Gestamp Automocion SA

MAD:GEST

Earnings Call Transcript

[Ana Fuentes, executive]

Good afternoon, and thank you, all, very much for attending Gestamp's 1st Q results presentation in this probably very busy afternoon for you. I'm Ana Fuentes, IR Director, and before proceeding, let me refer you to the disclaimer on Slide number 2 of this presentation that has been posted on our website and we set out the legal framework under which this presentation must be considered.

The conference call will be led by our Executive Chairman, Mr. Francisco Riberas; and our CFO, Mr. Ignacio Mosquera. And as usual, at the end of the conference, we will open up for a Q&A session.

Now let me please turn the call to our Executive Chairman, Mr. Francisco Riberas.

[Francisco Jose Riberas de Mera, executive]

Good afternoon, and thanks for attending this call in which we will be presenting Gestamp first quarter results.

[ And ] starting in Slide #4. We had a quite good performance of the team during this first quarter, and we have been able to achieve a very good set of results. In terms of revenues, our group has had revenues of EUR 3,049 million, EUR 3.49 billion. That means an outperformance of 3.9 percentage points if we don't consider the impact of FX and scrap.

In terms of EBITDA, we have generated EUR 315 million, and of course, excluding the EUR 4 million, which are coming from the Pheonix plan cost in the first quarter. And I would like to say also that we are on track in the Pheonix plan, which is a very relevant topic of Gestamp and what we need to do during the 2024, '25 and '26.

Moving to Slide #5. I think we have had in terms of revenues, also a very good set of results because they're comparable. The previous year was challenging. In fact, the market in terms of light vehicle production in our footprint has decreased from 19.4 million in first quarter 2023 to 19.3 million, so minus 0.4% evolution.

If we compare this first quarter 2024, we are still 12% behind the numbers in the market in the first quarter 2017. And this year, even though the global decrease has been minus 0.4%, it's been more impacted to Western Europe with a decrease comparing with the first quarter 2023 of minus 4.7%, a little bit compensated with better volumes in China.

In Slide #6, basically, we are stating that even though in terms of a reported basis our auto sales has decreased by 2.9%, what is true is that we were comparing against versus a tough comparable figure from the first quarter 2023, and of course, also impacted by the seasonality due to Easter holidays. But in any case, you will see here in the chart, just comparing with ourselves [ fair ] vehicle manufactured in the first quarter 2018, we had been able to move from EUR 94 per vehicle in first quarter 2018 to EUR 150 per vehicle in the first quarter 2024.

Just referring to Slide #7 to our organic growth. We have been able to have an organic growth in our Auto business division of EUR 104 million, which is representing 3.5% increase. And of course, this organic growth has been partially offset by a slight decrease in [ Gescrap ] and also for the impact of the FX basically coming from currencies in China, Turkey and Argentina.

In terms of market outperformance in Q1 in Slide #8, we have been able to outperform the market in our auto business at FX constant by 9.9 percentage points. We have [ done ] it -- We have grown by 3.5%. We have had a very good outperformance in areas like Mercosur and Eastern Europe and especially in Asia the market has decreased in some extent, and we have been able to grow our turnover by 17.5%. And also we have been doing that with a quite solid profitability and considering that it's a very challenging market.

In the bad part of the story, we have done not such a good performance in Western Europe, basically considering the difference in steel prices from first quarter 2023 to first quarter 2024, and also in NAFTA because of our less exposure to the American customers.

In Slide #9, we refer to the impact of the Pheonix, which -- and the impact of Pheonix during this first quarter has been EUR 4.4 million. So that means that our reported EBITDA in terms of our Auto division has moved -- has been reported EUR 298 million and without the impact of this EUR 4.4 million, it could have been EUR 303 million.

What is important to say is that we have already incurred 13.3% of all the expenses that we have considered in the beginning. We are on track in the execution of the plan. And even though still we don't see a significant improvement in our results, but it's clearly a clear improvement in our underlying operations. So we are quite optimistic about what is going on around the Pheonix plan.

Moving to Slide 10. We wanted to basically outline here that our NAFTA division has been, in some extent, part of the performance compared with the previous year in terms of EBITDA. So that means that if we just see what is excluding Pheonix in our Auto business division without considering NAFTA, we could have been able to get EBITDA margin of 12%, while in the first quarter 2023, we could have get 11.7%. Just to remind you, in the reported basis, we -- last year, in the first quarter, we did 10.8%. And this year, we had 10.5%.

And in the Slide #11, just a few words around scrap. Even though the scrap markets and the prices have been going down in Europe and U.S. and also in China, that is directly impacting to some extent our revenues from first quarter 2023 to first quarter 2024. We have been able to react. And in terms of profitability, the company has been able to generate in terms of EBIT EUR 19.9 per tonne, which is representing an increase in our EBIT margin from 6.8% in first quarter 2023 to first quarter 2024.

So now I hand it over to Ignacio Mosquera.

[Ignacio Vazquez, executive]

Thank you, [ Paco ], and good afternoon to everyone. Moving on to Slide #13. We can have a closer look to our financial performance in the first quarter of 2024. And as Paco has already explained, Pheonix plan aimed at restructuring our NAFTA operations, has had a EUR 4.4 million impact in our Q1 2024 P&L at EBITDA level.

For the first quarter of 2024, we have reached revenues of EUR 3.049 billion, which entails a 3% decrease when compared to the EUR 3.144 billion from Q1 2023. Revenues for the Auto business, excluding scrap and at FX constant, have grown by 3.5% year-on-year in Q1 2024 as FX has negatively impacted our result by EUR 190 million.

In terms of EBITDA, we have generated [ EUR 311 million ] in Q1 2024, meaning a 10.2% margin. If we exclude the impact from Phoenix, EBITDA in absolute terms would amount to [ EUR 315 million ] with an EBITDA margin of 10.3% or 10.5% if you exclude [ Gescrap ], aligned with the Q1 margin of last year.

As Paco has mentioned earlier, our profitability this year has been dragged by our NAFTA business, the typical business seasonality and persistent inflationary pressures. Reported EBIT has decreased by 22% year-on-year to EUR 135 million with an EBIT margin of 4.4% or 4.6%, excluding Phoenix impact as a result of the decrease in EBITDA together with higher depreciation and amortization year-on-year.

Net income in Q1 has been EUR 55 million, that compares to the EUR 80 million reported in the same period last year, mainly due to lower year-on-year EBITDA in absolute terms. Increase of D&A levels compared to last year, which was extraordinarily low and slightly higher financial costs since the peak of interest rates was reached by mid-2023. Net debt has increased by almost EUR 175 million to EUR 2.233 billion as we will explain later.

To sum up, a good set of results with a difficult year-on-year comparable due to the extraordinary Q1 2023 and taking into account that, traditionally, our business has a weaker fourth quarter in relative terms that improves quarter-on-quarter throughout the year.

If we now move to Slide #14, we can see the performance by region on a year-on-year basis. Looking at each region in detail, revenues in Western Europe have decreased by 9% year-on-year in the quarter to around EUR 1.1 billion. Performance in the region has been affected by the tough comparison base. Q1 2023 market growth was a record, thanks to the normalization of semiconductors supply.

Also, for Gestamp specifically, the falling raw material prices affects this region in this particular quarter. In terms of EBITDA, it reached almost EUR 120 million, and EBITDA margin stood at 10.4% in the period, down from the 10.9% reported in Q1 2023, given the lack of operating leverage due to the seasonality and lack of market volume.

In Eastern Europe, the performance in Q1 2024 has been solid, proving again our strong positioning in the region, particularly in markets such as Turkey, Romania and Czech Republic. On a reported basis during Q1 2024, revenues and EBITDA have grown year-on-year by 4% and 1.2% to EUR 468 million and EUR 61 million, respectively. Solid EBITDA margin of 13.1% is below the 13.4% reported last year due to the inflationary pressure.

In NAFTA, not much to add to what Paco has already explained. We have started with the execution of Phoenix plant, which is already showing signs of improvements in the underlying operations but not fully translated to the P&L as we will have to wait some time to see these improvements reflected in our profitability.

Our revenues have decreased by almost 2% year-on-year, while EBITDA has decreased by 15%, leading to an EBITDA margin of 3.8%. If we exclude Phoenix impact, EBITDA margin reached 4.5% in the region. This should be a year from minus to plus. We should see a better performance in the second half.

As deeply explained during our full year 2023 results presentation, turning around the operations in NAFTA to improve our market positioning and profitability is at the top of our priorities and will take some time.

In Mercosur, our results have been strongly impacted by Forex in Argentina that has led to revenues and EBITDA decreasing in the quarter by 12% and 6% year-on-year, respectively. EBITDA margin in the period has improved versus last year to healthy levels of 11.4%. In Asia, our performance continues to benefit from our strategy to grow in electric vehicle, mainly in China, and we continue to see this market as an opportunity for us.

Our approach of focusing on premium products with differential technologies is allowing us to gain good quality market share in a very competitive EV world in China. In the first quarter, revenues in this region have seen the strongest growth at 10.8% and have reached almost EUR 490 million with a strong outperformance in a complex and very competitive market, thanks to our value-added EV products.

As a result, EBITDA grew by almost 31% compared to Q1 2023, with an EBITDA margin improving to 15% in the period, showing an extraordinary operational execution of our projects in the region. We continue working to gain position in this region as we have been doing over the last few years with a strong organic and profitable growth.

Finally, [ Gescrap ] has seen revenues decreasing by 5.8% year-on-year to EUR 154 million as a result of the decrease in scrap prices. Nevertheless, well managed operations have allowed for EBITDA to decrease by only 3% year-on-year, leading to a slight margin improvement from 8.1% to 8.3% in the first quarter of 2024. Overall, we have seen that our geographic diversification has supported a solid performance in the quarter, in line with our expectation to meet the guidance for the full year.

As we move to Slide 15, we see the continued focus in reinforcing our balance sheet profile and deleverage. We have ended March 2024 with a net debt of EUR 2.233 billion, which implies a net debt-to-EBITDA ratio of 1.7, lowest leverage ratio for the first quarter since the IPO. If we look at the debt in absolute terms, we see that we are succeeding in our debt reduction strategy as we have reported the lowest gross and net debt figure in the first quarter since the IFRS 16 implementation.

Net debt in Q1 2024 is EUR 175 million, above the EUR 2.058 billion reported in December 2023, which includes dividend payment of EUR 40 million and a $0.5 million equity contributions from minorities. In terms of free cash flow and in line with the business seasonality for Q1, we have generated negative free cash flow of EUR 135 million, including EUR 4.4 million expenses related to Phoenix. This negative free cash flow generation is due to the normal seasonality, negative working capital in the quarter, CapEx investments to continue reinforcing our growth strategy and pushing the EBIT transition and diversifying our footprint and a lower EBITDA in absolute terms.

However, we are firmly committed on reaching our target of generating positive free cash flow in the range of EUR 200 million for the full year, and we should expect a change of trend already in Q2.

Turning to Slide 16. In fact, our financial strength through reinforcing our balance sheet and our deleverage strategy is being recognized. On March 14, the credit rating agency Moody's upgraded our corporate rating by 1 notch to Ba2 with a stable outlook following last year's Standard & Poor's upgrade.

As indicated by Moody's, this upgrade is the result of our continued strong organic growth above the market with an adequate balance sheet structure, leading to the deleverage path demonstrated in the last few years and the ability to maintain a stable profitability on a context of uncertainty and volatility at both sector and macro levels. This represents great news for Gestamp as a proof of the market, acknowledging our efforts to keep a disciplined financial strategy, which was one of the key pillars for the long-term strategy provided during our Capital Markets Day in June 2023.

Thank you all. And now I hand over the presentation to Paco for the outlook and closing remarks.

[Francisco Jose Riberas de Mera, executive]

Thank you, [ Ignacio ]. I'm just referring in Slide #18 that assuming the latest forecast by the [ EHS ], in this case, we continue to see the market this year to be flat with basically 90.3 million units to be produced during 2024. In this scenario, probably Asia is going to do a little bit better and Western Europe a little bit worse.

And for the next years to come for 2025 to 2026, we see basically a slight growth of CAGR of around 1.7%, assuming the forecast by [ EHS ], and being able to reach the global manufacturing amount of 95.1 million units by 2027, which is exactly the same amount which was achieved 10 years before in 2017.

In Slide 19, basically following our first quarter, we have a good visibility for the rest of the year, and that's why we reiterate the guidance we provided for the year 2024. In terms of revenues in our auto business, we will be able to do a market outperformance in the low single-digit range. In the case of Gescrap, very similar revenues to what we had in 2023. In terms of EBITDA, in our auto business, we intend to increase our EBITDA margin by being around flat to a slight increase during 2024 with Gescrap EBITDA margin very similar to the one we had in 2023.

We are convinced that we will generate a positive free cash flow in the range of EUR 200 million, and we should be able to preserve our leverage as stated in the Capital Market Day and to have our net debt-to-EBITDA between 1 to 1.5 range.

And just to conclude with clear message, we consider our set of results for the first quarter 2024 as a very positive one. So that means that we feel comfortable, and we have a good visibility in order to be able to deliver on our guidance. And of course, in terms of the Pheonix plan, we are doing a very, very strong work in all what we are doing. Still, we don't have the visibility, but we are already improving our facilities over there.

And with this now, we are basically open to your questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Francisco Ruiz from BNP.

[Francisco Ruiz, analyst]

I have some questions. The first one is, can you give us an idea of how Pheonix plan will impact the performance in the region in terms of the market? We have seen some underperformance. And if you expect that this situation will continue during the year or not?

The second question is if you could give us an idea of how much the raw material has impacted in the quarter because the [indiscernible] in Europe has been negative, but I don't see any reference when you quote on the performance overall, the [ mark ] [indiscernible] market. And also, I would like to know how sustainable the 15% EBIT margin from Asia and [indiscernible] is? I mean, we could say Pheonix margin to keep in the coming quarters?

[Francisco Jose Riberas de Mera, executive]

Okay. Thanks for your questions. And let's start with the Pheonix plan. The Pheonix plan in this quarter, we had some -- we have been able to really move forward in what we were expecting. We are on track with what we are expecting to do. And still the visibility we have in this first quarter is very limited. It's -- the final result in terms of EBITDA is a little bit more aligned with the kind of EBITDA we generated in the second half of 2023.

But we are expecting in the second half of 2024 to do better than the one that we have already in the second half of 2023 because we are still -- we see that some of the results of the Pheonix plan will start to pay in the second half of the year. So overall in the year, it's not going to be such a big impact, but what we are working quite hard is in all the underlying things around increasing the profitability in our North American operations in a quite sustainable way.

Referring to your second question about the raw material, it's not easy to provide you with the figure because the [ real ] decrease in the price of the steel happened during the year, but they have different impacts in the different quarters. But it's true that if we compare with [ third ] quarter to first quarter, we had already accumulated basically different decreases in the price of steel, mainly in Europe because we have seen now a kind of decoupling between the steel prices within Europe and Asia. So I cannot provide to you right now a clear amount per ton, but there's been some decrease. We basically justify a little bit of this kind of gap between the performance in terms of sales in Europe and our performance sales in Europe.

And coming back to your last question about how sustainable is our EBITDA in Asia, as you know that everything is moving very fast in Asia, we have a very good set of results and EBITDA growth over there. A lot of it is coming from [ EVs ], as was mentioned by Ignacio Mosquera. But what is true is that the market is moving very fast, and we do have a position with some customers. Our operations are running very well in Asia with a high level of performance.

So what -- we will see what is going to happen in the second quarter, but the visibility we have right now is positive for the whole year.

[Operator]

Our next question comes from the line of Alvaro Lenze from Alantra Equities.

[Alvaro Lenze Julia, analyst]

The first one would be if you could help us understand the evolution in terms of organic growth, especially in Mercosur and Eastern Europe, and how much is this potentially distorted by the hyperinflation accounting in Argentina and Turkey? So if you could provide us some information, some detail on what's the actual volume performance there and how that compares to local production levels?

The second question would be on -- well, the next 2 questions on the U.S. market. We saw news recently of Volkswagen Chattanooga facility having a union win. So the plant is now going to be unionized in the sense that this is potentially one of the problems that the company has been facing, right, the labor market in the U.S. So how do you read this? And how does this change your views on the different alternatives that you have on the Phoenix plan?

And the third question also regarding North America is, if I look at the evolution of EBITDA margin, it has declined very significantly excluding what you have labeled as the restructuring cost of Phoenix. So what kind of performance can we expect from this region until the restructuring plan is completed, or why don't you allocate more costs to the Phoenix program?

[Ignacio Vazquez, executive]

With regards to your first question on organic growth and hyperinflation, it is factually correct that those 2 regions are impacted by hyperinflation. Nevertheless, in the case of Argentina, I think that there has been an impact on volumes on the one side. But in the case of Eastern Europe, the organic growth has been positive versus the production.

[Francisco Jose Riberas de Mera, executive]

[indiscernible] In terms of the Chattanooga plant, it's true that we have received this news around that the union has been able to, let's say, to win this battle around Chattanooga. To be honest, right now, even if this has happened, the pressure and the agreement that Volkswagen has already reached before this plant being unionized has been already in line with the kind of agreements which have been done in Michigan with the American customers. So we don't see that it's going to be an impact in terms of extra cost, in terms of wages [ just do for that ].

And in any case, what is clear is that in our Pheonix plan, we have different levers in order to be able to increase our profitability. Of course, some parts of these levers are related to prices. Prices for new programs that are coming with new prices, which are good and some discussions with customers. But the real important levers are coming from the improvement of the operations and also for the improvement in terms of our purchasing activity. So I think these are coming. And of course, we are not concerned about the success of our Pheonix plan due to this kind of decision about the union of the plant in Chattanooga [ Volkswagen ].

And in terms of what is happening in terms of the declining of the EBITDA in U.S. or in North America, I think I explained that if we compare with the first quarter 2023, it's true that there is a decline. It's true that there are some specific factors in this quarter. For instance, some strikes that happened in Mexico in one of our customer plants. And there were some specific topics. But the visibility we have right now in terms of the EBITDA that we should be able to generate -- in the full year 2024, we are expecting EBITDA to be in line with the EBITDA that we had in 2023. And that means that we should be able to improve a lot already for the next years to come.

I need to reiterate that we have a lot of data around the performance of our operations in U.S., which is already improving, and we are expecting to have a much better news in the next quarters to come.

[Ignacio Vazquez, executive]

Just to add one additional point with regards to the Phoenix cost and the allocation of Pheonix cost. As we mentioned at the beginning of the year when we presented the Pheonix plan, we have an allocated budget to Phoenix which relates specifically to the restructuring plan. So it's not a matter of allocating more or less cost to it, just to give you a better understanding of which costs are related there.

[Operator]

[Operator Instructions] And our next question comes from the line of Enrique Yaguez from Bestinver.

[Enrique Yáguez Avilés, analyst]

I have two questions. The first one is also regarding the market outperformance. It has been weaker than the market in NAFTA and Western Europe. And the question is, what do you think is the reason for this underperformance in this market? Is your higher exposure to EVs or is there higher exposure to to premium European OEMs?

And the second question is regarding CapEx. I know that you prepare not to disclose the fee expected for this year, but I would like to know if at least do you foresee the need to slow down your investments for this year because an important competitor has recently announced the decision to slow down its investment in battery [indiscernible]. So I don't know if you agree this view or not, what are your plans on this front?

[Francisco Jose Riberas de Mera, executive]

Thank you for your questions. I can take the first one in terms of market outperformance. It's true that we have done a little bit worse in North America and Western Europe. In the case of Western Europe, part of it is coming from, of course, this decrease in the steel prices, as mentioned. It's true that in some extent -- if we compare ourselves in the first quarter '23 to '24, it's true that in the first quarter of 2023, we have an extraordinary level of sales around EVs, especially in Germany. And this year, first quarter sales in the EV market in Germany have decreased.

And it's not just a matter of a mix of customers. It's just a decrease in terms of sales of EV during first quarter comparing with the same period in the previous year with subsidies.

In the case of North America, it's true that as far as you know, we are a little bit more positioned ourselves in, let's say, European-based customers in the last years. I would say, the performance of these customers maybe is a little bit worse than the ones by the American players, including Tesla. And this is basically why we have this different performance.

In any case, what we have right now is that we are improving or increasing our exposure to American players. And in the next years to come, we are planning, of course, to increase our market share over there. So we feel comfortable and that was already expected from our side. And maybe in terms of CapEx...

[Ignacio Vazquez, executive]

Sure. Just under -- I'll refer to our guidance with regards to leverage and free cash flow where we have a firm commitment to keeping our leverage below 1.5x and generating EUR 200 million of free cash flow in the year. Because of that -- that is a key item in relation to our CapEx investments for the year, but we also need to balance and keep reinforcing our strategy and commitment to grow with our customers.

So long story short, we are firmly committed on our leverage target and free cash flow while keeping investments for our clients.

[Operator]

Our next question comes from the line of Robert Jackson from Banco Santander.

[Robert Jackson, analyst]

The first question is related to your comments regarding the visibility and growth in Asia and your exposure to the EV segment, which you say is growing well. But I like a few -- well, last year or so or especially over the last few months, the talk of a slowdown in the EV segment has been increasing. So my question is, your guidance, how does that consider -- or what's your outlook in terms of the EV exposure, like the slowdown expected for this year?

And the second question is related to your Pheonix plan. What do you see as the main challenges, at least for short to midterm, which could derail some of your targets?

[Francisco Jose Riberas de Mera, executive]

And just first one, if we refer to how stable is the market and our sales in Asia, we feel quite comfortable. I think we have the right exposure to very good programs. I was visiting our operations there 1 month ago. And what we see is that our operations are running quite well and the volumes are still very solid. Right now in Europe or in U.S., we see some doubts and concerns about the evolution of the sales of electrical vehicles, but we don't see these kind of doubts in Asia and China.

And the data that we have is that first quarter and also the previous year, around 2/3 of the EV or the electrical vehicles produced in the world and sold in the world are happening in China. And the amount of new vehicles and EVs is very high. And also in terms of penetration and the decision by the people and by the final customers to buy EVs is not a problem in China. So I would say that there is not any concern in China about the evolution of EVs, and we are well positioned in some of these products.

Of course, it's a very dynamic market and everything could happen, but we have a strong team with a very good operation. So we feel comfortable about it. And it's not [ easy ]. We see some of the, let's say, foreign players not performing so well in such a competitive market. And in terms of the challenges we see for Pheonix, of course, there are challenges because North America has been a program for us for years. But we have a very structured plan in place and we feel comfortable in all the different levels.

We have already gaining a lot of traction in some plants. It's true that we don't see it because some of the plants which were performing well, the volumes are now a little bit weaker, but we are expecting them to recover. So that means that this is going to pay some credit in the second half of the year. And also, we are doing a very good, let's say, performance in terms of negotiations with customers and with suppliers.

So I think right now, even though, of course, it's tough, we have a very good implication by our corporate team, together with the NAFTA team and also together with the expert [ plans ], which are supporting these problematic plants that we have in U.S. In each of the cases of the 3 plants, there is a very strong team coming out from these [ ex ] plants. And to be honest, I am surprised at how things are moving on in the right direction. So we expect things to really come back and to see opportunities and good results in the second half already during this year.

[Robert Jackson, analyst]

Okay. And just following on from that, if I look at Magna's results that came out last week, one of the comments they made was that they're still seeing cost inflation on the labor side in the U.S. Is that something you're still seeing as well?

[Francisco Jose Riberas de Mera, executive]

Well, in terms of Magna, as you know, it's not easy to learn and to replicate the results of Magna because it's a kind of conglomerate with different divisions. And just one part of the divisions is related to what we are doing. But of course, it's true that it's been the impact of inflation in U.S., operations has been a little bit more substantial than the one we've seen in other places -- in some other places. But of course, our customers know around it, and they want to be sure that the suppliers are healthy enough in order to be able to work with them and sustain the manufacturing.

So to be honest, we are having constructive discussions over there, and we don't see, let's say, such a big problem.

[Operator]

[Operator Instructions] We appear to have no further questions at this time. I hand the conference back to you. Thank you.

[Ana Fuentes, executive]

So thank you, all, for having joined us today. And as usual, if you have any further questions, you can contact the IR team and wishing you all a very good evening.

[Francisco Jose Riberas de Mera, executive]

Okay. Thank you.

[Ignacio Vazquez, executive]

Thank you.