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

Welcome to the earnings release of Q1 of the automotive Today, we have Lorea Aristizábal who is Director for Corporate Development. [Operator Instructions] And now I'm going to give the floor to Lorea. So Lorea, please go ahead.

Thank you very much, Juan. Good afternoon, everybody, and welcome once again to the earnings release of the first quarter. And these results that our CEO, Jesus Maria Herrera, has explained in detail today during the AGM, during a presentation that is available on our website. It's at your entire disposal there. So therefore, in this conference, the only thing we're going to be doing is reviewing that presentation and above all, we'll be addressing your questions. So let's start off by talking about the headline that Jesus Maria gave us this morning, that is that Q1 has been summarized in 2 words, a historical record. And we're talking about a complex first quarter with variables that have had an impact on production in all geographies and throughout the entire trimester, throughout the entire quarter like the scarcity of semiconductors and other that have had an impact on specific geographies, in particular in the month of March as occurs in Europe with the invasion of Ukraine or China with COVID. But apart from other cost variables, such as European energy inflation, that come from 2021 and which have continued very present in this first quarter and affecting the operating margins of some of our plants. But let's look into the details. Let's kick off with Brazil, the Brazilian market that started off strongly affected by COVID. And this meant that the production activities dropped and so did the sales of vehicles. And this situation has improved during the quarter which has only been 1 million vehicles produced. In other words, 18% less compared to last year, which means that Q1 is going to be the weakest quarter of the year, which according to the current estimates, will grow in Brazil up to 10% to reach 2.3 million vehicles. a context in which we have managed an outperformance of 26 points with the growth in sales at a constant rate of exchange of more than 7%. Let's move on now to North America. The North American market that, although it has dropped to 2% in the quarter, is one of the strongest markets we have today with Mexico that has been one of the very few countries where the production has increased in Q1 and the United States where we can still see that there are record prices for vehicles. A market with very good growth prospects of plus 13% for the year 2022, up to nearly 15 million vehicles, which is explained by the historically low levels of inventories. We only have something like 25 days. The context in which we have achieved an outperformance of 19 points with the growth of sales at a constant rate of exchange of nearly 18%. But let's move on to Europe. The market that unfortunately has focused the attention in Q1 due to the invasion of Ukraine. Productions that have fallen 19% compared to Q1 of 2021 and now stands at 3.8 million vehicles. And there have been the following reasons to explain this. Firstly, the reduced industrial activities, mainly during the month of January. Secondly, because there's a persistent scarcity of semiconductors. Thirdly, because there have been less vehicles produced in Russia because of the lack of imported components in the context of the sanctions that have been imposed. Four, there have been lower levels of production in other European markets due to supply problems related to Ukraine and Russia and especially in relation to the supply of cabling. The current estimates in Europe give us a scenario for Q2 and Q3 with similar volumes to those reported in Q1 and Q4, that will be slightly better, which means that the European market would grow 3% to reach 16 million vehicles. And these estimates take into account a certain amount of reactivation of production in Russia over the next few months based on the self-supply of components and chain of supply for cables that will be completely normal, thanks to the rapid strategic relocation movements carried out by the European OEMs. But any projection nowadays is related to uncertainty associated with the war in Ukraine, its duration, its intensity, its extension and its repercussions. In the meantime, and in this context, and during this first quarter, we have achieved an outperformance of 26 points in Europe with a growth in sales at a constant rate of exchange of nearly 7%. Let's move on to the market in India. The Indian market has recovered pre-COVID levels in 2021. And in Q1, it has continued with a good evolution with a slight slump of 2% compared to the previous year and especially focused on the month of March. And behind this positive evolution, we have the fact that Indian citizens prefer private vehicles instead of using public transport after the pandemic. And there's also a very significant demand that has come over the last 2 years, which means that we expect India to grow by 8% in 2022, all the way up to 4.5 million vehicles. Although India is also suffering from the impact produced by the scarcity of chips. And the strong demand combined with our position contrast what I just said. And that means that we are still beating the market. And in the first quarter, we have achieved an outperformance of 17 points with the growth of sales at a constant rate of exchange of 15%. Lastly, China that has been present in the daily headlines in recent weeks because of the onset of the Omicron variant in the country because of the zero COVID policy of the government that has brought about strict lockdowns in several cities and the closing down of plants. And with strong months like January and February, the fact that the most significant lockdowns started -- have started in March and that people are only allowed to work partially under conditions of an operational bubble, this is what explains that vehicle productions have not been so hit or hit so hard in Q1, and that's why we've seen plus 6%, exceeding 6 medium vehicles. Although it is expected that there will be a greater impact of this lockdown in Q2, and it's expected to be the worst quarter in the year in China with 2022, that would be completely flat compared to the previous year. Although we must remember that in 2021, China was already at pre-COVID levels. And in this context, our sales at a constant rate of exchange have dropped by 22%. And this is the result, on the one hand, of our major exposure to areas of lockdown like Changchun or Shanghai. And on the other hand, because there's a growing market share of the Chinese OEMs vis-a-vis the Western OEMs, and we have much greater exposure to them. And this means that we have had a very significant loss of market share. So all of the above means that the global market is shrinking, we have minus 4.5% in Q1 with different realities between markets as we've already seen versus CIE that has grown 6.5% at the quality rate of exchange, 11 points more than the market in a trend that has already been consolidated in these last few quarters and in practically all of our geographies. And if we were to analyze the geographic explosion of CIE and if we consider what each market represents for us, the drop in our market has been nearly 10%, which means that we have a real outperformance of 16 points. So let's move on now to the financial magnitudes. And as was stressed by Jesus Maria this morning and in an inflation environment like what we are facing now, it makes more sense to analyze the evolution of results in terms of absolute values and not in terms of percentages and margins. CIE has a turnover of EUR 972 million with an EBITDA of EUR 159 million and EBIT of EUR 118 million and a net profit of EUR 82 million. Each and every one of the magnitude of our operating accounts that I've just pointed out have grown in absolute value compared to Q1 of 2021. And we have obtained the highest quarterly net profit of our history because we've never exceeded EUR 80 million until now. But it's not the figures really. Of course, they are important, but rather it's the results achieved in a very complex context with a decline of nearly 5% in the amount of volume produced and nearly 10% if we consider the CIE market mix and with scenario with cost inflation. And these results show that diversification really works when the circumstances are adverse because this has allowed us to profit from the fact that not all geographies, not all the customers are equally affected by market dysfunctions. And in the meantime, the indebtedness ratios are improving, thanks to our high percentage of conversion of EBITDA into operating cash, 69% in Q1. And in this item, we've also reached a historical record more than EUR 105 million, an operating flow that we've invested in, on the one hand, on recurrent items like the EUR 20 million that have been invested in working capital and EUR 52 million in growth. But the most important thing is that 65% of the operational flow that has been generated has been dedicated to remunerating shareholders with dividend in 2021 of EUR 44 million and EUR 17 million invested within the framework of our share buyback program, a program that we launched towards mid-March because we had a unique opportunity brought about by the strong decline in the price of the share. And even so, as we've seen, it's been an intense cash quarter. We have managed to reduce our indebtedness ratio up to 2.3x the net financial debt stroke EBITDA. And that's all because we are coming to the end of this conference. And I would like to finish with the same message that Jesus Maria was pointing out this morning. We trust because we know that the lines of action defined in the strategic plan for 2025 are absolutely positive. We have operational lines in AIC. And we can see how through these lines of work and help through the firm commitment of all the CIE team, we would achieve the ambitious objectives that have been established by the plan for 2025. So with this now, we can move on to the questions, and thank you very much indeed for your time and for listening to me. Thank you.

Okay. Yes, we have a number of questions here lined up. And let's start off with national guidance 2022, firstly. And then if the guidance for 2025 in terms of growth, are they going to update it at any point in time in view of the strong growth that we have achieved?

Well, let's see, as regard to guidance 2022, which we haven't given, I think that we are all aware of the fact that today, we have too many variables open because they are -- we are continuously revising the volumes of production. And we're not very sure about the effect that is delivery produced by semiconductors in the year. And we also have inflation -- influence on the operating accounts. And we have passed through negotiations up and running with all of our customers and in all geographies. And we also have the repercussions that have not been quantified in terms of the Ukraine war. So it's very difficult to be very clear about the net result of all of these impacts. And in fact, what we are seeing is that many of the players -- that many of the suppliers that gave guidance for the year 2022, well, in recent days, we've seen that they have reduced their revision. We see Conti, Autoliv and Dana. And well, that means that what we understand is that, well, it really doesn't take -- make too much sense to give you the guidance. But in any case, we will be delighted and certainly willing to give you guidance in the shorter and longer term if visibility improves. As regards to guidance for 2025, I'm really surprised to see that we're talking about improving the guidance for 2025, considering the current situation because I believe that the guidance for 2025 in itself is tremendously ambitious. And it was so even before we put into this mix all of the variables we're talking about now because we saw the guidance before we spoke about inflation and the Ukraine war and after the problem we had with the offer of semiconductors. I think things have to be done step by step. Firstly, we have to recover a certain normality. I don't know how to call this, but we have to get back to normal in the sector. It requires a very big commitment on our part. We have to maintain that we are going to fulfill the ambition this guidance for 2025, and we'll see whether this has to be improved or not. But firstly, let's try to look into -- well, let's try to achieve stability in the normalization of the sector. That's the main issue.

Okay. We have several questions here and questions on the pass-through. And I'm trying to group them up a bit.

Yes. try to summarize them, please.

Well, basically, is how are the pass-throughs are operating and the impact that these pass-throughs are going to have on our accounts on sales, turnover margins, et cetera.

Well, if we talk about pass-through and what I think is that you already know, as though there is a variable that is the most important in our operating accounts and in our pass-through, which has to do with raw materials. And as you know, this is something that we have automated in our contract in such a manner that there's an automatic pass-through of raw materials. So that means that, let's say, this is something we should be less concerned about. Although it's true and everybody knows that, and we are very aware of the fact that there are other variables of our accounts that are not indexed in the contracts. However, in the case of certain geographies, and I have to stress this in certain geographies only not in a generalized manner, they are tremendously important as goes with energy in Europe. So we're working on this. We are fighting more in those divisions such as forges or aluminum. We are working much more intensely because what we're trying to do is pass this on to our customers. We have part of it already passed on. And what we're trying to do is, well, we're negotiating with our customers. And what kind of effect -- I think that this is the second part of the question, what kind of effect does this have on our cost this pass-through? Well, I think that there are 2 effects, 2 effects that are mathematically evident. And I'm not going to discover anything new here because on the one hand, we have sales in which there's a repercussion of this pass-through, how much -- well, we were -- what we were saying is that the outperformance in the market has been 11 points. So what we could say is that nearly half of that, we could say that it's 4 or 5 points, half of that could be the pass through. In other words, what pass-through represents in terms of sale and the rest of it is real growth. But if we were to talk about the impact on our accounts, well, we have the mathematical effect of the dilution of the operating margins because of these fictitious sales, or these incremental sales. And in this case, what we're doing, we're talking about between 1 and 2 points of dilution of the operating margins because of the pass-through we've done.

Okay. Well, there's another question. The future prices of energy and what kind of energy hedgings do we have?

Well, okay. Well, yes, Europe is the geography where we have seen that there is a major concentration on this increase in energy prices or just to focus on the European market. For instance, we're talking about EUR 80 or EUR 80-something for gas more than EUR 230 for whatever has to do with electricity. But we understand that future prices will depend on how the situation in the Ukraine evolves. And this is not only what we say because what we -- based on what we see and based on what we have mentioned to our suppliers, we believe that in the future, there's going to be a reduction in 2023, and that there's going to be a sort of normalization in 2024 as regards to energy. But if I talk more about the short term, well, we believe that Q2 in terms of energy is going to be as difficult as Q1. And from then on, we expect there to be a slight decrease in Q3 and Q4. And in Spain, we hope that the government measures will help. So what we believe or what we want to believe is that we are now facing the worst of this cycle. But as I said before, we are negotiating with our customers. And let's say that part of this has already been transferred, but we are trying to transfer most of these costs. We are optimistic with the negotiations. You have to be optimistic, that we still have time left and months left to negotiate and close things. I think the question you were also asking whether we had any hedge if we had any kind of coverage or hedging? No. No, we don't have any hedge. We don't have that because we do spot purchases. We have something pretty small in some geography, but it's practically nothing, not at all significant as regards CIE on a general level.

We have several questions that have to do with the underperformance of China. And what does it do to possible solutions? And if an M&A could be a solution? Are there other technologies? Well, what do you think?

Well, I think that I anticipated the question because I already spoke about part of this in the presentation, and Jesus Maria also pointed this out during the AGM. Because on the one hand, it is true that we have certainly not been favored by the fact that the major areas of lockdown have coincided with those places where we have planted operation. So this -- on the one hand, this has definitely not helped us. And then on the other hand, structurally speaking, I would have to talk about commercial exposure. So what we can see is how the Chinese OEMs are recovering the market share that they've lost in recent years, a market share that they've lost in favor of Chinese OEMs. I have some recent information. I think that is from a couple of months ago, but it's valid. And that is how the Chinese OEMs as regards to private vehicles or passenger vehicles have more than 35% of market share, where before only 2 years ago, they were at 15%. And as regards to the SUV market, which is the majority market, the Chinese OEMs are close to 60% vis-a-vis the Germans, for instance, or the Western countries that hardly have 10% of market share. So this exposure, the exposure that we have to these is not favorable, but be careful. Be careful because we don't really have it very clear in our minds that this is an issue, but this is a problem because you know that what we are very clear about CIE is that there's a reality and there's also a priority that is much more important than others, which has to do with profitability vis-a-vis volume. And we're not pretty clear if we want to become involved in that pricing war, which we can see the local suppliers are involved in when they supply Chinese OEMs. So lots of market share. Well, obviously, this is something that nobody likes. But if it is followed by losses of profitability while gaining market share is -- well, perhaps we are well off as we are, and we won't really mind losing market share but maintain profitability. And as regards lockdowns, I said that this hasn't favored us either, but I'd just like to give you some more info. And in the second week of March, that's when the lockdowns kicked off in Changchun and Guangdong, although these measures were relaxed and then Shanghai started at the end of March, on March 28, and they were totally restrictive with the population. So we're talking about areas where we have plants in operation. And yes, we have felt the impact. It's been very harsh.

Okay. We have another 2 questions that are connected to cash flow. And firstly, factoring of this specific instrument in time and the buyback, do you think that that's going to be expanded share buyback?

Well, factoring, okay. And I suppose that the question has to do with the fact that this quarter, we've seen that we've gone from EUR 300 million to EUR 330 million. So somebody is asking why we've increased this or whatever. Okay. Yes, it's true. There has been an increase in absolute value. And that seems to suggest that we've increased the proportion of factoring in the quarter. But reality shows that relative to the sales -- extrapolated sales of the quarter, you can see that the factoring percentage of sales has even diminished. It has diminished in March 2022 in relation to December 2021 because we have to consider the effect of pass-through on the sales and also on the figure, the factoring. So there has not been a change in the proportion of factoring on the factoring policy, but rather, this is also an effect caused by pass-through in the situation that we are experiencing, but in any case. And generally speaking, I think that I mentioned this at some previous quarter, we're talking about a balance sheet with more than EUR 550 million in assets. So EUR 300 million of factoring doesn't seem to be -- well, that doesn't seem to be a too large proportion. And I think that if we think about recurrences, what we'd have to think that at the current levels and under the current circumstances with the inflation, and we're going to be talking about a recurrent factoring that's of EUR 300 or more than EUR 300 million. I'm not sure if there was a second question in relation to this, yes... Oh, the share buybacks -- sorry, yes. Well, would we consider extending the share buyback? Well, we always anticipate things. I think that right now, we have bought something like 1.5%. And right now, we have on the table, we are considering buying up to 5%, and which, by the way, the prices are exceptionally low. So that means that the EUR 150 million maximum of cash that we're going to use is going to be far too much possibly. And if we're going to increase this -- are we going to increase this figure? Well it all depends. It will depend on the market, if the financial market and if the shares recover. And if we still consider that CIE is the best investment also or not. So first, let's finish here and continue with the rest of it. But conceptually speaking, I have to say that whenever we see that the CIE share is low and there's an investment opportunity, well, without a doubt that we will try to go for it.

So we have another question here on our estimates. In relation to Mexico and China, there's also a certain amount of interest in the prospects for the market and its future trends.

Mexico and China. Well, what do we think about IHS? Well, we've seen some significant corrections that have been made in the last release. And it's true that this correction has been focused on the Chinese market. And this recovery of production that has been lost. I think that we will see it happening during the rest of the year. So what I believe is that we fully agree with IHS by thinking that in the second quarter, we'll have the worst happening, but we believe that things will improve after that. And the other question, if I'm not mistaken, has to do with the Mexican market. I mentioned it was Mexico wasn't more generally speaking. Okay. Well, I'd like to mention Mexico very quickly, and then we'll talk about some general issues. Well, I mentioned that Mexico is one of the very few countries where they have increased the production in Q1 by 3%. And vis-a-vis everybody else with the exception of China, where they've also grown. So we can see that the Mexican market is strong. And not only that, but we also expect this to be a trend that will continue in the next few months. And if we talk about this from a general perspective, this is what [ Juan ] mentioned, if we talk about the global market. At the previous conference 3 months ago or whatever, we spoke about the level of dispersion was in forecast regarding the production figures for this year. And this dispersion has been significantly reduced because I believe that the worst figure, we were using was 3% or 4% in growth and the best figure, well, somebody was using the figure of 10% or 12%. But now we don't have this dispersion because now the highest have reduced their figures. And we have a minimum dispersion relative to the fact that we're talking about 2 to 4 points of growth in the year. So that means that considering what it is we have to do with the prospects we have in mind.

Okay. We are compiling all the questions. We don't want to miss anyone. A couple of questions on emerging markets in Brazil. Is there -- so what's the recurrent margin in Brazil? And then in India, is the fact that they are operating at full capacity, that does it limit our growth possibilities? And does it limit our possibility of getting more market share.?

Well, regarding Brazil, let's say that I'm going to go backwards a bit. And if I'm not mistaken, since the year '19, which is when we had margins of 18% in the year 2020 and with the exception of Q2. We went back to that world of 18%. And in the year 2021, we also seen recurrently different quarters where we had EBITDA of about 18%. And it's true that in this quarter, we are a little bit higher than that. It's 20%. Although we have to bear in mind that Brazil right now is approximately 6% of CIE sales. So we're talking about only EUR 1 million that explains those 2 or 3 points of margins. But if we talk about normalization, we must think about Brazil around 18%, which is what we will try to improve if we possibly can. Let's only hope that it will be 19% instead of 18%, but that's where we have to stand not 20%, which has arrived this quarter. And the other question is India. Okay. Well, I suppose that this has to do with the comment that was made at the Mahindra CIE conference when they published the earnings and when there was a conference with investors and our CEO, Ander Arenaza what he said is that he was asked what kind of capabilities to our plants have, and he said that we were very full. However, somebody will perhaps remember that the CapEx for this year was going to be a normalized CapEx of about 5% or 6% relative to sales. How do both things coincide with our growth? Well, this coincide because you can see this in the annual report of 2021. Because in 2021, significant investments we made in India and lots of CapEx was invested there. So several new plants have been opened. One of them for forgings, another plant for stamping, another plant for aluminium. And these plants are not yet contributing towards our operating accounts. In other words, we're talking about lots of capacity. We're very full, and they're in operation, but we have built capacity that this year, little by little, will be commissioned. So that is the squaring of the circle. Why is it worth growing so much? Because we're talking about full capacity, and we also have free capacity and also because the CapEx there is also going to be normalized.

We don't have any more questions. Okay. Well, wonderfully, that was very well summarized. Well, thank you very much.

Well, thank you all very much for your attention, for your time. And I would like to stress that you go to the website, you have the website at your disposal. And for those of you that didn't see it before this conference, you can see the video of Jesus Maria, Jesus Maria's intervention during the AGM. And there he spoke about 2021, presented the results of 2022, far better than what I've done now. So I would like to invite you to see that on our website. Thank you very much for your time, and we are here for whatever you need us for. Thank you very much. Goodbye, everybody. [Statements in English on this transcript were spoken by an interpreter present on the live call.]