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

Welcome to the conference call on the results of the Second quarter of CIE Automotive. [Operator Instructions]. The presentation will start shortly. Thank you for waiting. Good afternoon, everyone, and welcome to the results preparation for the second quarter 2024 of CIE Automotive. Today, we have Jesus Maria Herrera, CEO; and Lorea Aristizábal, Director for Corporate Development. [Operator Instructions]. And now I'll hand over to Lorea. Go ahead, please.

Hello. Good afternoon, everyone, and welcome back to the conference call and the results for the second quarter. We can start if you agree by reviewing the market situation. In this second quarter, global production has shrunk by 0.5 point compared to the second quarter of 2023 with a clear dispersion between markets with the Mexican and Asian markets that show a strong growth versus markets like the European or the Brazilian markets that have fallen. Let's look at the details. Starting with Europe, in the CIE market with the worst performance in the second quarter with a contraction of 6% that takes the quarter to 4%. And it seems to be confirmed that the stagnated demand has already been covered and that inventories are at normal levels, which does not favor production. The most relevant news in Europe during this second quarter has been the provisional imposition of new import duties additional to the existing 10% to imports of Chinese electric vehicles. Since July 4, electric imported cars have an additional duty of between 17% and 38% according to the OEM involved. This duty is temporary until November when the EU will have to decide whether to make it definitive or not. The imposition of these duties would speed up the productive implementation of the Chinese OEMs in Europe in the midterm as we've seen some of them announced. But in the short term, the penetration rate of electric vehicles in European sales will probably feel the effects even more strongly. And even before these duties during this first half year, we've already seen a slowdown in electrification. According to ACEA datum, the penetration of electric vehicles, both in the first and second quarters has been 19% compared to 22% for the year 2023 or 25% in the fourth quarter of 2023. Another potential effect of these import duties is that of possible reprisals by the Chinese government, something will have to be monitored, and it is expected to have a special impact on German manufacturers. Regarding the future for production in Europe in the short term, we expect to continue to see contractions in the European market since the comparison base for last year's were demanding. And specifically, for the second half of the year, IHS estimates a contraction of 6% versus 4% in this first half. Therefore, 2024 overall would close at minus 5%. We continue with Brazil with a drop of 2% in the quarter, and this has also represented minus 2% in the first half, a drop that has been contextualized among others by these three factors. First of all, the poor performance of export South [ Viovodship ] Poland because the destination markets are importing Chinese cars. In the first six months of the year, 165,300 cars were shipped by the country a drop of 28% compared to the same period last year. It's the worst export situation since 2009, excluding, of course, the pandemic in 2020. Another reason why production has fallen is that Brazil is also importing Chinese cars. In the first half of the year, Brazil registered almost 200,000 vehicles imported models, 38% more than in the same period last year. Imports where the Chinese vehicle represented 78%, almost 5x more than what they represented in the first half of 2023. The third factor, the floods in the south of the company during the month of May. A month had during which production fell 30% compared to the previous year. For the second half of the year, it is expected that there will be an improvement compared to the first half after getting over the dip caused by the floods. And in the midterm due to a more and more loans for vehicle buying. Therefore, it's estimated that there will be a growth of 6% in the second half, what would leave the annual growth at a figure of 2%. In North America, there is a dispersion in our markets in this second quarter with Mexico growing 10%, 5% in the first half and United States growing only 1% in the quarter, 2% in the half year. On the one hand, there's a very different, a very positive performance in the Mexican market. And the month of April, for example, has been the best April in the last seven years in terms of vehicle sales. On the other hand, the U.S. market is still resilient. The slight increase in this market during the second quarter is important for a market that is already mature and the market that has been penalized by the hacking that in June affected over 15,000 dealers and which has caused a disruption in sales of vehicles amounting to some 100,000 units in the second quarter. This has had an impact on the inventories, which have risen from 48 days in March up to 55 days in June, just 13% below normalized levels. For the rest of the year, growth is expected both in Mexico and the United States, with Mexico growing by 3% in the second half and closing the year at 4%. And the United States growing 1% in the second half and closing the year at 2%. The Indian passenger vehicle market has again grown significantly during the second quarter, 4% compared to the second quarter in 2023. With a month of May, which has been a record in vehicle sales. After this first half, strong growth, 7%, the second half of the year is expected to show very similar volumes to the first half, a very positive figure. Although in terms of growth, the second half will show a growth of 1% because of the more demanding comparison base. And this would mean closing the year with plus 4%. But as you know, when we talk about India, it's also important to talk about other segments apart from the passenger vehicle, which we are also exposed to and which have had a very positive development in the second quarter. Two-wheelers, motorbikes 19.6% growth, tractors, plus 1%, trucks, plus 12.5%. Moving on to other Asian market, China where production in the second quarter has also grown significantly, 4% compared to the previous year, leaving the first half at plus 5%. The main reasons for this strong growth can be found in the favorable development of exports, which have grown around 30%. And the new incentive plans implemented during the months of April and May, that include more affordable loans to purchase vehicles and a scrapping program. As we've been seeing, the Chinese market continues to have an intense price war with the first half of the year where it's estimated that prices have been reduced by 20% on average compared to last year. In the electrification area, the first half confirms the dynamism in the demand for electric vehicles with wholesale sales that have reached 4.6 million units in the first half which implies a growth of 31% year-on-year and a penetration of more than 45%, 12 points more than last year. We must also say that at the closing of June 2024, the market share of Chinese local brands amounts to 57% and has increased by 7 points compared to 2023. Looking at the future of this market, we see that the IHS estimate is a 4% shrinkage during the second half of the year. And behind this hypothesis is a demanding comparison base together with the hypothesis of a possible slowdown in exports as a consequence of the import duties implemented in Europe. Bearing in mind this minus 4% in the second half, the year would close practically flat, in line with 2023. Adding all this together and to close the chapter on the markets, the global market has dropped up by 0.5% in the second quarter, which has brought to a drop of 0.2% in the first half, and it is expected to shrink by 3.6% in the second half. This would represent minus 2% year-on-year. Moving on to the CIE results, starting with sales, which at a constant exchange rate reflects a growth of 2.5% in the second quarter and therefore, 3.1% in the first half. This implies an outperformance of 3 points in the second quarter and a half year outperformance of 3.3 points. In view of the historical development of sales and especially in the post pandemic context, we're talking about a structural recurrent outperformance and which is extended to all geographies except for China. Not only sales have grown significantly. So [ hope ] the rest of the lines in our P&L. We've seen how the quarterly EBITDA has reached 18.6%. EBITDA margin over sales, which represents an improvement both compared to the margin for the second quarter of 2023 and a sequential improvement compared to the margin for the first quarter of 2024. We're talking about EUR 190 million in EBITDA with a growth of more than 3% and an EBIT of EUR 142 million with a growth of almost 5%. The figures in [ C ] and themselves are, of course, important. But even more so is their consistency, their solidity, some headlines. Practically, all geographies expand operating margins in the second quarter both compared to 2023 as well as in the sequential comparison. All geographies are in an EBITDA margin range of approximately 18% and 20% without a significant dispersion and the same goes for EBIT. We see a very well-balanced geographic distribution in sales. We've seen a gradual dilution of Europe in favor of American and Asian. A share in sales, which is reflected in a very similar regional geographic EBITDA. Other headlines for the quarter. India exceeding 8% EBITDA margin. China will never focus on profitability for a Europe that is resilient in a very complicated environment. With all this half year, in which the increase in sales has meant an EBIT conversion of 35%. Proof of the improvement in our operating profitability. We also highlight the 3% growth in net income in a demanding interest rate environment, reaching EUR 184 million in the first half, a growth which are on a like-for-like basis, bearing in mind that in the first quarter of 2023, the profits of our German forges was included, would represent almost 10%. Regarding cash flow, during the second quarter, we have continued with high levels of operating cash with an EBITDA conversion rate of 66,%, exceeding once again EUR 120 million in quarterly generation. For the half year, having generated almost EUR 250 million in operating cash, implies a further growth inflow of more than 5% compared to the same period last year and operating cash flow, which continues to grow, which is recurrent and which is in line with our strategic commitment up to 2025. Other elements to be highlighted in the cash flow in the second quarter, stability of the working capital and the factoring used -- an investment in maintenance in line with previous quarters and investment in growth that is slightly higher due basically to the construction of new capacity, payout of dividends and operations with treasury stock. And during the second quarter, there has been a no dividend payout at the parent company payouts that take place in January and July, but the dividend has been paid out to minority shareholders amounting to around [ EUR 40 million ] mainly in India and one of our Chinese subsidiaries. With all this included, almost 2/3 of the cash flow that is being generated in the first half has been dedicated to remunerating the shareholders. And after remunerating the shareholders, we continue to deleverage the company with the debt ratio in June 2024 at 1.45x net financial debt over EBITDA, a level below our usual comfort zone of 2x, which shows our capability to generate and to invest in corporate operations in line with the strategic plan. We're coming close to the end of the conference call talking about the future and repeating our message from the first quarter. In view of the degree of compliance with our strategic objectives at the closing of 2023, the good results obtained in the first half of 2024, and the good prospects for the coming quarters, we reconfirm our commitments for 2025. And now we will open the Q&A where today, we're lucky enough to have our CEO with us, Jesus Maria Herrera. Thank you all very much for your attention.

We'll start with a first question related to our performance. We asked what are the drivers for the outperformance in this second quarter whether it's a pure gain in market share?

Hello. Good afternoon. I'm Maria Herrera. I think it's a trend that we've been seeing some time in our performance because in all the geographic areas where we're present except for China, as mentioned earlier, the outperformance is truly significant. It's something that comes from before, and it's going to continue to be this way in the coming quarters. So let's say that it's a usual thing. You know that this sector is a sector that's consolidated around a few players, let's say, the strongest players technologically and financially and CIE is one of them, one of the most important ones, and that's why naturally, CIE has an increase in market share in the various geographic areas we are present in.

And specifically about China continuing with this question, how long do you think the underperformance can last in this market? And about the margins, how sustainable are the margins reach in this first half of 2024?

Well, the underperformance as said many times, is just the result of the growth in Chinese local customers. It's a growth in local Chinese customers that is based on Chinese suppliers with costs that we're not interested in costs that are not profitable. We've explained the developments, the growth of our Chinese customers but we don't know what the trend is going to continue to be. But it's true that we don't work in that niche. You know that turnover is important for us, but profitability is even more important. And you've seen how in China, with a drop in sales we have been able to improve our margins at applying what we apply in all geographic areas. The CIE management model and culture, and we show this during the COVID year, during the COVID year, we were at home for quite a long time, and we were one of the few companies that had significant profits. I remember properly over EUR 180 million in net profit. In other words, our volume that was dropping significantly, but we are quick enough to be able to adjust to those volumes and obtain very significant profitabilities. I would highlight, apart from China, what was also mentioned earlier, the improvement of margins in all geographic areas we're in. And that's why we have managed to obtain particularly the same profitability in all of them between that 18% and 20% that was mentioned, which is what gives us a wonderful consolidated result of 18.5% in EBITDA and 14% EBIT, which is unique in the whole sector. But again, exclusively because there are no other groups that can be as successful as we are in any part of the world. All our competitors have geographic areas where they suffer. The CIE model is proving that it's successful everywhere where we operate.

A question on what we think the effect of the import duties will be on Chinese electric vehicles in Europe?

Well, this will affect OEM production in the short term or whether we expect the local presence of Chinese OEMs in Europe. Well, we have to say that nobody likes duties, we will trust in a free market but a free market under the same conditions. The social and labor conditions in some parts of the world are not the same as in others. And we don't agree with [playing] about with that. So they obviously have more favorable market conditions. And that's why import duties are set but bearing in mind the history and what happened with Japan, for example, in the end, there will be an agreement. There's always a lot of noise at the beginning and then there's an agreement, a quota share, and we'll continue to work normally, obviously, with more Chinese customers producing in Europe in this space without the [indiscernible]. But those Chinese customers are going to need the suppliers that operate in Europe because the Chinese have already shown. And I mean the Chinese as the competitors of ours that they do a very good job in China, but outside China, they find it very hard to be efficient. So if the Chinese OEMs are set up in Europe, they're going to have to come to us as suppliers for them. So the snapshot wouldn't change too much our thinking in the midterm. And to supplement this, just a footnote we shouldn't think that the only people that import cars from China to Europe are Chinese OEMs. 25% practically of what was imported last year was SAIC, especially with their MG brand, but the next one was Tesla with practically 20% of the imports into Europe made by Tesla, the second European brand, Renault with [indiscernible] BMW. And -- we have to remember that not all the importers are Chinese OEMs. Maybe as many would say, we'll see the implementation of Chinese OEMs or European or Western OEMs that decided to increase their production in the future.

We've seen an increase in CapEx. Now we changed that just completely. We've seen a growth in the CapEx of 6.6% in sales over the guidance, is it necessary to obtain the outperformance you're achieving? Are you going to review the guidance for 2025 because you think there will be a deviation versus the guidance? What are your comments on this deviation in CapEx?

Well, as usual, as CIE, CIE is going to meet all its guidance in 2025, at least or perhaps a little bit sooner. Having said this, what's important is the great commercial success we're having, and especially if we focus on Mexico to produce parts in the north of Mexico with the U.S. as the destination. We've had months of extreme success. We've started with very strong investments in technology that in the midterm are going to give us a sales level that is much higher than considered before.

In any case, from a quantitative point of view, in the strategic plan, we spoke about 5% over sales this year. And this was the case in '21, in '22. In '23, it was over 5% because of the general inflation and the fact that in 2024, there's going to be 1 point extra as we're seeing. This means we're talking about [ EUR 1.4 billion ]. We're talking about peanuts in the overall strategic plan. And this is an answer to the question as to whether we're going to revise let's work out the numbers. It's a pure peanuts.

We move on to a question on the P&L. Other European suppliers keep talking about high labor costs in their quarterly results. And this has an impact on the results, what is CIE seeing in their various markets from the labor point of view?

Well without a doubt, not just in the European market, but in the various markets, the American market has been an example, recently, and the increase in labor costs, this is a reality we face and we can only be more and more efficient. If you analyze CIE, we've had a growth in recent years that's been significant, both in sales and margins, and we work with the same people. And CIE even the fixed cost is no longer fixed. We are working and growing with a smaller headcount. And that's the only way of making our margins grow and continue to consolidate better results each day and each year.

Continuing with the P&L. A couple of questions on net income. I'll start with the first one. If financial expenses due to interest in this first half can be extrapolated to the end of the year. And also we -- what we can expect from the tax point of view in the second half?

Financial expenses this year are going to be very similar in the second half and the first half, and we expect a drop in the next year. So this will help us to increase our net income. And regarding taxes, it's obvious that we have a very high profit level, which means that taxes continue to grow. And that's why 65% EBITDA conversion rate into operating cash has more merit than what we initially expected when we dropped the strategic plan. We spoke about the enormous increase in interest rates that have blown up financial expenses. This is part of the 65% calculation. And net profits are very high. So this has an effect on taxes. But even so, we're achieving one of our main goals in our guidance for 2025.

And another question on net income. Is there any concrete explanation with respect to the drop in minority stakeholders this quarter?

If you're comparing it with the first half of 2023, I think there were EUR 12 million in the first half, another EUR 12 million in the second half. But you have to remember that this included German forges which in the first half had a number of positive one-offs. Like the insurance [ boost ] of the floods or the energy subsidy in Germany. All this was included in the first half. And since German forges were under the umbrella CIE, India that's we have a somewhat higher minority result in the second half of 2023. If we look at the first half and second half, we're practically at EUR 10 million per quarter, so there's nothing special. Yes, that's the case. The EUR 13 million, that the sale of [indiscernible] represented in the first -- half and that 30-some percent no longer exist this year. And that's why we have to give a lot more merit to the increase in net profit at our company without having that result from the sale of [ EMC ].

Now there's a question. Since we're seeing growth in EBITDA in a complicated market, since it's estimated that the market will improve next year, will there be a greater growth in EBITDA? What do you think about the Bloomberg consensus?