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

[Audio Gap] 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 in the Investor Relations section. We encourage you to follow along with the on-screen presentation. [Operator Instructions] 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. Additionally, all figures discussed are nominated in U.S. dollars, unless otherwise stated. It is now my pleasure to introduce GIS management team. Mr. Jorge Rada will lead the call. Sir, please proceed.

Good morning, everyone, and thank you for joining our fourth quarter and full year 2024 earnings conference call. We greatly appreciate your time and continued interest in GIS. As we close 2024, I would like to remark our strategic view on our achievements for the ending year and outline our priorities for 2025. While certain markets, particularly Europe, continue to pose several challenges, in North America, we have made solid progress in expanding our footprint by optimizing existing operations and strengthening our customers' trust, continuing to build upon our competitive strengths in global markets. This year marked a phase of consolidation. We successfully advanced through the utilization ramp-up of the 2 new casting lines at San Luis Potosi, which are close to full operating status. Additionally, 2 plating lines at Evercast are now operational with one of these still at its ramp-up phase. At the same time, our machining capacity at Evercast is also on track to full installation and utilization. Despite flat or slightly lower volumes compared to the previous year due to industry seasonality and cautious consumer demand, profitability metrics have shown consistent improvement. This strong performance was primarily driven by greater efficiency, enhanced operational KPIs and a more value-added product mix. Moving forward, our commitment to operational excellence and financial discipline will continue to strengthen profitability, building on the solid foundation we have established. Throughout the year, we secured $140 million in new contracts, which demonstrate the resilience of our commercial strategies, aiming to strengthen our product portfolio with more value-added parts as well as diversification in the Commercial Vehicle segment. In the final months of 2024, the global automotive industry remained focused on managing production and inventories in response to regional demand patterns, including slower growth in key markets and in some cases, related to soft adoption of electric vehicles. For the North American region, vehicle production in 2024 dropped 1% to 15.5 million units, primarily due to inventory management effects. However, vehicle sales reached 19.3 million units in 2024, an increase of 3%, where Mexico led the region followed by Canada. This market is expected to stabilize into a modest annual growth in 2025 despite current political uncertainties. In Europe, vehicle production totaled 17.1 million units in 2024, down 5% from 18 million in 2023, given in part to subdued demand and regulatory uncertainty, especially regarding EV adoption time lines. However, vehicle sales increased 4% year-over-year to 18.6 million units as customers remain cautious and OEMs continued adjusting strategies ahead of the 2025 EU emissions regulatory changes. In China, production increased 4% to 30.1 million units, driven by strong domestic demand for new energy vehicles and robust exports despite EU import tariffs on Chinese-made battery electric vehicles. The extension of new energy vehicles incentives, combined with a new trade-in scheme brought vehicle sales to 26.3 million units, marking a 1% annual increase. Draxton's core operations recorded a mixed performance in 2024, shaped by both regional demand changes and from our strategic shift towards higher value-added processes. Consolidated casting volumes reached 470,000 tons, down 3% from 2023 that was benefited from extraordinary demand in North America related to the strikes of the Detroit Three as softer volumes in Europe were partially offset by a steady casting performance in North America. Machining volume totaled 18 million units, increasing 23% year-over-year, primarily due to our North American expansion, particularly from the ramp-up of new machining lines and improved utilization at Evercast. This shift towards higher value-added processes not only aligns to industry trends favoring advanced and precision engineered components, but strengthens our overall profitability. In a nutshell, North America casting volumes remained stable, while machining growth in this region was the strongest one across all our regions, increasing 39% year-over-year. At Evercast, our machining expansion is progressing as planned, and our second plating line is ramping up with peak capacity anticipated to reach by year-end 2025. In Europe and Asia, casting and machining volumes declined 6% and 3% year-over-year, respectively, in line with the typical year-end seasonality and remaining market headwinds. However, our European commercial team successfully captured volume reallocations, a significant achievement to remark as it generally takes up to 18 to 24 months, but in this case, was set up within the same year, a clear reflection of our agility and execution skills. Additionally, we are expanding machining capabilities in Europe and Asia to support higher casting volumes and enhance value-added processes. By 2025, we aim to rebalance our portfolio towards a higher concentration of parts for commercial vehicles, seeking to create a virtuous cycle with higher machining volumes to drive incremental casting outputs. Going to our financial results, quarterly sales stood at $206 million, slightly lower on a year-over-year basis due to softer casting volumes and lower cost of energy indexed into our sales prices. However, full year sales reached $907 million, supported by stable North American demand, a favorable product mix and higher machining and plating outputs. EBITDA for the fourth quarter totaled $25 million, yielding a 12% margin, led by manufacturing efficiencies and disciplined cost control. This performance resulted in a full year EBITDA of $106 million, recording a 46% year-over-year growth. Our strategic focus on higher value-added processes and product mix diversification was instrumental for these results in tandem with operational efficiencies that will continue to bolster profitability in the following quarters. GIS Ederlan, our JV with Fagor Ederlan, delivered a steady performance this quarter with revenues increasing 15% year-over-year. The plant expansion is nearing completion, while machinery installation will progress in phases as customer volumes materialize. Currently, 50% of new capacity has been secured under contracts with significant revenue potential for next years. This JV is now supplying a range of machine components, including brakes and suspension parts for important North American platforms in line with our broader scope to higher value segments. Having made significant investments between 2022 and 2024, for the year 2025, we will continue our focus on operational optimizations. Our main objective is to maximize utilization and line speed, enhance overall efficiency, unlock incremental output with moderate CapEx and transform our product mix to increase the share of the more profitable products. Likewise, we are well positioned for the gradual shift to electric vehicles as braking and structural components remain essential across both ICE and EV platforms. Our electrification-agnostic product pipeline ensures to capture demand regardless powertrain adoption. Commenting on the possible tariffs imposed by the United States on Canadian and Mexican and Chinese imports, our teams are closely monitoring the situation and will provide updates as necessary. Based on recent developments, we expect a resolution shortly, although extended uncertainty remains a possibility. On the aluminum and iron tariffs, we are not properly affected as we produce high-value pieces from raw material with a different taxation treatment, although we remain vigilant from this open front. With that being said, I will now turn the call over to Saul Castaneda, our CFO, for further financial information.

Thank you, Jorge. Good morning, everyone, and thank you for joining us today. This quarter represents the conclusion of a year marked by consolidation, resilience and strategic execution, particularly within Draxton North America operations. In this sense, despite facing persistent macroeconomic and industry-specific headwinds, we delivered strong results, underscoring the strength of our diversified business model and operational agility across all regions. Consolidated revenues for the fourth quarter were $231 million, reflecting a 5% year-over-year decrease, while full year 2024 revenues reached [ $1.1 ] billion with softer volumes in Europe and typical seasonality effects, which were partially offset by our North American operations as these remain a strong driver of growth following the full operational capacity of both casting lines in San Luis Potosi and the ramp-up of our machining and plating operations at Evercast. Consolidated EBITDA for the quarter totaled $28 million. showing a 42% year-over-year improvement. And for the full year, it reached $112 million, up from $79 million in 2023. This translates to an EBITDA margin of 12% for the quarter and 11% for the full year, compared to an 8% margin for both periods in the prior year respectively. Profitability improvements were led by sustained cost efficiencies and enhanced operational leverage, particularly in North America, where our profit increased significantly on a year-over-year basis. While volumes remained nearly flat when compared to the third quarter due to the typical fourth quarter seasonality, profitability metrics such as profit to sales ratio continued to improve sequentially. This underscores our ability to generate higher profits per ton even in a more moderate volume environment. Looking ahead, we expect continued sequential enhancements in our overall financial performance, driven by operational efficiencies in North America; market share gains in Europe, supported by our commercial agility and expanding machining capabilities; strategic consolidation of the investments made, ensuring sustained profitability and growth for the short and medium term. As of year-end, the company drew the remaining amount of the syndicated loan, bringing the cash balance to $74 million. Despite this transaction, net debt leverage ratio remained at 2.2x, same level recorded at the end of 2023 and reflecting an improvement over the level observed during 2023. The financing strategies deployed earlier in the year significantly improved our debt maturity profile and provided financial flexibility. Additionally, it is important to mention that we executed this strategy of interest rate swap agreements to hedge our exposure to floating rate. In this sense, fixed interest rate hedges have been settled for the 2 long-term syndicated loans, providing certainty for financial costs and interest outflows. With these hedges, we fixed rates that help us to achieve our 2.5% to 3% target range for North America and 1.5% to 2% target range for Europe. These actions effectively mitigate interest rate volatility amid fluctuating monetary policy environments that enhance the resilience of our capital structure against macroeconomic headwinds. For the full year, CapEx totaled approximately $76 million, slightly lower than anticipated with expenditures primarily directed towards maintenance, productivity enhancements and select capacity expansion projects. For 2025, we expect a CapEx of around $85 million with the following allocation; maintenance CapEx, approximately $40 million, reflecting the increasing scale and operational needs to our asset base. And for growth and optimization, CapEx around $45 million, including residual disbursements from prior year strategic projects alongside targeted investments in high-return initiatives such as specialized machining for next-generation components. While CapEx will ease compared to peak investment years, it will remain structurally higher than historical average due to our ongoing operational demand and asset base expansion, mainly in maintenance CapEx. During November 2024, the company paid the second installment of the dividend for $0.03 per share, which in addition to the one paid in April, will result on 2024 dividend yield over 5% above the market's median of the industrial peers. Wrapping up, our resilient EBITDA performance, effective capital allocation and prudent balance sheet management have positioned GIS to navigate the evolving macroeconomic landscape. And as we enter 2025, we focus on driving profitability, enhancing capital efficiency and delivering sustainable value. Thank you for your attention. I will now hand the presentation back to Jorge.

Thank you, Saul. In summary, 2024's challenges and industry headwinds have not deviated our long-term strategy at all as we remain well positioned to benefit from gradual volume recoveries, improved efficiencies and expanded product offerings. Based on our team's capacity to react to the industry dynamics and shifting trends, we continue to deliver a solid operational and financial performance. Heading to 2025, we will build on our operational success while maintaining prudent financial policies to ensure sustainable growth and protect shareholders' value. We remain committed to maximizing profitability and value creation while efficiently serving our customers and thereby further consolidating our market position globally. With this, I conclude my remarks for today. Thank you for your continued support and confidence. We can start now with the Q&A session.

[Operator Instructions] Our first question will come from Carlos Alcaraz from Apalache Research.

Congratulations on the results. First, to ask you about the increase in EBITDA. Could you give us more color on the growth drivers? And could you give us a breakdown on the forecast CapEx for 2025?

Yes. Well, maybe I can take the first one, and Saul will take the second one. Well, the growth drivers for EBITDA growth are the following. Number one is a bigger share of more value added. For example, we are increasing our production volumes on machining and also on plating, which is -- there are processes that we didn't have in the past, and we are growing gradually, especially in Mexico. This is one. The second one is also -- all the negotiations that we had with our customers last year, because we remember that we were mentioning over the course of the year that we were negotiating price increases because of inflation and exchange rate and all this. So we concluded all these negotiations by, I would say, third quarter last year. So we started applying the new prices gradually over the year. And by the end of the year, we had already all the products with the new price levels, okay? So that is another avenue for the growth of the EBITDA. And also we have a better product mix also on the foundry and on the casting because we are producing more products of certain, let's say, segments that are more profitable than in the past. Actually, we are using a strategy to convert more capacity, not adding capacity, but trying to, let's say, negotiate the exit of some products that are not so profitable, and we are increasing the mix of the products that are more profitable. And in addition to that, we are reaching, let's say, full operation capacity in the new casting lines that we installed in San Luis Potosi. And all the discipline and all the operational efficiency that you reach by getting to, let's say, a certain level of capacity utilization is giving you also, let's say, dilution of the fixed costs, and that is helping us to increase also the profitability. So we are in a good track to continue growing profitability in the next quarters based on all these that I mentioned, additional value added, better product mix and additional productivities and efficiencies in all the operations and the price levels are already at the right level, okay?

Perfect. And I will take the second one. Thank you, Carlos, for your question. It's a very good one, very important. And let me split the question in 2 perspectives. I will say that if we go back to February 2024, our CapEx projected for the full year probably was around $100 million. And I say this because we are going to be very strict with the execution of the CapEx for 2025. And as I mentioned, probably we projected around $100 million, but we closed the year with nearly $80 million, $76 million. For 2025, our budget definitely includes or project $85 million each. And I will say, like I already mentioned, basically 50% related to maintenance. And as we mentioned, we have a larger scale. So we need kind of $30 million to $40 million per year for maintenance. But definitely, the other 50% is more related with strategic expansion projects that were already made, and this is just scheduled payments. We should target specific investments, but I would say those will be very few. And we are really, really -- our top priority for 2025 will be cash flow growth. So it is a very important question because even when we are projecting or budgeting $85 million of CapEx, we are going to pursue additional productivity, as Jorge mentioned, and efficiency to enhance EBITDA. We're going to improve working capital to unlock [indiscernible] cash. We are, as I already mentioned, conducting a comprehensive analysis of CapEx projects to save our resources. So I will say this guidance or perspective will be optimizing in the 2025 CapEx.

Maybe just to add to what Saul just mentioned. Regarding the expansions, there is some something that is executed already in 2024, we will pay in 2025. And we are adding additional capacity, especially for machining in Mexico. But all this expansion CapEx or not all, but most of it is in the first semester because in the second semester, we will have much less. And this is a clear reflection that we are stabilizing the capacity, and we don't have at this moment in our plan, additional expansion CapEx for the second semester onwards. Of course, we will always be open to new, let's say, contracts as long as it makes sense to add this capacity either in Mexico or in Europe or in China. But at this moment, all this CapEx is, let's say, concentrated on the first half of 2025.

[Operator Instructions] Our next question comes from Emilio Fuentes from GBM.

I have several questions. I'll go ahead and say them all at once. First of all, I'd like if you could give me a little bit more detail on volume dynamics on a region-specific basis? Secondly, I would like to know what's the current capacity utilization on your new expansion lines, particularly San Luis Potosi? Third, the EBITDA per ton of $227, I would like to know with what number you will feel comfortable? What's a number you think is achievable and that will mean a significant improvement for 2025? And what would be the growth driver in order to improve this EBITDA per ton number? And finally, the machining expansions, what's the objective on volume per region? And how should this ramp-up be done?

Good. Let me start by addressing the first two, okay? Volume dynamics per region. Okay. I will start by talking about Europe. We all know that Europe is going through a transformation. The automotive industry used to have 17 million vehicles produced in Europe and now they are around 16.5-or-something-like-that million vehicles. So we have reacted over the years very efficiently by changing our product mix and addressing other industries like, for example, the commercial vehicles. And we are very strong now in commercial vehicles in several of our plants, producing, let's say, support for the engines, and we are also producing some parts, especially for electric trucks. And we are adding -- with these products, we're adding additional machining. And that is a very good advantage that we are offering to our customers because not all the casting companies can do the machining of the parts. So in Europe, we have been overcoming or offsetting the reduction of the automotive industry in light vehicles by adding in our portfolio products that are oriented to the commercial vehicles. So having said that, our volumes have been very stable in the last years. And this is due to that commercial strategy that we have implemented with additional machining and orientation to commercial vehicles. Of course, we are the leaders in brakes components, and we continue to be the leaders there. And I think Draxton is recognized in the industry for, let's say, #1 in brackets and also very good in production of brake calipers, et cetera. So volumes in the future for Europe are going to be very stable. Of course, as we mentioned in our, let's say, text at the beginning, we have received orders for reallocation of volumes from other companies that are not delivering good results and they have quality problems or financial problems, et cetera. So we have been reacting to this reallocation of volumes that are also a good service to customers and the customers are appreciating that from Draxton. So we don't see a big growth in volumes in Europe. We see a very stable situation for our volumes in the next future. In China, we also have a stabilization of volumes, but we are adding capacity in machining of special diff cases. Differential cases are a special part that goes into the transmission. It can go in internal combustion and can also go on electric vehicles. And we are specialized in China in making differential cases, both in casting, and now we are adding a specialization in machining. So this year, we will launch a special product for a very important customer, Chinese, Swedish. And we are launching these cases. So we will continue to grow in China based on machining -- not necessarily on casting volume, but on machining. In North America, we have been growing on casting volume because we are adding more capacity, especially on ductile iron, which is oriented to several components on the suspension and several components on the brakes. But we are already -- in San Luis Potosi, the 2 new lines are operating, I would say, in 3 shifts, the whole week. But of course, the efficiencies in these lines take some time to get to the maximum level of efficiency. So in the second semester of this year, we are ready to go to the maximum utilization rate of, I would say, 80% to 90% utilization of these 2 lines. Now we are in the ramp-up phase, and we are still launching new products that were originally contracted for these 2 new lines. So by the second semester, end of this year, we will be fully -- I would say, with the full capacity utilization in these 2 lines in San Luis Potosi. The machining that we are adding in Evercast, this is an ongoing project because still this year, we are still adding more capacity for machining. So we have 2 streams. One is the ramp-up of the product that we were launching. And the second one is the addition of more capacity of machining for the new product that we are launching for the customer. In the plating, which is the zinc and nickel covering or coating of our components, we already installed line 1, and it's fully operational at full capacity. The line 2 started last year, and we have a ramp-up curve. We see volumes already materializing for the second semester. And by the end of the year, we also see that the second line of the plating will be, let's say, at very good level of utilization, which is according to the original plan that we had when we made the investment on these 2 plating lines. So this is according to the volumes for the region. So I mentioned Europe, I mentioned China, and I mentioned North America. I think we already answered the capacity utilization also. In China, we are, I would say, operating a very good level of capacity utilization. Machining is also there. In Europe, we have some gaps in some plants that we could do better in capacity utilization. We are working on that. We think that reallocating products from other customers to Draxton can be a very good option. And in North America, we have contracts. So as we mentioned in our report, we won $140 million of business that will be developed and launched in the next 18 to 24 months. Saul, do you want to continue with the other 2?

I can -- but probably the only left will be the EBITDA per ton. And I can take that one, Emilio. I would say that for 2025, we probably expect an upside of around 10%, probably a little bit more. And as just Jorge mentioned, with the San Luis Potosi expansion, ramp-up utilization during the quarters, we are expecting an improvement -- a sequential improvement in EBITDA per ton each quarter due to this better capacity utilization. But also, we are expecting an important improvement during the second half due to value-added processes ramp-up. This also has higher margins than the foundry. And so we are expecting a better mix in the second half of the year. As I already mentioned, we closed the year around $230 per ton. Probably, we'll have room for 10% to 15%. But we are going to see this or we are expecting to see this sequentially quarter -- in each quarter, an improvement in a sequential way. Probably, as I already mentioned, due to this ramp-up, a better utilization of the capacity and also with the consolidation of efficiency and productivity plans or action plans that we already deployed in both regions.

Very clear. Just to be sure, you said current utilization at the San Luis Potosi plant sit at around 80% to 90%.

I would tell say that it is -- I would put it in this way. We are running 3 shifts the whole week, okay? But we are -- because we are launching a lot of new products, that takes a lot of the time of the machine because we have to make tests and we have to set up the new products. That is why it is a little bit difficult to explain, but I would say that we are running 100% of the time. But since we are developing new products and launching, it doesn't look like it is full in the output, okay? So these new products will stabilize in the first semester. And in the second semester, now you will be seeing higher volumes of ductile iron in San Luis Potosi that will reflect that the lines are running 3 shifts. At the moment, part of these 3 shifts is being used for testing the new products. I don't know if I'm getting this message across well, Emilio.

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

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

Thank you.

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