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Edited Transcript of CIE.MC earnings conference call or presentation 23-Jul-19 1:30pm GMT

Half Year 2019 CIE Automotive SA Earnings Call

GUIPUZCOA Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Cie Automotive SA earnings conference call or presentation Tuesday, July 23, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lorea Aristizábal Abásolo

CIE Automotive, S.A. - Director of Corporate Development

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Conference Call Participants

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* Alexandre Raverdy

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Alvaro Lenze Julia

Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst

* Jose Maria Canovas Garcia de Blanes

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst

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Presentation

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Operator [1]

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(interpreted) Welcome to the presentation of the results for the first half of 2019 of CIE Automotive. Lorea Aristizábal, Director for Corporate Development for the Group CIE, will be in charge of giving this presentation. (Operator Instructions)

And now I'll hand over to Ms. Aristizábal. Go ahead, please.

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development [2]

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(interpreted) Good afternoon, everyone, and welcome to the conference call on the results for the first half 2019 of CIE Automotive. Before beginning, I would like to remind you 3 important elements to consider in comparing the results for this quarter of 2019 with the first half of 2018.

First of all, as we've been doing in previous quarters, we have adjusted the figures for the first quarter of 2018 and they do not include the results for the Dominion, STOXX or Biofuels.

And secondly, in this second quarter of the year, we have closed and booked 2 acquisitions, Aurangabad and Inteva Roof Systems, which we will be calling CIE Golde from now on. In the case of Aurangabad, we have booked the compete second quarter, 3 months, but for CIE Golde we have only booked 7 months in the second quarter.

And finally, I would also like to remind you that we haven't yet included figures from Mapremex, our latest acquisition announced in June, but which has not been closed yet. And now we do begin to start to discuss what happened in the sector during the first half of the year and how we have performed in each of our markets.

As an initial summary, during this second quarter, news have basically come from China and India, whose volumes have been significantly worse than those forecast and have led the analysts to lower their estimates for 2019 for these 2 countries and consequently for the global market. Meanwhile, the remaining markets have had a performance similar to what was expected.

We can start by discussing China. For the first half, the Chinese market has shrunk close to 14%, and even stronger contraction during the second quarter, with a drop of almost 16% compared to 11% in the first quarter. Among others, some of the reasons that we believe are behind this negative evolution may be the following: a lack of visibility regarding trade agreement between United States and China; second important factor is bringing forward the new emissions regulation, the China 6 emission standard. The application was on the agenda for July 2020 in the case of China 6a and for July 2023, in the case of China 6b.

But as many as 13 Chinese provinces that represent approximately 50% of the passenger car sales in China have already started to apply the new standard in July 2019. And in some cases, they have directly applied the China 6b standard. This has had an impact on the Chinese automotive market in a very similar way to what happened in Europe with the application of the WLTP.

What can we expect from China in 2019? Well, we expect the second half of the year, which, in principle, will benefit from certain factors, such as the lowering of VAT from 16% to 13%, which came into effect in April this year. Mathematically, a favorable comparison base with the second half of last year. And the macro analysts are talking more and more about the possible implementation before the end of the year and possibly in the fourth quarter of government measures to stimulate the economy, lowering tax rates; relaxing tax regulations to stimulate spending; application of measures to promote the consumption of durable goods, like cars and appliances; we'll see.

But in any case, a poor Chinese market in 2019 with an expected contraction for the year right now of close to 7%. China on the medium term with better prospects 2020 where it is expected to return to growth gradually at rates of around 2%. And from there on, a growth of between 4% and 5% a year.

And we think that this makes sense and would reflect a Chinese market that's making the transition from a booming market growing at double-digit figures to a premature market growing at a high single-digit rate.

Meanwhile, CIE in China. Well, the organic evolution of CIE in China has been slightly worse than the market in the half -- 17% versus minus 14% on the market, with a second quarter that was especially negative. And here we're basically talking about a first half last year of CIE in China, which was the best in the history of CIE in that country. And there are currently no important projects at a ramp-up stage as there have been in previous years.

But in any case, we're talking about a very small part of CIE that has barely contributed EUR 100 million.

For the future, CIE's prospects in China are positive, bearing in mind our new presence in the roof segment. A segment, which, of course, is affected by the general drop in volume, is expected to develop more favorably than the market in general as it has been doing in recent years.

We move on to India, the other market that is the focus of news in this quarter. We've been surprised by seeing an India that was very negatively affected in the first half by several factors. Some of those are the general drop in consumption because of the uncertainty brought about by the elections in April/May.

Secondly, the transition that the OEMs are making to meet the new emissions regulations that will come into force in April 2020, the so-called Bharat VI, exactly the same as occurred in Europe with WLTP or in China with the China 6, I've just mentioned.

Thirdly, the adaptation of vehicles to the new safety standards that came into effect in July and which will again come into effect in October 2019.

Fourth, the higher cost in motorbike insurance with an anticipated payment of the first 5 years of insurance, which makes buying the vehicle more expensive.

And fifth, we can mention the problems that the 2 most important consumer finances are going through in India, a country where 80% of cars are financed.

The impact of all these factors has been especially acute in the second quarter with an unexpected drop in production of close to 12% versus a drop of 3% in the first quarter of 2019.

As our colleagues from Mahindra CIE reminded us yesterday in their presentation results, the second quarter has been the worst quarter in the automotive sector in India in last 2 decades, especially pulled down by terrible month of June, during which our customers tried to reduce stocks in view of the coming situation and have shut down their plants. For the first half, overall, India has declined by 7%.

What can we expect for the rest of the year? It's expected that India will drop close to 5%, with a second semester that will definitely be better than the first. This expected improvement in the second half, especially concentrated in the fourth quarter, is based mostly on the greater confidence of the consumer once the election period is over. This is an effect we've seen in the past that we saw in the elections in 2009 and also in 2014.

Secondly, the attempts by the government to solve for the problem of the main shadow banks, the consumer finances.

Thirdly, a favorable comparison base with the second half last year. We could also talk about the planned launching of new vehicle models by various OEMs that have announced this in order to try to promote demand.

And of course, we also have to talk about the monsoon forecast, which is good, and which is usually associated to better harvest and greater consumption. The fact is that we don't believe that there is a structural change in demand in India. We believe that once the factors that are affecting the market disappear in the coming quarters, as they gradually disappear, demand will come back. And in the mid-term, the prospects for India continue to be very favorable, with an expected growth of around 8% and 9% per year.

Even though it's the most difficult half for India, we have continued to beat the market by 4 points. We have dropped 3% versus 7% for the market in the half year.

We move on to another market, Europe.

The second quarter has been a continuation to the first quarter and have suffered the impact of the same events that had just been extended over time. And this basically is the latest effects of WLTP. The impact of the changes in demand in vehicle powertrains with less diesel, more petrol, more hybrid and electric, we're talking about the uncertainty of Brexiting. And we also have to remember that in the first half of 2018, there were very high volumes, which implies a very demanding comparison for this first half.

With all the above, the European market has suffered a 6% decline in this first half, with a second quarter that was especially negative, close to 7%, compared to the first quarter, which was approximately minus 5%.

What can we expect from the second half of the year? Well, something that is in line with what we said earlier, a somewhat more positive second half because of the disappearance of the WLTP 2018 effect, a smoother transition towards the new regulations in 2019 and because of a lesser demanding comparison with the second half of 2018, which was very low in volume.

The latest estimates we have for 2019 in Europe are a market drop of approximately 2.5%, similar to the estimates already [had in] recent months. And for 2020 and following years, we expect a return to growth, with the rates that are -- those of a mature market in Europe, we've seen 2 different realities as we've seen in recent quarters.

The traditional Europe linked to the passenger vehicle, which in the half year has dropped 4% versus 6% for the market and on the other hand, Mahindra CIE Europe linked to the truck segment, which has grown by 6% in the half year compared to the major truck production drops we've seen in Germany. Overall, CIE in Europe, which has remained practically flat. And this stands out in such difficult context as the one we're seeing in the European market.

North America. North America, which in the first quarter had an uneven performance, Canada continues to drop significantly, minus 8%. The United States dropped almost 3%, and Mexico has broken the trend and has grown slightly over 1%. The total for North America has dropped by 2.5% in the half year. In these markets, we can perhaps highlight the U.S. market, which according to the OEMs themselves are focusing on adjusting stocks and producing vehicles with a higher quality and margin instead of just looking for a greater volume.

The second part of the year in North America, as we've been saying for most countries in Europe, we expect it to be somewhat better than the first half of the year, although for the total year North America expects a drop of around 2%. We have obtained a gap in the market of more than 14% in the half year. We've grown 12% versus a 2.5% drop in the market. And finally, we finish here with the markets, we move on to Brazil.

After a first quarter that we consider to be a transition after the November elections in 2018, Brazil has had a good performance during the second half, with a growth of more than 5%. And this means that the half year has had a growth of over 2%.

The good prospects for this market therefore continue gaining strength, and remember, basically due to the good performance of the internal or the domestic market. Prospects for the year, overall, they're still very favorable. A total year with a growth of 6%, and as of 2020, a growth of between 3% and 4% per year. We continue to grow very significantly in this market as a result of the strong position of our plans out of the crisis. We've grown 4% in this quarter, and we have very good prospects both for the short and the long term.

With all this, the global market in this first half with a production drop of 7%, much more acute in the second quarter with 8% versus the first quarter of almost 6%. And in this context, CIE has beaten the overall market by 9 points and has grown organically close to 2%, once again proving our capability to organically beat the market and to continue to gain market share.

But we also have to remember that the CIE growth in the half year has been more than 9%. Since times like these, organic growth can prove to be more complicated. But we take the opportunity to dedicate resources to inorganic growth, and this also enables us to gain additional market share. And as occurred this year, it enables us to integrated companies with which, in the future, we're going to generate a great deal of value through their improvement.

And finally, the prospects have again been corrected downwards in recent months. It's currently estimated that world production will drop this year 2019 by close to 4%. With 2020, that is estimated to be more or less flat, and with growth estimated between 2% and 3% as of 2021.

We move on to discussing margins. And in this very negative context, we have significant drops in volume is when we have to remind you of the differential aspects of the CIE business model that we always talk to you about but now that we have to appreciate more than ever. On the one hand, the flexibility of our P&L with very low fixed costs that enable us to assume drops in sales without affecting margins.

Secondly, with CIE's capability to improve the efficiency of its processes by especially making use of moments of less organic growth like these.

Thirdly, very strict commercial policy that doesn't allow us to drop into the temptation of accepting low profitability volumes, as usually occurs in these situations with a very stressed market. Of course, we're not immune to a poor market situation like this, but it is true that our structure and our business model help us to buffer the consequences much better than other players.

That is why we can confirm that although we haven't reported this separately, the CIE margins on the organic side have improved both compared to the same period last year as well as compared to the first quarter of 2019, and both in percentage over sales, as an absolute value, which again enable us to reaffirm the achievement of our strategic goals for 2019.

And instead of the organic growth, we talk about CIE's current perimeter, we have to remember that the 2 acquisitions closed during the half year have margins lower than the rest of CIE, which brings about a short-term dilution effect on global margins, as you've been able to see in all our geographic areas. But even so, even including these acquisitions, we have improved margins compared to the first half of 2018: 18.1% EBITDA margin versus 17.9%, 8.8% in net income versus 8.5% in net income last year over sales. We have increased EBITDA by 11%, and we have increased the net income 14% up to EUR 150 million.

If we talk about the balance sheet and the cash flow, except for the extraordinary cash flow for acquisitions, all cash flow items this year semester were within the usual limits. We have converted over 59% of the EBITDA into operating cash, with maintenance CapEx representing around 4% over sales and a growth CapEx of around 2%, having paid out EUR 40 million in dividends, a dividend which continues to grow very significantly year-on-year.

The main variations in the balance sheet are explained by the acquisitions closed during the first half of the year, and which represent an additional financial debt of EUR 783 million. And even with this, at the highest debt peak you're going to see, leverage is still at very healthy levels. We have closed the first half with an adjusted net financial debt of EUR 1.551 billion, which represents a ratio of 2.39x EBITDA.

Excluding the extraordinary flow for the acquisitions, and thanks to the extremely high conversion rate we have in this first half, we have dedicated practically all the operating flow of EUR 183 million to reducing debt, which enables us to ensure the deleveraging of the balance sheet over the coming quarters.

Finally, in terms of profitability. Although the RONA of the first half with a total perimeter has been 19% due to the dilution of the acquired businesses, the organic RONA as of 30th July reaches 23%, completely in line with the strategic goal.

And with this, we end this presentation of results discussing the CIE's strategic plan by first reconfirming our commitment to meet the 2019 guidance and therefore closing the Strategic Plan 2016-2020 a year earlier than planned. All this in spite of the negative macroeconomic and sectoral context we find ourselves in and which in recent weeks has again taken many players in this sector to issue profit warnings in relation to their forecasts; and secondly to also reconfirm the presentation of a new strategic plan, a strategic plan 2020-2025 about which we hope to be able to give you more information in the near future.

And that is it. So we move on to any questions. Thank you very much for your time.

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Questions and Answers

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Operator [1]

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(interpreted) (Operator Instructions) The first question is by Alvaro Lenze from Alantra Equities.

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Alvaro Lenze Julia, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [2]

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(interpreted) I connected a little bit late. I don't know whether you already discussed it, but I would like to know if there's been any nonrecurrent impact in Brazil? Because I see that the implicit margin in the second quarter has been very high, over 19%. And I would just like to know if you can give us an idea for the second half of the year?

And on the other hand, whether in China -- well, I believe in China that organic growth in Q2 has been fairly poor with a fairly strong drop, I don't know what you expect this to be for the second half. And whether you expect to beat the market or whether the drop should be more or less in line with the performance expected for the market.

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development [3]

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(interpreted) Hello, Alvaro. Well, regarding Brazil, there's no major extraordinary impacts. There hasn't been a peak because of a one-off. In the case of Brazil, what you're going to see to a greater or lesser extent a little bit more in some quarters, a little bit less some quarters. And whenever we are accompanied by the market with its growth, what you're going to see is the result of having done our homework during the crisis and having an operational leverage that continues to improve our margins.

Again, as long as we're accompanied by the market, we're beating the market and we're still picking up market share there, and we're concentrating market share. And you're going to see this in our margin, it'll be a bit lower in some quarter, a little bit higher in others, but that's the trend. Remember that the pre-crisis Brazil, the Brazil a decade ago had very high double-digit EBITDA margins, so why not be ambitious and believe that we can go back to that?

Regarding China, I think that -- well, you're absolutely right. First of all, the objective figure is that there's been a major organic drop in the quarter in our tier 2 sales in China. Let me give them that name to distinguish them from the Golde site in China that we're not talking about. We're talking about that CIE tier 2 in China, which has always been a small part of CIE and is being focused on a business segment that we've mentioned very often because we're not the best thermometer for the market, we're not exposed to the market in general.

We've gone to China, and we've invested very carefully in China and in a very limited way over the last 15 years to work for certain American and German OEMs and produce certain parts for them. So it's a market segment that is really not representative of what's happening in the market.

In recent years, we've had major projects in a ramp-up stage that have already completed. Those growth phases that are in full series and are now exposed to the specific volumes of those customers.

So can we expect a -- make a comeback in the coming months? Well, I don't think so. I think that we can try to beat the market or do something similar to the market. But above all, Alvaro, we have to remember that it's a very small part of CIE that is even more diluted than it was with the new acquisitions that it has an extremely small impact on CIE globally. And that I think that what we have to focus on more now is on the important China, which is the China of our new Golde roof business.

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Alvaro Lenze Julia, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [4]

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(interpreted) Okay. And a question, a follow up on China. The new roof side, which obviously isn't going to contribute to organic growth, if we saw an organic growth in that side before it was integrated in CIE, I don't know whether the drop is more or less in line with the market? Whether it's improving? How would it compare year-to-year?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development [5]

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(interpreted) Let's see if I understood the question properly. You're talking about the sales of CIE Golde in 2019 in general compared to the sales of CIE Golde in 2018? Is that the question, Alvaro?

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Alvaro Lenze Julia, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [6]

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(interpreted) Yes.

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development [7]

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(interpreted) Yes. Okay. I understood it, then. Well, bearing in mind that CIE Golde has greater exposure to Chinese market that is expected to drop in the year to double-digit figures. While Golde is doing a much better job. We're talking about a company that last year had almost EUR 700 million in sales, so -- over EUR 600 million. And this year we also expect them to exceed EUR 600 million by far. So we could be talking about a slight drop in Golde's sales compared to last year, a small drop, much less than the market and much, much less than its biggest market, which is China.

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Operator [8]

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(interpreted) (Operator Instructions) The next question is from Jose Maria Canovas from JB Capital Markets.

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Jose Maria Canovas Garcia de Blanes, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [9]

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(interpreted) A couple of questions. Well, on Brazil, you've answered almost everything. I don't know whether I heard it properly, but I think you said that this was a result of the good work you've done in recent years. Can we expect these margins to be more or less recurrent for the region or should we expect lower margins?

And then in Mahindra Europe, before they commented on the major drop in commercial vehicles. I'd just like to confirm beyond any changes in the cycle and the strong comparison, I don't know whether you can confirm that there have been no cancellations from any customers, that would be the question basically?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development [10]

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(interpreted) First of all, I confirm your understanding of the Brazil issue. I said that this is a consequence of having done our homework during the crisis. We're expecting a peaker quarter to provide the current margins, I think that's too much of a commitment. I said that some quarters will be a bit higher, some quarters a little bit lower, but you will see a gradual improvement in margins in Brazil.

And regarding Mahindra CIE Europe and the truck situation, well, it was said yesterday by our colleagues from Mahindra CIE, the truck market, and especially the truck market that affects us most, which is production in Germany, our market and our environment, we have a drop of approximately 6%. And I say approximately because the truck figures are obtained almost every half year. They will continue to be good again in March, but we have a current production drop in Germany in the truck area of 6%.

And canceled projects? No. We haven't had projects canceled. It was said this -- suggested during the conference call, but I did mention earlier that we are being more selective than ever regarding the projects. In other words, when you have a pressure situation on the market, there are always 2 strategies. The strategies are picking up volume, picking up volume, picking up volume because the only thing you're worried about or trying to select the nonprofitable volumes and not accepting them.

If you remember, from the beginning at Mahindra CIE Europe in 2013 when we integrated the Mahindra CIE Europe plants, during the first few months, we spent a lot of time selecting processes, projects that were at a loss to try to do away with them even if that represented fewer sales. And again, now I think we're in a situation where customers apply pressure. They offer us a number of projects with high volume but low profitability and we're being more selective. Canceled? No, it's not so much canceled than we're accepting fewer projects.

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Operator [11]

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(interpreted) (Operator Instructions) There are no further questions in Spanish, so we're going to move on to the questions in English.

The first question in English comes from Alexandre Raverdy from Kepler Cheuvreux.

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [12]

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I have 2 questions basically on the H2 outlook. First on outperformance. Which level of market outperformance should we expect for H2? You said you reported a strong 9% in H1. If we assume, say, flattish global production? And the -- what -- in terms of regional dynamics, what should we expect? Should we expect the same region to drive the outperformance, i.e., NAFTA and Europe. So that is the first question.

And the second is on the margin outlook. So you posted an impressive margin this quarter. You mentioned that margin and (inaudible) scope are higher in Q2 than Q1 despite the decline in organic growth, so you did a great job. But going forward, how should we think about margins if we take into account the market dynamics, the usual seasonality, et cetera? Can we expect even stronger margins in H2 versus H1?

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development [13]

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(interpreted) Alex, regarding the performance for the rest of the year, I think that at this stage we already have a history of many quarters and many years, including this strategic plan, where what you've seen is that gap between what's happening on the market and what CIE Automotive is doing, that outperformance, that gap, which some quarters is smaller and some quarters is bigger, but it's been there quarter after quarter.

Of course, what's happening is that you can't have the same figure in growth when the market is growing at 2% or when the market is declining as it has been this quarter.

What we do undertake to do is to maintain the outperformance, that gap between the market and us. That gap, which has been significant in recent quarters and during the entire strategic plan and which in this half you can see that the gap is 9 points. For the second half, I think that we can undertake to have a significant gap as there has been to date.

But the starting point, which is the market, I think that during 9 months the figures are being lowered for the second half of the year in the estimates. So we are uncertain about how it's going to finish.

But in any case, 2 comments. First of all, we should bear in mind that there's a lot more merit to drop less than the market when the market drops a lot than to grow more than the market when the market grows, which is what has happened in this half and we have been successful.

And secondly, I think that what we have here is a commitment to outperform the market, which will mean that the average growth in CIE's organic sales in these 4 years strategic plan will be close to that 9% we've undertaken and which we will achieve, as we have done with the rest of the guidance.

In the second question, you asked about margins. It's true that the margins for the CIE organic perimeter, excluding Aurangabad and CIE Golde have been record margins in the second quarter. Regarding how they're going to come in the second half? Well, I'll say 2 things. First of all, they're going to be good enough to meet the guidance. You can take that for granted. The compliance with the guidance 2019 will never be in doubt.

Secondly, you do have to consider one effect, and this again is historical, and we have the track record of many quarters and many years at CIE to prove it. The first part of the -- the first half is closer to 6 months, and the second half of the month -- of the year is closer to 5 months. In other words, the level of activity is always less. And the margins, if you look at the track record, is usually somewhat lower.

Having said this, I go back to the first pointer, both regarding outperformance and regarding growth and regarding margins, I'll refer to the guidance for 2019 and confirm once again that we're going to achieve it.

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Operator [14]

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There are no further questions in the conference, so I'll now hand over the call to the speaker.

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Lorea Aristizábal Abásolo, CIE Automotive, S.A. - Director of Corporate Development [15]

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(interpreted) Well, thank you all very much for your time, and good luck with the results season.

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Operator [16]

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(interpreted) This ends our conference call. Thank you very much for attending.

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Editor [17]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.