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

Good day, everyone, and welcome to GIS Second Quarter 2025 Earnings Conference Call. Joining us today, we have GIS Chief Executive Officer, Mr. Jorge Rada; 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 today. 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 lines have been placed on mute 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. It is now my pleasure to introduce GIS management team. Mr. Rada will lead the call. Sir, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us today. During the quarter, we continued to strengthen our focus on disciplined execution and operational stability across all regions despite ongoing market volatility. Our ability to swiftly adapt to macroeconomic, geopolitical and trade-related pressures enabled us to deliver another quarter of resilient results, extending the gradual sequential improvements that began in 2024. This marks the fifth consecutive quarter of double-digit EBITDA growth. As Saul will discuss in more detail later, we remain committed to financial discipline, continuing to optimize working capital, being cautious with discretionary CapEx and reinforcing our cash position. This prudent approach enhances our resilience and preserve the company's financial flexibility in a complex global landscape. In light of recent tariff changes, it is important to highlight that the vast majority of our components are manufactured domestically and supplied to customers operating locally. This significantly reduces our exposure to trade policy risks under the USMCA framework. As of today, we have not observed any material changes in our customer orders or receive early signals of shifts in demand. We remain fully compliant and largely insulated from tariff-related impacts. Our commercial operations remained solid. In the first half of the year, we secured new programs awards totaling $116 million in annual revenue, exceeding the first half of '24 levels and performing well above seasonal industry trends, further demonstrating our strong market position. Lastly, regarding Cinsa, we are beginning to see the earlier benefits of last year's organizational restructuring. Streamlining management functions has led to faster decision-making processes and creating margin flexibility. Turning to the global automotive industry. Second quarter production and sales reflected a complex and still evolving environment shaped by region-specific dynamics such as trade policy shifts, inventory normalization and changing consumer sentiment. In North America, light vehicle production totaled 3.9 million units, representing a 4% decline year-over-year but a 5% sequential increase, reflecting sustained manufacturing momentum despite ongoing trade policy challenges. Sales grew 2%, reaching 5.1 million units, despite the mild sequential slowdown in monthly volumes. Early in the quarter, demand was boosted by pre-tariff pull-forward effects. However, recent trends point to more cautious consumer behavior as affordability concerns continue to weigh on purchasing decisions. In Europe, production declined 4% year-over-year to 4.1 million units, impacted by retaliatory tariffs from the U.S. and increased imports of Chinese vehicles. Quarter-over-quarter, however, production remained nearly flat. Sales volumes stood at 4.4 million units, a 3% decline compared to the prior year, as monetary policy actions proved insufficient to offset elevated vehicle prices and the region's challenging macroeconomic backdrop. In China, light vehicle production reached 7.5 million units, up 9% year-over-year, driven by strong domestic demand and a recovery in export volumes. Chinese brands continued expanding their footprint in emerging markets, though rising competition is pressuring margins. Sales increased 10%, totaling 6.5 million units, supported by aggressive promotional activity and the reinstatement of EV subsidies. In this context, Draxton's consolidated casting and machining volumes posted mixed results for the quarter. Casting volumes declined 4% year-over-year, totaling 116,000 tons, primarily due to softer demand in North America and Europe. In contrast, machining volumes continued to grow, rising 23% year-over-year to exceed 5.6 million units, driven by sustained demand in the North American braking segment. These strategic investments made over the -- sorry, the strategic investments made over the past 2 years are gaining momentum in their value maximization phase. While certain KPIs are still ramping up, the operational performance of our newest facilities continues to improve, which will support the ongoing expansion of our margins in the upcoming periods. Regional performance. In North America, casting volumes decreased 6% year-over-year, though remained stable quarter-over-quarter. Machining volumes increased 34%, reaching 4.3 million units, surpassing the 4 million mark for the second consecutive quarter, reflecting strong and sustained demand. Our first plating line has now operated at full capacity for 12 consecutive months. The second line is advancing as planned and is expected to reach full utilization by year-end in alignment with new program launches. At Evercast, machining capacity focused on premium brake components continues to increase its utilization rate. As a result, plating volumes grew 27% year-over-year this quarter. In Europe and Asia, both casting and machining volumes declined slightly by 2% year-over-year, but input costs such as energy and scrap have stabilized. We continue to operate efficiently despite the backdrop of weak consumer demand. Draxton remains well positioned, delivering resilient results and maintaining stable volumes. Our focus remains on reinforcing market share by being a flexible, agile partner that enables value creation for our customers. Turning to Draxton's financial performance. Second quarter sales totaled $232 million, reflecting a slight decrease versus the second quarter of '24. Despite minor volume headwinds, results were supported by a favorable product mix and steady demand for our high-value components. EBITDA reached $30 million, representing a 13% margin and a 10% increase year-over-year. This not only consolidates the sequential margin expansion we've seen in recent quarters but also reaffirms the effectiveness of the value-driven strategy. The main margin drivers this quarter included disciplined cost and expense control, allowing us to maintain operational flexibility; improved manufacturing efficiency fueled by productivity gains across North America and Europe; and a growing contribution from value-added processes such as machining and plating, which now accounts for a larger share of our product mix. Finally, EBITDA per ton reached $257, representing an 11% year-over-year increase, and further highlighting the impact of our profitability-enhancing initiatives. GISEderlan, our joint venture with Fagor Ederland, continued to demonstrate margin resilience and serves as an important technological depreciator within Draxton's portfolio. The installation of new high-complexity machining equipment remains on schedule. This expansion will increase throughput in core applications while also enhancing our capabilities to support next-generation vehicle platforms. On the operational side, the joint venture sustained strong efficiency, underscoring the maturity of our collaborative model and its competitive edge in capturing growth opportunities in premium braking and suspension applications. Looking ahead, we remain focused on capturing incremental opportunities to maximize profitability, optimize our product mix and deepen alignment with our customers. In this regard, our ongoing investments in value-added capacity continue to strengthen our competitive positioning and support our solid earnings profile, even amid challenging market dynamics. In Europe, we will continue to operate with discipline and agility, maintaining our presence in adjacent sectors such as commercial vehicles. In North America, we remain fully committed to USMCA compliance, maximizing exposure to potential tariff risks while continuing to serve local customers with cost-efficient, high-performance solutions. On the sustainability front, we remain firmly committed to enhancing our ESG performance, which is a core pillar of our long-term value-creation strategy. As highlighted in our recently published annual report, we made meaningful progress on our circular economy agenda by maintaining a recycled scrap rate of 90%, a key milestone that contributes to both cost efficiency and carbon footprint reduction. With that, I will now turn the call over to Saul, our CFO, which will walk you through the financial performance and key initiatives for the quarter.

Thank you, Jorge. Good afternoon, everyone, and thank you for joining us today. In the second quarter of 2025, we delivered a resilient financial performance amid continued macroeconomic volatility and foreign exchange flotations, supported by the strategic and operational actions previously outlined by Jorge. These efforts enable us to sustain profitability and preserve our solid financial position. At a consolidated level, revenues totaled $250 million in line with expectations. This period reflects the combination of softer casting volumes and raw material price fluctuations across our core regions. Despite those pressures, EBITDA reached $31 million with a consolidated margin of 13%, representing a double-digit year-over-year increase and marking the fifth consecutive quarter of sequential margin expansion. We are confident that these margin gains are sustainable supported by the evolution of recent investments and the continued stabilization of operational KPIs. As of June 30, our net debt-to-EBITDA ratio stood at 2.3x, slightly below the previous quarter. This improvement reflects the benefit of annual EBITDA growth partially offset by noncash FX effects on our euro-denominated liabilities. Our financial strategy remains anchored in cost stability and risk mitigation. In this context, at the beginning of the quarter, we successfully refinanced Evercast loan which allow us to optimize our maturity profile, achieving better alignment between debt amortizations and expected cash flows. During the second quarter of 2025, we achieved positive cash flow generation driven by our continued efforts in working capital optimization and disciplined capital expenditures. These actions supported our liquidity position, closing the quarter with a cash balance of $56 million. Looking ahead, we will remain focused on working capital optimization, disciplined CapEx deployment and preserving healthy cash flow levels and balance sheet strength in line with our long-term financial priorities. During the first half of the year, we deployed approximately $38 million in CapEx, primarily related to prior commitments from the expansion programs initiated last year. Our full year CapEx guidance remains aligned with previous estimates, within the $80 million range. As we move into the second half of the year, CapEx intensity is expected to decline as legacy projects are finalized. In the current environment, we are prioritizing cash preservation while staying up into strategic investments that enhance our long-term competitiveness. At this point, I want to thank you for your attention. I will now turn the presentation back over to Jorge for closing remarks.

Thank you, Saul. To conclude, during this quarter, GIS and Draxton once again demonstrated the strength of our disciplined execution and the resilience of our operating model in the face of a complex and evolving environment. Despite external challenges, we continue to advance in our value-added capabilities, improved margins through financial discipline and further align operations with our customers' evolving needs. As we enter the second half of the year, our priorities remain very clear: maximize the utilization of our recently expanded capacities to capture incremental margins from value-added processes; sustained cost and cash discipline, particularly in the dynamic European environment; pursue strategic opportunities, leveraging our scale, technological edge and healthy balance sheet; and ensure full compliance with USMCA provisions with virtually all components manufactured domestically for local clients, shielding us from potential tariff-related disruptions. With this road map, we are confident in our ability to execute with flexibility and agility and to continue delivering profitable growth in an uncertain environment. Finally, I wanted to sincerely thank all our stakeholders for their continued trust and unwavering support. With that, I conclude my remarks. Let's now open the floor for the Q&A session.

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

First, regarding the startup of the second plating line, will it have any impact on EBITDA in the second half of the year? And second, about the new programs worth over $116 million, which geographies are they mainly focused on?

No further questions, right, Carlos?

Yes. That's all.

Okay. Could you start?

Sorry, I meant the second one, I don't know...

The second one is the $116 million additional volume of bulk business that we are getting, which regions.

Okay. Perfect. Sure. I could begin with the first question, Carlos, thank you for those and a pleasure to have you here. No, we are not expecting an impact with the second line or any other business in Evercast. We are performing very well there. I will say we achieved our margins, our target margins, during the second line start-up, so we are not foreseeing any challenge or negative effect during the second half of the year.

On the contrary, I think we will get a positive effect on the EBITDA because we will -- now the second line is operating a little bit above 1 shift of the 3 shifts available in the plant. So we are, let's say, working at 1.3 shifts right now. And gradually, during the third quarter, we will start growing. And in the fourth quarter, the expectation is that we will be running, let's say, at full capacity with the 2 plating lines. Having said that, if we launch properly with the productivity, quality and efficiency that we are planning, then we definitely have to see additional EBITDA coming from that. And regarding the business that we are getting, the $116 million, for this first half of the year, we can say that 60% of that volume is for North America and the rest, 40%, is Europe and Asia. Some portion of these additional business is replacement business and some portion is additional business, and it can be foundry, it can be value-added. So we normally don't give you all this detail because it's too much. But definitely, what we want to say when we mentioned this is that we definitely are getting business, we are replacing the program that are phasing out, and we are continuing to grow. So I think we are very happy that even with this environment that is very complex in the industry right now, we are very stable in terms of business acquisition.

Perfect. Very clear, Jorge, Saul. Congratulations on the results.

Thank you, Carlos. Nice talking to you.

Our next question comes from Emilio Fuentes from GBM.

I was wondering doing some preliminary numbers. We have an estimated free cash flow generation for the quarter of around $18 million. But we can see that your net debt rises around $10 million during the quarter. Could you give me a little more detail on what's the reason behind this? I know you have some euro debt around 20% that could explain some of this impact. But if you could give us a little more detail on the different impacts you saw during the quarter, that would be really helpful.

Sure. Thank you, Emilio. A very interesting question, and thank you for that. It is important to highlight that we are not undertaking any incremental borrowing. Any increase in reported debt during 2025 is solely attributable to IFRS 16, as you know, the lease liabilities on this accounting policy. And even foreign exchange fluctuations, as you mentioned, we have a euro-denominated loan. As a matter of fact, for us, it is allocated in an European entity. So we are not having any P&L FX fluctuation effect but we are seeing an increase of the debt for around EUR 6 million or EUR 7 million. So in this matter, this around EUR 7 million is, I will say, the FX effects and probably around additional EUR 15 million of IFRS 16 is the reason that you are seeing an increase in the debt, but we are not taking any single dollar of new or incremental debt there.

Maybe Evercast, you want to...

Sure. Probably just to highlight, thank you, Jorge, during the second quarter, we concluded a very successful refinancing for Evercast. As you recall, we closed the refinancing process of GIS during 2024, the loan allocated in the holding and also this euro-denominated loan in this European entity. So the only remaining process that we had for this year was Evercast loan. So we concluded, as I mentioned, a very successful process there. I would like to congratulate the treasury team and also to thank Comerica for that process. And some relevant or important aspects of that loan, this is a facility of $52 million. We doubled our revolving line credit. So we pass from $5 million to $10 million of revolving line. The term is 6 years. We have grace period of 2 years and step-up payments. So as I mentioned during the call, this is more aligned with the cash flow generation that we are expecting in this JV. And we did it also with a very good spread amid the volatility and uncertainty in the market. So that's why I'm pleased with this transaction and very thankful for our treasury team efforts and also for the bank support.

Our next question comes from Alejandro Azar from GBM.

Jorge, Saul, just a quick one. I just wanted to get more color on the decline in volumes in North America, if that's related to the commercial vehicle production. Or what are you seeing, especially thinking that you are ramping up capacity across some of your lines? And the other question is looking back maybe 2, 3 years ago, you used to have an EBITDA close to, in 2022, of $122 million. And in that same span, during 2023, '24, you've invested heavily in CapEx, but it doesn't seem that we're going to arrive at a higher EBITDA versus 2022. My question would be, at least in 2025, all those investments made during the past 2.5 years, what would be the objective of GIS management, of Board to take the company in terms of the size in EBITDA terms?

Well, let's start with the first question, Alex. Thank you for the questions. Regarding the volumes in North America, we are developing a strategy to, let's say, change the mix of products that we are making. There are 2 types of iron. One iron that is, let's say, more profitable than the other one. It depends on some products. So what we are doing is that we are reducing gradually the volumes of the products that are not as profitable, and we don't want to continue for long term with this type of products, and we are changing the volumes to products that are more profitable, okay? And in that transition, from those products to the other ones for the most profitable, we are having this kind of gap in terms of volume, but it's because we are phasing out the nonprofitable. And then the more profitable volumes that we acquired recently with commercial negotiations are coming up in the next quarters. Actually, next year is when we are going to see increase in those kind of volumes. And those volumes will come with additional profit because these products are with higher margins, okay? That's why you see, in 2025, a decrease in volume in North America. But next year, we will come back with higher volumes and better margins because these new products will come with better margins because they are made with a more profitable iron. Does that make sense, Alex?

Yes. You mean you're losing the gray iron, right?

Yes. We are not losing, we are actually deciding to dedicate all the capacity to ductile, which is our specialty. We are actually concentrating on that, and that's more profitable, gives us focus, efficiency. And also the prices and the market consider this product as, let's say, has a different level, and all the companies making this ductile are in a better shape than when you are making gray. So for the second question, do you want to take it, Saul?

Yes, probably at least to start with this and probably, Jorge, would like to add something else. Thank you, Alex, for your question. I would say the most relevant effect or item that we are concluding to be the effect or the impact of our margins in 2023, 2024, against those years that you were mentioning, 2021 or 2022, it's basically the exchange rate, Alex. Just to give you some figures, probably a 2021 exchange rate, I mean, U.S. dollar against Mexican peso were above 20%, like MXN 20.30 in the average of the year, then MXN 20.12, something like that but the following years declined in a very deep way to less than MXN 18 in 2023 and then MXN 18.30. And probably in this year, we will have something more close to our 2021 or 2022 exchange rate. As you know, we had this hedge strategy to have more certainty of our outflows and our P&L effects. But definitely, I would say, a major item in that comparison is the exchange rate. I don't know, Jorge, do you have anything else?

Yes, go ahead, Alex.

Yes, Saul, if you have a sensitivity on your mind, I don't know, for every MXN 1, for every 5%, 10%, what's the impact that we should -- if I'm not mistaken, I don't know if it was close to $15 million per every peso, but you might have a more direct figure.

For every peso, our EBITDA impact is around $4 million.

But that's annually or just quarterly?

It's annually. We can double-check that, Alex, but probably I'm not wrong because it's just for Draxton Mexico operation. We have a different scheme in Evercast. We are not hedging Evercast operation or FX in that JV, but we can double-check that. If I'm not wrong, it's around $4 million to $5 million, something like that. Probably you have more, a double-digit figure that we were mentioning in previous years, but that's compared with a different exchange rate from a previous year. But I will say, for every peso, it's like that, probably $4 million to $5 million.

Yes. Regarding the margins, we have to remember that we have not finished the ramp-up of the volumes in the plants that we, let's say, made heavy investments like in San Luis Potosi and in Evercast. We practically finished the investment. There is very little remaining of CapEx for those expansions. But still, we have the ramp-up curves. That's why you don't see much higher EBITDA so far, but we expect that the EBITDA will continue growing in the next quarters based on the ramp-up of these additional capacities that we installed. And regarding the exchange rate, last year, we had a hard time negotiating with customers exchange rate flotations and inflation and all that stuff. So we finally finish all the negotiations and we have better price levels, okay? But yes, from now to the future, we have a totally different base of prices based on the update of costs because labor in Mexico has been increasing dramatically in the last 5 years. And all this had to be negotiated with customers.

Exactly. And just as Jorge mentioned, Alex, we need to be able to capitalize these investments in order to improve or to boost our productivity and efficiency in our operations in order also to mitigate all labor increases that we have seen in the past 3 or 4 years. So we need to be more agile to mitigate those increasing cost impacts also.

Is there any way you guys could remind us the investments that are missing -- I mean not missing, but that still are in the ramp-up phase? If I'm not mistaken, I have in mind the machining one, the plating one you already mentioned, that the second line of the plating will come up in the second half. But is there any casting new lines that are still ramping up or are yet to ramp up?

In San Luis Potosi, we installed 2 lines. The 2 lines are running already the 3 shifts. But I mean this equipment, normally, they need a couple of years to optimize efficiencies, okay? So we are still launching new products, and we still have some space to fill up that capacity and to improve KPIs, operational KPIs. In addition to that, we are going to launch an existing capacity that we are phasing out, this gray iron products, we will exchange for ductile iron. That's why I will repeat what I said before. We are phasing out some products, and we are incorporating new products in that line. That is not new investment, but it's already there, okay? But there is a temporary period in which we will not -- we will see volumes a little bit down in San Luis Potosi. But in 2026, we will start to see volumes going up there in that line that is already existing.

Okay. That's great. Both one more, if I may, and that would be on capital allocation. On your general assembly meeting, if I'm not mistaken, the Board left, I don't want to say a restriction, but like a covenant on the dividend payment. Is there any way you can give us color on the metrics that allows you or give you more probability of paying that dividend in full or paying it in different installments? Whatever can you say, it would help us a lot.

Sure. Thank you, Alex. I will say that probably we will have more color in October. Probably that will be discussed in a deeper way in the Board meeting of October. I will say until now, we don't have that clearness or that decided yet. As you have just mentioned, the Board has been delegated by the Annual General Shareholders' Meeting to assess this possibility to distribute a dividend. But I will say, as we mentioned in the previous call, during April, the amount or the installments will be defined probably in that meeting, in October meeting. Probably we don't have any preference at this moment.

It will depend on the situation at that moment. We will always make our projections assuming that the dividend will be paid because it's already, let's say, approved by the assembly. However, the Board will have more information from the market, from the new programs, et cetera, and they will make a decision in that meeting. At the moment, there is no, let's say, inclination yet for a yes or for a no or for something in between.

Yes, but it is a very important aspect, what Jorge is mentioning. We are assuming for our projections that we need to be able to generate enough cash flow for that scenario. So that's why we are optimizing our working capital and being very careful with the CapEx allocations and deployments.

Okay. Is there any leverage target that management feels comfortable having?

Sure. I will say a net debt leverage of 2x will be reasonable to say that, Alex. And we are foreseeing to be a little bit above that level at the end of the year. Probably, we are going to achieve this during 2026. But I would say around 2x.

[Operator Instructions] We have a follow-up question from Emilio Fuentes.

Once again, I was wondering, once you wrapped up capacity at your new plant in San Luis Potosi, will you explore getting a similar sales mix between machining and casting, as you have in North America and Europe? Will you be exploring to improve your sales mix for more profitable products in the other geographies or it's not something you're looking into?

Well, I think maybe I want to be more clear on that because what we are doing in San Luis Potosi is to phase out production of some type of products in gray iron. This is foundry, not machining, okay? And we place those volumes with ductile iron, which are some products that are for suspension, that are, let's say, more profitable. It has nothing to do with machining. In Europe, we have practically 0 gray iron. All our products are ductile and some even special alloys, but a variation of the ductile, okay? So there is no such a big change that we can make on the product mix in Europe and Asia regarding iron. In the machining front, definitely, we can do something in Europe to continue growing. We are talking to potential customers to increase volumes for machine parts. So the machining in this business is giving you more, let's say, fidelity from the customer because when they give you the casting and the machining, it's much more difficult for them to switch suppliers. So in this business, what we see as a potential avenue for growth is adding machining. And yes, in Europe, we have that opportunity. We see that some customers are keen to continue talking to us in terms of potential business for machining because they want to outsource those operations and concentrate their operations on the assembly. And in the future, they are thinking always about technology, about AI and electronics and automation and things like that for the cars. That's why they would like to have partners like us to help them with some operations that they want to outsource like the machining. I don't know if I answered the question, Emilio.

Yes, yes. That was what I was alluding to. You were looking into increasing your sales mix in the machining side in Europe. So that's something you will be willing to look into in the near future.

Right. Yes. We see as a trend from the customer that they want us to do more machining.

With no further questions in the queue, I would like to turn the call to the management for the close of this conference.

Thank you, Antonio, 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.

Thank you.

You may disconnect.