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

Welcome to the CT Automotive Interim Results Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Simon Phillips, CEO. Simon, over to you.

Good morning, everybody. Thanks for joining us today. So I'm Simon Phillips. I'm the CEO and Founder of CT Automotive. And with me is Anna Brown, who's our CFO. So for many of you guys joining today, you may not know much about CT Automotive, so what I wanted to do is just give you a little bit of background. So CT Automotive is an interiors business, specializing in kinematic parts, illumination electronics, actuators and decorative finishes. Our product range includes things from air vents to armrest, to deployable cup holders, in-car mood lighting and also panel finishes. The kind of OEMs that we serve, these customers include a lot of the major brands that most of you will know, such as Ford, GM, Nissan, Volkswagen Audi Group, Honda, Tesla, Rivian, Stellantis. And also, we serve many of the premium brands such as Bentley and Lamborghini. The business, you could say, is characterized by high barriers to entry, limited competition, high technical expertise, long-term revenue streams and protected margins. One thing that's worth noting is that in the 10 years prior to COVID, CT Automotive experienced 30% CAGR growth with strong gross margins, profits and cash generation. Our products, they're unique to each vehicle, and we're the only global supplier once launched into production. Revenue streams typically last 6 years, providing excellent visibility into our forward revenue streams. Margins are maintained through what is known in the industry as open book costings with our customers. Revenue streams come from 2 forms. Initially, what is engineering sign and development contracts for design and development of tooling and production lines and then ongoing production revenue. The split ratio between ED&D and production is approximately 1:12 of our turnover. In terms of our global presence, our manufacturing plants are located in China, Mexico and Turkey, all of these countries really being low-cost economies. We have distribution centers in the U.K., Czech Republic, Spain, Detroit and Tokyo for just-in-time delivery into our OEM customers. Cost -- to drive further cost efficiency in the business, administration and design functions are led out of our India office to further reduce our cost base, which is based in Pune. Growth drivers. Growth in the business is driven by our efficiency and innovation and design and production techniques compared to our competitors. Geographical distribution, sales revenue is approximately 50% from Europe, 40% from the U.S.A. and 10% from Asia. One thing worth noting is that the interior content in most platforms is becoming more premium, leading to additional growth in dollar value revenue per platform for us. At this point, what I'll do is I'll pass you over to Anna, who's going to take you through the financial highlights this year.

Thank you, Simon. Good morning, everyone. Starting with the financial highlights for the first half of 2024. So firstly, we would like to point out that we have delivered a strong performance against our key profitability and cash metrics. And we are on track to meet our PBT expectations for 2024, and we are slightly ahead in terms of our PBT margin for 2024. In terms of the revenue, we have seen some softening in the first half of 2024 as expected, and this was due to customer demand aligning back with the broader automotive markets, which meant that our production revenue recorded at $56 million against $65.8 million in the comparative period for 2023. Tooling revenue, on the other hand, has done really well. We have recorded $4.5 million revenue in terms of tooling projects, representing 7 projects against 5 projects for the first half of 2023, where we've delivered 5 of those. The gross profit margin has improved by 250 basis points on the back of our ongoing management actions to reduce direct costs, which we commenced at the start of 2023. This also meant that our adjusted EBITDA and PBT both have benefited from those margin improvement initiatives. And adjusted EBITDA resulted in $7.4 million for the first half of 2024 and PBT $4.1 million, which is a significant improvement compared to the first half of '23. Our net debt position resulted in $5.8 million, which reflected our improved cash generation. And I'm now going to hand over to Simon, who is going to talk to you in a bit more detail about the operational highlights and our new contract wins.

So the operational highlights for the first half of '24 has been pretty staggering. I mean, 5 new contract wins totaling yearly revenue of estimated at $27.5 million. Order book, the new program launches scheduled between now and 2027 strengthens our confidence in achieving our 2025 top line sales targets, which is significantly up. Net sales increases from program launches for '25 is approximately $20 million. Our RFQ pipeline, our current RFQ book is currently valued much higher than we normally are at, which further solidifies our confidence in continued growth. One thing that we restructured this year is our sales department. We doubled our sales resource, opening new offices in Turkey, China and India, adding to our existing sales teams in Japan, Europe and U.S. We are also planning on new offices in South Korea and South America. A key driver in the first half of this year was our efficiency gains. And that was really continuous effort to improve cost of sales and fixed costs have paid off, allowing us to generate higher profits on lower sales, while we increased gross profit by 250 basis points. I mean it's important to note that we lost some economies of sales due to the lower sales compared to last year. As we move into 2025, we expect new product launches to drive top line growth, which will then naturally improve margins at both gross profit and net profit levels. And then just a final thing to like orders the team at CT. I mean, we've been incredibly focused on ESG achievements. We're proud to announce that our team received the Silver award in the latest Ecovadis audit, reflecting our strong commitment to ESG principles. So at this point, I'll pass you back to Anna to take you through the key financials.

Thank you, Simon. So starting with the income statement, looking at some of the key P&L captions here. So as I have previously mentioned, revenue line, we recorded $60.5 million revenue, which essentially comprised of the 2 revenue streams, one being the production revenue at $56 million and tooling revenue at $4.5 million. And as previously mentioned, the production revenue stream aligned back to the broader automotive market as expected and as we have previously announced. Our margin improvement initiatives meant that gross profit in absolute terms, broadly stood at similar levels to the first half of 2023 and in margin terms has shown a 250 basis points improvement to [ 28.7% ] on the back of the cost optimization programs. Our operating expenses have benefited from some savings across both freight and overhead base, which meant that our adjusted EBITDA showed an improvement from $6.7 million to $7.4 million, taking into account depreciation, amortization and non-underlying items resulted in the operating profit of $5 million. It's worth mentioning that the non-underlying items are significantly lower in the first half of 2024 and represent only one item, which is the technical accounting adjustment to reflect the impact of hyperinflation environment in Turkey. Taking into account of $1.3 million of finance costs, our PBT stood at $3.8 million as reported, but reversing back out the nonrecurring items, the hyperinflation impact essentially meant that our adjusted PBT from continuing operations was $4.1 million, which is a step improvement from $2.5 million, which we have recorded in the first half of 2023. Now we would like to take you through some of the key bridges, starting with the revenue bridge, which has shown the key components of revenue -- essentially sort of revenue journey from the $68.2 million last year through to $60.5 million this year. So there are 2 main revenue streams in the business, one being tooling and the other one is serial production. So as I already mentioned, tooling revenue has increased by $2.2 million on the back of delivering 7 tooling projects in the first half of 2024, which was a high number of projects against 5 projects in the first half of '23. In terms of our serial production, there are 3 main production locations being China, Turkey and Mexico with small reductions in Turkey and Mexico and a higher reduction in serial production in China being the hub of our manufacturing. Looking at the number of programs, 55 programs continued during the first half of 2024. They commenced in 2023 or prior years, but continued in first half of '24. 13 programs have ended in '23 and the first half of '24 and then 13 programs actually commenced in the second half of '23 and the first half of '24. So these are the key drivers of our revenue bridge. Now moving on to the next slide, looking at the gross profit margin bridge. We thought that it would make sense to present it literally showing the key building blocks from the 21.6% gross profit margin for the full year '23 through to 28.7% in the first half of '24. So we had some reduction in the tooling margin. This was driven by the fact that during 2023, we had a significant export tooling contract, which didn't repeat in the first half of '24. And then looking at the key building blocks of the profit margin improvement in the serial production. So 5.9% came from material cost savings. through supply chain rationalization, vertical integration and also reduction in some of our scrap materials. Our labor cost savings delivered 1.6 percentage points to the gross profit margin improvement, and that came from continuing our efforts on robotics and automation, which we have commenced in 2023, but successfully deployed that in the first half of '24 and will continue on that journey in the second half of 2024. We also have moved some of our key production programs to another location in China, Guangzhou, which is more cost efficient. There was some margin compression as a result of the semi-direct nature of some of our labor, which was essentially sort of impacted by the reduced volumes in the first half of 2024. And we also had some profit margin improvement as a result of improving our quality processes. So moving on to the next bridge and looking at the adjusted EBITDA. So here, we are showing the progression from the first half of 2023 EBITDA of $6.7 million through to $7.4 million for the first half of '24. In absolute terms, tooling has contributed $0.7 million to the EBITDA improvement. As previously explained, our production vertical, clearly, we had some EBITDA deterioration as a result of a lower revenue, but this was offset by the reduction in freight costs, which benefited from reduced volumes, but also improved container rates. We had some foreign exchange losses in the first half of 2024 of $0.7 million. Those are primarily originating from intercompany loans and translation losses. So those are noncash in terms of their nature. Last year, in the first half of '23, we have recorded a foreign exchange gain of $0.3 million. So the overall delta in the bridge is then resulting in $1 million. And then we also have benefited from some reduction in our admin costs, as some of our efficiency initiatives, while targeting not necessarily just direct costs but also some overhead base. So looking at the balance sheet. Firstly, you can see a significant improvement in terms of our net assets. Over a period of 12 months from the 30th of June 2023 through to June '24, you can see there is a $10.5 million improvement in terms of our net asset base. And now looking at the key components in terms of the balance sheet at the end of December through to June, probably worth pointing out a significant reduction in trade and other payables, as we continued to continue to reduce our AP balances in China. And we also have been borrowing less trade loans and invoice finance facilities. So there's a $3 million reduction between December and June position. This did in turn mean that our cash levels also have come down between December and June position. Now looking at the net debt bridge. This essentially demonstrates the key building blocks of how our net debt progressed from the position at the year-end December '23 through to June. Our pro forma net debt stood at $5.5 million. Essentially, what we have done is to -- we've shown the net debt position as reported at $3.8 million, but there was a significant Chinese payroll, which essentially fell over to the other side of the year-end. So December Chinese payroll was paid in January. So adjusted for that, bringing the pro forma net debt position to $5.5 million. Then during the first half of 2024, we have been able to generate operating cash of $4.4 million. So that is about 62% conversion of our EBITDA of $7.1 million. And as I previously mentioned, we continue to reduce our Chinese AP balances, which was the main driver of the net working capital movements. We have spent $1.6 million on CapEx, primarily adding some CapEx in expanding our operations in Mexico and also robotics and automation in China and Turkey. And $3.1 million was spent on repayment of lease liabilities and interest. So that resulted in a net debt position of $5.8 million in the first half of 2024. Now moving on to the business review. I will also cover a slide on sustainability. Here, we're introducing our key strategic pillars of our sustainability, so being a reduction of our carbon footprint, looking after our people and also forward-thinking management and rigorous governance. So these are our 3 strategic pillars of sustainability. And as Simon has already mentioned, we work very hard to improve our Ecovadis scoring and have recently been awarded Ecovadis Silver Award, which placed us in the top 50% companies, which were assessed by Ecovadis for sustainability. I'm now going to hand over to Simon, who is going to review the key operations in China, Mexico and Turkey.

Okay. Thanks, Anna. I mean I think the key takeaway points from what Anna just presented there is that under sort of difficult circumstances of reduced sales as aligned with the broader automotive market. I think I'd really like to thank the CT team. I think there's a few of them, who are probably listening in at the moment on what was like incredible execution to improve gross profit margins and improve profits despite sales dropping, which means that as we go obviously into 2025, where we launch more programs and sales increases, we expect to see that margin improvement, both at a gross profit margin level and then obviously at a net level. But let me start by taking you through a review of some of the key operations. So as Anna said, China, we continue to relocate work from Shenzhen to Guangzhou to reduce labor costs and consolidate overheads. Additionally, increased automation in both assembly and the mold shop, in part contributing to the 250 basis point improvement in gross profit. Reduced economies of scale really doesn't mask the real performance improvement that we achieved. We introduced real-time production monitoring system. So over the past 3 months, we've introduced this real-time system in both assembly and mold shops, helping us identify inefficiencies. We expect this initiative to further drive gross profit margin improvements by the end of H2. In Mexico, we've actually doubled our floor space in Mexico, as we plan to scale revenue from $10 million to $40 million by 2025. This expansion will continue to unlock economies of scale, resulting in improved profitability. We're launching new technologies in Mexico, which will include foam in place and PVC flaming. Efficiency gains that we've been working on from China will be applied to Mexico, which will further optimize operations. Turkey. In our plants in Turkey, inflation and currency volatility have decreased, stabilizing operations in Turkey, similar to Mexico. We're deploying lessons learned from China to enhance some efficiencies. Turkey is on track to meet operational expectations. Additionally, we're pursuing domestic opportunities in Turkey that could significantly boost top line revenues. Next slide, please. So automation and driving future change. This is a real key factor of what we've been working on in CT at the moment. And I think a big opportunity in the future to drive down fixed costs. So in terms of digital transformation, this year, we're focused on fully digitizing our manufacturing and administrative functions by integrating our Microsoft Business Central with our manufacturing execution system leading into our real-time production planning. We aim to increase efficiencies and reduce costs. These gains will start to materialize in probably around Q1 2025. Robotic strategy. We continue to advance our robotic strategy across all manufacturing areas, driving both productivity and efficiency. AI implementation, which is a key factor that we've been working on. We are piloting advanced AI systems for production planning and visual quality systems. Our next step is to expand AI integration in supply chain management using technology to drive margin improvement. The financial benefits of all of these will -- these initiatives will begin to emerge in 2025. So next slide, please. So the general outlook. Well, for '24, as we enter sort of Q4, we're confident of meeting analyst profit forecast. In 2025, we've got significant sales growth. Our current business launches and RFQ pipeline provide us with a solid foundation for sales growth in '25, in line with analyst forecasts. Margin expansion, the increase in top line revenue projected in '25 will enhance margins throughout the general economies of scales, as you can imagine. The sales team, so as discussed earlier, we've increased that by 200%. We significantly increased the sales team development and our RFQ book remains quite robust. The refinancing is kind of a critical part. The refinancing process will be completed by October and that will really position the company for great growth into the future, both from funding CapEx as well as being able to fund our global working capital requirements. Automation, ongoing automation will continue to improve direct labor cost of sales. And then the final bit, which is so important to us is the digital and AI transformation that we're going through. Our ongoing digitization and AI initiatives are expected to be transformative for fixed costs, which will result -- these results will start coming evident in 2025. So that's a wrap up to what the outlook looks like. I hope we've covered most of the points of H1. I'll pass you back now for any questions that you may have.

[Operator Instructions] And we have a few questions here. The first question is, is the general move to EVs a good or a bad thing for CT Automotive? And how do you think the market will evolve over the next 12 months?

So really, from CT's perspective, we're kind of agnostic when it comes to EVs or ICE vehicles. In some ways, you could say that potentially the move to EVs is possibly better for us because what we certainly have seen is that in the EV marketplace, the value content of our offering tends to increase. For example, what might be a traditional set of events turns into an electronic set of events, including actuators as people start to integrate with their centralized iPads. And so for that, there's more value add to come out of it. In terms of the general marketplace, I mean, I think certainly in America and Europe, there tends to have been a slight slowing of the EV growth. And I think that's largely down to the fact that it's still in the sort of early adoption phase and potentially still at the bottom of the S curve with regards to technology. And what I mean by that is I think that every week, you see situations occurring on battery packs where chemistry is resulting in further ranges. I think that -- and not to mention the cost of lithium-ion battery packs dropping substantially. So as the cost of battery packs reduce and the range starts to, I guess, approach things like 600 miles, then for sure, EVs will gain traction. I think the drag on EVs currently is the high level of depreciation that people are seeing the higher insurance costs and potentially still certainly within Europe and America, the lack of infrastructure with regards to charging. But I think these are all problems that people will overcome. And as we get further up the S curve, the EVs will gain traction for sure.

Great. And can you really grow market share in the current environment given the various challenges facing the automotive market?

Yes. I mean I think the thing is that when you look at a company like CT and projected revenue, let's say, into '25 of roughly sort of $140 million, in the grand scheme of the automotive market, we're actually just scratching the surface. So even though there might be levels of contraction that occur, I think when you're small and nimble as a company like CT, then you still have the possibility of growth. I mean in particular, there's one OEM, which for confidentiality, I'd rather not mention the names at the moment, but we're just at the point of signing contractual agreements with them, which is the first time that we're with that OEM, and they're one of the largest in the world. And I think it's a great growth opportunity for us in the future.

Great. And leading on from that, a further question on sales. You mentioned the RFQ is much higher than normal. What's driving that? And is it OEMs starting to plan for a pickup in end markets or the results of a better sales effort from your side? You mentioned earlier that a significant increase in the size of the sales team.

Sure. Actually, I think it really comes down to a better sales approach than what we've probably done historically. We're far more analytical about our sales approach these days. We're looking at databases advising on all of the OEMs around the world what products coming up, when their product launches are and more of, let's say, a targeting of specific platforms that we're very interested in. I think we've also taken a much better approach to sales these days because when you think about it, we have a cross matrix of product offerings that range everything from wrapped panels to interior lighting, to air registers, to armrest, cup holders. And so what we're requesting from the sales team is to try a more systematic approach to look at the overall offering that the company does rather than really just receiving an RFQ for air registers and saying, okay, we'll quote that. It's more a case of like saying, "Well, if we're going for the air registers, let's find out who are the purchasing teams that deal with all the other products within that group." So I would say that there's a much more targeted sales effort that's going on than we have done historically.

Excellent. And how long does it take to win a new job or customer? And once you've won a client, how predictable is the income stream?

It really kind of depends on -- if it's winning a new job from an existing client, then I suppose from the point of RFQ to start of production can be 2 years of product development and cost negotiations and product launches. But if it's a brand-new client, then it can actually be quite difficult because the barriers to entry are extremely high. And what I mean by that is that there's a hell of a lot of sort of upfront work that goes on. You have to prove to the clients that you're capable, you have to undergo significant audits and be approved by them before being able to receive RFQs and actually get on to their business winning platforms. And that process itself can take at least 1.5 years to get through. So the good thing is -- in a way is that I mean, once you're in with the clients, then what I think CT has got quite a good track record of is that we're pretty good at farming the field once we're in.

Great. And would you consider acquiring another business? And if so, what type of business? And how would you fund it?

I mean it's an interesting question because actually, that's something that's very high on our priorities at the moment. And I think that there's no question that the auto industry has been through a very tough time, COVID, now into a period of, let's say, reduced volumes due to the economic outlooks of high inflation and high interest rates, which has certainly caused stress on a number of the automotive supply base. And as a result of that, that gives opportunities to consolidation and acquisitions, some of which we are currently looking at opportunities there. I think in terms of targeting acquisitions, we are really looking for companies that are broadly in the same field that we're in, areas that we can generate synergy to improve profitability and bottom line by sort of utilization of our resources like sales and engineering design and development or our high focus at the moment on automation and digitization, how we could deploy that into those acquisitions to yield the benefits of profitability, I guess, through synergy. Specifically, interesting acquisitions for us is acquisitions that take us into an OEM base that currently we're not in, given the longevity of breaking into those OEMs because of the upfront audits and that kind of stuff. Alternatively, one of the things that we're looking at is potential companies that might give us some broader base on our manufacturing into LLCs that we're not currently in.

Great. And how is your search for a new CFO progressing?

Well, actually, on that side, it's pretty much done. The new CFO will be [ Salman ], who's been working with the company for just over a year now. So the positive side from that perspective is that the person, we're going to be working with, is a person that the company has worked with for the past year. He understands the business extremely well, and he can hit the ground running.

Great. And have you considered paid for broker coverage in order to provide better guidance to the wider private investor community?

At the moment, we -- I think a lot of the questions from our investors at the moment is look at your company, you're performing to your numbers, you've got good growth ahead of you. And yet, ultimately, the -- let's say, the wider investment group really has never heard of CT Automotive. So we've been taking a lot of actions at the moment with regards to obviously having a new PR firm. We also have a consultant working with us at the moment to look at ways of getting our name out there more because I think fundamentally, this is the issue currently with CT. It's not the performance of the business, it's not our ability to hit targets, not our ability for growth. I simply think it's down to opening us up to a wider audience. So that is something we're working on at the moment.

Great. And do you have any aspirations to pay a dividend?

As one of the major shareholders, I would love to. But the fact is simple is that we're a company that's actually a growth business. We're on a growth curve. And the first protocol for our cash at the moment is to reinvest in order to achieve the growth targets that we want. Not to mention, I think, sort of going forward, we do have our eye on acquisitions as well. So I think this business is primarily a growth-based business.

Great. And I'm trying to make sense of this question, and you probably will better than I will. Is CT Automotive planning parts for design and manufacturing to take a market competitiveness in future?

We are. In the auto sector, quite honestly, I mean, cost of products and to a certain level, innovation is the driver of growth. So from our perspective at the moment, we're working on some very interesting concepts of how to design components, almost straight from raw materials, to injection, to subassembly with shortening all of the chains in between and reducing the labor costs. And we have some really great innovations that are going on. To a certain extent, that's something that I'd rather not talk about here because you never know if our competitors are listening, but it's a fundamental focus of what that question is about.

Tremendous. Thank you very much. And that's the end of questions. So thank you, both Simon and Anna, very much indeed for your time. And to all listeners, you'll now be taken to a web page to give feedback on the presentation. If you can't complete now, you'll get a follow-up e-mail. We'd be really grateful, if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.