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Edited Transcript of GISSAA.MX earnings conference call or presentation 24-Oct-19 4:00pm GMT

Q3 2019 Grupo Industrial Saltillo SAB de CV Earnings Call

Saltillo, Coahuila, Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Industrial Saltillo SAB de CV earnings conference call or presentation Thursday, October 24, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jorge Alberto Rada Garza

Grupo Industrial Saltillo, S.A.B. de C.V. - Head of Draxton & Auto Parts

* Jorge Armando Mercado Perez

Grupo Industrial Saltillo, S.A.B. de C.V. - CFO

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Conference Call Participants

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* Alejandro Azar Wabi

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Héctor Manuel Maya López

Santander Investment Securities Inc., Research Division - Research Analyst

* Jose Vazquez;GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good morning. My name is Bree, and I will be your conference operator. At this time, I would like to welcome everyone to the Grupo Industrial Saltillo's earnings conference call. (Operator Instructions)

I will now turn the call over to Rafael Borja with i-advize. Please go ahead.

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Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

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Thank you, and good day, everyone, and welcome to Grupo Industrial Saltillo's Third Quarter 2019 Earnings Conference Call. Joining us today is GISSA's Chief Financial Officer, Mr. Jorge Mercado; Draxton's Global Manager and GISSA's Chief Operations Officer; Mr. Jorge Rada; and GISSA's Investor Relations Manager, Mr. Arturo Morales. Please be advised that this call is for investors and analysts only.

During this call, they will be discussing GISSA's performance after the earnings release issued yesterday. 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 presentation slides that are now available on the live webcast.

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 are subject to change due to a variety of factors. For a more detailed and complete disclaimer, please refer to the earnings release. Also, all figures discussed are in Mexican pesos unless otherwise stated.

It is now my pleasure to introduce Mr. Jorge Mercado to begin with the main highlights of the quarter. Mr. Mercado, please go ahead, sir.

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [3]

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Thank you, Rafael, and thank you all for joining us today. This quarter showed an improved trending results compared with the previous last quarters. Even though we're facing a volatile environment and weakness in economic activities in most of our geographies, we delivered a strong EBITDA performance, growing double digits. This was the result mainly of our rightsizing initiatives in Draxton and our restructuring efforts in Vitromex.

Recently, we announced the refinance of our debt to a syndicated loan of up to $245 million. The new structure has significant advantages over the previous loan. We were able to free up $137 million of amortization in the next 2 years. We were able also to lower financing costs while improving our leverage metrics. Net debt-to-EBITDA leverage is currently at 1.9x. We're in a good position to face either the challenges or opportunities of the coming quarters.

But now let me turn the presentation to Jorge Rada to start to talk about the business, Draxton.

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Jorge Alberto Rada Garza, Grupo Industrial Saltillo, S.A.B. de C.V. - Head of Draxton & Auto Parts [4]

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Thank you, Jorge. And thanks everyone for joining us today. The North American automotive market reported a slight growth in sales and vehicle production, supported by the solid performance of the U.S. economy as the FED has reduced interest rates. In Europe, we observed a lower decline in production and sales, 1.2% and 0.6%, respectively, than those reported in the first semester of the year. This shows signs of stabilization. In the same way, China reported much lower variation, 2% negative, in sales for the quarter. For the medium term, analysts are estimating that the Chinese automotive market will return to its growing track as this quarter reported a 6% growth in sales versus the second quarter of 2019.

Regarding Draxton's quarterly performance, Draxton's global sales in the quarter was 9% below the previous year. This is explained by a 4% volume decrease due to the planned phase out of some programs but also of the dollar/euro exchange rate impact, which explains 2 percentage points of the variation as well as a reduction in scrap metal price which is included in our [total track right formula].

EBITDA for the quarter was $35 million, 32% higher than the third quarter of 2018. Despite lower volumes, Draxton was able to post EBITDA growth due to our productivity improvement action that we have implemented in all the business units and better product mix in North America, with more ductile iron products in addition to the lag in the calculation of prices and the international reference indicators for raw materials are posting as downward trend. This quarter's results have provided a change in trends in accumulated figures. Draxton's EBITDA was $105 million, aligned with the same period of last year.

During these 9 months, Draxton, as an integrated global supplier, has been awarded programs totaling $120 million annually. If we add this figure to the $130 million nominated in 2018, Draxton will begin production of programs amounting $250 million annually in the next 24 months. Most of these new businesses are related to brake systems, systems that will continue to grow in share of our portfolio. This system has potential to become 70% of Draxton's portfolio of our Mexican business unit. As we have mentioned before, vehicles in the future, whether internal combustion, hybrid or electric, will continue to use similar brake systems as the ones produced today, making this platform a strategic one within our portfolio.

This concludes my remarks about Draxton.

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [5]

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Thank you, Jorge. Now let's move on to Vitromex. Vitromex sales in the Mexican markets have been growing at a higher pace than the industry, while domestic market has shown slowdown. We have implemented a product portfolio renovation and a capacity rationalization program as well as improving our service level, generating positive results and a better product mix.

EBITDA for the quarter had a favorable comparison versus the same period of last year, even as we faced challenges in natural gas, maintenance costs and onetime charges related to restructuring and Vitroker line development expenses. [The volume improvement trend in Vitromex], as we have mentioned in previous calls, is tied with revenue growth in Mexico first, followed by improved productivity and restructuring actions, driving significant margin expansion. We feel confident that we're on the right track in Mexico, both in terms of our commercial strategy as well as restructuring efforts.

While we're still not satisfied at the speed at which we're regaining volume in the U.S. market, we continue to go through the process of becoming a supplier to key home center customers, which have been approved from the manufacturing quality side. [As 2% indeed] in their own internal margin changes, we remain confident that even if it takes longer, we will start reselling in the future. We're adjusting our cost structure to be [stagnant].

Now moving on to the consolidated figures of the quarter. Our 3 quarter include Evercast and excludes Calorex. Now this being said, the consolidated revenue decreased 6% year-over-year, mainly due to the market conditions that we have mentioned before. This quarter's EBITDA increased 19% year-over-year. Most of this is explained by the Draxton's performance and a positive comparison with Vitromex. It is also perceived that avoiding raw material cost increases affected profitability.

Now thank you all for your attention, and this concludes my remarks for today.

Operator, please begin our Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [2]

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Thank you. What I want to ask the audience, since everybody speaks Spanish, that we have native English speakers. Can you conduct the questions either in Spanish or English?

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Jorge Alberto Rada Garza, Grupo Industrial Saltillo, S.A.B. de C.V. - Head of Draxton & Auto Parts [3]

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For everyone in English, we will have to do it in conventional form.

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Operator [4]

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(Operator Instructions) Our first question will come from Héctor Maya with Santander.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [5]

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(foreign language)

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Jorge Alberto Rada Garza, Grupo Industrial Saltillo, S.A.B. de C.V. - Head of Draxton & Auto Parts [6]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [7]

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(foreign language)

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [8]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [9]

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(foreign language)

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [10]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [11]

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(foreign language)

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Operator [12]

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(Operator Instructions) And we will take our next question from Jose Vazquez with GBM.

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Jose Vazquez;GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division, [13]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [14]

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(foreign language)

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Jose Vazquez;GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division, [15]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [16]

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(foreign language)

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Jose Vazquez;GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division, [17]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [18]

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(foreign language)

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Operator [19]

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Our next question will come from Alejandro Azar with GBM.

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [20]

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(foreign language)

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Jorge Alberto Rada Garza, Grupo Industrial Saltillo, S.A.B. de C.V. - Head of Draxton & Auto Parts [21]

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(foreign language)

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [22]

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(foreign language)

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Jorge Alberto Rada Garza, Grupo Industrial Saltillo, S.A.B. de C.V. - Head of Draxton & Auto Parts [23]

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(foreign language)

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [24]

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(foreign language)

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Jorge Alberto Rada Garza, Grupo Industrial Saltillo, S.A.B. de C.V. - Head of Draxton & Auto Parts [25]

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(foreign language)

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [26]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [27]

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(foreign language)

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Alejandro Azar Wabi, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [28]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [29]

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(foreign language)

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Operator [30]

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(Operator Instructions) We'll take a follow-up question from Héctor Maya with Santander.

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [31]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [32]

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(foreign language)

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Héctor Manuel Maya López, Santander Investment Securities Inc., Research Division - Research Analyst [33]

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(foreign language)

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [34]

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(foreign language)

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Operator [35]

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(Operator Instructions) And there appear to be no further questions at this time, so I'll turn it back to Mr. Mercado for closing remarks.

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Jorge Armando Mercado Perez, Grupo Industrial Saltillo, S.A.B. de C.V. - CFO [36]

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So thank you all once again for your continued interest in GISSA. We're very pleased to be able to talk to you, to chat and to show what we're seeing about the business. Please don't hesitate to contact us if you have further questions. And have a good day all of you. Thank you.

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Jorge Alberto Rada Garza, Grupo Industrial Saltillo, S.A.B. de C.V. - Head of Draxton & Auto Parts [37]

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Thank you.

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Operator [38]

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This does conclude today's program. Thank you for your participation. You may now disconnect.