Grupo Industrial Saltillo, S.A.B. de C.V. (GISSAA.MX) Q3 FY2025 Earnings Call Transcript & Summary

Joining us today, we have GIS Chief Executive Officer; Mr. Knut Bentin; GIS Chief Financial Officer, Mr. Saul Castaneda; and GIS Treasury and IR Director, Mr. Arturo Morales. Please be advised that this call is meant for investors and analysts only. During this call, the management will be discussing GIS performance as per the earnings release issued on Thursday. If you did not receive the report, it is available at www.gis.com.mx at the Investor Relations section. We encourage you to follow along with the on-screen presentation. All participants are in listen-only mode to prevent any background noise. There will be a question and answer session after the speakers opening remarks and instructions will be given at that time. Let me remind you that forward-looking statements may be made during this conference call. These are based on information that is currently available and subject to change due to a variety of factors. For more details and a complete disclaimer, please refer to the earnings release. Also, all figures discussed are expressed in American dollars, unless otherwise stated. I will now turn the call over to Mr. Saul Castaneda, GIS Chief Financial Officer. Mr. Castaneda, please go ahead.

Thank you, operator, and good afternoon, everyone. Before we dive into the quarter's results, I'm very pleased to welcome our new CEO, Mr. Knut Bentin. Knut brings more than 25 years of international experience in the automotive industry, having held senior leadership roles across Europe, Mexico and the U.S. He is widely recognized for his operational expertise, financial discipline and thoughtful leadership. Having previously worked with GIS, Knut already knows our organization in Draxton's business very well. This familiarity has allowed him to pursue our strategic agenda from day one. Knut, we are excited to have you on board and look forward to working under your leadership as we continue to strengthen Draxton position as a key global player. With that, I will turn the floor over to you.

Thank you, Saul, and good afternoon, everyone. It is a real pleasure for me to join this first earnings call at GIS. Since my start in mid-August, I have had the opportunity to meet teams across all our regions, visit key operations and engage directly with customers and partners. I'm deeply impressed by the strong execution-driven culture I have found here, powered by highly capable operators, engineers and commercial leaders, all committed to safety, quality and creating value every day. With such a solid foundation, I'm truly excited to build on this legacy and work together with our teams to drive sustainable growth and strengthen GIS global position. Let me now turn to the highlights of our third quarter performance. In the third quarter of 2025, we continue to operate with discipline in a challenging environment marked by trade-related policy shifts and even demand across end markets and temporary challenges linked to expansions at Evercast. These conditions require us to act with agility and focus on meeting customer requirements. Year-to-date revenue posted its first increase of the year outperforming the broader industry. This improvement reflects the impact of commercial initiatives launched in 2024, underscoring the resilience and strength of our business. In the same spirit, we secured new program awards valued at approximately $167 million as of September, equivalent to nearly 20% of Draxton's annual revenue. As outlined in our earnings release, and Saul will further comment on this, third quarter results are presented on a pro forma basis, excluding $3 million in severance expenses related to our ongoing structural optimization in North America. This adjustment provides a clearer view of our underlying performance. Beyond structural optimization and operational discipline, we have maintained a prudent approach to CapEx allocations projecting a solid cash position. With no outstanding CapEx commitments from the '23-'24 expansion cycle, we are now consolidating the returns on prior investments and strengthening financial flexibility. Regarding international trade, the outlook remains dynamic. However, our operations are structurally resilient. Most of our components are manufactured and supplied locally, minimizing the exposure to tariff risks under USMCA and similar agreements. To date, we have not observed any material shifts in customer order patterns as we remain fully compliant and operationally agile across all geographies. As for Cinsa, while domestic demand remained soft, performance improved, thanks to a more favorable product mix, lower fixed costs and strong results in Mexico's traditional retail channels. Turning now to the global automotive industry. The third quarter brought a more positive sentiment. With improved production outlooks in key regions, particularly North America and China. Despite ongoing constraints, trade tensions and evolving regulations, automakers have adapted strategies to offset the potential impact of tariffs and shifting policies. In North America, light vehicle production reached 3.9 million units, up 3% year-over-year, while sales totaled 4.9 million units, up 2%, the region's strongest quarter of 2025. This momentum was largely driven by a surge in electric vehicle sales ahead of the expiration of federal and EV tax credits at the end of September. On the other hand, commercial vehicle production remained under pressure, declining 12% though the contraction was less pronounced than in the first half of the year. In Europe, light vehicle production totaled 3.4 million units essentially flat year-over-year at 0.3% as higher imports from China and weaker U.S. bound exports weighed on output. However, Sales improved to 4 million units, up 5% year-over-year, supported by better macro conditions. Notably, commercial vehicle production surged 20% fueled by fleet renewal programs, government-backed incentives and favorable financing conditions. In China, production rose 7% year-over-year to 7.7 million units, driven by robust domestic demand, declining battery costs, expanding charging infrastructure, government incentives, and stronger exports to Europe. Sales reached 6.7 million units, up 10% year-over-year. Overall, these dynamics reflect the sector that is adapting quickly to policy shifts and consumer trends, creating both challenges and opportunities for GIS and our customers. Draxton's performance reflected divergent dynamics across regions and segments, yet showed strong resilience related to industry trends. Draxton's total casting volumes reached 114,000 tons up 1% year-over-year, supported by our commercial strategies and higher commercial vehicle demand in Europe. Machinery volumes continued their positive trend, rising 30% to 5.9 million parts, driven by greater adoption of value-added processes. In North America, casting volumes declined 5% to 64,000 tons, reflecting softer commercial vehicle production, mainly at our Saltillo facility. By contrast, our Irapuato plant benefited from renewed demand for crankshafts and large pickup engines. Machining volumes rose 39% to 4.7 million parts marking the third consecutive quarter above the 4 million mark. In Europe and Asia, casting volumes increased 8%, while machining volumes contracted 2% due to weaker OEM demand and seasonal summer shutdowns. Even though revenue improved 12% year-over-year with profitability stable, thanks to a favorable mix and disciplined cost control. I want to underscore that third quarter results were affected by cost overruns in Evercast's value-added operations, plating and machining. As you know, throughout 2025, we are materially ramping volumes in these processes. This growth has entailed extraordinary costs, including higher consumption of materials, special maintenance, increased labor expenses and consulting fees. While stabilization will take a few months, we will focus on executing corrective actions, ensure strict process adherence and operating discipline to accelerate the recovery to the used profitability. Draxton's revenue totaled $229 million, up 4% year-over-year, supported by higher casting volumes and a greater share of value-added solutions. Pro forma EBITDA, excluding severance costs from the restructuring plan mentioned reached $25 million with an 11% margin. While profitability benefit from efficiencies in new production lines, a stronger product mix and cost discipline, it was also affected by Evercast related overruns, lower commercial vehicle volumes and seasonal downtime mostly in Europe. On a per ton basis, pro forma EBITDA stood at $219, down 13% year-over-year, largely by above-mentioned effects from Evercast. Importantly, initiatives already are underway and are expected to reinforce the profitability going forward. Looking ahead, our priorities remain clear: to stabilize and accelerate operational improvements across all plants, reserve cash and fully consolidate the expansion of value-added capacity. We are working closely with customers to anticipate market dynamics while maintaining the highest standards of service, technology and product integrity. We are also strengthening operational agility and expanding our presence in adjacent segments, including commercial vehicles. At the same time, we continue to optimize CapEx and working capital supporting resilient cash flow generation. With that, I will now hand back over to Saul, who will provide a more detailed review of the financial performance of GIS.

Thank you, Knut. I will walk you through our financial performance for the quarter. As previously explained, third quarter results were affected by higher variable production expenses, primarily labor and raw material cost overruns, major and extraordinary maintenance and tooling. Extraordinary costs identified totaled approximately $4 million. This impacts occur within Evercast value-added processes and are included in Draxton and GIS EBITDA reported herein. Separately, the earnings release was prepared on a pro forma basis under which extraordinary costs are excluded. Third quarter of 2025 and year-to-date figures exclude $3 million in severance costs related to the ongoing restructuring plan in North America. These costs were excluded from both Draxton and GIS results for comparability purposes, considering they are associated with an ongoing restructuring rather than ordinary turnover in the normal course of operations. Despite these headwinds and the continued softness in the global commercial vehicle segment, our pro forma results show resilience. Consolidated revenue totaled $249 million, up 3% year-over-year, supported by Draxton's strong performance in Europe, and the growing share of machining and plating solutions in our portfolio. Consolidated pro forma EBITDA reached $26 million with a 10% margin. As previously mentioned, profitability was weighted by Evercast operational challenges and planned seasonal shutdowns in Europe. As of September 30, our pro forma net debt-to-EBITDA ratio stood at 2.4x, slightly above the level reported a year ago and unchanged from the second quarter. Importantly, gross leverage remains within our expected range and consistent with the full year trend, as we do not anticipate taking on new debt in the remaining quarter. Management's priority is to uphold strict financial discipline across costs, operating expenses and cash optimization to support improved results and in turn, reduced leverage. Despite temporary margin pressures, we continue to prioritize cash flow generation supported by disciplined working capital management and strict CapEx efficiency. We closed the quarter with $52 million in cash, maintaining a solid liquidity position. This provide us with the flexibility to meet financial commitments, navigate ongoing market volatility. All in all, we remain firmly committed to financial discipline. Even in a volatile environment, GIS financial strength remains solid and position us to continue supporting our business operations and long-term growth. In the first 9 months of 2025, after applying strict standards, we invested approximately $51 million in CapEx thus, lowering guidance disclosed earlier this year to $75 million for 2025. These investments were primarily directed to our capacity expansion scheduled payments, equipment upgrades and operational flexibility enhancements. Across the company, we continue to apply strict attention to CapEx prioritization, focusing on technological upgrades and efficiency improvements. Looking ahead, we will maintain financial discipline to ensure sustained cash generation and preserve the flexibility required to respond to changing market conditions. Thank you for your attention. I will now turn the call back to Knut for his closing remarks.

Yes. Thank you again, Saul. Before we open the line for questions, I want to reiterate that our entire team continues to execute with focus and determination despite persistent macroeconomic and industry-specific pressures. Our performance reflects the strength of our business model, the depth of our customer relationships, the prudence of our financial profile and the capabilities we have built across our global footprint. We remain firmly committed to our core priorities: margin expansion, sustainable cash flows and advancing our market position through disciplined execution and excellence. I'm also a stronger believer that the foundation of our successful organization lies in its people. Over the past week -- the past weeks, I have traveled across the different regions where Draxton operates and I have had the privilege of witnessing firsthand the dedication and talent of our teams worldwide. This gives me the confidence that together, we are well positioned to navigate complexity and build the next chapter of long-term value creation. With that, I want to thank you for the time today and for your continued interest and support. We look forward to updating you on our progress. So operator, please now open the line for questions.

[Operator Instructions] Our first question comes from [Adonai Felix].

[Felix Garcia] from [Apalache Research]. And Knut congratulations on your new role. I have [3 questions]. My first question is about the expiration of U.S. tax incentives for electric vehicles. Do you expect this change to affect Draxton's product mix, particularly in terms of demand for traditional versus hybrid or electric powertrain components? My second question refers to the margin adjustment driven by the additional costs of Evercast. Do you anticipate this effect to persist during the next quarter? And finally, when do you expect to achieve the full stabilization of the second plating line?

Yes. Maybe Felix, I'll take the second and the third question. Yes, as you have seen, we had a significant impact from Evercast in Q3 with the $4 million. We are very closely working with the plant in a very regular follow-up meetings also with them. The situation has improved to a significant degree. However, there is still some backlog in maintenance and also in the control of the chemical compositions for the plating operations so that we expect a much reduced impact but still some impact over the course of Q4. So our endeavors will really direct everything to bring it back to normal levels as quickly as possible, but we have to count that there's going to be still some impact, not of the magnitude of Q3, but some. And maybe the question regarding the EV tax incentives, Saul, you're better prepared to answer that.

Sure, Knut. And probably, I would like to start that -- Adonai, thank you for your questions. Mentioning that, as you know, more than 85% of our portfolio can be redirected or used in internal combustion engine, hybrid motors or electric. So we are very confident that we are kind of protected against any major disruption in the EV trends. So it is for us an important aspect to keep our portfolio on brake systems and all these parts that can go for, as I mentioned, to any particular application. And regarding the EV tax credits, as we mentioned, we saw like a benefit at the end of the quarter. So we're not foreseeing any major changes in the trend of EV -- of the electric vehicles, production and sales. As you know, probably against or compared with the original forecast that analysts made, they are backward or they are with this -- they are behind the schedule or the plans originally made. But specifically, I would say that we are not foreseeing any major changes or benefits as we saw in this quarter, I will say that this quarter, we have like an extraordinary benefit in that particular area, Adonai.

Our next question comes from Emilio Fuentes from GBM.

First of all, I have a question related to the restructuring of your North American footprint. I was wondering if you expect to see further reduction of your workforce in the region, especially in light of similar restructurings we saw during the COVID pandemic and semiconductor crisis. And if so, how big is the impact that we expect going forward? And the second question, if I may, could you give us a little more detail on the dynamics you saw on Europe, particularly on the casting -- on the casting volumes that saw the recovery despite a softer production environment. Is there anything particular you're seeing on the order books of your clients?

Probably I can start with the -- regarding the restructuring effects or impacts. Emilio, thank you for your questions. I would say that we are foreseeing or expecting a different scenario than in COVID. We are not foreseeing these major disruptions to our operations or these major layoffs. This is more like a specific restructuring plan. So we're going to be -- to have an assessment of our structures. We know that we need to be agile and have leaner structures. But basically, the most important part here is that we could see more impacts in our P&L, probably around $3 million for the next 2 to 3 quarters, I will say that, Emilio.

Can I have a follow-up on the last part? Are the $3 million going to be split between the next 2 quarters? Or do you expect $3 million on the fourth quarter 2025 and $3 million on first quarter 2026?

No, it's going to be more split over the next 2 to 3 quarters. And really very much as Saul pointed out, it's kind of ongoing efforts really to become a leaner, more agile company. So we are discussing now what is going to happen here. But it's not going to be by any means, something that happened maybe in the COVID crisis. So it's going to be more punctual, more kind of, yes, in the typical ranges of optimization that every company undertakes.

Our next question comes from Alejandro Azar Wabi also from GBM.

A quick follow-up, and then I'll start with the other ones that I have, if I may. On the new structure, new organization that you're planning, let's say, '26, '27, how should we think about the EBITDA per unit post this reorganization? And also including the value-added processes, machining, plating, et cetera.

Thank you, Alex, for your questions. And as you know, I will start saying this. For us, the $300 per ton mark will be -- or should be the target. We will maintain that target for our operations. Definitely, with a stabilized operation and with the full benefit of these value-added processes, we should pursue something higher than that. As you know, we do not provide specific guidance, but probably you can make some estimations to -- for something like we had in the first and second quarter. So that could give you a color of -- in which level you can see the margins and the EBITDA per ton. And definitely, once we are -- with the full operation in control and everything stabilized, definitely, we could pursue that and even higher of that reference in the next quarters. And I don't know Knut, if you want to add something?

No. Absolutely, clear. I mean, these targets, they remain valid. And I think what we have now seen with Evercast is a temporary situation that we need to overcome as quickly as possible. And then we have to resume the speed that we have been on in quarter 1 and quarter 2. What I can see from my visits across all the plants now, the teams are very, very engaged. They have very clear action plans are executing, a huge area of improvements so that I'm pretty confident that we are going to see those improvements in the very near future.

So when thinking when thinking about the investments GIS made in the last 24, 36 months, the expansion in Evercast, expansion in, if I'm not mistaken, San Luis, then the plating, the machining, what needs to happen in the next 2, 3 years. So we can achieve that profitability. And my question is related to, is it a thing of casting volumes? Is it utilization, which is currently low and needs to rise because you're seeing the machining volumes ramp up dramatically. So what needs to happen in the next couple of years for investors to see those investments pay off in terms of EBITDA growth?

Yes. Yes. Really, the challenge here is that we need to improve the performance levels closer to the best-in-class that we have within the system. So we have to recognize that there is, in some way, there is a learning curve. It's not only a matter of putting infrastructure in place. It's also creating the capabilities of the people, of the team and maintain that over time. And that is basically the challenge that we are focusing on. We have made a number of changes that really do not go under this chapter of restructuring, but we have also changed people from facilities to other facilities so that we can speed up that learning curve. What we see again is a very high commitment of people to make these moves. They are not always easy. But we see that people are willing to go the extra mile to make these improvements happen. And that is in particular valid for everything that goes, let's say, into the segment of the foundries because obviously, there's a number of foundries where we can play this very nicely. With the machining, I think here, we have still a very, very strong opportunity to build more on our global capabilities in machining to assure for more exchange of best practices here. We have the possibility to work closer with our JV partners here. And we are also working on joint agendas with them to improve the performance in those facilities. There will be meetings to be held over the next 10, 14 days to set up these agendas and then to have really specific action plans. I think we are very much with you that it's of utmost importance that these huge investments that have been made are being brought to the profitability as we are used in let's say, business that we have already holding for a longer term.

And last one is on the dividend payments approved in the shareholders meeting. If there's anything that you guys can share with us. If you're going to pay a portion of it? If it's going to be delayed to next year? How are you guys thinking on that after seeing that CapEx, it's coming down.

Sure. Thank you, Alejandro, for the question. And I will say that this matter will be reviewing in the next Board of Directors meeting. We have still one more meeting in the year in the early December. So we didn't discuss or the Board didn't have resolution yet in this -- on today's meeting. So the commitment was to go deeper and analyze the entire situation and the environment and the financial position and commitments of the company during the next meeting that will be in the early December.

We have a follow-on question from Emilio Fuentes.

I realized we didn't talked on the subject of the recovery in Europe. Could you give us a little detail on what instigated this recovery? Is it something you're seeing in particular with your customers?

Sure. Sure, Emilio. Thank you. Up to date, I will say that the facilities were operating in a better shape that we performed in the last quarters. But definitely, the following quarter will be, as you know, we will have better cycle of business in the fourth quarter. So I will say, during the third quarter, we saw this major maintenance programs in the -- across all the OEMs and basically all the facilities are shut down, However, our volumes performed very well. The factories or the facilities had great KPIs on their operations. We still have room for improvement, definitely. But we did a great job during the last quarter. And after saying this, I will say fourth quarter, we are foreseeing a better figure or a better performance regarding different aspects, probably a higher volume, not as high as we would like, but higher as a matter of fact. But -- and also other benefits that are -- that we get on the last part of the year on the last quarter each year. So basically, we are foreseeing a better performance in the fourth quarter for this region.

[Operator Instructions] With no further questions, I would like to give the floor to Mr. Castaneda to close the conference.

Thank you, and thank you, everyone, once again for your interest in GIS. Please do not hesitate to touch base if you have further questions. Have a nice day.

With this, we conclude today's conference. You may now disconnect.