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

Good evening, and thank you very much to all of you for taking the time to attend Gestamp first half 2024 results presentation. I am Ana Fuentes, IR Director. And before proceeding, let me refer you to the disclaimer of Slide #2 of this presentation that has been posted in our website and 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 the conference call, we will open up for a Q&A session, as usual. Now, please let me turn the call to our Executive Chairman.

Okay. Thank you, and good afternoon, and thanks for attending this call in which we will be presenting our H1 financial results. During the first part of the year, our group has performed well in a difficult environment with lower volumes than expected and with a quite substantial inflation impact. In terms of our revenues, we are reporting EUR 6,140 million sales, which means 2% less than in H1 2023, but outperforming the market by 6.4% in the second quarter. During H1, we have generated EUR 654 million EBITDA, excluding Phoenix Plan impact. And in Q2 2024, we have been able to improve our margin from Q1 to reach 11%. In terms of free cash flow, we have generated, in the second quarter, EUR 77 million free cash flow, offsetting a big part of the negative free cash flow we generated in the first quarter. So overall, the company is now fully focused on achieving our full year target. In terms of the auto manufacturing Gestamp footprint, the volume has been rather similar to the one of the H1 2023 and below the ones of H2 2023, and with a slight increase of light vehicle production in Asia, mainly in China and also in North America, and a reduction in areas like Western Europe and Mercosur. If we move to Slide #6, in the case of Gestamp, our auto business revenues excluding Gescrap has been reduced by 1.7% compared with the H1 2023. But of course, in -- we need to assume that in H1 2023, our sales were very strong with a clear outperformance of the market. Also, we have been impacted in this first half of the year with some negative ForEx. And also, we have been able to continue with a sound growth, outperforming the market and improving quarter-on-quarter in 2024. As mentioned, Gestamp has been able to outperform the market at the FX constant by 4.6% in the first half of the year, a solid outperformance in Asia with our sales -- when our sales have grown by 12.6%, while the market has grown only by 1.1%. I think it's a quite remarkable figure in a challenging market. Also, we had a solid outperforming in Eastern Europe, Mercosur and in North America. And only in Western Europe, our sales have performed worse than the market, impacted by some specific programs in Germany and in Spain. In terms of our Phoenix Plan, I need to again clearly state that it's an absolute priority for Gestamp because it's a key lever in order to improve our group profitability for the next years to come. The plan is running on track. We have a fully dedicated team in place, which are helping to improve and to stabilize all our operations in North America. Already we have achieved a margin improvement quarter-on-quarter in 2024 with a better Q2. And for the first half of the year, we have already -- we have been already showing a EUR 12 million impact in our profit and loss account, which means 40% of the expected impact for the full year. And a part of our auto business, Gescrap is also performing very well. With the scrap prices going down, the -- going down comparing with the ones in H1 2023, Gescrap has reduced their sales by 10% in H1 2024. But in terms of profitability, we have been able to increase our EBIT margin from 6.2% to 7%. And in absolute figures, we have increased our EBIT by EUR 0.5 million. So it's a business which is profitable, resilient and very strategic business for Gestamp overall. And now with this, I hand it over to Ignacio Mosquera.

Thank you, Paco, and good evening to everyone. Moving to Slide 11, we can now have a closer look to our financial performance in the first half of 2024. As Paco has already explained, Phoenix Plan, aimed at restructuring our NAFTA operation, has had a EUR 12 million impact on our P&L. For the first half of 2024, we have reached revenues of EUR 6,140 million, which entails a 2.1% decrease when compared to the EUR 6,273 million from the first half 2023. Revenues for the auto business excluding Gescrap at FX constant have grown by 5.1% year-on-year as FX has negatively impacted our result by EUR 401 million. In terms of EBITDA, we have generated EUR 642 million in H1 2024, meaning a 10.5% EBITDA margin. If we exclude the impact from Phoenix, EBITDA in absolute terms would amount to EUR 654 million with an EBITDA margin of 10.6%. We should highlight our sequential improvement in the second quarter, where, excluding the Phoenix impact, we have had a reported EBITDA margin of 11% in the quarter. As a result of the EBITDA drop and slightly higher amortizations, reported EBIT has decreased by 22% year-on-year to EUR 285 million with an EBIT margin of 4.6%, or 4.8% excluding Phoenix impact. Net income in the first half has been EUR 106 million. That compares to the EUR 162 million reported in the same period last year, mainly due to a lower year-on-year EBITDA in absolute terms, increase of depreciation and amortization levels compared to last year, which was extraordinarily low, and higher minority interests, partially compensated by less financial expense. Net debt has decreased by almost EUR 33 million to EUR 2,191 million, as we will later detail. To sum up, good set of results with a difficult year-on-year comparable due to the extraordinary first half of 2023, and considering that traditionally, our business has a weaker first half in relative terms that improves quarter-on-quarter throughout the year, as we have already seen in the second quarter of 2024. If we now turn to Page 12, we can see the performance by region on a year-on-year basis. Looking at each region in detail, revenues in Western Europe have decreased by 11.6% year-on-year in the first half to around EUR 2.2 billion. Performance in the region has been affected by the tough comparison base. The first half of 2023 market growth was a record, thanks to the normalization of the semiconductor supply. Therefore, this region is mainly affected by the global market decline, revenue mix in specific programs, and to a lesser extent, the falling raw material prices in the first half. In terms of EBITDA, it reached almost EUR 239 million and EBITDA margin stood at 10.9% in the period, down from the 11.4% reported in the first half of 2023, given market volumes drop in the period. In Eastern Europe, the performance in the first half of 2024 has been solid, proving again our strong position in the region, particularly in markets such as Turkey or Romania. On a reported basis, during the first half of 2024, revenues have grown year-on-year by 9.1%, up to levels of EUR 948 million, although EBITDA levels have decreased by 6.8% to EUR 118 million, partially impacted by currency fluctuations. EBITDA margin of 12.4% is below the 14.6% reported last year due to the inflationary pressures and project mix volatility. In NAFTA, not too much to add to what Paco has previously explained. Phoenix Plan is already showing signs of improvements in the underlying operations with higher EBITDA margin quarter-on-quarter in 2024. Our revenues have increased by 7.3% year-on-year, while EBITDA has decreased by 8.1% if we exclude Phoenix impact of EUR 12 million in the first half of 2024. This lower EBITDA in absolute terms leads to an EBITDA margin of 6.6%. As we have seen during the first half, profitability would evolve from minus to plus, reaching at the end of the year similar levels to the full year 2023, excluding Phoenix Plan impact. As you all know, turning around the operations in NAFTA to improve our market positioning and profitability is at the top of our priorities. In Mercosur, our results have been strongly impacted by ForEx in Argentina and floods in Brazil during May. That has led to revenues and EBITDA decreasing in the quarter by 10.7% and 25.8% year-on-year, respectively. EBITDA margin in the period has decreased versus last year to the levels of 10.7%. In Asia, our performance continues to evolve extraordinarily good. In the first half, reported revenues in this region have seen a strong growth, reaching almost EUR 955 million with an outperformance in a complex and very competitive market. Our approach of focusing on premium products with differential technologies is allowing us to gain good quality market share in a very competitive EV world. As a result, EBITDA grew by almost 26% compared to the first half 2023, with EBITDA margin improving to 14.5% in the period, showing an extraordinary operational execution and becoming the region with the best profitability levels in the first half. We keep on working to gain positioning in this region, mainly in China, as we have been doing over the past few years with a strong organic and profitable growth and a clear EV strategy. This market continues to be a great opportunity for us. Finally, Gescrap has seen revenues decreasing by 9.7% year-on-year to EUR 317 million, as a result of the decrease in scrap prices, as Paco mentioned before. Nevertheless, well-managed operations have allowed for EBITDA to increase by 2.9% year-on-year, leading to a strong margin improvement from 7.4% to 8.4% in the first quarter of -- in the first half of 2024. Overall, we have seen that our geographic diversification has supported a solid performance in the first half. Turning to Slide 13, we see that, as we already mentioned in our Q1 results call, we're back to positive free cash flow generation. As shown on the slide, excluding extraordinary Phoenix costs in Q2 2024, we have generated EUR 77 million of positive free cash flow despite revenue and EBITDA fall. During the quarter, we have executed the acquisition of Mitsui stake in North America with a cash outflow of EUR 23 million. As a result, during the first half of the year, the company has generated a negative free cash flow of EUR 54 million due to negative free cash flow generated in Q1, in line with the typical business seasonality. Turning to Slide # 14, as a result of this, we see that we continue preserving our financial strength, and we remain disciplined over leverage in absolute and relative terms. We have ended June 2024 with a net debt of EUR 2,191 million, EUR 33 million lower than last year's same period, which implies a net debt to EBITDA ratio of 1.7x, maintaining a similar leverage as of Q1 2024 despite the seasonality impact. We are succeeding in our debt reduction strategy as we have reported the lowest net debt figure in a first half since the IFRS 16 implementation. This strong net debt reduction since 2020 is due to a strategy of disciplined and selective CapEx approach, a good delivery on results and a well-managed balance sheet to preserve our financial discipline. Thank you all. And now, I hand over the presentation back to Paco for the outlook and closing remarks.

Thank you, Ignacio. And according to the latest report of -- by S&P, there is a clear deterioration of auto manufacturing volumes expected now for the second half of 2024. Now, they are expecting a 2% decrease of full year volumes compared with the ones of 2023. This forecast has been deteriorated very sharply in the last 2 months, and the main areas impacted are Asia with almost 1 million vehicles less; and Western Europe, which has fallen again this year and with volumes clearly below the ones of 2019. And moving to Slide 17, for 2024 and considering this new forecast, now we see in all regions, but in North America, clearly the auto manufacturing will go down from 2023 figures being Western Europe with minus 7.4% in the most impacted area. For following years until 2027, S&P is now considering a moderate growth of 2.3% CAGR, finally reaching in 2027, the volumes already manufactured in 2017, so 10 years later. In Slide 18, basically, the message from our side is that Gestamp has a clear and well-defined strategy in order to secure our long-term positioning with our customers. Now, the market is in a transition phase with volumes not growing as expected, especially in Western Europe, with a transition to EVs, which seems to happen more slowly everywhere except in China, and with inflationary pressures, we're still impacting our costs, especially in the labor cost. In this context, Gestamp now is clearly focused on preserving profitability, implementing different initiatives in order to be able to improve our efficiency, to enhance our flexibility of our operations to be able to respond to unusual fluctuations of demand, and, of course, to be able to execute properly on our backlog. And of course, in terms of profitability, our key priority is North America and Phoenix Plan. And a part of preserving profitability, we also want to preserve our financial strength with a much more selective CapEx strategy, trying to minimize risk of volumes. So all in all, profitability and financial strength are clearly our priorities in this market context. So, even if now we see a deterioration of the market, our group is fully focused on achieving on our full year targets in terms of revenues, EBITDA margin, free cash flow generation, and of course, preserving our leverage below 1.5x EBITDA to debt. Many actions are already in place in order to be able to achieve our targets, even if the market conditions are worsening. Moving to Slide 20, I due to all the challenges, our group is very focused on operations, but we remain also very committed on fulfilling the different targets included in our ESG plan. All these efforts have been recognized with improvement of our rating in Ecovadis, where we have achieved a status of Golden medal, and also in Sustainalytics and also in FTSE Russell Index. So, all in all, as a summary, H1 '24 has not been easy, but we are delivering on our commitments with a solid set of results in H1, committed with our guidance with the effort of the whole group, and improving day by day on our ESG targets, and a very specific and key target related to the full implementation of our Phoenix Plan in North America. So, thank you, and that's all from my side. And now, we are open to your questions.

[Operator Instructions] Our first question comes from the line of Francisco Ruiz from BNP Paribas.

I have 3 questions, if I may. The first one is on your guidance for the year. You have reached a margin that implicitly in order to reach last year, targeting the end of the year means that you should do, in the second half, a margin close to 12%. Could you give us an idea on how you will reach that level? And if you could get a little more specific on geography, especially in Western Europe? The second question is on minorities. We have seen a big increase in the P&L of the minorities moving from -- up to EUR 40 million or something like that at H1. So could you give us an idea of what is this for, taking also into account that you have bought some minorities to Mitsui? And last but not least is, in the cash flow statement, it's record CapEx, which is slightly higher than last year. And I don't know if you could give us some idea of what is going to be the CapEx for the rest of the year.

Okay. Thank you for the questions. I'm taking the first one. Yes, it's true that we have a challenging second half of the year, and we are working on that. It's also clear that the -- in the second quarter, we have already achieved some kind of improvement, reaching 11%. And now, what we are implementing very quickly are different cost actions in order to be able to flex on our levers. I think it's important to mention that the decrease in terms of volumes, especially in Europe, in this quarter, has been quite quick. I would say that some operations in Germany and in other countries in Europe have deteriorated in terms of volumes. And we have not been able to flex because our customers, they have been trying and intending to -- in their programs to reach the original levels. So, it has not been easy for us to flex. But now, clearly, we are acting, and we are taking all the necessary measures in order to implement all the flexibility. We are working on that. It's true that we should have also some specific improvements. For instance, in the case of our North American operations, last year, we performed worse in the second half of the year. And this year, we are expecting to do better. And the Phoenix Plan is giving us some light around that. And also, we have some important program for us where we have a good profitability and a good content in terms of EBITDA to sales and sales per program that we are expecting them to ramp up in the second half of the year. So with these measures and all kinds of -- and other kind of measures, we are now -- we are still working on a plan in order to be able to come back to this level, which is not 12%, but close to 12% margin expected for the second half of the year. So then, your question on minorities, on CapEx?

Yes. I can take those ones, Paco. In terms of minority, I think that, first of all, I'd like to reflect that the minority levels that we had for 2023 in the first half were extraordinarily low. So the comparison base, it's actually relevant. But also in the case of minorities, you reflected on the acquisition, and we've done the acquisition of Mitsui, but that was with the effect of the end of May. So actually, for 2 months out of the -- or for 5 months out of the 6 of the half, you have the impact of the minorities from the United States. And also on a separate basis, what we've had is extraordinary levels of minorities in terms of Turkey due to the hyperinflation effect. So the profitability that we had in terms of hyperinflation in our P&L has been reflected partly in a minority level, which is pretty high this half in comparison to last year. And in terms of CapEx, as mentioned in prior calls, we're not providing specific guidance on CapEx, more focused on profitable growth. But obviously, we're taking active measures and having a selective CapEx strategy, as we have reflected in the presentation today. And obviously, we're looking at active measures in terms of -- on key levers to reduce our CapEx, for example, on current CapEx this year. I hope that answers your question.

Yes. So, as a way of modeling, minorities last year were EUR 40 million because already the EUR 40 million in H1. So what we should expect for the rest of the year?

It's a little bit too early to comment because at the end, it's depending a lot on the fluctuation of the currency, specifically in Turkey. So it's a little bit early to comment on what's going to be the impact. But obviously, what you can infer is that with the acquisition that we have done of the minority of Mitsui in the U.S., we will have, obviously, a pickup of minorities in the rest of the year.

[Operator Instructions] And our next question comes from the line of Christoph Laskawi from Deutsche Bank.

I have a couple. The first one would be just on the supply chain situation. Obviously, we had Porsche warning about sourcing problems for aluminum. Just wanted to check if your supply chain is basically intact. Or do you face any issues currently in sourcing material that you need for the products? Then, the second question will be on the Western Europe underperformance in Q2. You already alluded to that some programs in Germany and Spain have been volatile and probably below expectations. But the underperformance, about 10 points versus production, looks pretty high. Could you comment further, how much of that was steel? How much of that was really single programs that came in below budget? And where do you track in terms of Q3 indications of the customers so far? And then one question on NAFTA, if I may, just confirming that the Q2 run rate and the sequential improvement remains on track for Q3, and we will continue to see probably not as big of a step-up, but further improvements in second -- in the third quarter. And then, just one housekeeping question. If you could comment on the FX impact for the group in Q3?