Gestamp Automoción, S.A. (GEST) Earnings Call Transcript & Summary

Please go ahead, speakers.

Thank you. Hi, good afternoon, and thank you very much all of you for taking the time to attend Gestamp First Half 2023 Results Presentation. I am [ Fuentes ], IR Director. And before proceeding, let me refer you to the disclaimer on Slide #2 of this presentation has been posted on our website, and we will set out the legal framework under which this presentation must be considered. The conference call will be led by our Executive Chairman, Mr. Francisco Riberas; and our CFO, Mr. Ignacio Mosquera. At the end of this conference, we will open up for a Q&A session. Now please let me turn the call to our Executive Chairman, Mr.Francisco Riberas.

Good afternoon, and thanks for attending this call in which we will be presenting the results of this first half of 2023. During the first half of 2023, Gestamp has obtained a very positive set of results in a more stable market. I think basically in terms of revenues, we have grown by 28.8% year-on-year, outperforming the market growth by 12.3 percentage points. During the first half, we have also been able to increase our EBITDA by 26.3%, reaching already EUR 700 million in this first half and a 12.4% margin, excluding the impact of raw materials. We have good growth and profitable figures, helping us also to generate free cash flow and to be able to leverage -- to reduce our leverage to 1.6x debt to EBITDA. And we have been able to do that while keep on investing in order to support our customer projects, especially in EVs. Moving to the Slide #5 and focusing on the financial performance in the first half of the year. In terms of revenues, our revenues in this first half has been EUR 6,273 million, which means a 28.8% in reported basis. In terms of EBITDA, we have generated EUR 700 million versus EUR 554 million in the first half 2022, which means an EBITDA margin of 11.2% and 12.4% if we exclude raw material impact. In to EBIT, we have generated EUR 364 million, which means 51% increase with EBIT we generated in the first half 2022 and which represents 6.5% margin excluding the impact of raw materials. Net income of EUR 162 million which is an increase of 38.5% compared with the net income in the first half 2022. Even with higher interest rates, we have had CapEx of EUR 425 million compared with EUR 376 million in the first half of 2022, and we have been able to reach the debt comparing with June 2022 by EUR 76 million. If we move to the next slide and focusing on the financial performance in the second quarter of 2023. Our revenues in this quarter have been EUR 3,129 million, which means close to 20% increase compared with the second quarter 2022 revenues. We have generated in this quarter EUR 363 million EBITDA compared with EUR 301 million in the second quarter last year, which represents 11.6% margin in reported times and 12.8% if we exclude the impact of raw materials. We have generated EBIT of EUR 199 million (sic) [ EUR 191 million ] compared with EUR 139 million in 2022 which is representing 6.7% margin if we exclude raw material. In terms of net income, we have improved our net income by EUR 10 million, reaching EUR 82 million and we have had a CapEx of EUR 221 million, which is very similar to the one we had in Q2 2022. Moving to Slide #7. In terms of auto market and especially in this Gestamp footprint, we have in the first half of 2023, an increase compared with first half 2022 of 12%, which is a very important recovery of the volume, but still with volumes which are below the ones we have in 2019 and 2018. Specifically, we talk about '18, that is already a gap between volumes in the first half of 9%. And this increase in the first half of 2023 has come from the different geographies, but especially it's been a very important comeback in volumes in Western Europe after suffering a lot in 2021 and 2022 and also, in some extent, a very important recovery from [indiscernible]. Moving to Slide 8. We have had -- we have been able to obtain a good outperformance of the cost of the market. In fact, in terms of market, we have been able to increase the growth of the market by 15 percentage points, 25% increase versus 12%. We have had a clear outperformance in different regions, like in Asia that we have been able to grow by 39% while the market has grown by more than 10%. But also in Eastern Europe and Mercosur, we have grown 22% in our most important market in Europe, but in this case, alliance with the growth of the market, and we have had less growth in North America due to our less exposure to U.S. manufacturers. And moving to the Slide #9. I think clearly, we consider as a management that we have had quite positive set of results -- record results for Gestamp in H1 2023. In terms of revenues. And excluding raw material impact, we have generated revenues for EUR 5,639 million which means a 32% increase compared with the volumes in H1 2018. And at that time, in this first half of '18, the level of -- the number of vehicles manufactured at that time was EUR 48.4 million, while in the first half of 2023, the number of vehicles manufactured has been 43.3%. So important increase in revenues with less addressable market. And in terms of EBITDA, we have generated in the first half 2023 EUR 700 million EBITDA, which means a 44% increase compared with the EBITDA we generated in 2018 and again, with different and lower amount of vehicle manufacturing. So a very solid set of results in an environment, which still is noncompletely favorable. And now I hand it over to Ignacio Mosquera.

Thank you, [indiscernible], and good afternoon to everyone. Moving on to Slide 11. We show in this slide the performance by region on a year-on-year basis. As you all know, our results remain impacted by the increase in raw material prices, which amounted to EUR 634 million in revenues during the first half of the year versus EUR 483 million in H1 2022 due to the volume increase despite the lower prices, particularly in Q2. Broadly speaking, EBITDA is not impacted by raw materials due to our pass-through process. Looking at each region in detail, Western Europe has performed broadly in line with the market with revenues growing by 21% year-on-year, almost to EUR 2.5 billion. This implies a limited outperformance to the market year-on-year. However, excluding raw materials impact outperformance would be close to mid-single digit as expected. It is worth also mentioning that the Western European market performance in H1 has been remarkable, growing above 20%. This region has lagged behind overall market recovery and now it's resuming its growth path, boosted particularly by electric vehicles. In terms of EBITDA, it reached EUR 283 million, a 34% increase year-on-year. As a result, EBITDA margin stood at 11.4% in the period, improving by more than 100 basis points year-on-year even with the impact from the raw materials pass-through and inflationary pressures. This has been thanks to an improved operational leverage, ongoing implementation of efficiency measures based on our operational excellence strategy, market recovery in the U.K. and lastly, constructive price discussions. In Eastern Europe, the performance in the period has been strong, proving again our solid positioning in the region. The performance in the region has been affected by Russia and additionally, a bit of weakness in Turkey due to the elections and project mix. Turkey is now back to strong growth, and hence, we should see some recovery in the region going forward. Overall, during the first 6 months of the year, revenues have grown by more than 23% year-on-year to EUR 868 million, while EBITDA has increased by almost 10% to EUR 127 million with an EBITDA margin of 14.6%. EBITDA margin came weaker mainly as a result of temporary FX impact on our P&L in Turkey. In NAFTA, the performance of the region continues to be weak due to our client exposure, project mix, limited profitability in some specific contracts. As a result, our revenues have grown by nearly 14% year-on-year underperforming the market, as previously explained, but EBITDA has increased by 4.5% in the period, leading to an EBITDA margin of 7.8%. In Mercosur, our solid market positioning has allowed us to grow by 25% year-on-year in the first half. EBITDA in the period has increased by 19.5% to EUR 61 million with EBITDA margin slightly deteriorating to 12.9% as the comparison base is a bit affected by one-offs affecting EBITDA. Similarly to Eastern Europe, excluding the raw material impact, profitability has been better than last year. Revenues in Asia have grown by almost 32%, reflecting the good market momentum, particularly during the April to May period and our strong positioning in EV in line with the group's strategy. As a result, EBITDA grew by 27% in the period. EBITDA margin in the region stood at 12.5%, below 2022 due to the project mix. Finally, Gescrap has contributed with EUR 351 million to our first half 2023 reported revenues and EUR 26 million at EBITDA level, which implies a 7.4% margin. Margin decline is reflecting lower volume and prices sold linked to the overall decline in raw materials. Overall, we have seen a solid performance in the period with strong revenue and an EBITDA margin, excluding raw materials at 12.4%. And we're firmly convinced we will reach our financial targets for the year. Now moving to Slide #12. We can see that we achieved a record figure for first half net income. Net income in the first half of 2023 amounted to EUR 162 million, which is 39% above the EUR 120 million reported in the first half of last year. This increase is thanks to top line growth and despite having reported higher financial expenses during this period, as a result of negative FX impact, increase in interest rates, and lastly, one-off costs from the refinancing agreement, which we closed in April. This performance at net income level demonstrates our commitment to improve profitability and generate value for our shareholders as we stated in our Capital Markets Day in June. Turning to Slide #13. We see that CapEx amounted to EUR 425 million in the period, equal to 6.8% of reported revenues in the first half of 2023. In the period, recurring taxes stood at EUR 165 million, representing a 2.6% of revenues and core CapEx amounted to EUR 197 million or 3.1% of revenues while intangible CapEx represented 1% of revenues in the first half of 2023. We should see CapEx increasing as a percentage of revenues throughout the year to reach around 7.5% of revenues we guided in February, with a stronger contribution from growth CapEx. Turning to Slide #14. We see that we are back to positive free cash flow generation. As shown in the slide, in Q2, we have generated EUR 57 million of positive free cash flow, more than offsetting the negative free cash flow generated in Q1, in line with normal seasonality of our business. As a result, during the first half of the year, the company has generated a total of EUR 30 million of free cash flow. This cash flow generation demonstrates that we're on the right path to reach our target of generating more than EUR 200 million of free cash flow in the year. We have ended up June with a net debt EUR 2.2 billion, which is EUR 79 million above the EUR 2,145 reported in December 2022, but EUR 41 million below the EUR 2,265 million reported in Q1 2023. Turning to Slide 15, you can see that Gestamp is fully committed to deleverage. And we have met the new target and we're on target to meet the target presented in the CMD of reaching a net debt-to-EBITDA ratio of 1% to 1.5% by 2027. As of June 2023, net debt implies a leverage ratio of 1.6x, which is the lowest since the IPO. In terms of liquidity, we have ended June with a solid liquidity positioning of EUR 2 billion which includes total cash balance of EUR 1.1 billion as well as undrawn credit lines. During this Q2, we have disbursed almost EUR 340 million of maturities to make an efficient use of our cash and limit our financing expense. Thank you all. And now I hand over the presentation to [indiscernible] for the outlook and final remarks.

Okay. Thank you, Ignacio. So if we move to Slide 17 and in terms of out-of-market for 2023, clearly, we have had a first half better than expected and assuming that in the second half is going to be very much in line with 2022. Now the forecast is 86.7 million units manufactured during this year versus an initial forecast in the beginning of the year of EUR 85 million. For following years, basically in line with what we have already communicated at the Capital Market Day. We are forecasting that during next year, there's going to be a limited growth until 2028 and the volumes at that time in 2028 are going to be able to be close to the ones we already have by 2018. And in terms of the EVs, clearly, EVs is going to be leaving the set of the growth for the future years and the EV penetration in terms of manufacturing vehicles will keep on growing. Last year was around 14%. This year is expected to be in 18% and probably by 2028, it's going to be more than 45%, which is now included in the forecast. So moving to Slide 18. In terms of our guidance and following our positive set of results in the first half, we clearly confirm our guidance for the year, which means that in terms of revenues, we are -- we should be able to reach high single-digit outperformance to the market. And adding, of course, the additional revenue, which is coming from the incorporation into perimeter of the scrap. In terms of EBITDA margin, we guided and we confirm a guidance of 12.5% to 13% margin, excluding the impact of raw material which clearly means a double-digit reported EBITDA growth in actual terms. In terms of CapEx, we should be able to be in a CapEx of around 7.5% of reported revenues, probably with more CapEx in the second half of the year as in the first half of the year, we were below 7% to sales. And with the generation of EUR 200 million, mainly in the second half as traditionally -- as traditional seasonality for -- in our business. So clearly and again, impact to deliver on our guidance. On Slide 19, we commented that 5 weeks ago, we held our -- in our -- one of our plants in Germany, our Capital Market Day. And at that time, we clearly stated that this time is going to be a key partner to our customers in the transition to this EV to this kind of a green revolution. So clearly, at that time, the idea was to focus in the short term in '22 to meet our guidance for 2023 to deliver in our commitments for 2023 and in the long term to be able to develop on a strategy toward 2027 with different pillars and different and clear targets. Moving to Slide 20. We just very quickly, we built this strategy at a time stating that, of course, we wanted to maintain a clear ambition in terms of growth, preserving our status of trusted panel with the customers based in our technology, innovation, preserving a high level of operational excellence, of course, focusing and keeping and increasing our profitability, preserving our balance sheet health and soundness and of course, being a pioneer in the secular economy to scrap. So at that time, we set up more and more targets and we provided more visibility. And in fact, moving to the Slide 21, we want -- I want here now to reiterate what were the targets we have stated in the Capital Market Day. But in terms of revenues, we stated that we wanted to keep a mid-single-digit performance to the market. In terms of sales for EVs that we wanted to modify by 5x reaching 50% or more of our sales in 2027 related to electrical vehicles. We'll be able also to expand our EBITDA margin between 150 to 190 basis points to have a leverage throughout the period until 2027 between 1 and 1.5x, to increase the return on capital employed by 350 basis points by the end of the period moving from 14% to 17.5% and also to preserve our strategic long-term strategy of dividend payout of 30%. Also in terms of ESG, always, we are very focused on, especially after the approval of our new ESG plan. And especially we mentioned in the -- in all these areas around decarbonization. We have a clear target set to be able to have -- be neutral in Scope 2 by 2030, to be neutral in the scope 1 by 2040. And in both cases, we are moving very well in advance and to be completely climate-neutral by 2050. And in fact, in Slide #23, we can see that in terms of scope 3 and in terms of circularity, we are actively moving for next year. In fact, following the acquisition of Gescrap at the end of 2022, we have recently announced the agreement with ArcelorMittal. By this -- by news of this agreement, we will have the possibility to use high-quality Gescrap in order to be able to have availability of low-emission recycled steel and with this steel to be able to manufacture components to our customers components made out of recycled steel and with no CO2 initiatives. So clearly, moving forward in all our commitments around decarbonization. So that's all now from my side. And now we are open to your questions.

[Operator Instructions] Your first question comes from Akshat Kacker with JPMorgan.

JPMorgan. 3 questions from my side, please. The first one on your EBITDA margin guidance for the full year. I just want to understand, at this point of the year, are you still targeting the higher end of that range for 2023? And to the extent it depends on OEM cost recoveries, how many of those negotiations have been finalized and closed please? That's the first one. The second one is on CapEx. To the extent you can, as you're doing your budget for next year, what kind of CapEx number should we be thinking about probably in absolute terms? Should we be thinking about something that's higher year-on-year or as a percentage of sales, should we be thinking about 7.5% to 8% of sales. Any guidance on that number would be helpful? And then one on working capital. If you could just talk about your assumptions for the second half and if there have been any changes in factoring?

Thank you. So regarding your first question around the EBITDA margin for full year. As I have already commented that we have generated 12.4% margin in the first half of the year, and we have guided a range of between 12.5% to 13%. So we feel comfortable about the reaching this target. And of course, in terms of the negotiation we have with our customers, we have already part of this negotiations closed and agreed in the first half of the year and we still have some room to end up some of these negotiations by the second half of the year. But in any case, to your question, we are going to be in this range, comfortable but I cannot provide you a much more accurate definition of this margin of EBITDA. Maybe for the other questions?

Yes. So on the CapEx side, I think that -- I mean, first of all, I'd like to reiterate that we have not built up the specific budget already for next year 2024. So I cannot give you a specific number on that. Secondly, I think that also, as we talked in the CMD, it's not so much about CapEx but also about return on capital employed. So also, we're not guiding specifically on CapEx, and I don't expect the proper guidance to be provided at the end of this year on CapEx. And going to your third question on working capital, I'd like to reflect on the working capital performance actually of the first half where we have managed it diligently trying to minimize the impact of increased interest expense. So you see that actually in terms of based of clients -- base of suppliers and inventories, they have remained broadly constant and maybe with a little deterioration. And I expect that in the second half, we will continue to managing in the same way, diligently trying to minimize the impact of financing expense.

Your next question comes from Anthony Dick with ODDO BHF.

I had a couple on my side. Just firstly, on the top line, seeing as you now sort of subscribe to the new OVP scenario. Is it fair to assume that our expectations for your growth for the full year should increase by the same magnitude? And then on the financing, I'm sorry, I didn't just catch the latest comment that you made but we did see a bit of volatility in the different items of the financing costs in Q2 and you mentioned there was some one-off with refinancing. So could you help us understand how the financing expense is going to evolve going forward, not only the financial expense, but also the other items below the EBIT basically? And then lastly, also on factoring. Could you give us the level of factoring? And also how does that come into your financial expenses?

Okay. Yes, I was not able to hear you properly. But just to understand, I think the first question was related to ourselves. I have understood that assuming the second half of the year, the number of vehicles expected to be manufactured worldwide is going to be constant to the first half of the year. What is our position regarding the growth in sales? I did not really catch the point. Sorry.

Yes, it was down and also because the LVP scenario has been increased over the last couple of weeks. So I'm just wondering if it's fair to assume a similar magnitude of increase for your top line or also if the pricing effects are going to -- how are they going to play into H2 with the raw material prices, et cetera, et cetera?

Well, I think just to be all in line, I think we have guided to do this outperformance to the growth of the market is to the growth of the market at the end of the beginning of the year was a little bit lower than the growth that now we are expecting. So even if this is going to be the case, as I mentioned, I reiterate this guidance, and we are going to be in this position to be in this high single digit or performance of the market in 2023. And a part of that, we mentioned about the financial expenses...

Yes. So on the financing expenses, we had a few one-offs actually this last quarter. The first flow was related to FX. So we have had an impact, specifically in Argentina and Mexico, Turkey related to our debt denominated in the nonfunctional currency and depreciation. At the time, we also had an impact of the unwinding of the prior syndicated facility when you unwind the syndicated facility due to IFRS 9 application, you need to unwind the normalized cost and that has been also an additional one-off. And with those 2 have been the main impact that have been of the increase of financing expense, together with basically the increase of [indiscernible]. This being said, we have most of our debt and reiterate that we have most of our debt basically denominated in fixed rates. So for also the second half of the year, we should see a reduction of the financing expense compared to the first half. And I think that your last question was on the factoring levels, as mentioned previously, we are managing very diligently our expenses related to financing. And therefore, we have reduced our factoring levels mildly by EUR 19 million in the first half of the year.

[Operator Instructions] Your next question comes from Alvaro Lenze with Alantra.

Just firstly, a follow-up. You mentioned that you have had some one-off from the unwinding of nonamortized cost, but if you could just quantify or maybe the EUR 42 million of financial expenses that we saw in Q1 is what we should extrapolate into H2? The second question will be on the results at a to minorities which there have been none in Q2. Just to understand what's driving this coming after probably EUR 16 million in Q1? And then coming back to your guidance, you're within the range to deliver. But just to understand the margin pressure that we have seen year-on-year, excluding raw materials, what do you think are the main drivers here? And how do you see this evolving into the second half of the year?

Yes. So on the financing, I think Alvaro just correct me if I'm wrong, but you said that if we could see EUR 42 million as a run rate for the second half, is that correct?

Yes, on a quarterly basis?

On a quarterly basis Yes. Yes, I think that, that is -- that number is more or less okay. It should not be -- maybe it's a little bit lower than that, okay? On the minority is for Q2, part of the minorities have been impacted by directly the -- actually the FX that we had on financing expense because if you think about it, where we have been impacted have been on countries where we have minority partners like Mexico or Turkey. So to the extent that there is also an additional FX impact in the second half or not, which we cannot speculate right now on the currency, that would have also an impact on the minorities.

And coming to your third question around the margin of EBITDA, it's true that it's going to be complex for the second half, but it's also true that part of this margin is going to come from the ability we have in order to be able to improve the performance of our operations and also we should not forget that we are increasing volumes, and we should be able to find some kind of leverage on that. So we are still discussing with the customers and topics. Of course, as we all know, in terms of some inflation problems, our own energy not right now as important as it used to be in the previous year. So we feel comfortable that we could really reach our target. And also, we can also preserve our long-term strategy with the customers being able to preserve a very good relationship in order to be nominated for future programs.