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

Good afternoon, everybody, and welcome to this results presentation. Today, we have Jesús María Herrera, CEO; and Lorea Aristizábal, who is the Director for Corporate Development. [Operator Instructions] And now I'm going to give the floor to Lorea. So please go ahead, Lorea.

Hello. Good afternoon, everybody, and welcome to this Q2 presentation. And I'm going to kick off by reviewing the evolution of the different markets in Q2. And once again, we've seen that there's been an important divergence between geographies and each region has evolved at different speeds and with a completely different dynamic approach. But let's kick off by reviewing Europe, where production has been reduced by 2% during the quarter with drop of more than 1% in the first half of the year. However, sales are still very positive with plus 4% in the quarter and plus 4% in the half year. And this shows that there's a disconnection between demand and levels of production. But most of that disconnection can be explained by the greater penetration of Chinese manufacturers in the European market. In other words, more and more sales are being covered by vehicles imported from China that is imported in a CBU format that is complete vehicles and also imported in the CKD format. And this is setting aside the production that was done in Europe historically. And it's true that some Chinese manufacturers are now considering having local assemblage capabilities, but we're still very far away from locating these supply chains or from making a significant contribution in terms of the European industrial fabric. But it's the context in which we also have a regulatory debate that is becoming increasingly important. In Brussels, they are still negotiating initiatives like the Industrial Accelerator Act that is geared towards achieving a greater localization of our production. And in Brussels, they're also making it possible to extend import tariffs to apply them to hybrid vehicles that are currently only applied to electric vehicles. But there's another relevant aspect of this quarter in Europe has been the growing penetration of electrification that has been boosted by the fact that the price of fuel has gone up because of the conflict in Iran and also because new incentives have been deployed by several European governments and also because there's an offer of product that is more extensive and competitive. So this is why electrified vehicles have now come to the forefront, and they've reached now 30% of sales in the first half of the year compared to 24% in the first half of the year of 2025, in this first half of the year in Europe, where CIE Automotive has grown 14% vis-a-vis a market of minus 1% with an outperformance of more than 15 points with a contribution that is close to 8 points of inorganic growth of Aludec. North America now, we will continue with North America, whereas in Europe, the industry is still dealing with a favorable that is not very favorable because on the one hand, the United States, where production shows that it has become stagnant with a slump of minus 1% in Q2, and it's been practically flat in the cumulative figures of the semester. But compared to Europe sales, they are penalized by a consumer that is under more and more inflationary pressure and also because there's been an increase in the energy costs originated from the conflict in the Middle East and sales have dropped by 3% in the United States. And we also have 2 structural factors that do not help the market either. We have levels of mobilization that are very high, nearly 80% of a very, very mature market and the removal of the $7,500 of incentives for the purchase of electric vehicles. But the positive thing or a positive development was that in June, the Novelis plant opened again in New York after 9 months of no activity. And considering how important this plant is for supplies in North America, the fact that it's been reopened should make it possible to get things back to normal again in the second half of the year. And then we have Mexico, where production has only dropped to 1%. The figures have been flat for the semester, mainly affected by the commercial uncertainty with the United States and also because there's been a weak demand from North America. And there's also regulatory uncertainty in the region that is still pretty significant after the decision that the United States of not renewing the USMCA in its current format. But it is true that the agreement will remain in force until the year 2036. But now we have entered an annual revision process that reduces visibility for manufacturers. And it's this week when people -- North American and Mexican officials were met up in the city of Mexico to address issues that were related to trade connected to the automotive business and tariffs. The Trump administration still defends more strict regional rules and it also wants to maintain certain tariffs even within the framework of a renegotiated agreement, although we'll see what happens as regards to future investment decisions in North America. So in North America has had a decline close to 4%, and the market has dropped by 1% with an underperformance of about 3 points. Now China. China has had a reduction in its production of 3% in the quarter, which means that the accumulated figure is minus 5%, and it's been significantly affected by a very weak first quarter of minus 8%. There are 3 main reasons that explain this. Internal demand, for instance, there's been a very strong contraction because there's been a reduction in sales of 20%, both in Q2 as well as in the first half of the year, an internal demand that is still being adjusted after the strong rates of growth reported in the years after the pandemic. This is a market that has matured, that is becoming increasingly electrified with a record level of penetration of 63% of the sales in the month of June. And well, the second factor is that there's lots of competition arising from the persistent pricing war, even though the Chinese government has tried to moderate that pricing war. And then the third factor is the sustained growth of exports that have been boosted by the combination of a very weak domestic demand and the need to place the production somewhere and also because there are very high levels of capacity that is not being used. So Chinese exports that are growing a lot. For instance, they've reached 5.1 million vehicles in the first half of the year, which is 55% more than the figure reported in the first half of the year 2025. And in June, they reached a historic maximum figure with more than 1 million exports in the month of June. But as you know, our exposure to China is pivoted. It's especially limited to local Chinese manufacturers. However, the market share has grown in a sustained manner until the current figure, which is 70%. And this means that we're going below the market levels, although we have a clear and sustained strategy. In other words, we are not going to sacrifice profitability for volumes. And the outperformance of more than 2 points reported in Q1 responded to the improvement of the competitive position of the Western OEMs, but this has had no continuity in the second quarter, and this has been reflected in an under performance of minus 6 points in the first half of the year. So let's move on to markets that are better. In Brazil, there's been a very positive move as we also had in Q1, there's been a very strong demand and growing production too. It's a very solid market with a growth of sales of 24% in Q2 and with production levels that have grown about half what the sales have about 13%. And we have an accumulated figure of the first half of the year, the same as in Q2. It's sales plus 20% and production plus 10%. There's a divergence between sales and production that respond to those sales that still are playing a significant role in the case of Chinese imported vehicles, brands like BYD or Chery or Great Wall are achieving more and more market share and are doing so very quickly, especially in the cheaper vehicles and in electrified vehicles with very aggressive prices and where the traditional local manufacturers are less competitive. And then we also have the Brazilian production that is being influenced by the weakness of the exports, exports that have grown by more than 20% in the first half of the year. And the main destination for these vehicles is Argentina has also dropped. It's been minus 35% in the exports from Brazil to Argentina. So we're dealing with Argentina, which is the main destination with a very complicated environment and with a decline in sales of vehicles and production in the first half of the year. And we also have the growing presence of Chinese manufacturers in the country. But even so, the production in Brazil has received a structural support, which is a limited rate of motorization of 30%, a solid labor market as well as better funding conditions. So there's been an improvement compared to the first quarter and more than half the vehicles are financed and interest rates have dropped to 14.75% or they've gone from 14.75% to 14.5% in June. We've also seen incentives to the automotive business and Brazil has also implemented a new taxation system to incentivate the purchase of efficient models by reducing what they call the tax on industrialized products. So with this context in mind, we're dealing with Brazil, but in the case of this first half of the year, Brazil has grown by 23% compared to the market growth with 10% with an outperformance of 13 points and a contribution that is very similar in terms of organic and inorganic growth. Let's continue now with India, a market with structural growth and diversified growth. And I'm not talking about passenger vehicles, but I'm also talking about other segments, too, with a production of passenger vehicles in India that is growing at a very high rate -- that is with 16% in Q2 and 14% in the first half of the year, and this has been followed by a very solid growth of sales. But it is true that we do expect that in the next few quarters, we will see a slight reduction of growth as the positive effects of the tax is reduced. And there could also be monsoons, which could possibly be weaker. So therefore, there is a strong Indian market because of structural elements like contained inflation, the launch of new materials, the new export markets, everything helps, of course. And there's a competitive advantage in India that is based on having technology transfer and diversification and which is helping us in such a manner that what we are doing is presenting [indiscernible] that has grown 22% compared to the market with 14% with an outperformance of more than 8 points and an exceptional first half of the year. But globally speaking, in the first half of the year, CIE has grown more than 9% with similar levels of organic and inorganic growth compared to a negative market of minus 1%, which means that we have an outperformance of more than 10 points. But for the year '26, we expect that there will be a reduction in production of minus 2%, which would mean that in the second half of the year, we would have a slump in worldwide production of minus 3%. So these might seem somewhat negative in the short term. But in any case, these prospects will become positive with growth figures of plus 1% and plus 2% in the next few years, a scenario in which there will be a greater stability of more mature markets, and there will also be growth of other markets like India or Brazil, for instance, that will play a much more outstanding role in terms of international production. And this growth of the CIE sales can be transferred to the profit and loss account with Q2 that in absolute terms are very similar to Q1 of the year, more than EUR 1 billion in sales, more than EUR 200 million in EBITDA and an EBITDA margin in excess of 19% and EBIT margin over 14% and a net profit that reaches EUR 95 million, which is nearly 10% over sales. And all of this even in spite of the impact that has been produced by [indiscernible] that is still hurting us with semester which the impact has been nearly EUR 80 million in sales, and this obviously has had a negative impact for our results. And these are very high figures, very exceptional figures that could be seen in the accumulated data over the year with the first half of the year that maintained sales above EUR 2,000 and EBITDA margin above 19.1% with our guidance. In other words, an EBIT margin over and above 14%, like our guidance says, as well as the specific features of each market, we have a profitability that presents a very balanced distribution between geographies, which strengthens or reinforces the quality and the stability of the results of the group. But if we talk about now generation and deleverage, we can see that our cash generation capacity is high and especially recurring because in the first 6 months of the year, [ VM ] has generated EUR 275 million of operating cash flow. That is 71% has to do with the EBITDA conversion above the 65% that can be seen in our guidance and also a generation that is allowing us to fulfill all of our priorities in terms of capital allocation because we're advancing the integration of new companies like the acquisition of Aludec at the beginning of the year. We are also paying our dividend to the shareholders. And in the first half of the year, it's been EUR 70 million that were paid with the dividends. And in the meantime, we are still strongly boosting organic growth for the group with an investment in CapEx of EUR 40 million in the quarter and more than EUR 85 million in the semester. So our net financial debt now stands at EUR 945 million. We have a rate of leverage of 1.19x. That is a historic figure, and it's below 1.26x that was reported 12 months ago. We have a solid cash flow generation, and we have a balance sheet that is becoming increasingly robust, and we're still reinforcing our financial position. So we're going to close by talking about the future, and I'm about to stress what we pointed out in Q1. And that is in view of the excellent results obtained in the second quarter. And based on our forecast for the second half of the year, we have to reaffirm our guidance. And we're now going to move on to the questions. And today, we have our CEO with us. So thank you very much for your attention, and we're now going to move on to the questions. Thank.

Okay. Well, let's divide this into themes or subjects. What are our plans for India? And well, because of the market share in India and the changes in terms of the market share. So what kind of plans do we have to change that approach?

Well, in the information that we've just presented and talking about CIE in India. And as Lorea just pointed out, we have grown by 22% in this first half of the year. The market has grown by 13.6%. So that means that we have an outperformance of 8.9%, but like everybody knows, we are focused much more on profitability instead of on growth. So this is why we have achieved an EBIT of nearly 15%, which is something that doesn't happen all that frequently in the Indian market. But I can state that we are really putting our stakes on India and that we have a number of greenfield projects because we want to carry on growing organically, and we understand that this is the most suitable way of achieving growth, bearing in mind that the valuations of the companies are really very good.

Okay. Well, continuing with outperformance in the market, there's a double question here. And that is what was the general outperformance like in Q3? And could you say something about NAFTA outperformance there, that is North America, please?

Well, as regards to NAFTA, I think that as everybody knows and since the tariffs were implemented by the Trump administration, what we are seeing is that there's been a minor temporary shift of production from Mexico to the United States in the case of certain manufacturers. But in our case, the industrial mix is different in both countries because in the United States, we are mainly present with plastic, with machinings and roofs, whereas in Mexico, we also have aluminum, stamping, forging and painting technologies. And as the comparison is carried out with the global management, this displacement of production that's only a temporary thing penalizes us to a certain extent in relative terms. But according to our forecast and according to what our customers say for the next few months and for the next year, we'll see that there's going to be outperformance there, too. And I would like to stress something that we mentioned previously, and that is, well, we mustn't forget the volatility of the North American market during the negotiation of the USMCA. I think that's something that will become more stable in the next few quarters in the future, and it's going to give us much more visibility. And we have volatility this year because of the uncertainty, and it's not the best context you can have. And also it was a double question, NAFTA and Q2, well, it's been very similar to -- if in the semester in the first half year, it's been 9% for year in growth and minus 1% for the market was 10%. As regards the quarter, it's been something like over 8 and something with growth with the market close to minus 1%. In other words, an outperformance of nearly 9 points, which is very similar.

There's a question on Europe now that the impact that you expect from the reduction in production announced by OEMs and in particular, by Volkswagen.

Well, the truth is you know that we are very diversified with all of our customers, whether they be Tier 1 or OEMs. And the truth is that all of the information that we are currently receiving, well, this is something that we're paying a lot of attention to, but we don't really see any kind of substantial changes. In other words, fear of the first half of the year is going to be very similar to CIE in the second half of the year. And obviously, with the effect caused by the holidays and by December because you know that the second half of the year is always worse than the first half of the year. But in any case, let's say that everything is normal, and we can see that there's also recurrence in what is going on.

Well, perhaps there are a couple of more questions here on Europe. So do you think that what do we expect in Europe in terms of our performance? And what about the future market share in Europe?

Well, you've seen that we have gained market share in the first half. It has been very significant and not only because of Aludec, -- because of the presence of Aludec, which represents 4.8 points, but we've also grown ourselves from an organic perspective, we've grown by 4.5 points and the market has dropped 1. So you can see that we are still growing over and above the market. And in this case, we're talking about 5.5 points. So we have to bear in mind that in this sector, people are suffering a lot. And this means that our customers are trusting any companies that have investment capacity. And this investment capacity that is given to us by our wonderful ratios of financial debt, means that our customers trust us much more. So if the market shrinks a little bit, that doesn't mean that is not going to carry on growing and it's not going to increase its market share either.

And well, just to continue now with Europe. When do you expect that new rates will be applied to hybrid vehicles? And what about local content? Anything to say about that?

Well, let's only hope how we know Brussels is going to do things and how quickly...

Well, it seems that we need to have a crystal ball here if we need that crystal ball. What is true is that in Europe, yes, progress has been made, although we don't really think that there has been a homogeneous European response. So now they're currently working on local content and on measures that have to be implemented to reinforce the European value chain. We think that they're walking down the right path because it's not only about where the vehicles are to be assembled, but rather how much technological and industrial value is created for Europe because having a more local content would be very positive because this is favorable for suppliers that have technological capability and also financial solidity, too. Well, just to say something positive because yesterday, we saw how Geely has come to Spain to set up a joint venture with Ford. They're going to set this joint venture up in Valencia. And I think that this does reinforce Europe. It also reinforces the future of its production. But why? What do I mean? Well, because we know that the European market does have absolute freedom or liberty, but I think the worst news would be to have Chinese manufacturers to come along to add on additional capacity. But I think that this is a very good news because the key word here is efficiency. And it's great to see that they are using the currently available capacity for future local productions. So let's only hope that this kind of approach will be repeated once again in the future and that it will allow us to achieve the localization that our CEO was talking about in terms of production.

So what about the second half of the year? What does it look like?

Well, I think that [ Chris Marek ] has also spoken about -- has already spoken about that, if I'm not mistaken. Well, if you want, I can answer that question again. Well, it's very similar to the first half of the year, and the only difference is the production [indiscernible] because of the summer holidays and because of the month of December.

Okay. Well, more specifically, they're asking here about the possible impact that Iran could have in the second half of the year. So could you please say something about this? I don't know something about the pass-through.

Well, yes, we have seen a certain amount of tension with Iran, especially in the case of certain raw materials, mainly plastic and aluminum. Although it is true that what we have to do is review things with our customers. We have nothing on this in the first half of the year, but this will be covered in the second half of the year. And if this issue of the Iran war continues, yes, there will be problems.

And in fact, just to finish off with this. As the outperformance has been very solid in the first half of the year and compared with the guidance, are we considering an upgrade? Are we considering upgrading this performance?

Well, yes, we want to improve our margins, and we want to have outperformance, and we want to be much better than the guidance internally, too. But let's say that we have to be somewhat objective because we are now living in a market that is dropping. It's more competitive. So let's say that we are managing to forge ahead, thanks to the growth in margins with the very high cash flow generation that we've spoken about before. But the important thing about this first half of the year is that we have integrated Aludec, as you all know. So let's say that the integration represented something like EUR 200 million. And in only 6 months, we have been capable of paying out a dividend. And we've also been able to maintain the same financial debt-EBITDA ratio. And I know of no other companies that can do it in that manner, but you can see how in only 6 months, this ratio between financial debt and EBITDA has not increased even though there was a major disbursement.