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

Good day, everyone, and welcome to GIS Second Quarter 2026 Earnings Conference Call. Please be advised that this call is meant for investors and analysts only. [Operator Instructions] I will now turn the call over to Mr. Arturo Morales, GIS Treasury and Investor Relations Director. Please go ahead, sir.

Thank you. Good morning, everyone. We appreciate your participation in today's GIS Second Quarter 2026 Earnings Conference Call. With me today are Mr. Knut Bentin, GIS CEO, who will provide a high-level overview of the business, our operating performance and main strategic messages for the quarter; and Mr. Saul Castaneda, GIS CFO, who will discuss financial results and balance sheet priorities. We encourage you to follow along with the on-screen presentation. Before we begin, please note that today's discussion may include forward-looking statements. Actual results may differ due to a number of factors. Please refer to the earnings release and supporting materials for further detail, including the discussion of risk factors. Unless otherwise stated, figures discussed are expressed in U.S. dollars. Comparisons are on a year-over-year basis and sequential comparisons are identified where relevant. If you did not receive the earnings release, it is available at the Investor Relations section of the company's website. I will now turn the call to Mr. Knut Bentig, GIS CEO. Please go ahead.

Thank you, Arturo, and good morning, everyone. Thank you for joining us for our second quarter 2026 earnings conference call. Let me begin with a few key messages that frame the reporting quarter. During the first half of the year, we have sustained operating momentum. Consolidated revenue and EBITDA stood above the figures reported last year, in line with our expectations. Notably, this growth was achieved despite unfavorable foreign exchange impact. This performance is the result of a clear commercial strategy, recent investments in capacity and the operational agility to adjust to the industries and our customers' needs. In this context, revenue and profitability benefited from higher volumes, a favorable mix towards value-added components, strong execution and continuous improvement in operating KPIs. In addition, Draxton secured USD 115 million in new programs during the first half of the year, supporting the midterm strength of our order book. Finally, our priorities remain clear: maximize installed capacity utilization, continue improving operational KPIs, support profitability initiatives and protect cash generation. Now turning to the macro and industry environment. The global mobility environment remained mixed with industry conditions continuing to differ by region. In North America, light vehicle production decreased 1% year-over-year, while light vehicle sales declined 2%, reflecting affordability constraints, macroeconomic pressures and a challenging comparison against pre-tariff purchases ahead of the implementation of tariffs on imported vehicles and auto parts last year. In contrast, commercial vehicle production increased 3%. At the recent USMCA joint review, the parties agreed to conduct annual reviews and the agreement remains in force. At this stage, we see no material impact on our operations as shown by customer schedules and order books. Nevertheless, we will continue to monitor the prevailing trade agreements closely. In Europe, light vehicle production decreased 5%, reflecting rising energy costs, affordability challenges and capacity adjustments by certain OEMs. Light vehicle sales rose 2% as the region continues to face competitive pressures supported by demand for electrified vehicles and ongoing tax incentives. Commercial vehicle production in Europe was 2% lower year-over-year. China remained the weakest of the major markets. Light vehicle production and sales declined 3% and 16% year-over-year, respectively, reflecting soft domestic demand and cautious consumer spending following the reduction in tax incentives. Exports, however, continued to provide a partial offset of these local dynamics. Given these mixed conditions, our focus remains on the variables within our control, growing the added value of our portfolio and awarded programs, operational excellence and disciplined diversification. Now let me turn to Draxton's operating performance. In North America, casting and machining volumes increased 7% and 9% year-over-year, respectively, supported by demand for heavier components, including commercial vehicle and large pickup applications, together with the successful ramp-up of new programs and solid execution across our plants. This renewed demand for large pickup platforms reinforces the value of this component within our portfolio of solutions. In Europe and Asia, performance was mixed. Casting volume increased 6%, while machining volume decreased 15%. The growth in casting reflected a greater contribution from commercial vehicle programs, while machining was affected by changes in customer platform mix and production schedules. Turning to Draxton's financial performance. Revenue reached $257 million this quarter, growing 11% on an annual basis, with both regions posting a favorable comparison against 2025, both in the quarter and over the first 6 months of the year, supported by a more favorable product mix, a greater contribution from value-added components, particularly in North America and stronger casting volumes. Ongoing efficiencies supported EBITDA growth of 6%, reaching $32 million. These efficiencies helped offset the temporary impact of surging energy costs while also fully mitigating a $2 million exchange rate headwind from Mexican peso appreciation. During the year, our operations have experienced a lag from scrap price indexation. Scrap prices have continued to increase and the corresponding pass-through will be reflected in future periods under the same pricing mechanism. This metal lag recovery does not change our focus on underlying productivity and cost control. We remain focused on mitigating industry challenges, inflationary pressures and adverse foreign exchange effects through productivity improvements, greater operating efficiency and targeted initiatives to reduce costs and expenses. These efforts will support a leaner and more resilient operating structure while helping protect profitability. Summing up, the quarter reflects solid execution within a still volatile market, highlighting efficiency gains across operations, higher volumes in both regions and an incremental contribution from value-added processes and reflects our clear focus on margin expansion and cash generation. The sustained program award cycle gives us a solid outlook to sustain our order book and business plan. It also confirms Draxton's competitive position and the value that we give back to our customers. I also want to emphasize that we are particularly proud of our team at Draxton Irapuato as they were recognized with the Labor Merit Award for fostering innovation, productivity and continuous improvement. Achievements like this reflect the culture of discipline, commitment and focus on improvement that underlies everything we set out to accomplish. With that, I will turn the call over to Saul, who will review the financial performance and our capital and liquidity priorities in greater detail.

Thank you, Knut, and good morning, everyone. I will now review the financial developments of the quarter. Consolidated revenue reached $278 million, up 11% year-over-year, while EBITDA increased to $32 million, representing an 11% margin. EBITDA also improved sequentially, reinforcing the positive operating momentum highlighted by Knut and demonstrating our ability to convert higher volumes and a richer product mix into stronger results. Importantly, this performance was achieved despite higher scrap and energy costs, which are recovered through customer indexation mechanisms with a timing lag as well as a net adverse foreign exchange impact of $3 million, resulting primarily from the appreciation of the Mexican peso. Higher volumes and continued improvements in operating efficiency more than offset these headwinds, underscoring the resilience of our operations and the effectiveness of the initiatives implemented across the organization. Capital expenditures totaled $12 million during the quarter. For the full year, we continue to expect approximately $60 million to $70 million, including close to $40 million dedicated to maintenance and operational continuity. This outlook reflects a prudent and disciplined approach to capital allocation, supported by the consolidation of recent investments and lower near-term expansion requirements. As a result, we expect more moderate capital needs to support stronger cash flow generation while continuing to fund all the investments required to ensure the reliability, safety and continuity of our operations. We will maintain rigorous return thresholds and prioritize capital towards essential maintenance, productivity, efficiency and selective projects that enhance utilization and create value. As of quarter end, interest-bearing liabilities, including lease liabilities, stood at $318 million, while cash and cash equivalents totaled $63 million, resulting in net debt of $256 million. Net leverage measured as net debt to last 12 months EBITDA closed at 2.2x compared with 2.3x a year earlier. This improvement reflects the resilience of our EBITDA generation, disciplined working capital management and prudent execution of capital expenditures. As recent investments are consolidated and near-term capital requirements become more moderate, we expect to release additional cash flow to strengthen liquidity, reduce leverage and preserve financial flexibility to pursue value-creating opportunities. In summary, the first half of 2026 demonstrated stronger operating performance and the tangible benefits of financial discipline. Revenue growth remained resilient, operating indicators continue to improve and prudent capital allocation further strengthened our ability to generate cash and enhance the company's financial position. With that, I will turn the call back to Knut for a few closing remarks before we begin Q&A.

Thank you, Saul. As you mentioned, the second quarter extended the steady operating start to 2026 as Draxton delivered one of its strongest volume quarters, supported by favorable platform exposure and disciplined execution. As we move forward into the second half of this year, these are our top priorities: First, we need to accelerate our operational KPI improvements to remain competitive and add value to our customers. Second, continue with our commercial focus, prioritizing profitability and diversification in our product portfolio. Third, continue improving efficiency and installed capacity utilization, specifically in Europe. And last but not least, protect cash generation through tight control of fixed costs, working capital and capital expenditures. All in all, customer schedules have remained stable. Our commercial pipeline continues to develop and our existing asset base provides room to grow without a broad expansion cycle, while remaining attentive to uneven market conditions such as the USMCA review process, regional powertrain shifts, energy cost surges and competitive pressures from Chinese exports. Bottom line, our ambition remains to be the preferred choice for iron casting solutions in mobility. Clearly, that path is based on a strong core, higher value-added content, disciplined use of capital and a clear focus on returns. And finally, I want to thank all our stakeholders across all regions for their continued commitment, particularly our investors for their continued interest in GIS. So operator, please open the line for questions.

[Operator Instructions] Our first question comes from [ Isaac Gonzalez ].

Just 2 questions. The first one is you mentioned about KPIs improvements. Which KPIs are you prioritizing and at what current levels? And how can we track this progress in the upcoming quarters?

Yes, [ Isaac ], thank you. The most relevant KPIs for us in the foundry are KPIs such as the yield, which means how much of salable metal we generate with each mold that we produce. And that has a number of impacts. It impacts obviously our man hours per piece. It impacts our electricity costs per part. So that is basically one of the key focus that we have to constantly improve the yield of those castings by improvements of the design, how we produce the parts, obviously, also then trying to increase the operational stability so that we can really maximize those yields to the limits that we are aspiring to.

And if I may, just to add for this clear reference that Knut provides, [ Isaac ], thank you for your question. Also, scrap. It's a very important KPI for our operations as well as energy cost for us.

And another question, if I may. What is the current revenue mix between commercial vehicles and other platforms in Europe? And how do we -- can we expect that mix to evolve? And are commercial vehicles programs structurally with a higher margin?

The commercial mix in Europe should be in the range of 20% to 30% of the overall output. And what we see is that there is a trend towards more commercial applications from the European Tier 1s. So we see that, yes, [ may ] increase in the past. We also have undertaken substantial investments, both in machining, but also to some degree, in the foundries to position ourselves better for this revitalization of commercial vehicles in Europe.

Our next question comes from Carlos Alcaraz from Apalache Research.

I have just one. With the casting volume growing, how close are you running to installed capacity?