CT Automotive Group plc (CTA) Earnings Call Transcript & Summary

Good morning, and welcome to the CT Automotive Group plc investor presentation. Throughput this recorded meeting [Operator Instructions] Before we begin, we'd like to submit the following poll. I'd now like to hand over to Simon Phillips CEO. Good morning, sir.

Good morning, everyone, and thank you for joining us today. So I'm Simon Phillips, I am the CEO and Founder of CT Automotive; and with me is Anna Brown, our CFO. So firstly, to give you a little bit of background about the company for those investors that don't already know CT automotive. CT automotives and interior business specializing in kinematic parts, illumination electronics, actuators and decorative finishes. Our product range includes things that you see in the car, like things like air vents, armrest, deployable cup holders, in car mood lighting and paddle finishes. So what you can see from the first slide that is our customer base, and they're well-recognized brands. And the people like Ford, GM, Nissan, Volkswagen, Audi Group, Honda, Tesla [indiscernible] Stellantis. The real we work with a lot of premium brands, people like Bentley and Lamborghini. The business itself can really be sort of characterized by what I would say is high barriers to entry limited competition and high technical expertise. It also has long-term revenue streams and protected margins. So before COVID in the 10 years. [Technical Difficulty]

Simon, sorry, just seem to have lost your audio there, ever so slightly. There we go, you're back now. That's great.

Apologies, everyone. I'm coming from an office in Pune. So the WiFi can be a little bit difficult. So one important thing to understand about the business is our product uniqueness. So our products are unique to each vehicle, and we're the only global supplier that once launched into production, we get revenue streams typically last 6 years, providing the business with excellent visibility into our forward revenue streams. Margins in the business are maintained through open but costings with our customers. Revenue streams come from 2 forms. One [indiscernible] the ED&D contracts for design and development, which include things like tooling, production lines, et cetera. And then thereafter, which is the ongoing production revenue. The split ratio in terms of top line turnover is ED&D production is approximately sort of 1 to 12. In terms of our manufacturing sort of footprint, so we have a global presence, our manufacturing parts are generally located in low-cost regions of the world. So that's regions like China, Mexico and Turkey. We also have distribution centers, those distribution centers in the U.K., the Czech Republic, Spain, Detroit and Tokyo. And the part of the distribution centers is for us to provide just-in-time delivery into our OEM customer base. The nature of the business that we operate in is always to find better cost benefits for the company to become more efficient. And one of the things that we're doing at the moment is administration and design functions to led out of our office in Pune, India, which is where I'm coming to today from and that helps further reduce our fixed cost base. Growth drivers. So growth in the business is driven by our efficiency and innovation, design and production techniques compared to our competitors. Thereby offering low-cost prices and the ability by producing technically advanced products at low cost, gives us the opportunity to grow in the market share of the OEMs that you've already seen. In terms of geographical distribution of the revenue that you see on the top line, so our sales revenue is approximately coming 50% from Europe, 40% from the U.S.A. and 10% from Asia. Another factor that's helping us really in terms of general growth is that most of you guys who are driving cars, you constantly see this increase of the quality of interior content and vehicles. And what we're generally seeing, as platforms change from one model to the next is a general increase in dollar value, let's say, per platform that we operate in. So at this point, what we will do is we'll move on to the investor presentation. I hope that that's given you a bit of background about the business itself. So Anna, if you could take the next slide.

Thank you, Simon. Hello, everyone. I'm Anna Brown. I'm the CFO of CT Automotive. So I'll take you through the financial highlights first. So as you can see, looking at all of our financial metrics, we have improved in 2023 compared to 2022 across all of our metrics. As our markets reopened in 2023, that helped us to grow revenue up by 15% to GBP 143 million in 2023. The gross profit in absolute terms has almost doubled or more than doubled to GBP 30.9 million, and that really was due to benefiting from reopened markets but also stabilizing direct labor and material costs and importantly, our ability to execute margin improvement initiatives, particularly in the second half of 2023. Our underlying EBITDA has also improved from a loss position of GBP 7.1 million to a profit of GBP 16.1 million. Again, benefiting from all the improvements at the gross profit level, but also benefiting from normalized container rates and more stringent discipline around foreign exchange. Our underlying PBT improved to GBP 8.3 million from a loss position of GBP 14.5 million in 2022. Again, benefiting from all the kind of factors which I have already explained at the gross profit and underlying EBITDA level. We had a strong EBITDA conversion rate to cash of 59%. And also, we have successfully reduced our net debt from GBP 12.2 million to GBP 13.8 million at the end of 2023, which benefited from the fundraise, which took place midway through 2023, but also through our ability to generate operating cash in the business. At this point, I will hand over to Simon to cover some operational highlights.

Okay. So take you through some of the operational highlights that we saw in '23. The operations in China did really great following what was a awful situation of enforced lot sales in the previous year. Turkey managed the inflation effectively and Mexico performed as expected startup of what is our new manufacturing plant. We streamlined our operations by closing what was an unprofitable facility in the U.K. A key focus for us for 2023 was the implementation and the execution of course, for automation across our facilities, which significantly enhanced our production efficiency and reduced our costs, as will be seen in the gross profit margin later. Additionally, we expanded our India office, which is quickly becoming, what I would say, is the nerve center for CT Automotive, providing critical support driving our global operations and also reducing the overhead cost of the business. We also relocated some production to Ganzhou from our Shenzhen facility, which gives us a situation where the labor cost more competitive there. But also Ganzhou, we've got higher levels of automation, which resulted in improving our gross margins and driving efficiency as well. Moreover, we launched numerous different platforms and programs throughout '23. I suppose most notably was the 710 forward program out of our Turkey facility, which helped the system driving that revenue higher. The efficiencies achieved in 2023 will annualize into 2024, read the jump-off point of '23. And we are actively working as we speak, to further improve those gross profit margins to yield a better result in '24. At this point, I'll pass you back to Anna so she can take you through the income statement.

Thank you, Simon. So let's take you through some of the key financial performance aspect. So looking at the income statement. As I have already mentioned, the revenue has grown by 15% to GBP 143 million. And as you can see, the growth came both from serial production, which went up to GBP 132 million, but also from tooling, which contributed GBP 11 million in 2023 revenue and that was down to a high number of projects, which were delivered in 2023. So gross profit, as I already mentioned, benefited from normalized market conditions, more stable direct labor and materials, but also the execution of our margin improvement initiatives during the second half of 2023, which means that in absolute terms, gross profit has more than doubled to GBP 230.9 million. Which also resulted in an improvement in our gross profit margin to 21.6% compared to 12% last year. We also successfully reduced our operating expenses. This was down to, first of all, lower container rates, which went down from almost USD 13,000 per container in 2022, down to USD 6,000 in '23. We've also deployed some initiatives in terms of rightsizing our overhead base and also a more stringent discipline around how we manage our foreign exchange exposure, which meant that our underlying EBITDA increased to GBP 16.1 million. Our depreciation and amortization remained at very similar levels to 2022 at GBP 5.3 million. We have incurred GBP 2.4 million of nonrecurring items. And after taking account of all of this, the operating profit settled at GBP 8.4 million in 2023 which is a significant improvement compared to a loss of GBP 16.8 million in 2022. After finance costs of GBP 2.5 million, the profit before tax for the year settled at GBP 5.9 million. And after taking account nonrecurring items, underlying profit before tax resulted in GBP 8.3 million profit compared to GBP 14.5 million loss last year. We would now like to take you through some of the key bridges. First of all, it's revenue bridge, which shows the key building blocks for revenue growth by 15%. So first of all, on tooling division has delivered GBP 3.9 million additional revenue in 2023, and that was down to delivering more tooling projects. We've delivered 15 to projects in 2023 compared to 12% in 2022. And then you can also see that our production facilities in China, Turkey and Mexico have all been growing during 2023 and contributed overall GBP 14.8 million in terms of revenue increase. Looking at specifically at the programs. So 52 programs were recurring. These are those projects which started production before 2022 and they delivered a 9.2% additional revenue in 2023. We've also launched 4 new programs, which started in 2023 and contributed additional GBP 3 million revenue one particular program is worth mentioning, it's quite significant, GBP 6.8 million, we generated additional GBP 6.8 million generated from P33a which is a program for Marelli Nissan which started during 2023. Looking at the gross profit margin bridge. So here are the key components, which show the progression from 12% in gross profit margin in '22, up to 21.6% in 2023. Tooling division has contributed 1.6 percentage points. Material cost savings delivered 2.7 percentage point improvement, and that was down to normalizing material supply, but also the work which we have done to rationalize and restructure our distribution and our supply chain. And in terms of the labor cost savings, these contributed 5.5 percentage points and the key drivers, as we have already mentioned, were normalized labor conditions in 2023 reduced headcount primarily in China, introduction of automation and robotics towards the second half of 2023 and also relocation of some of our production programs from Shenzhen to Ganzhou facility in China, which benefits from lower labor costs. Underlying EBITDA bridge is showing the key building blocks in terms of the improvement of EBITDA from GBP 7.1 million loss in 2023, up to GBP 16.1 million profit. As you can see, in absolute terms, tooling has contributed at the gross profit level, GBP 3.8 million; cereal production 12.2 million. And within that, GBP 6.1 million came from labor cost savings, GBP 3.1 million came from material cost savings and GBP 3 million were contributed from margin on additional sales. We also benefited from lower freight costs, GBP 1.7 million contributed towards the EBITDA improvement as a result of lower freight and also the work which we have done in terms of rationalizing our distribution and supply distribution and logistics chain. We have introduced more stringent controls and discipline around managing our foreign exchange exposure in 2022. We've incurred a foreign exchange loss of GBP 3.8 million. But in 2023, we've managed to contain that volatility and generated a GBP 0.9 million profit, GBP 0.9 million foreign exchange gain and admin headcount cost reduction contributed GBP 0.9 million towards the EBITDA improvement. Looking at net debt, that has significantly improved from GBP 12.2 million at the end of 2022 down to GBP 3.8 million in 2023. The key components were our ability to generate operating cash flow, and that was GBP 8 million. We also spent GBP 3.2 million on CapEx, GBP 5.5 million on repayment of lease liabilities and interest on our working capital facilities and we also benefited from the fund raise, which took place mid-May last year, which contributed GBP 9.1 million net of transaction costs. At this point, I will hand you over back to Simon.

Thanks, Anna. So first of all, let's look over view of our key operations in China. So our operations in China have been a significant contributor to our overall success in 2023. China contributed roughly about GBP 106.7 million to our revenue, and that was really driven by a strong recovery in demand post-COVID. We capitalized post-COVID on enforced lockdowns by ramping up production and improving efficiency, which paid a critical role in the revenue growth that you've seen. The strategic relocation of production to Ganzhou further enhanced our operational efficiencies, contributing significantly to our gross profit margin bridge that Anna showed earlier. Focused on improvements in our ERP system has given us improved efficiency and headcount overhead reductions. Our focus on automation and cost management in China has resulted in a substantial labor cost saving, which again was a key driver to our improved EBITDA. Our operations in China could save thrived really since the recovery of post COVID and that's really sort of showcasing the resilience and the strategic capability of our business within that region. Progress on material improvement our margin improvements. So as you've seen from the EBITDA bridge, we've made substantial progress in our margin improvement initiatives throughout 2023. Automation has been, I would say, the cornerstone of that strategy, a significant lease of enhancing our production efficiency and reducing our labor costs. Strategic relocations such as moving production to Ganzhou further contributed to the cost savings and the operational efficiency. I'd say, a robust cost control measures have driven significant savings in materials and logistics, and that's resulting in a multiple increase in our gross profit margin from 12% to 21.6%. But at this point, I would say it's definitely with noting again that 70% of our PBT was created in the second 6 months of the year. So as you can imagine from that, our pressed profit margin jump off win was at a higher level in the fourth quarter than the average that you saw of 21.6%. These improvements are not just a onetime gain. They set a strong foundation for the continued margin enhancement into 2024 and beyond. So a review of the operations in Turkey and Mexico. Our Turkey operations contributed about GBP 15.6 million in revenue. And despite facing hyperinflation pressure that we saw in '23, our team effectively managed manage the cost and maintain stability. We implemented robust financial controls to mitigate the implication of the impact of hyperinflation, ensuring that our operational -- our operations remains profitable. In Mexico, our post start-up performance has been quite impressive, contributing GBP 9.7 million in revenue. But one thing worth considering in Mexico at the moment, GBP 9.7 million revenue is really just covering our costs. Mexico has been set up to gear up to $30 million or $40 million, which will start to play out in '25. The successful ramp-up of the new programs in Mexico has been a key driver of this performance, highlighting our ability to quickly adapt and optimize new operations in a different location of the world. Both Turkey and Mexico have demonstrated strong operational performances contributing significantly to our overall success in '24. So talking about revenue visibility and our new business pipeline. So we have strong revenue visibility going forward, supported by a solid pipeline of new business opportunities. Our long-term contracts are recurring revenue streams provided by stable foundation for future growth. We are actively pursuing new projects and partnerships, which are expected to drive additional revenue growth in the next -- in the coming few years. Our strategic focus on expanding our customer base and entering new markets will further enhance [Technical Difficulty]

Simon, I do apologize. I think we just had a dip in your connection there we just lost the last few seconds on that.

Okay. Can you hear me again?

Absolutely, sir.

So just going on to the outlook then. So looking ahead, we're very optimistic about the continued growth and success of CT Automotive. I think historically, we've had a very good track record for that, both in terms of growth, margins and profitability sadly disrupted during the COVID period, but we strongly believe we're back on target now. The margin improvement achieved in 2023 will continue to benefit us in '24 with further operational enhancements expected and currently being worked on right now. We are in advanced negotiations for a new debt facility, which will provide us with additional financial flexibility moving into the future. Our focus on innovation and efficiency and expanding our market presence positions us we believe very well for '24 and beyond. So we're confident in our ability to meet market expectations for '24 as we have done it in '23. And we have a positive outlook for '25 and beyond, driven by should the strategic initiatives and strong execution capabilities that you've been able to with us in '23. Just as a sort of final thing to say Anna and I are extremely proud of the team efforts resulting in a 70% PBT generation in the second half of this year post fund rating and our ability to unlock the chance to be able to drive these margins. We've implemented robust systems on future underlying issues and made significant technical accounting adjustments to Mid-cap FX going forward. Our financial bridge highlights key improvements in turnover and EBITDA executed very efficiently by the management team. And just on a last note, I think what we would like to do is we would like to thank our investors for their vote confidence in the fund rate. And our customers for their unwavering support during the COVID period, which clearly was a very historically difficult time for the business. So on this point, I'd like to pass you back so we can start your questions.

Fantastic, Simon. [Operator Instructions] We've received a number of questions, both pre submitted throughout today's presentation. If I may just start off with the first question that we've got here. It reads as follows. New business was obviously strong in 2023. How is the new business pipeline developed in 2024?

So I mean, looking into '24 at the moment. I mean, we have got one of the strongest I say new business pipelines I've been in the period of time that running the business from being a founder. I mean to give you some sort of examples the back end of '24 Q4, we're launching a number of new programs, which include things like Ford Puma and Lincoln Navigator, Ford Explorer, Honda Prologue, Ford Expedition, some additional content [ Duke ] GM, but through the BEV free van that they have, high [ vcode ] they're launching a new range of the trucks that they have done in Spain, and we've picked up additional consent on Rivian 101. So between all of those programs, what it really means is that we're not going to see a huge amount of revenue coming in '24, but going into '25 year versus in a very strong position.

Fantastic. Next question we've got here. When you win a new program for a car manufacturer, how long does the work typically last for?