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

Welcome for the conference call for the third results 2024 of CIE Automotive. [Operator Instructions] Thank you for waiting. Good afternoon. Welcome to the conference call on the results for the third quarter. Lorea Aristizábal, Director for Corporate Development is with us. [Operator Instructions] Now I'll hand over to Lorea. Go ahead, please.

Good afternoon, everyone, and welcome to the conference call on the results of the third quarter, and we can begin by reviewing the market situation, a situation which, again, this quarter has not been at all homogeneous, with markets like the Mexican, Indian and Brazilian market with a much better trend than the average and markets like the European, U.S. or Chinese markets evolving more in line with or even worse than the average. Let's start with Europe which is the geography with the worst performance with a drop of 7% in the third quarter and 5% in the first 9 months of the year. [indiscernible] by a context of inventory normalization and deciding this by the consumer regarding which vehicle to buy, lack of incentives, et cetera. Moreover, internal uncertainty about import regulations and the new tariff measures for Chinese vehicles worsened the already complicated market of electric vehicles in Europe and have slowed down the growth of the segment. According to ACEA data, the penetration of electric vehicles in Europe dropped to 21% during this third quarter and 20% during the first 9 months of the year, below, in any case, the 24% penetration recorded in 2023. A reduction that suggests that the current measures are not working. The fourth quarter doesn't seem any better with an expected decline of 11%, which would represent a drop of 7% in Europe for the year overall. Moving on to North America, a drop of 5% in vehicle production during this third quarter with very uneven behaviors between our geographies. On the one hand, Mexico is standing out because of its growth and the United States because of its decline. The Mexican market continues to show a very positive trend with a growth of 7% in the quarter and 6% in the first 9 months of the year. A growth driven by the increase in vehicle production, both for the local market as well as for exports. As a figure, vehicle exports have grown by 7% year-on-year during the first 9 months of the year, which reflects the growing importance of Mexico as a production hub. On the other hand, the United States suffered a [indiscernible] of 5% in its production in the quarter and 1% during the first 9 months of the year. Affected to a large extent by the destocking initiatives at Stellantis and as part of the inventory reduction strategy, Stellantis has reduced its production by more than 100,000 units in this third quarter in comparison with the third quarter of 2023. Added to this is the political uncertainty around the presidential election next November and this has curved investment and discretionary consumption decisions in the sector. For the [cross] sector, a drop of 3% is expected in North America, due in part to the continuation of the Stellantis destocking strategy, Hurricane Helene which has also affected production in the month of October, and all this would represent a moderate drop of 1% for the year. We switched continents to talk about China, a market where in spite of the significant subsidies for vehicle scrapping which offer up to EUR 2,600 for electric vehicles and EUR 1,950 for internal combustion engines, neither sales nor productions are bouncing back. Production has fallen by 3% in this third quarter, although in the cumulative total until September, it's still positive with a growth of 2%. The effort of many OEMs to maintain the inventories under control after months of very high inventories and this explains to a large extent the production trends during this third quarter. In fact, at the closing of September, inventories in the Chinese markets are below the so-called warning level of 1.5 months and are currently at approximately 1.3 months. That is somewhat below 40 days. Again, this quarter, we have to highlight the trend of the electric vehicle in the Chinese market, which has surpassed the historic figure of 1 million electric vehicles sold both in the month of August and September. A pool of 1% is expected in vehicle production in the fourth quarter. But at the same time, is the order that is expected to be the strongest in the year with almost 9 million vehicles produced. This would imply a growth of 1% for the year overall. We continue with India, a market in which passenger vehicle production has remained steady during this third quarter, but has grown 4.5% during the first 9 months of the year. This stability comes after several quarters of continuous growth in a context of slight overstocking before the Diwali festivities. However, other segments have shown diverse behaviors. On the one hand, 2-wheeler production, motorbikes, which represent approximately 25% of our sales in India and which grew by 13% in this quarter, driven by the strong rural demand and also by growth in urban areas. The Truck segment, however, fell by [indiscernible], and Tractors recorded a growth of 3%. In the short and long term, the prospects for the automotive sector in India remain very positive in the fourth quarter. It is expected that the Passenger Vehicle segment will grow by 1% and reach 4% for the whole year. And also, if we extrapolate the historical trends of the festive temporary Diwali, if the sales pattern remains the same as today, the year-on-year growth during this year's festivity period would be a 10% growth in the motorized sector and 4% for tractors, which is very positive, consolidating India as a production and export hub and strengthening the growth expectations in all segments. Finally, the market, which has been clearly better than the average Brazil market which has seen a growth during this third quarter of 17% and 5% during the first 9 months of the year. A very significant recovery in this [indiscernible] driven by factors that have hampered the Brazilian automotive market during the first half of the year and which in this period have had a better trend. On the one hand, a boost in internal demand, vehicle sales in Brazil, which have grown by 11% in the quarter reaching a total of 670,000 units sold and an upturn which has been driven to a large extent by the good performance of the market in the month of July, recording record sales of 230,000 units. On the other hand, growth in exports. Brazilian exports have shown a considerable growth during this third quarter with 150,000 vehicles exported which represents an increase of 30% compared to the same period last year and 45% more than during the second quarter of this year. All this in the context of an improvement in access to lending in a country where over 50% of automobile purchases are financed, the drop in interest rates from over 13% in September 2023 to the current 10.75% has been key. As a figure in 2024, the demand for financing for the purchasing of passenger vehicles has increased by 15% compared to last year, with a total of 1.5 million vehicles financed up to the month of August which represents the highest financing level since the end of the decade. To finish with Brazil, 2024 is expected to show a growth of 5% during the fourth quarter, consolidating an annual increase of 5%. We closed the capital -- markets referring to the global market, where vehicle production fell by 4.6% in the quarter and 1.6% in the first 9 months of the year. A fall is expected of 4% in the fourth quarter. A fourth quarter with 23.3 million vehicles produced. And with that drop of 4% in spite of being the quarter with the highest growth in the year, thanks to the drive in India -- in China, sorry. This would represent a fall of 2% overall for the year with very different dynamics in different markets, as we've seen. Let's focus on CIE. In a quarter where the turnover at a constant exchange rate rose by almost 2% which represents a very significant outperformance of around 6 points in which North America and India, the geographies that have accelerated their outperformance in growth compared to previous quarters, while Brazil and Europe remain at very high outperformance levels. And China continues with its underperformance trend in market in Gulf by a fierce price war. During the first 9 months of the year, sales at the constant exchange rate have grown by more than 2%. This represents an outperformance of 4 points, distributed in practically all geographies and which is recurrent over time. If we look at the main magnitude in the income statement, the main headline this quarter refers to the significant improvements in EBITDA and EBIT, which have grown, respectively, 2% and 3% up to margins of 18.6% and 13.8%. We're talking about a significant expansion in the operating margins on a consolidated level in a quarter where there is a special contribution to that improvement from Brazil, Mexico and India. If instead of the quarter, we talk about the first 9 months year, we could summarize this in 3 headlines but cover the excellent performance achieved. An increase in sales of EUR 38 million which translates into an increase of more than EUR 20 million in EBIT, operating margins in the various geographies with very little dispersion between them versus the consolidated operating margins, which improves their quality with no geography lagging behind the rest and an increase of 2% in an accumulated net profit, which for a comparable perimeter without bearing in mind the activities that were discontinued during the first 9 months in 2023 represents an increase in net profits of more than 6%. If we talk about cash flow and the evolutions of the net financial debt, the keys to this quarter could be summarized under the following points. A high EBIT to operating cash conversion rates close to 66%, a growth in operating cash flow by more than 3% compared to the same quarter the previous year. A close and optimal working capital management, an element that at times has consumed cash during the third quarter, but we have managed to keep it at practically neutral levels. CapEx which is somewhat higher than in other quarters has occurred in the second quarter of this year and has occurred because of the impact of the new plant we're building in the north of Mexico. A growth CapEx that is going to play a very relevant role in the future in providing sales and results and the growth CapEx that we continue to concentrate is strong growth markets such as the already mentioned market of Mexico, Brazil and India. The fourth or fifth point, rather, the final dividend for 2023 are paid out in third quarter to EUR 54 million and which implies having distributed more than 3/4 of the quarter's cash flow. But even with the dividend, the increase in financial expenses or the increase in CapEx, we have deleveraged our balance sheet by EUR 15 million in the third quarter, leaving the net financial debt barely EUR 1.06 billion, with which our leveraging ratio continues to be reduced one further quarter and is left at only 1.43x net financial debt over EBITDA, a historically low leveraging ratio at CIE which is way beyond our comfort zone of 2x and enables us to comfortably cope with future investments in cooperative operations in line with the strategic plan. And we come almost to the end of the conference call to briefly comment on our expectations. If we talk about the fourth quarter, it's important to remember that it is a quarter that is positionally volatile, and we should always be especially prudent since our customers adjust the number of vacation [reach] or the number of plant shutdown at the last minute based on how the year has gone and based on their own interest. And this fourth quarter of 2024 seems to present itself with special uncertainty, which has been reflected in the various profit warnings you've seen published by manufacturers from the sector in recent weeks. In any case, the snapshot for 2024 at CIE is going to be that of another excellent year where, as we had already mentioned, you're going to see sales and market share growth, you're going to see an expansion in margins and results, important cash flow generation and a significant or very significant deleveraging. And of course, based on that excellent 2024, we're going to see, we again reconfirm today our commitments for 2025. And with this, we come to the end and move on to the questions. So thank you very much.

Your first question related to the sales is the increase in combustion engine vehicle parts in India, is this also happening in other markets?

Slight technical problem, sorry. I think I've given a figure that says that the penetration of electric vehicles has fallen in Europe. And I've mentioned how in 2023, Europe had an electric vehicle penetration of 24% for the whole year, which grew over the quarters. and which exceeded 24% in the final quarter of 2023. And yet in the year 2024, we've seen a drop. So with the exception of China where there is an increase in production and sales of electric vehicles and I mentioned that they've exceeded for 2 months 1 million electrified vehicles sold in the market, in the rest of the geographies, it's true that we haven't seen major electrification data and we have seen better figures for internal combust engines.

A question on the evolution in margins. Mainly the improvement in Brazil, whether there are any nonrecurrent issues and the slowdown of improvements in China and the improvement in North America, by geographies can we review those variations in the quarter?

There's nothing unusual, nothing extraordinary. When we're at such high margins as this, we've seen it before, little ups and downs in specific quarter don't mean anything. I think that we have to look at the trends. For example, North America, well, what we've seen is a Mexico where our aluminum plants are onboarding more added value products. Therefore, the product mix is better. We're seeing a Brazil where we have the contribution from [indiscernible] which we integrated several quarters ago, which continues to provide improvements and good news. So I think that we're talking about slight ups and downs. But I think the whole thing is the initial message in my message. There's nothing extraordinary. There's nothing that's nonrecurrent. The global effect is recurrent a point here or point there. If you've seen the conference call for CIE India, we're still committed to the margins that we've seen again this quarter and which we agreed to have in the future. So we're very pleased about the contribution of the different geographic areas that drive the CIE global results.

And related to margins, there's a question about whether we see a floor in the drop in sales in China and whether we are considering the need to implement a more profound restructuring measures in Europe?

If we see a floor in China, I think this is a question that we ought to pass on to our Western customers if they've reached their floor and I think they're taking all the measures they can to bring that floor closer. We've seen Volkswagen fighting with new models, creating a new R&D center in China. I think that Western customers are fighting to bring that floor closer. And their floor is closer, so is ours because the underperformance we have in the Chinese market has to do with our customer mix. What was the other question regarding Europe, sorry?

Whether we see the need to implement more profound restructuring measures?

I think we have to ask the suppliers that are losing market share, the suppliers that are facing commercial success problems in Europe. I don't think it's our situation. Our situation is again in market share in Europe or draft of order in a context of an extremely complicated Europe with a lot of available capacity. And as we've said during many quarters, that market shares are being concentrated. We're one of those players and therefore, I think they're talking about major restructuring as we've seen announced doesn't make any sense in our case.

Related to Volkswagen, a couple of things. How the possible shutdown of capacities can affect us and the strike expected in Europe?

Well, it's true that this week, we keep hearing news about Volkswagen. Yesterday, there was a meeting between the unions and the Works Council and the company. The employees of the Works Council explained the measures that Volkswagen has said that they want to close 3 of the 10 plants as in Germany, they spoke about tens of thousands of jobs that are going to be cut back, and they spoke about cutting back wages by 10% for employees in Germany with a 0 increase in years '25 and '26. It sounds like radical measures. They can contextualize a little, Volkswagen contextualized it. They said that the German and Volkswagen plants have a much higher cost than the rivals, than the competition and the reaction from the Volkswagen unions has been radical. They've given them 2 days, you have 48 hours to withdraw this or we will go on strike. I think we'll probably see strikes. We have to wait tomorrow, Wednesday, they have the second round of talks. After those 48 hours, they have the second round of discussions. And I'm sure that in such a complicated context, the politicians will get involved, et cetera. It seems that Volkswagen is starting with very hard negotiations and probably end up in an intermediate scenario. But this just reflects a situation that is really complicated and which will probably end up with part of this becoming a reality. And that's not to get one thing. Germany produced 6 million vehicles and today, they're producing 4 million. This has an impact on Volkswagen and it makes a certain common sense to shut down part of the surplus capacity. We can add in the effect on us of the total of CIE sales of approximately EUR 4 billion, barely 1% goes to Volkswagen plants in Germany. And if we annualize the figure, so an impact of a 1-week strike, I think we're not talking about a significant impact. But in any case, if it happens, we'll monitor it, and we'll tell you about it.

And the profit warnings in the sector in more general terms, how do they affect you?

Well, it's true, we've had a month of September and October that's been nonstock. We had the first one at the beginning of September, BMW, then Mercedes, then Volkswagen, Stellantis. And yesterday to go no further, we had Ford. I think that all the profit warnings that we've seen have a sequence. On the one hand, they all share in common that they will refer to macroeconomic issues to a situation of a deterioration in the macro economy, et cetera. Secondly, they have in common that several of them refer specifically to the negative impact they're having in China, BMW, Mercedes, Volkswagen. We're talking about manufacturers that have a tremendously important impact. From the results and sales in China, we are seeing a BMW with discounts of more than 30% in the vehicles in China, Audi with 20%, a situation that's really complicated to them. And the second point, apart from the macro economy is those affected by the Chinese market. And thirdly, in most profit warnings, there's a specific issue that affects each of the manufacturers. In the case of BMW, for example, it was the recall associated to Continental and the ride system. In the case of Volkswagen, they talk about some write-offs, also in the case of Mercedes. Ford spoke yesterday about the impact of the hurricanes. They all have their specificity. Point one, common to all of the macro; point two, common to some in China and thirdly, specific points that affect each of them. But I don't want to forget that there are as many or more OEMs that haven't given profit warnings and they have the same macroeconomic situation and some have exposure to China. And I've heard comments from some automotive analysts that have said something that I think is very right. Apart from all the elements that obviously have an impact on everyone, part of these profit warnings have a context and a framework that has to do with the buffer with which each company budgets and the buffer with which each company gives its guidance to the market. If you give a guidance to the market for a budget, we assume there will be kind of brilliant and sun is going to shine every day. Well, probably something will go wrong, and you'll have to revise it. Well, if you come out with a certain margin in your guidance, you're ready for negative things to happen. So the commercial diversification of CIE protects us from this. And again, I insist that part of it is as it is and part of it has to do with how they each handle their guidance and their communication to the market.

A question as to whether we're seeing any speed up in the decisions of the Chinese OEMs to enter other markets, are their decisions speeding up?

No, on the one hand, we have the European market where they were all going to disembark and all of a sudden, there's little news because of the tariffs. I think the only 2 projects that continue with a certain delay are BYD in Hungary and Chery in Barcelona, which has been delayed a year. It's true that perhaps in other geographies there's still news, but there's nothing concrete in all of them. As far as I know, we have BYD in Turkey with the plant in Turkey. We have conversations with Chinese OEMs in Mexico, not to use us a back door to the U.S. market, which is [indiscernible] is every day, but with the intention of serving the growing internal demand in Mexico. We have Brazil, where we have a little bit of everything. But I think that there are several geographies like Brazil and Europe and the U.S., obviously, that are reacting with tariff issues. And until the tariffs are clarified, and the sustainability of those tax barriers is made evident, some investments will be left in limbo and we'll have to wait and see. But we shouldn't forget that Chinese OEMs are reporting quarterly results where we only know one Chinese OEM BYD that is showing a profit. So running at a loss and investing a great deal abroad is not an easy combination.

There's a question now on India. How do we plan to tackle the loss of market share in India we've seen in recent years, perhaps after 7 years without M&A?

Surprised by the question because in India, as far as I know, both compared with the passenger market and with our mix there and that we have 50% of our Passenger Vehicle sales, but the other 50% is related to other segments such as motorbikes, tractors and trucks. And the figures I have in my head don't show a loss in market share at all. There is an outperformance, and you have it in the presentation for this quarter and also previous quarters, but it's over 4% every quarter this year. So I don't quite get the question. But in any case, M&A in India, without a doubt, it's an important strategic option. It's one of our strategic priorities. We're trying -- we're having conversations in India as we are in other parts of the world, and we have a lot of open M&A projects also in India. And without a doubt, a market with one of the biggest growth rates we're going to see in the coming years is very attractive. So we're definitely trying.

And we are asked specifically about India again. The loop systems in India. Why doesn't it come under the umbrella of CIE India?