Nemak, S. A. B. de C. V. (NEMAKA) Earnings Call Transcript

Good morning, everyone, and welcome to Nemak's Third Quarter 2026 Earnings Webcast. I am Denise Reyes, Nemak's Investor Relations Officer, and I am pleased to hold today's call along with Herve Boyer, Nemak's CEO; and Alberto Sada, CFO; who are here this morning today to discuss the company's business performance and answer any questions that you may have. As a reminder, today's event is being recorded and will be available on the company's Investor Relations website. Herve Boyer, our CEO, will lead off today's call by providing an overview of business and financial highlights for the quarter. Alberto Sada, our CFO, will then discuss our financial results in more detail. Afterwards, we will open for a Q&A session, which participants may join live or submit written questions via the Q&A function. Before we get started, let me remind you that information discussed on today's call may include forward-looking statements regarding the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions you not to place undue reliance on these forward-looking statements. Nemak undertakes no obligation to publicly update or revise any forward-looking statements whether because of new information, future events or otherwise. I will now turn the call over to Herve Boyer.

Thank you, Denise. Hello, everyone, and welcome to Nemak's Third Quarter 2026 Earnings Webcast. During the quarter, our top line increased 22% year-over-year, reflecting a stable industrial environment in North America as well as contributions from the recently acquired operations in Europe and the rest of the world. The E-Mobility structure and Chassis Applications segment represented approximately 14% of our revenue during the quarter highlighting the continued evolution of our portfolio and the increasing contribution of these applications to our overall business. This strong performance reflects the benefits of our diversified footprint and strategic actions we have undertaken to broaden our capabilities, customer base and geographic reach. EBITDA totaled $174 million, increasing 21% year-over-year, reflecting disciplined execution across the organization and continued progress in our integration and operational initiatives. As we move forward, our focus remains on capturing the opportunities created by our expanded platform, leveraging the strength of our broader portfolio and further enhancing operational efficiency across the organization. We believe these efforts will strengthen our competitive position, support sustainable financial performance and drive long-term value creation for our shareholders. Turning to recently acquired operations. I'm really pleased to report continued progress across all work streams. The integration process has been positive and aligned to plan, supported by close collaboration between teams and encouraging results in the area ranging from operations to commercial to finance and technology. Based on the work completed to date, we continue to see further potential for value creation across the merged organization. And all synergies are currently estimated in the range of $20 million to $40 million with benefits beginning to materialize in 2027 and building thereafter. Beyond the financial benefits, this acquisition represents a transformative milestone for Nemak. It significantly expands our technological capabilities, customer relationships, geographic reach and participation in attractive growth segments particularly within E-mobility, structure and chassis applications. Importantly, it also broadened our product portfolio with highly engineering aluminum and magnesium components strengthening our position in advanced lightweighting solutions. The strategic rationale of the transaction is already reflected in increased commercial activity, a more robust order book and a growing pipeline of opportunities with both existing and new customers. I am particularly encouraged by the cultural fit we see across the organization. We are increasingly operating as a integrated and effective team, leveraging our combined strength and expertise to better serve customers, accelerate value. During the quarter, we successfully completed the refinancing of 2028 euro-denominated senior notes, which is an important milestone in proactively managing our capital structure. The transaction combined access to the Mexican capital market with bank financing, allowing us to extend our debt maturity profile and enhance financial flexibility. This outcome reflects the confidence of our financial partners and our continued commitment to maintaining a disciplined financial profile while supporting the company's long-term strategic objectives. Now turning to commercial activity. we continued to build momentum in new business awards. During the third quarter, we secured approximately $220 million in annual revenue from awarded contracts bringing our year-to-date total to approximately $620 million. This result already exceeds the $440 million of awarded business secured during full year 2025 underscoring the strength of our commercial execution and customer engagement across regions. The mix of awarded business included 70% in the ICE powertrain segment and the remaining 30% in E-Mobility, structure and chassis applications. This reflects both the continued relevancy of our ICE business and the progress we are making in expanding our participation in higher growth applications. From a customer perspective, approximately 20% of the awarded business was secured with Chinese OEMs that we recently added to our portfolio. This reflects the progress we are making in broadening our customer base and expanding our presence in the world, not just automotive market. These efforts are fully aligned with our strategy to diversify our customer portfolio and adapt to evolving market dynamics while creating new avenues for profitable long-term growth. During the quarter, we achieved several important production start-up milestones across our product portfolio. In the e-mobility structure and chassis applications, we launched a state-of-the-art magnesium Cross Car Beam for a premium European OEM manufactured in Austria. We also initiated production of advanced longitudinal members and [indiscernible] for an another premium OEM in Europe, North America and China. These structural components support large SUV platforms across internal combustion, hybrid and fully electric vehicle applications. Beyond our established customer base, we are also expanding our reach with OEMs in China. To this end, we launched innovative and lightweight shop tower programs with 2 leading Chinese OEMs further strengthening our commercial position in one of the world's most dynamic automotive markets and highlighting the growing relevancy of our capabilities and leading Chinese manufacturer. Furthermore, these platforms are powertrain-agnostic. Therefore, diversifying our exposure to different propulsion systems and supporting long-term growth opportunities across a broad range of vehicle architectures. At the same time, in the ICE powertrain segment, we started manufacturing the first Rotacast V8 engine block at 1 of our facilities in Germany. This highly integrated and technically demanding application underlines the versatility and competitiveness of our proprietary technologies. We also launched production of a complex 7.3-liter cylinder head in North America, a highly engineered component that combines lightweighting, durability and high performance requirements. Overall, these launches reinforce the continued relevancy of the ICE powertrain segment and our ability to deliver differentiated and complex solutions to leading automotive manufacturers. I am also pleased to share that our commitment to operational excellence continues to be recognized by customers across different regions. During the quarter, our operation in Chongqing, China received the Quality Excellence Award from Beijing Benz Automotive recognizing the team's consistent delivery performance and reliable quality. In addition, our operation in Chennai, India, received the Supplier Sustainability Award from Tata Motors in recognition of its waste water management initiatives and strong commitment to sustainability, environmental stewardship and operational excellence. These recognitions reflect the dedication of our teams around the world and reinforce the trust our customers place in Nemak as a reliable partner. This concludes my remarks. Thank you for your attention, and I will now hand the call over to Alberto.

Thank you, Herve. Good morning, everyone. I will begin with the highlights of the quarter and an overview of the automotive industry developments across our key regions, followed by a review of our consolidated and regional financial results for the third quarter of 2026. During the quarter, revenue increased 22% year-over-year, mainly reflecting the incorporation of the acquired operations and higher aluminum prices. EBITDA grew 21% to $174 million supported by the contributions from the recent acquisition and progress on the integration and operational initiatives. In addition, we successfully concluded the refinancing of our 2028 senior notes, which extended our debt maturity profile, diversified our sources of funding and reduce our refinance risk. Turning to the automotive industry. Market conditions remained mixed across our key regions during the quarter. In North America, consumer demand remained resilient. Light Vehicle sales were stable year-over-year, while industry inventories remained steady at approximately 51 days of supply. Production in the region declined approximately 4% year-over-year during the quarter mainly reflecting extended summer downtime in certain OEM operations. Regarding the USMCA, following the July review, the agreement remains in force, and discussions among parties continue. We reiterate that under Nemak's commercial agreements, our customers take possession of our products ex works at our facilities. Therefore, they are responsible for our logistics and export and import activities including an applicable duties or tariffs. In Europe, light vehicle sales increased approximately 5% year-over-year during the quarter, supported by broader model availability, improving affordability and continued electrification trends. Battery electric vehicles continue to gain share and now represent nearly 1/4 of new vehicle registrations. However, regional production declined approximately 1% year-over-year as a stronger demand continued to be largely supplied through imports, particularly from Chinese manufacturers. In addition, lower exports and elevated energy costs remain headwinds for the industry. On the regulatory front, the legislative process continues on the European Commission's proposal to introduce greater flexibility the post-2035 CO2 framework, which will replace the factoban on internal combustion engines with a 90% emissions reduction target. If adopted, this would reinforce the role of hybrid and plug-in hybrid powertrains throughout the next decade, an area where Nemak remains well positioned to support these customers. In China, market conditions remain challenging. Light vehicle sales declined approximately 24% year-over-year during the quarter as the impact of government incentive programs moderated and demand for internal combustion vehicles continue to weaken. Vehicle exports remained a key support for the industry, partially offsetting softer domestic demand. Nevertheless, light vehicle production decreased approximately 6% year-over-year during the quarter. In South America, industry conditions remain favorable. Light vehicle sales grew 11% year-over-year, benefited from numeral launches, fleet renewal activity and healthy labor market conditions particularly in Brazil. In turn, regional light vehicle production increased approximately 3% year-over-year during the quarter, supported by manufacturing investments, new production lines and the continued expansion of local operations by Chinese OEMs. Overall, global light vehicle production is expected to reach approximately 91.5 million units in 2026, nearly 2% lower than last year, with China accounting for most of the decline. Outside China, the industry outlook remains broadly stable, and Nemak's diversified geographic and technology footprint positioned well to navigate this environment. Turning to our financial results. Revenue was $1.5 billion, a 22% increase versus the third quarter of last year. This performance was driven by the incorporation of the acquired operations, attributed $158 million as well as higher aluminum prices. ICE powertrain revenue totaled approximately $1.29 billion, while e-mobility structure and chassis applications revenue amounted to approximately $214 million representing 14% of consolidated revenue. EBITDA was $174 million, 21% above the $143 million reported in the third quarter of 2025 and 2% higher sequentially. The improvement was due mainly to the contribution from the acquisition, a favorable product mix and commercial negotiations. EBITDA margin was 11.6%, broadly stable versus last year. Operating income totaled $25 million compared to $26 million in the same period of last year affected by noncash asset write-offs of approximately $24 million and extraordinary costs related to our footprint optimization initiatives. SG&A was $112 million, in line with the recurring level of approximately $110 million per quarter that we anticipated on our last call and compared to $80 million in the same period of last year. The year-over-year change is related to the incremental expenses from the acquired business. In turn, net income was approximately breakeven in the quarter mainly reflecting the impairments recognized during the quarter and higher financial expenses, including onetime costs related to the refinancing. These factors were partially offset by an income tax benefit. This compares with a $25 million net income reported in the third quarter of 2025. Turning to the balance sheet. Net debt was approximately $1.76 billion at the end of September, broadly unchanged from the end of June. Cash and cash equivalents totaled approximately $320 million. On a pro forma basis, interest coverage ratio was 4.9x. Our commitment to deleveraging remains unchanged and we continue targeting leverage levels closer to the 2.0x over the medium term through EBITDA growth, disciplined capital allocation and free cash flow generation. During the quarter, we fully refinanced our EUR 500 million, 2.25% senior notes due in 2028. The transaction was funded through a combination of local bond issuance in Mexico and the bank loan. The local bond issuance for PHP 7.4 billion was swapped into approximately EUR 371 million through a cross-currency swap at the blended euro cost of approximately 4.36% based on reference rates at closing. The bank facility was for EUR 130 million with a 5-year maturity. With these transactions, we have now completed the liability management for 100% of our outstanding notes. As a result, we extended the average life of our debt from approximately 3.2 years, to 4.0 years, reducing refinancing risk and diversifying our funding sources while keeping a debt profile aligned with our global currency exposure. Capital expenditures totaled $100 million during the quarter compared to $70 million in the same period of last year. The incremental CapEx was mainly driven by investments associated with our Augusta, Georgia facility which remains a strategic priority as we prepare for future structural and e-mobility programs. We continue to align a disciplined approach to capital allocation. Moving to our regional results. In North America, revenue increased 15% year-over-year to $747 million, driven by higher aluminum prices and product mix. EBITDA increased 9% to $73 million as product mix and commercial negotiations more than offset the impact of the appreciation of the Mexican peso. In Europe, revenue increased 30% year-over-year to $522 million primarily due to the incorporation of the acquired operations and higher aluminum prices. EBITDA increased 32% to $66 million, reflecting the contribution from the acquired operations. In the Rest of the World, revenue increased 32% year-over-year to $231 million, reflecting the contribution of the acquired operations. In turn, EBITDA improved 34% and to $35 million. Overall, this quarter reflects progress in integration and a stronger financial foundation following the refinancing. We remain focused on accelerating synergy capture, improving profitability and strengthening free cash flow generation, supported by our diversified footprint, solid liquidity position and proactive approach to capital management. We believe Nemak remains well positioned to continue creating sustainable long-term value for our stakeholders. I will now turn the call back over to Denise.

Thank you, Alberto. We are now ready to move on to the Q&A portion of the event. [Operator Instructions] We will now open the floor for questions. The first question is from Jonathan Koutras from JPMorgan. Jonathan, please proceed with your question.

I have 2 questions on my side. The first one on the impairments, right? So which plants does the $24 million footprint optimization impairment related to? Is that a legacy Nemak plant? Or is it the Austria plant originally from GF Casting and should we expect more charges or restructuring cash costs in the fourth quarter and into 2027. The second question is still on [indiscernible], just to clarify. I was under the impression that the Georgia facility was going to begin operations already in the third quarter. So -- was there a reason for a delay? Or was that just wrong, let's say, I had misunderstood and again, the estimate here of top line accretion from this plant still is the $170 million to $200 million annually, correct?

Thanks for the question, Jonathan. Let me just answer the first one related to the impairment that we performed this quarter that relates to a legacy Nemak plant, which has been operating with a lower volume, and that's part of our overall strategy to consolidate revenue on -- or volume to the different plants. Would there be more in 2027, that's something that we are analyzing. So certainly, we will keep you informed. But for sure, I mean, we're always looking for ways how to optimize our footprint in the most optimal way. .

And Herve speaking to that. And when it comes to your second question for the new greenfield in Augusta, Georgia. So now you got it totally right. So the plant is currently ramping up. We started deliveries a couple of weeks ago, we have got the okay to ship from our customer BMW at a very limited volume so far. And then we are ramping up step by step. There is quite sophisticated rampant plan supported both by China and by Augusta, until Augusta can gradually increase the footprint the numbers of -- that you just communicated when it comes to the outlook of the revenue remains valid. It seems that this vehicle has been very well welcomed in the market. So we have even a push from our customer to see how we could supply more parts than having a steeper ramp up.

No, perfectly clear, Herve. And now Alberto, just a follow-up to that. The Austria plant in Herzogenburg, right, that 1 still hasn't been written off completely, right? That's still going to flow in the fourth quarter. I assume?

Correct. That's still to happen.

And the next question is from Emilio Fuentes from GBM.

My first question is on the synergies from GF Casting Solutions. Could you specify where you're seeing the most significant benefits? And if you have seen some of those figures you commented already reflected in this quarter's EBITDA. And I have a second question on Europe and rest of world markets. Could you give us a guidance on where do you see EBITDA margins normalizing after the integration?

Thanks for the question, Emilio. Related to synergies, and I think we have made comments on this in the past. We're expecting this to be somewhere between the range of $20 million to $40 million on a recurrent basis. And those come from a combination of different aspects. We have made a very thorough exercise on how to deliver value from the integration of Georg Fischer. And they come from both our ability to implement best practices all along. Georg Fischer Casting Solutions had a great operations and they also have opportunities. So I think both ways, there are means of us to improve efficiencies and capitalize that as potential benefits. We also have scale effects that come from our ability to buy at a larger scale. And ultimately, we have ways how to optimize our overall footprint as we have discussed with the adjustment of our plant in Austria. So it's a combination of different elements. We also have opportunities to improve our CapEx figures by using existing equipment on both sides with the business that we have on our backlog. So it's a combination of multiple things. Most of them go through the P&L, other ones are more cash flow driven, but that essentially adds to the entire synergies figures. We are not seeing those yet in the third quarter of this year. Those should be gradually materializing next year. And then related to your question related to the ongoing margins, I think what you see right now in terms of margins for our European operations reflect pretty much as well as the rest of the world, how we're seeing things with the addition of the consolidated business. Certainly, there is seasonality on our results, as you can see also on the quarterly development. But ultimately, we see those figures not changing that much from what we see them right now aside from that positive effect of synergies as we move along in the next year.

Our next question is from Michal [indiscernible] from Principal.