CIE Automotive SA

MAD:CIE

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the conference results first quarter of CIE. [Operator Instructions] And I'll now hand over the floor to Lorea. Go ahead, please.

[Lorea Aristizabal, executive]

Good afternoon, everyone, and welcome to the conference call on the results for the first quarter for the CIE. As you know, this morning, we held the shareholders' meeting. And during the meeting, our CEO reviewed among other [Audio Jumps] , the follow-up of the degree of compliance of the goals in our 2025 strategic gap after the first 2 years of implementation. So let's begin the -- and then Adriel will be talking about the results for the first quarter 2023. We spoke about a goal of our growth in turnover. We spoke about increasing our turnover approximately 20 percentage points more than the market growth during the period and the closing of 2022, we complied with 70% of this goal with an outperformance of 40 points obtained comparing the 10% market growth in these 2 years versus a growth in our sales adjusted with our pass-through of 24%, a context in which our structural outperformance has been enhanced by the stress situation of many suppliers and which just helps us to consolidate market share quickly. The second goal was the EBITDA margin. We spoke about exceeding the EBITDA margin over sales of 19% in 2025, and we could confirm that we have paid more than 50% of our margin expansion goal with a starting point in 2020 of 15% and an EBITDA margin in 2022, which adjusted without [indiscernible] is at more than 17%. Operating cash flow generation goal we spoke about generating an operating cash flow of 65% of the EBITDA on a sustained basis, about EUR 500 million as of 2025. The starting point was an operating cash flow in 2020 of slightly over EUR 200 million versus more than the EUR 400 million generated in 2022. This implies having complied with over 6% of our path towards the goal of a generation of EUR 500 million in 2025. The fourth goal, CapEx, we spoke about investing around EUR 1 billion EBITDA in CapEx in the 5 year period, which represents approximately 5% of the annual turnover. And this 5% is, in fact, the bridge investment in the first 2 years. The Fiscal corporate tax, we spoke about paying out annually 2% of turnover for corporate tax and 2% has been the average payment base first 2 years. With these operating and financial goals to which we additionally add the goals in the area of [indiscernible] commitments acquired that go beyond the operating and financial goals in areas such as compliance, supply chain, commercial issues, M&A, finance, human resources, Investor Relations and commitments that are based not only on the 2025 goals, we have wanted to make this specific through intermediate goals throughout the 5-year plan. We have reconfirmed that we have met all the intermediate goals laid down for the years 2021 and 2022. And this is the review of the 5-year strategic plan so far and the degree of progress in compliance after the first 2. And this brings us to the third year of the strategic plan, and we will review the results of this first quarter. We're going to review Market by market, we'll start with China during the first quarter of 2023. We've seen the negative impact on sales of the end of the vehicle purchasing incentives at the end of 2022 and the negative impact on production because of the exponential increase in COVID positive as a result of the elimination of the restrictions. So a year that started slowly and which has had a significant rebound in the month of March and April, driven on the one hand by incentives implemented by regional governments and also because of the gradual reduction in the spreading of COVID. From here on, a little bit of uncertainty about the evolution of the Chinese market in the coming months. we are pending the potential implementation of additional incentives for vehicle purchasing, but above all the central issue, we're pending the possible delay by the government in the coming into effect on July 1 of the China 6p regulations since its implementation would mean additional discounts to sell off the existing inventory of vehicles manufactured under the previous standard, and this would further promote the current price war.[Indiscernible] With all this context, a CIE business in China that's very resilient with a high degree of flexibility that has allowed the EBITDA margin to expand practically 17% in a quarter where our sales have dropped by approximately 20% versus the 8% drop in the market. We move on to talking about India, a first quarter where India has had some news. It has officially become the most populated country in the world, surpassing China. If we combine this factor with its low motorable rate and its growing middle class with purchasing power, we have a very favorable combination. A first quarter where production has grown by 9%. CIE India with sales that have grown in line with the market and which continues to improve its potential to improve margins within a bit that has grown by 17% versus the first quarter of the previous year and has expanded its margin by 200 basis points to any reach a margin of 17%. -- if we think about the future, we have to add that India also has a special expansion potential. The 5 new plants that we have opened in the last 2 years in the country. These plants still have very low utilization levels, which for the future means growth with the investment already made and a significant operating average for additional margin expansion. We also have to consider that in this first quarter, we have had a very favorable passenger vehicle market onsets, but not so favorable in other segments such as motorbikes trucks or tractors, estimates point to a recovering in these other segments, which would represent an even greater potential with the expansion of CIE India in sales and margins. Talking about Brazil, we could perhaps highlight that in dispersed, they have been up to 8 factories from different OEMs that have shut down their activities and assigned collective vacations during the month of March to try to adjust production and inventories due mainly to our financing terms in the country that are limiting the growth in vehicle sales and even so, due in part to the low comparable base last year, production has grown at double-digit figures. This means that the Brazil marketing, although we're still far away from pre-COVID levels is making a steady recovery. Our Brazil division is the one that has proven the most dispersed order with an organic growth of 30%. And CIE has beaten the market by close to 20 points. And even more remarkable is the extremely strong growth in EBITDA with 40% compared to last year with another quarter over 20% in EBITDA margin. Europe has been the production market growing the most in the first quarter, 17%. In this first quarter, practically all European OEMs have reported sales growth at a high single digit or double digit. We see in the market that OEM discounts per vehicle purchases remained at low levels. We see that the prices of second hand vehicles have remained high indicators of the pricing power of the OEMs a consequence, on the one hand, of the strong order intake, there is a demand. And on the other hand, the inventory level, which is below historical levels this is the European context a context that's improving, but which remains uncertain with volumes at absolute volumes that are still low and where CIE has been able to grow more than 16% organic practically in line with the market. Our 2 Europe MCIE and XCIE have grown significantly in this first quarter by 20% and 37%, respectively, a growth that has also implied a margin expansion in both segments up to close to 17%. We move on to North America. The United States with OEM discounts per vehicle purchases that have risen slightly in recent months, but they are still at absolute levels that are very much below the level of forecast through the pandemic with discounts of approximately $1,700 versus the $4,500 and before the panic, this indicates that demand is still very strong. Without a doubt, the famous IA inflation reduction act is having and will continue to have a positive impact on our industry in this market. Mexico have had its best quarterly production since 2020, a production driven both by the internal demand and by the export demand, a market, which is one of the clear beneficiaries of the supply chain location fact after the pandemic during this first quarter, we've seen a major investment announcements highlighted perhaps the announcement by Tesla to build a mega factory in this country in the state of mobile Leon. And in this context, the United States, Mexico, the organic growth of our North America division has been 8%, slightly lower than the market with an EBITDA that had grown more than 5% and which implies preserving high margins close to 20%. The global picture of the market, a growth of 6% in the pool, although as we have seen with a shrinking Chinese market and other markets very significantly. Leaving aside the particulars of each geography, there are certain elements in general, such as in the still relatively low inventory level, the demand in the pipeline that is maintaining high OEM order levels and with a world production that is still 4% below pre-Covid levels. if we take the [indiscernible] just estimate for 2023. A supply that has improved during the first quarter, and we see a somewhat relaxed tensions in the hygiene that the semiconductors have affected over 400,000 vehicles in the board much better than the 2 previous years. And with prices of many routes such as steel aluminum plastic that are going down compared to previous quarters. In the consolidated CIE, a very good quarter with a real outperformance of 4% over the market and with the growth in EBITDA and EBIT of 40% with practically all geographies contributing to this growth in consolidated operating results for the group. And this is extremely important with all geographies with a double-digit EBIT. If we review the financing statement in nonoperating items, we can highlight perhaps two aspects of the engine side. And although a strong growth in financial goes in an environment with increased rates is inevitable, we believe that financing management with initiatives such as increasing the OpEx rate in the financial debt is contributing to net profit, a financial strategy that we have been implemented since a number of quarters ago, if at the end of 2021, our fixed rate debt represented 35% at the closing of 22%, it represented 50%, and currently, it represents almost 60%. and the other nonoperating item I wanted to highlight the activities have been shut down, where there are EUR 7 million in profits that correspond to our German oils business that is being sold, a business that has benefited from nonrecurring elements that lead to EUR 7 million on net results. Basically, the subsidy received from the German government related to energy costs in recent years as well as a positive one-off up because of a quality issue with a supplier. These are positive impacts, but in the net result of CIE because of the minority stakes represented a little over EUR 4 million and have also been offset by the negative nonrecurrent impact of the settlement and renewal of the manager's participation plan. So a net profit of EUR 90 million, the highest in our history which without a doubt, represents being on the podium in the sector with 9% over sales and 50% of EBITDA turned into net profit. This first quarter again shows that we are capable of deleveraging quickly. We have deleveraged the balance sheet by more than 0.1x net financial debt EBITDA in the first quarter. We faced this to a net financial EBITDA ratio of 1.86 levels below our comfort zone of two times. -- a deleveraging rate, which in annual terms, would imply deleveraging the balance sheet by around 0.4 to 0.5x net financial debt EBITDA in the absence of corporate operations or inorganic growth. And in the first quarter, where there's nothing relevant to discuss with a CapEx that has been 115% over sales, in line with the guidance of our strategic plan, a working capital that have been neutral in the quarter and a dividend paid out in January, an interim dividend paid in January of EUR 50 million, which will imply exceeding EUR 100 million in dividends during 2023 first sign in our [Indiscernible] a dividend that has been steadily growing at double-digit figures for years, including this year. Looking to the future, there is still a certain spread in the estimates of the various analysts, although some are coming closer to a consensus and perhaps we can highlight the very cautious forecast of some suppliers. Having said this, the IHS estimates point to a growth in the global market of 4% up to 85 million vehicles for this year 2023, with markets like India that grew by 8% or the other extreme [indiscernible] that would stay flat. And we confirm our expectations for 2023 growth in sales, growth in results, expanding margins, as already mentioned in previous conference call. And a special highlight is that we also expect a growth in net profit in spite of such a high enriched rate environment, which gives a lot of merit to the intense work we're doing on the operating side and the financial state in order to counteract the negative financial impact considering what we said at the beginning of the call regarding the degree of implies and progress of the strategic plan in the first 2 years. If we add to that what we said about the first quarter and the prospects for 2023, all this together means that we, again, reconfirm our commitment up to 2025. This brings us to the end of the presentation. I don't want to take up any more of your time. And if you agree, we can move on to the Q&A

[Unknown Analyst]

we have a lot of questions. And again, we're going to group them together by themes to be able to answer them more efficiently. We would start with sales. We've seen an ounce performance or the outperformance by geographies that shows a different trend compared to previous sports has something changed in CIE with special focus on China

[Unknown Executive]

Well, what do we see in the evolution of sales and outperformance this quarter? What I see is an extremely strong Brazil. China with an underperformance as also good in previous quarters and the rest of the geographies are practically in line with the market. It's a quarter... It's a quarter. I don't think we can draw conclusions from a quarter. If we go to longer periods, we'll see how the year goes. But what we have is a sample. We have 2 years, '21 and '22 where the outperformance against the market was 14 points in 2 years in those quarters. And you can check it those 14 points that seem great. There have been called is with more or less. So I wouldn't draw any major conclusions from a single order -- and apart from that, a [indiscernible] where let's look at the important Pete, there are 4 points in our performance over the market and 4 points in a real outperformance an increase in market share. This is practically the same outperformance as we had in the first quarter of 2022. But in 2022, our growth in sales included 2 things: the pass-through and the outperformance. And in this case, we can compare the first quarter, I guess, first quarter because we're at a similar raw mature price level, here we're talking about ones in real tome in growth in market share. So I think that is the main tone for this first quarter, apart from the details in my geography or another. And we need to take a longer period just one more digital conclusions. And one, I think you've mentioned China, the dynamics in China yes. I think that this is more of the same. We've been talking about the same for several quarters. And the answer is still the same. There is a fact, and that is that the Chinese OEMs are increasing their market share. And CIE has less exposure to Chinese OEMs than to Western OEMs. So this somehow this is taking us to this underperformance. Are we worried? No. CIE strategy in China, there's one headline always in China or wherever, in whatever market strategy is the same. We prioritize profitability over volume. But in any case, what we've always said in the recent quarters, I think that this quarter, let me give a little bit more of a qualitative information about China because there are lots of things happening in China. And the other day, when the Chinese OEMs published their results, the only Chinese OEM that stated that they made money one was bit, the only one. And it's an OEM, where it's complicated to for conclusions about making money because it's an OEM with a vertical integration along the entire supply chain from the batteries to Tier 2 going through OEM. So therefore, although we don't know the transfer prices between the various levels in the supply chain, it's difficult to draw conclusions as to whether BIT is making money producing cars or where they make money in their supply chain. The rest of the Chinese OEMs and clear that they are not making any money. We have the latest statements from Lion, for example, that says that with a strategy of focusing on the Chinese electric vehicle and they're not making money and they need to have new strategies. They said it yesterday, they've opened a new factory in China for export to the European market or we have statements from other OEMs talking about starting to study a manufacturing capabilities in the rest of the world. What do I mean by this? Well, I mean that there are many variables in China? It's a changing situation. And I think that we need to put the focus on what's going to happen in China and in the Chinese OEMs in the coming quarters and the coming years. So regarding the CIE strategy in China is always going to be the same. Profitability glasses volume -- but in a market with the OEMs with very widely changing strategies that we'll have to monitor very closely to see what the Chinese market is going to be like. So we have to stay calm and see what happens.

[Unknown Analyst]

A couple of questions about margins, though we measured the impact of the pass-through on margins and sales this quarter. The issue of energy, what impact has it had on us this quarter?

[Unknown Executive]

Well, if any of you had the opportunity of listening to the conference call for MCIE, we spoke about how the MCIE Europe division, which contains you have to remember, most of our forges and forges are one of our highest intensity industries in energy consumption. And this is one of the areas where our margins have benefited. So an energy trend, and of course, our fingers that will be sustained. But lets get figures. So if we talk about Europe, where last year, peaks were reached in Germany in the price of energy of EUR 700,800 per megawatt hours. This third and fourth quarter last year, it has gone down to 300 and some. And this first quarter, we've been at a level of EUR 100 to EUR 100-something. And in gas, we see levels of EUR 50 with futures dedicating to coming on to science. So with regard to energy, I would say that we had a first quarter where there's been control over energy prices and once again, and we expect a certain stability. Let's see if that happens.

[Unknown Analyst]

Okay. Now a question on working capital. Traditionally, in the quarter, it usually consumes cash and it's been basically neutral. Can you add some color to what's behind this?

[Unknown Executive]

The reality behind the actual figure is that we have a working capital in the first quarter with a small operating investment offset by a small increase in the absolute value, EUR 20 million increase in factory, EUR 20 million invested in operating investments. So again, a balance sheet of EUR 5 billion is practically nothing. That's why I said it's neutral. -- factoring that has grown that a little bit in absolute value. But it had grown because CIE has grown, but it's still at a level of 8%, 9% over sales. And we've had this figure for many quarters in a row. So it's true that it's been a quarter with that small investment a second quarter that is usually a bigger generator. But like the comment on our performance, I think that drawing conclusions from one single quarter is not really rigorous. I would look at the CIE policy and the CIE policy is always fulfilled. During the year, we want to have a year with no significant investment in working capital. And this is what we see for the rest of the year with a quarter like this with a little bit more investment and the other quarters will generate more cash. But throughout the year, we'll see a working capital that is practically neutral or with no significant investment. And thinking about 2023 and prospects, can we give some color on what outperformance we expect development in margin and especially personnel costs in Europe. I'm going to refer to the words of our CEO in the conference call for the fourth quarter and our comments of our CEO -- the shareholders' meeting this morning. And what I said while I was giving my presentation, we confirm a 2023 growing in sales, growing in results in absolute values, including net income in spite of the merit behind that and with an expansion in March. This is what we expect for the year 2023, all in line and done gradually to reach those objectives to 2025.

[Unknown Analyst]

And can you update the semiconductor situation? What do you think for 2023? Will it be sorted out or not?

[Unknown Executive]

Well, an impact of EUR 11 million in 2021, an impact of EUR 3 million in 2022 and $400,000 in this first quarter. I think that the figures speak for themselves when we talk about how the semiconductor impact is being reduced with regard to the number of vehicles that are not produced because of the chip shortage. As you know, we don't directly handle the semiconductors. We only have indirect information. And that information tells us that things are improving in the second half of the year will be better than the first half. And we hope that in 2024 at last, we'll be able to stop talking every day about semiconductors. We think that the extra capability for the production of semiconductors that is gradually being brought in is going to provide results and we'll see that in the coming quarters. And after talking about 2023, I'll link 2 questions on the guidance 2025 One would be a beta reclamation of the compliance with the operating cash flow issue.

[Unknown Executive]

And our view of the progress made, will there be an update in short or medium term... [Audio Jumps]updated the guidance in the short term. We're very pleased. We feel that the guidance we have is tremendously ambitious. Regarding the guidance for cash flow generation, which I would say is the most important one, the most important of them all. In the end, cash flow, at the end of the day, what we get is the value generated and that's cash flow. As you'll know, we have a 5-year strategic plan on the table. And the starting point was 2020 going up to 2025. The starting point was an annual cash flow generation of over EUR 200 million to a little bit. So there are EUR 300 million to go in cash flow generation to reach the EUR 500 million in the goal for 2025. And in 2022, we've made EUR 400 million in cash flow generation, more than EUR 400 million in annual operating cash flow generation. This means that we are moving forward very quickly towards that goal of 500 as the general pack, the first quarter of 2023. We've made EUR 113 million in operating cash flow generation. So we maintain the guidance for 2025. These are very ambitious goals. And the cash flow objective you're asking about and the rest are very much in line with the compliance.

[Unknown Analyst]

Move on to M&A-type questions and corporate development in general. What is the size of the M&A opportunity you see in India in this case?

[Unknown Executive]

Well, India. In India, I would say that we're looking at M&A issues to reinforce existing technologies that have a high demand from our customers, such as stamping, aluminum. And technologies that we don't yet have in India, such as the plastic injection technology. The size, well, all kinds, we're looking at small family companies with 3, 4 or 5 plants with a turnover of around 100. We've seen some groups with a turnover of EUR 200 million or EUR 300 million we like it. We feel comfortable. And it's a geography, we have a sufficient structure. 25 plants currently give us a sufficient structure to feel comfortable. And if we find a target with a significant turnover, we'll be delighted to integrate, delighted. And related to India, the as why don't we buy more than MCIE up to the limit of 75% that would be allowed by law. Well, because we don't have an additional need. Beyond what we've already consolidated. We've been buying minority stakes in that company when the opportunity has come up. When there have been opportunities where at some point, our partner, Mahindra or at times, some investors or stakeholders have wanted to offer us a block of shares, and we've made use of the opportunity we can give it. And we've already consolidated, which is the ultimate goal. And the only thing we would do would be to reduce liquidity. So right now, we feel comfortable with the position we have. if there were future opportunities, we would consider them on a case-by-case basis, but I think we have the 2 build a certain liquidity and at the same time, a majority stake that allows us to consolidate and manage the company. So we're comfortable right now. And in general, for CIMIAs, are we missing any product segment or even getting involved in areas outside the automotive sector. No, I'll start at the end. No, we're not considering going from the automotive sector to other sectors as to whether we miss anything. Well, we want to promote things we already have, we bought them. And when I refer to promoting, this could be geographies such as India, Brazil, Mexico growing markets, as well as technologies, promoting technologies like aluminum, plastic stamping composite materials, future technologies. But not just reinforcing what we have. We also have to think about something new as the question asked. And not so much in products because we have all the technologies to make components today. But from the point of view of the geographies, I think that we still have geographies to explore markets that perhaps are a little bit borderline in size to make them interesting. But they have very significant growth forecast that would make them big markets that we have reverted in markets like Indonesia with a [indiscernibles] vehicles or Thailand or Malaysia or are on these markets, many of which are concentrated in Southeast Asia, what so it could be of interest. So M&As to promote the good things we already have in technology and geography and that will contribute perhaps to including additional markets.

[Unknown Analyst]

We have a question now that Mahindra has practically left MCIE does Mahindra have specific brands to leave MCIE as such with this current 8%.

[Unknown Executive]

Well, that's a good question that we would need to ask our partener Mahindra directly i'm afraid i, can't answer that. But it's true that there is a reality. You've seen a gradual divestment of MCIE as our financial investment have they always spoken about. So why not think that there could be a second step divestment in CIE. But a question for Mahindra. I'm afraid in any case.

[Unknown Analyst]

And what's the status of the process to sell the German [indiscernibles]

[Unknown Executive]

Well, it's moving forward, is moving forward very well. We've had a lot of interested parties since Christmas, we announced the assets with per sale. And I would say with very different profiles, we have industrial companies with a strategic interest going through financial investments or private equity. So this means that we have very interesting different points of view and different offers on the table, and we're moving forward with all the negotiations, trying to, of course, maximize the resources we obtained for this divestment -- and let's see if by the next quarter, we have additional news to give you, but I think I have to stop here at this point. A more long-term and conceptual question because we briefly mentioned some structural drivers, motor vehicle to raise the level of inventories in various countries. And this will set the future for these markets. So they ask us for a little bit more color on them if we have it

[Unknown Analyst]

A little bit more color on those future drivers.

[Unknown Executive]

Well, a driver issue that I think we've mentioned is the age of the vehicle stock. And I think we will have very recent news in our edge where Spain as an example, how its vehicles are aging. We're talking about Europe, where in 2022. -- the average vehicle stock was 12 million vehicles, we're getting closer to 40 million space right now. And the U.S. [indiscernible] to auto aging. They used to be at 12 years. Now there are over 30 average vehicle age, India a different world, 25 years, the average age of the vehicle. Imagine the potential renovation there. China with 7, 8 years average age of their vehicles. This may sound like a little, but China before the pandemic in 2018. The average vehicle age was 4 years. So different markets with different vehicle ages, but they all have something in common, and that is that there have been an aging of the vehicles in the last 4 or 5 years. And this is a very important renewal driver. Another driver I mentioned was the vehicle rate, a number of vehicles per country. And if we look at vehicle rates, we have North America, the United States, specifically with over 70% of viable owners Europe around 60 and then we have the rest of the world. Mexico, with 30% approximately, China and Brazil with 20% and India with 3 4. So without the doubt, those markets that I defined during the pool when we spoke about M&A and other things, what I defined as growth markets, Mexico, China, Brazil, India, where these vehicle ratio below the 30%. I think this is another major driver to grow the market. And the third one, I think you mentioned to correct me if I'm wrong was the inventory stock issues, inventories -- if we use as an approach, the difference between sales and world production to talk about inventories, it's estimated that in recently during the pandemic, 2021. Over 7 million was destroyed in stock during that period. This is being recovered. It's expected that the big numbers say that approximately or have been recovered, we still have a couple of millions to go EUR 3 million to recover. What are the different markets like, well, Brazil is at approximately 30 days. So this means 25% below the averages. China in March was at 50 days. This is approximately 5% below its normal rate North America, approximately 33 days versus 60 is still more than 40% below its historical levels. India, it seems that for passenger vehicles, it's been normalized, but we still have to rebuild the motorbike inventory and truck and tractors and then Europe which is where we have fewer market figures from the market, but we hear the various OEMs. And we believe that they are still below the market. And since I mentioned to the OEMs that -- the other day, we read about the closing of the inventories in the United States. So each of the OEMs. I gave a bigger I said that the industry in the United States is a 33 days inventory versus the 16 normalized days. But the fact is that the story is completely different by OEMs. [indiscernible]. -- the headline of the results of the first quarter has been the normalization of inventories. And in the United States, [indiscernible] is already at 60 days. They've completely normalized. But at the other end, we have Toyota and Nissan, Hyundai here with 20 days and below the inventory. So that 33% is just an average approximation to the market. But in fact, the situation of the OEMs is completely different. We've reviewed age, we reviewed inventory. We've reviewed vehicle property rates. I think that these are 3 of the main drivers for the future automotive market with their own particulars and the specificities in each market. Well, that was the final cherry on the cake. There are no more questions. Well, good. I think we add a little bit of everything. We've reviewed the short term, the first order. We reviewed the year 2023. We've reviewed the future, -- we reviewed industry drivers. I think it's been very thorough. So I'd just like to thank you all for your time. Thank you for joining us today, and you know where we are if there are any questions unanswered. Thank you very much.