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

Ladies and gentlemen. Welcome to the CIE Automotive Q3 results presentation. We have Lorea Aristizábal, Director of Corporate Development with us. [Operator Instructions] I'll now hand over to Lorea. Go ahead, please.

Very good afternoon, everyone, and welcome to the conference call on the results for the third quarter, the third quarter in which we've seen strong growth in all markets compared to the third quarter of last year. Thanks to lower comparison base, the third quarter of 2021 was the most hit by the shortage of semiconductors, a third quarter this year that has had a very complex sale environment in general both from the macroeconomic and sectorial point of view and which has affected some markets more than others. And if you like, we can review them quickly. We start with Europe. And in spite of a 20% growth in this third quarter, Europe here continues to be the market most behind. It has grown in the quarter less than the rest of our market, and has been the only one that has worsened in volume sequentially compared to the 2 previous quarters. However, the current forecast referred to a strong fourth quarter, the strongest in the year, with 4 million vehicles produced, which would take the year 2022 to 15.2 million. And even so, even this with very strong quarter, these levels would represent 2% less than 2021, 6% less than 2020 and almost 30% less compared to the pre-pandemic volumes. From here on, a 2023 is expected with a growth of 7%, up to 16.2 million vehicles, which would simply mean a tie with the year 2020. European growth scenario for the fourth quarter and for 2023, which we consider with a certain amount of portion, since we're facing a very vulnerable market subject to too many uncertainties, energy crisis, shortage of chips, inflation, interest rates, consumer confidence, emission regulations, et cetera. We move on to North America with a growth of 24% in this a little bit lower than market growth, a strong fourth quarter, similar to the third with 3.7 million vehicles, which would take 2022 to 14.5 million, 11% more than last year 2021, but still 11% less compared to the pre-pandemic volumes. A growth that would continue next year with plus 6% for North America to reach 15.4 vehicles produced. One of the main hypothesis behind this forecast is the historically low inventory level that still exists today in the North American market and which should leave production in the coming quarters making North America recover its pre-pandemic level by 2025. In China, a market that last year recovered pre-pandemic levels, and making the comparison with this year, much more demanding. But even so, this quarter, it has grown 31% and 30% sequentially compared to the second quarter of the year in a context where a lost volume is being recovered in the second quarter because of the COVID lockdowns, as you remember. China is also expected to have the strongest quarter of the year in Q4 with 7.4 million vehicles produced, which would take 2022 to 26.4 million, 6% more than 2021 and 7% over pre-pandemic volumes. The current expectation is that China will continue to grow from these levels by 1% in 2023 to reach 26.6 million vehicles offsetting some of the strength of 2022 and gradually reach a historic record of 28 million, when it is expected to exceed in 2025. A very good prospects for this market without significant bottlenecks like other geographies and with specific incentives that have been implemented once again by the Chinese government to revitalize the automotive sector, a critical sector for the country's economy and incentives that seem to be achieving the impact they were looking for. Moving to India, a growth of 33% in the quarter and we have to emphasize the fact that India is a market that last year already reached the pre-COVID levels like China, which underlines even more the extremely strong double-digit growth this year, which has led to a quarterly production record of 1.3 million vehicles. For the fourth quarter, our volume is expected of 1.2 million. This would imply an annual growth of 21%. And reaching the historic figure of 5 million vehicles in India, which put them in fourth position of producing countries worldwide, a fourth position that would be consolidated in 2023 with an expected additional increase of volume of 3%. The combination of a really low car ownership level, a growing middle class, a strong post-pandemic demand and a normalized supply without disruptions in the supply chain make the excellent situation of the Indian market. Finally, Brazil, which has also grown in this third quarter much more than the average, 34%, exceeding 600,000 vehicles, which consolidates several consecutive months of sequential improvements in volume in the country. The fourth quarter is expected to be similar to the third, and we take the Brazil market 2.2 million vehicles 5% than last year although still 20% below the pre-pandemic level. For 2023, a new growth of 5% is expected and a gradual recovery up to 2.8 million vehicles produced, which were the pre-pandemic levels, and it is expected that these levels will be attained in 2026. Well, the global market, the sum of the different snapshots of the various markets we've seen results in the third quarter that so far is the best quarter this year with 21.2 million vehicles produced and a growth of 27%. Even so, it's expected that the last quarter of the year will be even better with 21.6 million vehicles produced but a forecast based on significant sequential improvement, both in Europe and in China, which we will have to monitor. If this is achieved, 2022 would reach 81.8 million vehicles produced, 10% below 2019 and 15% below the peak volumes of 95 million in 2017. And with this backdrop, with this market, we have reported this third quarter, a third quarter where, again, we have exceeded 1 billion in sales for the second consecutive quarter. This has taken us to sales slightly over 3 billion so far. Sales, which in comparison with the market in the first 9 months of the year represents an outperformance of more than 8 points, a quarter where we're growing at double-digit -- high double-digit growth in all our account result lines in an environment that continues to be extremely complicated. A quarter, which is [indiscernible] with EUR 1.056 billion and EUR 171 million, respectively, with an EBITDA and the net income growing by 30%. And accumulated EBITDA in the year of practically EUR 500 million and a net income of EUR 235 million. And we have to highlight what we are achieving. Significantly higher results than the ones we had before COVID when the market hasn't yet recovered these levels. If we talk about the balance sheet and especially about cash flow, which, as you know, is our top priority, it always has been, always will be. Talking about operating cash flow, we have generated EUR 100 million in the quarter, in line with previous quarters, more than EUR 300 million so far this year, which means converting 66% of the EBITDA. If we talk about cash flow, including the growth CapEx and the gross working capital, we have generated EUR 75 million in the quarter and more than EUR 200 million so far this year. We're talking about concerning into free cash flow, approximately 45% of the EBITDA and reducing our debt level to 1.8x net financial debt over EBITDA. But we haven't done it that way. In this context, we have decided to invest the EUR 200 million of free cash flow generated during these first 9 months in corporate operations. The same profile, all of them with a single goal to remunerate the shareholder. We have invested EUR 94 million in dividends, EUR 60 million in buybacks to reduce capital and EUR 57 million in the purchase of MCIE minority stakes taking this debt to 2.1x at -- in other words, our high cash generation level is enabling us, on the one hand, the value of the company by reducing debt from the 2.4x net financial debt EBITDA in December 2021 to the current 2.1x. We're practically in our comfort zone of approximately 2x. And at the same time, this enables us to invest in maximizing shareholder remuneration, the investment at which we believe currently makes sense in the present context. And there's a little more to add. These are the messages, and this is our presentation. I would like to end by saying that the good results in the last few quarters and the favorable prospects for CIE even in this complex environment, enables us to talk about continuing to grow, and it enables us to look at the future with optimism, even if it's with prudent optimism because of the uncertainties today, of course. And now we can move on to the interesting part, if you like, to your questions.

Yes, we have several questions. Let's try to group the subjects together as usual. We'll start with the third quarter. There are 2 specific questions. The sequential drop in margins in Europe when the rest of the areas have improved. And another question is the higher depreciation in NAFTA. Is that due to anything specific?

Margins in traditional Europe, if I'm not mistaken, we're talking about approximately 15% compared to a somewhat higher percentage in the third quarter last year, 16 points up, I think. If we look at it sequentially, I'm at 16, 17, 15, there's a certain drop in margin in the third quarter. Yes, that's normal. I think, it's normal. There's a penalization because we have to remember that this has been the quarter with the highest price we paid so far on average. We paid the average. I'll repeat it again, the highest average energy price so far. So yes, to me, it seems normal to have suffered a little penalization in the Europe margins this quarter. And also bear in mind that Europe, the Europe we report includes most of the -- most energy-intensive division we have, the aluminum injection division and it also increased machining and plastics. In other words, we're talking about energy intensity in those divisions. I think that we need to normalize this. We have to talk about the first 9 months in an extremely complicated market in Europe that's having margins between 15 and 17 in these first 3 quarters, I don't see the problem. What I see is an incredible achievement. The second question was about NAFTA depreciation. Okay. The depreciation issue. Yes, perhaps it's increased slightly. There are a number of issues, such as an increase in activity. You know that we have an important part of our amortization related to activity levels. There's a part of the projects that are being launched, especially in our gold plant in the United States. So you have the initial depreciation of all that without yet having sales and the results. There's a tooling depreciation issue in Mexico. But I wouldn't single that out as important. I think it's an isolated issue, and we've seen depreciation levels. We've seen in the past and we'll see in the future. So going beyond 1 quarter and 1 geography where there's a slight one-off deviation.

The next question is about the 9 months of breakdown of ForEx pass-through and market share gain.

A recurrent question. If I remember correctly, this question was answered by our CEO, Jesus Maria in June. And I think, I remember that at the time, the growth in the first half has been 18%. And we were talking about a ForEx of 6% and dividing the other 2/3 practically between real organic growth and pass-through. If we continue the way of Jesus Maria, I'll answer it the same way. After 9 months, we have a growth of 23%. You've seen in the presentation 7-point-something ForEx, which is approximately 1/3. And the other 2/3, I think, are distributed in real organic growth accumulated over 9 months and a little bit less than 1/3 in the accumulated pass-through in these 9 months.

We are also asked regarding the fourth quarter, opinion on the AIC forecast on that fourth quarter compared to the CIE portfolio.

Well, if we start talking about the fourth quarter and prospects, I would start by saying that the current visibility is always less than we had pre-pandemic before the [ EBIs ] were set by our customers and now our customers are changing with much less notice. And there's no -- not just only complicate our production management but also visibility. I'll say this as a disclaimer. Fourth quarter, I said this earlier, the fourth quarter, according to IHS is going to be the strongest in the year. That is based on 2 major hypotheses that are the special strength of the Chinese market in the fourth quarter, a Chinese market that would be EUR 7.4 million stronger than all the previous quarters. And this is possible, we think, it's feasible, considering the Chinese environment that we can discuss later, if you like. And the other hypothesis is the enormous strength of the European market, which sequentially would go from 3.5 million to 4 million vehicles. I think that this is where we actually have a little bit more caution and prudence, given the low visibility and the great uncertainty in the European market right now. I don't know if there was something else in the question or was it the fourth quarter of IHS versus our portfolio. Our portfolio tells us that we could be talking about a Europe that is coming on strong. But we've also had a slight portfolio services in the last few months. And therefore, I think we have to be prudent. It could be a slight reduction. And I hope that the effects initially forecast will be felt in our portfolio.

And now we're asked about 2023, the IHS estimates that have gone down over time. Do you expect further corrections in Europe, for example, for the OEMs? How do you see the 2023 as seen by IHS?

Well, it's true. IHS has lowered its reviews. And it's true that all the latest reviews have been concentrated in 2 markets. They've been reviewing and dropping market and raising China. But the net at different points in time in different quarters, in different years, has given a net cost negative. And what we're saying about the fourth quarter, EUR 4.5 million was the beginning for Europe, EUR 4 million is the current forecast, EUR 6-point-some million for China and EUR 7 million is the current forecast for China. It's true that we have other kinds of estimates. Fitch, for example, I think this week, they published. And I think, I remember that they spoke about a more negative Europe in the fourth and next year than published than what has been published by IHS. There are differences of opinion, and there isn't a very clear consensus neither regarding the fourth quarter or 2023. And again, basically, it's focused on 2 geographies, China but most of all Europe. And when there's no consensus and difference of opinion, it probably means that we still have to wait for that consensus to reach a middle ground. And I think that we have to wait to move into the quarter to have a better vision, not just of the quarter but of next year. So I think that we have to be cautious, especially about the European market, I would say.

And thinking about CIE and the raw materials that seems dropping, how are those negotiations going with customers? Perhaps raw materials could go down in 2023 and other types of inflation? How are those discussions are going? How do you see things in 2023 at CIE?

Well, something is easier than others in the area of raw materials. There are difficulties, but there are conversations that are ending very successfully because in the end, raw material is a commodity included in -- so let me say that it's the least complicated but -- and then I would talk about 2 energy, especially focused on Europe. Initially, the customers were very negative about accepting the energy pass-through in Europe. But it's true that over the quarters, the negotiations, I would say, ended up fairly reasonably. There's a time when our customers have to make a decision, which is to kill supplier base or accept at least part of that inflation that is affecting that is having such an impact on the results of the suppliers. And I think that they've understood that the long-term survival of the supply chain and their supplier base means accepting a part of that pass-through. So these are conversations that have been more successful with some customers in some geographies and some European countries than others. But we're managing to pass through a good amount. And the third look would be labor, especially in recent quarters, there's been a brutal effect in the United States and is also coming here in 2023 in Europe at a lower level, but it's also coming. And I think that customers there are much more negative about accepting it. And we'll see how conversations develop in the coming months. But of course, we cannot make the future of our results that depend on those negotiations being positive. So we're very focused on action plans at all plants, so that at all of them, we will try to offset all that potential that isn't passed through to customers. So I think that our results approved this today. It proves that for many months, we've been passing through what we can. But productivity, efficiency, expansion, resizing with our own tools where we can in each plant and with its own context that this is what we've been doing and what we're going to continue to do.