached $31 million with a 13% margin, representing a 15% year-over-year increase and marking the highest level recorded over the last 10 quarters.

This strong performance reflects manufacturing efficiencies driven by disciplined control -- cost control and a greater share of value-added and higher-margin products production parts and strategic focus initiated in 2023 that continues to support margin expansion. In line with this trend, EBITDA per ton improved to $261, a 22% increase compared to the first quarter of 2024. This was fueled by the integration of more value-added components into our product mix, reinforcing the effectiveness of our profitability-driven approach.

GISEderlan, our partnership with Fagor Ederlan continues to deliver solid results, aligned with our strategic objective of moving up the value chain through machining and specialized processes in North America. Following steady contributions last year, the ongoing installation of new machinery is progressing as planned. For the quarter, revenue increased by 3% year-over-year, supported by our strong positioning in premium brake and suspension components. We see further opportunities to continue growing our market share in these types of components.

Looking ahead, we remain on track to consolidate the incremental capacity investments made over the past few years. Our focus remains firmly set on maximizing utilization rates and improving operational efficiencies in order to increase our share of higher-margin processes and further strengthen profitability throughout 2025.

In Europe, we will maintain our emphasis on financial and operational discipline, coupled with the flexibility needed to organically capture additional market share, particularly in the commercial vehicle segment. Regarding potential tariffs, no new measures have directly impacted our operations to date. We remain fully aligned with USMCA requirements, nearly all of our automotive components are produced domestically for locally operating customers, which significantly limits our exposure to broader trade policy shifts.

That said, we continue to monitor potential developments closely and remain ready to adapt swiftly as we have effectively done in the past in difficult situations. On the sustainability front, we've made significant progress with the installation of solar panels at our facilities in Europe and China, in line with GIS' clean energy strategy. Additionally, we expect to enhance our sustainability reporting to ensure full alignment with our core ESG commitments and compliance programs.

With that, I will now turn the call over to our CFO, Saul Castaneda. Thank you.

[SaúlCastañeda de Hoyos, executive]

Thank you, Jorge. Good afternoon, everyone, and thank you for joining us today. First quarter 2025 continue to reflect the dynamics observed last year in a market environment marked by ongoing geopolitical tensions and emerging challenges. However, our diversified portfolio and robust global footprint enable us to deliver stable performance and resilient results.

Consolidated revenues for the quarter totaled $253 million, a 7% year-over-year decline, primarily due to lower casting volumes and decreased raw material costs, which reduced nominal sales figures. This was partially offset by a higher share of value-added processes. Consolidated EBITDA for first quarter 2025 reached $32 million, also the highest level in the last 10 quarters with a 13% margin, surpassing the 10% margin post in first quarter '24. These margin improvements reflects continued cost efficiencies, a favorable product mix with a greater contribution from value-added processes and stable capacity utilization, particularly in Draxton North America.

Looking ahead, we expect our strong performance to continue, supported by further operational efficiencies, ongoing machining and plating capacity ramp-ups, new program launches and volume transfers, market share expansion and a disciplined approach to financial management.

As of the first quarter, our net debt leverage ratio stood at 2.4x, consistent with year-end 2024 levels, primarily supported by EBITDA growth. We expect a gradual improvement in leverage as EBITDA continues its upward trend. Our debt strategy, which included the 2 syndicated credit facilities secured in 2024 has been reinforced with interest rate swaps to mitigate floating rate volatility. This has enabled us to maintain competitive financing costs.

In addition, after the close of the quarter, we completed the refinancing of a credit facility at Evercast, further strengthening our debt maturity profile and providing enhanced financial flexibility in the face of evolving macroeconomic conditions. As of quarter end, our cash balance stood at $47 million, ensuring adequate liquidity to meet operational requirements. In this regard, we remain committed to optimize working capital and rigorous assessment of CapEx allocation to uphold a healthy and resilient balance sheet.

In the first quarter of the year, we deployed $20 million in CapEx, primarily tied to pre-existing commitments from recent expansion projects. Our full year 2025 forecast is approximately $85 million, which includes maintenance CapEx of approximately $40 million to support ongoing operational needs across our expanded global footprint and growth and optimization CapEx of around $45 million, primarily reflecting scheduled payments for plating and machine capacity expansions that have already been executed.

While we continue to fulfill operational CapEx associated with prior commitments, new investments are being managed under a more conservative approach with a strong focus on cash flow preservation as a key strategic priority. In parallel, we remain committed to prudent working capital management, ensuring our balance sheet remains stable and flexible amid an increasingly complex global landscape.

Finally, as a relevant update on April 10, during our Annual General Shareholders' Meeting, shareholders approved delegating to the Board of Directors the authority to distribute a dividend of up to $0.089 or [ $89 ] per share later this year. The Board of Directors will determine the exact amount as well as the decision to distribute such amount in one or multiple installments in accordance with the best interest of the company. This delegated authority also includes the discretion to withhold the distribution entirely, taking into consideration the company's financial position, investment plans and prevailing economic conditions.

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

[Jorge Garza, executive]

Thank you, Saul. In a nutshell, our first quarter 2025 results underscore the solid foundation of GIS global footprint, our diversified product mix and our ability to swiftly adapt to changing market dynamics. Within this context, we are confident that our core strategy will continue to deliver sustainable profitability, driven by an increasing share of value-added processes and a sharp commercial focus.

For the remainder of 2025, our key priorities will be completing the ramp-up of machining and plating lines to further strengthen margins and profitability, capturing additional market share in Europe, particularly through the expansion of our commercial vehicle components offering and enhancing profitability and cash flow generation through financial and operational discipline, improved KPIs and higher capacity utilization. This strategy will allow us to leverage our flexibility and adaptive operations, consolidating our position across all regions where we operate.

With that, I conclude my remarks for today. Thank you for your continued support and trust in our company. We can start now the Q&A session.

[Operator]

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

[Carlos Alcaraz Pineda, analyst]

First, could you give us more color on the terms of the Evercast refinancing? And do you expect the EBITDA margin growth to continue?

[SaúlCastañeda de Hoyos, executive]

Thank you, Carlos. Thank you for your question. It was a very important refinancing process for us. It will bring us a period of 2 years without amortizations. We basically keep the same cost and all the conditions, the covenants, it basically remains and stood in the same way that we have. I would say the most important aspect is that we are going to have 2 years without -- as I mentioned, without any amortization and strengthen our period of -- and give us flexibility. And another important aspect is that this credit facility goes for 6 years. And as I mentioned, without payments for the next 2 years.

Regarding margin expansion, as you can saw in this quarter, we reached 13% of EBITDA margin. It was a great improvement against the 10% of the previous year. And I would say that this was really an achievement. We expect this kind of margins probably to the first half, more to the second quarter of the year. Fortunately, we achieved this early than we expected. I would say there is room for improvement, probably not as much in terms of margins, but probably there is a kind of some space or room to improve these margins.

But as we mentioned in the previous conference call, low double-digit margin is probably expected for the year. And I will say around the same levels that we achieved in this quarter is reasonable.

Jorge, I don't know if you...

[Jorge Garza, executive]

No, yes. But Carlos, thank you. Nice talking to you. I think we would definitely expect improving the margins, but not only in percentage, but in absolute numbers because we are going to increase our volumes of machining parts and our volume of plating. Also, we are launching additional programs in North America that are, let's say, higher margin parts, and that is going to provide or bring us more EBITDA in the next, I would say, 3, 4 quarters. So by the end of the year, we definitely expect to see better margins than the first quarter.

[Operator]

Our next question comes from Alex Azar from GBM.

[Alejandro Azar Wabi, analyst]

I have several questions. The first one is a follow-up on margins. If you could remind us what is the only thing that you are expected to ramp up this year? I mean, you have been expanding casting capacity in the last couple of years. But should we only expect the ramping up of the plating and machining lines? Or is there a casting line that is still in the ramp-up phase?

[Jorge Garza, executive]

Okay. Let's go one by one, okay. Let's answer this one. Okay. Definitely, we have additional volume that we are introducing in San Luis Potosi. That plant is still growing. Remember that we had the installation of 2 new lines, molding lines. Those lines are already running, let's say, 3 shifts. However, we are still launching new programs and the launching of programs in those lines take some time from the production schedule, okay? So now we are validating new products and the customers will start producing or, let's say, requiring series production of these new products during the year. So definitely, we will see additional volumes in San Luis Potosi for the second half of this year. That's casting, okay?

In China, in the second half of this year, we will start producing another part for an electric vehicle from, let's say, Chinese OEM, and that is more value-added again, this is machining. And in Europe, we are still launching continually products -- new products in Spain, basically in casting, and we are, let's say, ramping up some products that we launched recently in machining. So no more casting capacity is added, but we are still, let's say, trying to fill up capacity that is available.

In Mexico, in San Luis Potosi, and in Europe, we are trying to get additional volumes from -- especially from commercial vehicles market, which are -- we are, let's say, very successful there. Maybe you remember that our portfolio in Europe is about 30% already commercial vehicles. So we have been very successful gaining new business there. So we are trying to continue growing in that segment.

[Alejandro Azar Wabi, analyst]

Okay. Got it. And what is your objective in terms of EBITDA per unit, Jorge? Is that still $300? Or with these efficiencies and new value-added processes, are you guys targeting a higher level than that?

[Jorge Garza, executive]

Well, in the long run, it should surpass $300. In the short-term, we definitely target $300. But in the future, when we are running at full capacity with the efficiency that is expected in every one of the programs, we definitely expect higher number than that. But in the short-term, our target is $300, yes.

[Alejandro Azar Wabi, analyst]

Okay. And the last couple of questions are related more to the environment that we are currently living. And my question is if you see -- because you mentioned tariffs as an impact but it could also be a benefit in terms of GIS. So I was wondering if you can give us some color on if you -- when you're analyzing possible impacts, you are also thinking where can you beat your competitors or your Chinese competitors or Asian competitors now that if our base case is that the USMCA provides.

[Jorge Garza, executive]

Yes. Definitely, we -- first, as I mentioned in the presentation, we haven't seen any reduction of volumes so far. It doesn't mean that nothing will happen, but nobody knows, okay, because nobody knows what is going to be decided by the government of the U.S. in terms of tariffs. But so far, we are producing normally.

Actually, the first quarter was, let's say, very stable in terms of volumes, very much aligned with our original expectation for the year, for the first quarter, okay? But if we see this in the medium-term, we definitely see that we can benefit from this situation in which the USMCA gets stronger, no matter the conditions. The conditions will be negotiated by the 3 countries. But definitely, there is going to be a block, an economic block formed by the North American countries. And definitely, we see that this can benefit GIS and Draxton especially, okay?

There is not enough capacity in the U.S. for manufacturing. So we still see that production from Mexico is going to be needed. And our costs are much lower than producing these kind of components in the U.S. And if the block imposes tariffs on Indian and Chinese parts, definitely, we will have an advantage.

[Alejandro Azar Wabi, analyst]

Okay. And my last question would be a follow-up on this, Jorge. If -- do you guys have an approximate of how much those, let's say, your brakes are produced in the U.S. Or let me put it in another way, is it economically feasible to manufacture your components in the U.S.?

[Jorge Garza, executive]

Well, first, most of the brakes are made in Mexico now. So there is -- I mean, there is also transportation or freight cost. For example, if you produce these components, the ones that we make, you produce them in the north of the U.S., you want to transport them all the way down to Mexico to be machined and assembled by the braking company. That is already a disadvantage for the foundry that is in the U.S. and the Midwest, let's say. So we have made some calculations. And even with the tariffs, they would prefer to buy from us. Almost nobody is making brakes in the U.S. anymore.

And to make the change and to try to take the production back to the U.S. it is going to be very costly for them and very time consuming. So maybe it will happen after the second term of Mr. Trump finishes, right? So nobody is thinking at this moment about moving production back to the U.S. This is what we have discussed with the customers, and this is our feeling after conversations with them.

[Operator]

[Operator Instructions] With no further question in the queue, I would like to turn the call to the management for the close of this conference.

[Jorge Garza, 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. Have a nice day.

[SaúlCastañeda de Hoyos, executive]

Thank you.

[Operator]

Thank you. You may disconnect.