CIE Automotive, S.A. (CIE) Earnings Call Transcript & Summary

[Foreign Language] Welcome to this results release for the third quarter of CIE Automotive. [Operator Instructions] The conference will start shortly. Good afternoon, and welcome to this results release for the third quarter of CIE Automotive. We've got Ms. Lorea Aristizábal with us today, who is the Director of Corporate Development. [Operator Instructions]. So Lorea, off you go.

Good morning. Thank you very much or good afternoon, everybody, and welcome to this results release for the third quarter of CIE Automotive. The second quarter was impacted by 2 factors: COVID in India and Brazil and semiconductor. And this third quarter, the protagonists have been the tensions in the supply chain, especially in the case of semiconductors because the situation worsened in summer because of the increase in COVID cases in Malaysia, which is one of the countries where semiconductors for automation are tested and packaged. Restrictions imposed by the government to prevent virus transmission included restrictions to movement, including movement to work. And if you bear in mind that we're talking about labor-intensive activities, then the impact was very important. Whilst in July, it was estimated that the semiconductors had an impact in the third quarter for around 1 million vehicles. Today, it has been calculated that there's been a production decline of 3.5 million vehicles in the third quarter. Added to this, we got the 4 million of the first 6 months, which makes a total of almost 8 million vehicles that have not been produced by year-to-date September. The North American, European markets have proportionally been most affected with 55% of volumes lost to date. It's these problems in the supply chains that explain the drama of volumes that we've seen in this third quarter. If we compare with the third quarter of 2020, the market has dropped by 20% overall, with Brazil and China dropping by around 20%. Others such as Europe and North America, dropping even further around 25% to 30%. And the exception is India, which is the only market that has grown in this third quarter by 3%. If we analyze the 2021 consecutive market. This third quarter has 16.5 million vehicles that have been produced as opposed to 20.6 million at the first quarter at 20% less and in the second quarter. That's 12% lower. If you now compare current volumes with the pre-COVID 2019 volumes in the first 9 months of this year, 56 million vehicles were produced. This is 16% less, and 10 million vehicles fewer than the 66 million that were produced in the same period of 2019. Despite the worsening of the market, our results have been excellent. Sales have outperformed the market by over 17 points in this quarter and an over 16 points in the year-to-date to September, continuing the outperformance that we saw in the first 6 months. Once again, this outperformance occurs throughout the whole of the geographical areas where we have a presence in each and every one of them with their own characteristics, but all of them with the backdrop of the inevitable supply concentration, which the pandemic and the current market situation are stepping up. Sales, which despite this outperformance have suffered in this quarter, especially in September with a significant slippage in comparison to the forecast that we were foreseeing, especially in the European market. If we talk now about operational margins in this third quarter on its own, in comparison to third quarter of 2020, margins have expanded by 50 basis points, even though sales were slightly lower, reaching 17% of EBITDA in the CIE consolidated balance sheet, which are leading to record operational margins in the third quarter and the current group's perimeter. If we look now sequentially for 2020, '21, this 17% is also worth highlighting because it is hardly 100 basis points less than the 18% of EBITDA of the first 6 months when our volumes and our sales have been significantly lower. Virtually, all divisions in the group have broadened their margins in this quarter and have withstood the inflationist pressures of many operational costs. This margin resilience explains -- is explained to a large point our business -- by our business model and the different levers that we've been working on. If we talk about the raw materials, we have pass-through clauses, which avoid that we are harmed when raw material prices go up. And as for supply interruptions, our philosophy of getting local supplies with over 90% of our suppliers being local has also helped us avoid significant impacts. We talk now about energy. We're not one of the industries that are considered as great energy consumers. Energy represents around 3% of our sales. So the increase in energy prices has a impact on our balance sheet. Of course, with some divisions such as aluminum and foundry having far greater impact than the other. If we're talking about logistics, local production for local supply also means that in general, we are not as exposed as others to the inflation and costs of marine transport costs. For example, in EBITDA accumulated of 17.7% of the sales are along the lines of the guidance for 2021, show that the main levers of value creation in CIE don't come from operational leverages of volumes, but it's something that we manage well. It's our management style, which means that we are consolidated now in 2021 to operational margins from pre-COVID days. And this doesn't mean that we've just improved in percentages but also in absolute terms because if you look at 2019 exchange rate, the results of the first 9 months of 2021 are similar to those of the first period for 2019. If we're going to finalize the results analysis by talking about cash flow and debt, which once again actually does what we committed to, which was to delever our balance sheet during this 2021, especially the deleveraging that has been achieved in this quarter, a quarter with fewer sales than we actually forecast and a quarter in which we paid dividend. The cash flow, these points could be summarized by firstly the conversion of almost 65% of our EBITDA in operating cash flow. As I said earlier, in second place, the payment of around EUR 30 million in dividends, of 2020. And thirdly, the way we have systematic control in investment and expansion, which has only accounted for 2% of the sales in the quarter. And finally, fourth, a special effort in controlling our working capital. In a quarter when normally what you get is investment in working capital, we've not only managed to not invest, but also to operationally compensate with the reduction of EUR 30 million in the factored amount. This effort will continue in the fourth quarter, and we will try to minimize the EUR 60 million investment in working capital of the whole of the first 6 months. And with all of this, our net financial debt has been reduced by almost EUR 15 million during this third quarter using -- leaving our net financial debt -- adjusted net financial debt to EUR 1,508 million. This has been very positive for the last 12 months from the 4.1 of September 2020, and which with this 2.56 that we've currently achieved is very near the guidance figure for 2021. To meet the guidance figure, our commitment is still the same, to carry on focusing on cash flow generation. This generation, which will allow us to carry out deleveraging whilst we grow organically and in the future, will assist us in organic growth additionally. Let's look now to the future. Let's look forward. And the first variable that comes into place, once again a lack of semiconductors. The end of September, Malaysia reported the recovery of 100% of its operational capacity. That was before what had initially been envisaged, and several chips manufacturers are redirecting their production to the automotive sector, which coincides with public commentaries of OEMs, which indicates a slightly positive tendency. IHS envisages that the impact of semiconductors in the fourth quarter will be similar to that of the third quarter. And from then on, it will improve. That makes us be cautious, but also moderately optimistic when we think about 2022. We're hoping that the worst will have been left behind in this second half of 2021. IHS calculates that despite that there will be a similar impact to the third quarter of semiconductors, global production of the fourth quarter should reach around 19 million vehicles. This will be a sequential increase of 15% in comparison to the third quarter, although it is still minus 20% in relation to the fourth quarter of 2020. With that in mind, as a whole, 2021 will reach an overall production of 74.8 million vehicles, which is practically flat line in comparison to 2020 with very different characteristics for each of the markets. Brazil and India are growing, Brazil by 6%, India by 21%. China and North America are virtually flat and a European market, which will have dropped by 3%. So the recovery of production is expected to be gradual throughout 2022 and 2023 with 2 consequential years of growth of around -- above 11% with productions around 83 million in 2022 and 92 million in 2023, respectively. So it will be by 2023, when the pre-pandemic production levels, this famous 89 million vehicles that were produced in 2019 will actually be broadly beaten. In addition to the specific drivers in each market, we've got the generalized driver of the situation of inventories, which has been further tensed in this third quarter. And to support the positive development of markets, we've got the fact that throughout this year, IHS estimates have actually been downwardly corrected, in fact, to 11.5 million vehicles for the impact of the semiconductor problems. But part of this drop has been compensated by lower demand than had originally forecast, which tells us about a certain amount of latent demand and future demand. So this is the setting that we're living in. It's very volatile, which has led to several [indiscernible] in the sector during the last quarter, the most recent today, all concentrated in this segment of supplies. That isn't our case. It is not our case. Our commitment is to our guidance, to the creation of value and with our shareholders is intact. We know the sector is going through a transformation. Yes, that's true, but it's a sector in which we will be winners. And we can finish this conference by just referring to another of our public commitments, which is that our intention is to carry on growing transparently with the market means that before the end of this year, we will publish the group's ASG 2025 strategic plan, which is in addition to the financial plan for 2025, which we published during the Capital Markets Day in June. We will keep you updated on the subject. And now we will move on to your questions. Thank you so much for having spent time with us.

There are several questions. Starting with a question about the markets. We've been asked, what do we think about the new forecasts made by IHS? When we returned back from the summer and IHS reviewed once again its yearly forecast, because they made a gradual forecast, but there was a time we went to -- from a growth of 8% and a bit to a growth of 1% before reaching the current flat growth. There were some people that thought IHS was being very dramatic. But actually, I think real data subsequently for the third quarter have actually shown that these forecasts are actually very realistic. I think there is still a lot of uncertainty surrounding IHS data, which is for the fourth quarter, the 19 million vehicles that are expected in the fourth quarter. And I say that because what we've seen in the third quarter has been horrifying actually. I don't know if you want to be reminded of July date. In July, it was said that the third quarter, we were going to be producing 20 million cars. Then in August, it was going to be 19 and a bit million cars, and that's 20% less. But it wasn't that this was said 15 months ago. We said that 3 or 2 even months ago. So 19 million vehicles for the fourth quarter would seem a major sequential growth. I'm not saying that we won't reach that. We would be really happy if we did, but we're just being very cautious about saying that. I think from then onwards, it's a bit of a crystal ball. I think, of course, the volumes are going to be recouped in coming years. Whether it's going to be 11 next year and 11 the following year or 12, what the final figures are going to be will have to be seen, We'll get greater visibility this year at the time. But I think recovery for upcoming years is a fact. A specific question about India. What's the outlook for India once the bottlenecks have been unblocked? Will there be a strong recovery in India? India as a market, as you know, is completely different to the rest of CIEs where we have a marketplace, which is that India is very diversified. And that's helpful because not all segments of the Indian market are evolving in the same way. What we've seen over recent months is the following. We've seen, for example, motor bikes has had a slightly lower demand. However, exports are increasing rapidly, low domestic demand but increased exports. And then we've got Bajaj that are exporting a lot as well. They're one of our customers. We've also seen that passenger vehicles are suffering a little bit more. Semiconductors have had an impact on clients such as Mahindra and Maruti. But demand is there, but demand has affected production. In the case of tractors because we also produce in India tractors, we think that will be maintenance because last year the increase was spectacular. So that's actually good news. And in the case of a trucks, there's an increase. So it's a bit of a mix, a mixed bag. And with all overall, we can say it's a good third quarter. But what can we expect for India? We've reviewed our short-term forecast. We thought we were going to have a fourth quarter, which is going to be very strong. Now, we feel that it's not going to be so strong. In the results release of Mahindra a few days ago, that was spoken about in detail. And if you're interested in hearing, we said that in the short term, especially in the fourth quarter, we didn't think it was going to be that strong. But from then on, yes, we do expect recovery in India. We still trust in India as a country. We're hopeful for everything that's happening in India. It seems that I'm trying to be a little bit pessimistic in the short term but even so, it's going to be the market that's going to grow most in this year in 2021. So we're talking -- we always talk about 2 markets that are growing this year, 2021, which is Brazil and Italy -- and India sorry, India more than Brazil. So which is reducing our expectations for the fourth quarter, it's still a very positive outlook in the case of India. Could you give us some details about the third quarter, July, August and September in CIE? And can you just give us explanation as to why the NAFTA margin is lower in the third quarter? Well, I think I actually already mentioned this, it's been a bit of a irregular quarter in the sense that July and August was stronger. September was a little slacker, and that's where the volume reductions have been concentrated in September and also in our sales and our activity. Can you just repeat the second part of that question? Can you give us a specific reason for performance in NAFTA countries? Well, NAFTA is the only region which in this quarter, just by a few decimal points, hasn't shown an improvement in comparison to last year. It is coming to us from the U.S. and from a series of operational matters, which were having a couple of difficulties with a couple of factories that we have in the U.S. It's not structural. It's just circumstantial. But we're just talking about a few decimal points. We're not talking here -- let's not blur some great results that improved a great deal in virtually all our geographies, just these couple of decimal points, which has happened in those geographies. We have actually larger margins. You're outperforming markets. Why don't you increase your out performance guidance for 2021 and for the future? Ah, you're never happy, you're insatiable. If you may remember, in the second quarter, we already said that we were many clouds on the short-term horizon. We had the issue of the pandemic, the problem of semiconductors that we weren't sure about what was going to happen, the logistical problems, supply chains. So we still prefer to be cautious even with the excellent results that we gave in the first quarter. So we didn't want to upgrade our guidance at all. And in fact, what we thought is actually happening. We thought that it was going to be a bad setup in the second half of this year. And so we can actually confirm our 2021 guidance. So why don't we upgrade our guidance, having seen what we've done in the last 9 months? Because it doesn't make sense. We want to make sure that we can meet the guidance we put out there. Just if you do a mathematical ratio, if we did in the fourth quarter what we'd already forecast, if we do in the fourth quarter 10%, 11%, which is what we had in our guidance, then we don't think there's any need to actually update our guidance figures. Can you give us a little bit more figures of the impact of energy, logistics, costs and the pass-through of your main raw materials? I think I actually spoke to you about this issue when I was giving my talk, but I'll go back over it again. If we're talking about raw materials, we've got pass-through clauses, which avoid that we are harmed when raw material prices go up, as they're doing now. Energy, we've quantified. As I said earlier, we're not one of the industries that are considered as major energy consumers. These industries are those that have double-digit regard to the sales in the case of energy costs. In our case, that's not true. It's around between 3% and 4% of our energy cost service sales. So energy price, of course, has an impact on our balance sheet, but it's not very uniform throughout. We've got some divisions that are far more impacted because they use more energy, for example, aluminum injection or foundry work and others such as plastic or even roofs. And as for logistics and interruptions in supply, with this philosophy that our suppliers are mainly local. We've avoided significant disruptions in that sense. So local production for local supply. This idea means that the logistics for our customers hasn't suffered as much as other people. I'm not going to just say that that's not important and everything we're suffering isn't important. But in comparison to other companies, our philosophy of local suppliers helped us a great deal and that has meant we've suffered less impact. A couple of questions about working capital. Why is the factoring lower in this third quarter? And what about costs and working capital and these unexpected, sometimes stoppages, how are you going to manage this in the future? It's going to be complicated, very complicated. I think this is perhaps the most appropriate adjective. I think managing working capital this year has been one of our huge challenges. It really has -- it's probably one of the best ways that CIE is managing things because I think our factories and the management teams and the factories are managing in this very volatile setting in which customers are changing their orders from one day to the next, it is incredible what we're actually achieving. And talking about working capital in general, and just to remind you, I'll talk about factoring shortly. Let's just refresh our memories about what's been going on in 2021. In the first quarter, there was actually investment and there was investment of around just over EUR 40 million. The second quarter in which normally we generate rather than invest working capital. But in the second quarter of 2020, we didn't generate cash flow. There was a small investment of EUR 15 million in the third quarter 16 -- third quarter in which the effort we've made has been tremendous. We haven't invested nor have we generated working capital, but we compensated in our factoring value with this EUR 30 million. What's going to happen in the future in the fourth quarter? We're going to carry on striving to try to recover part of the EUR 60 million of investment that we've seen this year with the goal that we always have every single year, which is that working capital shouldn't be something that has to be invested in a great deal, but we should be able to grow without investing too much in working capital. As for the drop in factoring, which has dropped by almost EUR 30 million in absolute figures. Perhaps absolute figures aren't telling us the whole story, we need to relativize what we're seeing. You know that our factoring policy is to factorize approximately 1/3 of accounts receivable. And I think that, that's around 31%, 32% the previous quarter. And the previous one to that, around 32%. So if we look at that and compare it to sales, and we don't always do that, but you do, the sales of this quarter, ones you can see. And this means that you proportion it out with the sales of each of the other quarters, we're talking around 6.5% to 8% over sales recurringly over the quarter. So yes, it has gone down an absolute value, but our activity has gone down. And if you put that in relative terms, there hasn't been a significant drop. And our policy is still -- it remains the same. Do you think there are more opportunities now when you talk about small players in the market? Yes, we do. This morning, we received a mail from a set of companies that were going bankrupt in Germany. The same goes for -- for us, we also read a report from one of the American consultants that it's been estimated that over 20% of Tier 2 and Tier 3 suppliers in the North American market are actually bankrupt. We've been talking about that for a while now, the perfect storm that we're seeing in our sector, which was already beginning just before the coronavirus, and then came the coronavirus. And there was an increase in energy prices, scarcity of semiconductors, et cetera. So you need to be very, very sound as a company to weather this storm. And unfortunately, it starts out affecting small suppliers, and it's going to affect larger suppliers without forgetting that there's a lot of coverage in this sector because there's a lot of soft loans still out there that haven't been paid back yet. So I think we're going to see an increase in this trend. Does that mean we're going to accelerate what we do? No, no, no. We're still deleveraging. We're concentrating on deleveraging. And I think time is going to go back, but a lot of time before we'll see the sales balance sheet that we want to return. Question about the long term. After this crisis in which OEMs may change this model of just-in-time to just-in-case model, another implications of working capital and in general, that sort of thing. Can you say a few comments about that? Well, yes, I think -- I said this earlier, I think we're in a sector that's going through a transformation. We're in a sector that I believe is going to affect all the links in the supply chain. If we start with our own supply chain and our own suppliers, I think after everything that has happened this year, people are going to sit back and think about something just extreme offshoring of part of the supply chain, the need to bring that back onshore, the philosophy of the local supply and local supplies, which may be a little less optimal from a cost perspective, but actually, in the end, protects you and from logistics disruptions, which has been one of the main problems this year. I think also that, in general, the supply chain, and this is actually in the question itself is going to come back and talk again about just-in-time. I think it was the Japanese who actually were the creators of just-in-time, and I thought about this actually after Fukushima and what happened in 2011 because then they realized that just-in-time plus a little bit more mitigated a risk a lot more than just having just-in-time. But I'm going to carry on when we talk about our supply chain. We've actually just mentioned this. I think in our space, our space when we talk about suppliers, there's going to be a natural selection. There's going to be concentration. There's going to be a fewer suppliers. I think it's smaller suppliers that are affected for us, but larger suppliers will also be affected in the long term. And then our customers, our dear customers with our OEMs are in a record -- absolute profit record. And I think that now they've trialed this honey, they've tasted the honey on the lips, they don't want to leave it to one side. So all these programs, these restructuring programs and cost reduction programs that we carried out during the pandemic is great. What's more, this also has some negative effects on all the R&D that they now need to do for new trends as electrification. Let's be realistic. Any kind of technologies that is being developed won't get to efficiency levels in the short term. But I think their model is going to be to changed completely. They're going to produce and avoid these huge vehicle stocks. They're not going to return to stock levels that existed before, and I think they're going to reduce in this way their working capital, the discount policy. There'll be fewer, lower manufacturing. Online sales, you have -- I mean you may have read this, the number of car sales that are being sold online. While, of course, factors will they be remain active if they carry on producing the saturation levels of OEM factories has never been that good. And now they're working on that. So I think we're going to see a new working model for OEMs. They want to earn money. They are earning money. And I think this is really good for the whole of the supply chain for everybody. If our customers are earning more, they won't be squeezing us so much. And so I think at the end of the day, it's a good question because the sectors going through a huge transformation in the long-term is affecting all the supply chain. Carrying on now with the response about money. Do we have to we go below the twice the EBITDA to debt? Or do you think we'll get back to money in the next 6 months? Too specific because it's a difficult reply. If you want to do a small M&A for a small family company that has joined any kind of market, you probably don't need this huge deleveraging. But if you're talking about an impact operation, yes, it will be. So I just think about the idea. We're not going to talk about 3 months, 6 months. We're not going to talk about specific date. Just think about this idea. We're deleveraging -- we're beginning -- we're just beginning to see the surplus capacity in the sector and how this is going down. So stay calm, carry on. Our time will come. I'm not in a hurry. Another question from in an environment in which there's more people with a greater appetite for the premium market, will that impact CIE? I don't know. A rhetorical question, to be honest. If the end product was more -- for premium products, that is the increase of premium products would go up, that would mean share of the market for premium products will be much larger than it is now. Anything that increases volume, we are happy about, of course. So I just believe that as a hypothetical exercise, just as how hypothetical the question is. What do you think specifically about the fourth quarter in CIE? I think we've already said this a little bit when we spoke about what we think about the IHS estimates. I think the main key for the fourth quarter, this 19 million because that I just think will be produced at 15% up on the third quarter, I think it's a little bit surprising. If we reach that goal, it's going to be a very sound fourth quarter, these 19 million are produced. However, we do run the risk still today of there being not very much visibility in the short term, at least 19 million vehicles that we're talking about are, they have a down review, a downward review and that affects the fourth quarter. So I don't think we should commit to what we think the fourth quarter is going to be, having seen how volatile the third quarter was with volumes dropping by 20% throughout the quarter itself. So let's just keep our eyes to the ground. We'll see what happens. You mentioned something about inventories. Can you say a little bit more and give us some figure of the inventories? Yes, I think we said that inventories are even more tense over this third quarter. There's this trend that was already there, but it's even more so. I'll go back to geographical areas, if anybody is interested in this. We've got Europe with around 50 days of inventory, which is around 10% below its historical levels. NAFTA is around 22 days, which is 60-something percent below its historical level. China, 36 days, that's half of historical stock. India, 15 days, which is almost 80% -- over 80% down on its historical comparison to what you get from the Southeast Asian countries. And Brazil, 17 days, which is once again 63% below. So a driver which actually undoubtedly helps the future evolution of production, that is the restocking driver and a driver which despite the fact that I really don't think we're going to be returning to stock levels that you had in the automotive supply chain of pre-pandemic years. I think that some will be recovered. And this is an important driver for future production. So remember, inventories is also a lever. No further questions. I don't know if Juan is wanting to end because it's his birthday today. So I think it's great to end on that because Juan needs to go and celebrate his birthday. Thank you for listening in, and good luck with this results season. We're at your entire disposal. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]