CIE Automotive, S.A. (CIE) Earnings Call Transcript

Good afternoon, everyone. Welcome to the Q3 results release of CIE Automotive. Questions can only ask in writing via the webcast. The conference will start soon. Thank you for waiting. Good afternoon, everyone, ladies and gentlemen. Welcome to the third quarter results release for CIE Automotive. We have Lorea Abasol, Director for corporate development. There will be a Q&A at the end, and it will only be possible to ask questions in writing via the webcast. I'll now hand over to Lorea. Go ahead, please.

Good afternoon, everyone. And if you agree, we'll start with the presentation by reviewing the evolution of the various markets during this quarter, a quarter that presents a picture that's very similar to the 1 we saw in the first half of the year with very different developments between geographies, which confirms even more so if possible. the growing role of Chinese manufacturers in several geographic areas. Let's start with Europe, if you agree, Europe where production levels have remained flat during the third quarter as well as in the first 9 months of the year. And if anything has become clear this quarter, it is the Chinese manufacturers progress, as we said, which is far from moderating, on the contrary, its sales penetration continues to grow and to consolidate as 1 of the main pressure factors on local production. In fact, Chinese brands have surpassed 11% market share during the months of July and August in Europe compared to 5% in the same months of 2025, thereby doubling their presence in just 12 months. Given this situation, it seems that Brussels could implement new measures, they are still in the preliminary stages. And I would like to highlight 2 themes that stand out. On the 1 hand, an initial agreement between Russells and Beijing to limit imports of Chinese hybrids into Europe to 350,000 units in 2027 compared, and this is important to the forecast imports of 800,000 vehicles in 2026, a measure that would be in effect for 4 years with annual quota increases of 6%. The second theme I would like to highlight is the important reproachment of positions between Germany and France regarding the Industrial Accelerator Act. You know that Germany has agreed to strengthen European local content requirements, while France has accepted to relax its position on emission reduction targets, therefore, an understanding between these 2 major automotive powers that could facilitate the approval of new regulations and accelerate it's coming into force, which is very important. Meanwhile, electrification continues to gain ground in Europe, driven largely by this growing penetration of Chinese manufacturers with an increasingly broad and competitive supply and by the rising fuel prices stemming from the Iran war to give you a figure, in this third quarter of 2026 electrified vehicles have already reached at 38% of sales versus 30% accumulated as of June 2026. This European environment continues to be extremely demanding. But I think that it's still important to highlight that CIE Automotive once again has shown its ability to grow above the market accumulating an outperformance of 13 percentage points in the first 9 months of the year driven by the addition of Alludec and the strong organic growth of the company. Let's continue with North America, a geography that has experienced a deterioration in its market conditions during this third quarter, with a fall in vehicle production of 5% which gives us 2% on the year-to-date. This situation is mainly due to the moderation in U.S. demand with vehicle sales that accumulate a drop of 2% in the year. What's the context, Assistant inflation, high vehicle prices, high fuel prices for consumers. And on the other hand, a significant tariff uncertainty with the revision of the USMCA for manufacturers, which continues to constrain their production and investment decisions. Therefore, in this context of volatility and uncertainty, CIE has recorded a drop of close to 5% in the first 9 months of the year compared to 2% for the market situation that we are convinced will be reversed in the coming quarters as the USMCA's regulatory framework becomes clearer and more visible. China situation, which remains as it was in the first half with a 6% fall in production, both in the third quarter and in the year-to-date. And to summarize a great deal, 3 major dynamics in the region. The sustained growth of exports, which exceeds 8 million vehicles in the first 9 months of the year, 66% more than in the same period of 2025. Secondly, a domestic demand, which continues to show a strong contraction with a drop in sales of 22% in the third quarter, in line with the cumulative figure for the year. And the persistent price war, which still continues, in this context and with this dynamic, the Chinese government presented its new 5-year plan for the period 2026, 2030 in September with the aim of addressing the sector's problems and to try to make it a more stable and profitable sector for all players involved. This is the context for CIE and our sales in this context have dropped 11% on the year-to-date with a 5% underperformance compared to the market. Although I want to highlight that we maintain high margins and high cash generation, which is what's important and a priority for us. And looking ahead, a possible moderation in the price war favored by the measures announced by the Chinese government, which could help stabilize the market and create a more favorable environment for our business. We are moderately optimistic. Brazil continues to consolidate as 1 of the most dynamic markets in the industry with sustained growth and very favorable prospects with productions that have grown by 9% in the quarter and 10% in the year-to-date. Brazilian industry, which continues to rely on strong structural factors, such as the low motorization rate still below 30%, financing conditions that have measured have improved somewhat, and local supply chain incentive programs launched by the government. However, we still see a major imbalance between sales and local production. In the third quarter, for example, sales have grown by 18%, almost twice as much as production. A difference that is explained obviously by the increasing penetration of imported vehicles from China. With a view to 2027, the coming into effect of new tariffs on vehicles imported under the CKD regime could help moderate this trend and we'll provide more incentives for more local production and favor the Brazilian automotive industry. In this context, we have recorded a growth of 17% with organic and inorganic contribution compared to a market that has advanced by 10%, which translates into an outperformance of 8 points. And we end up with India, a market that continues to stand out for its enormous structural growth potential, both in passenger vehicles and in other segments, passenger car production has increased by 19% in the third quarter and 16% in the year-to-date, accompanied by an absolutely dynamic domestic demand with sales that have grown so far this year by 18%. And rest of the segments have also grown significantly. Two-wheelers, 20%, tractors 18%, trucks 16%, so it's a market that grows in all its sectors. And it's grown based on structural factors, such as a motorization ratio of less than 10% and expanding middle class and an industrialization process that continues to attract new investments as well as short-term factors such as the positive impact of its VAT reform for vehicles, a context in which CIE has grown in the year-to-date by 23% compared to a market of 16% with an outperformance of more than 7 points. We close the chapter on individual markets and refer to the global market, which has fallen by 2% in the quarter and 1% in the first 9 months of the year. CIE has accumulated an 8% growth at a constant exchange rate in 2026, surpassing the global market by 9 points. And we can say that approximately half is due to organic contribution and the other half due to inorganic contribution on a global level for 2026. The estimate is that the fall in production will be 2% which would represent a fourth quarter with a market drop of 4%. We'll see. Prospects are improving medium to long term with an annual growth expected to be between 1% and 2% through 2030. In a scenario that will be driven by the stabilization of the more mature markets, including China, we include China here and a strong growth in markets like India and Brazil that will gain weight in the global output. And growth in our sales, which also spills over into our P&L with a third quarter with magnitude higher than those recorded in the same period of the previous year, EUR 1,037 million in sales, EUR 195 million in EBITDA with this extraordinary margin of 19%, an EBIT of 14% and a net profit of EUR 83 million. The third quarter has reversed the negative exchange rate recorded during the first half with a favorable evolution of both the dollar and the real which has offset the unfavorable development of the Indian rupee and allowed the currency impact to be virtually neutral in the quarter. Positive headlines that are also reflected in the year's cumulative figures with results for the first 9 months that show a combination of growth and profitability that is extremely good with a margin of 19%, in line with our guidance and an EBIT margin above 14%. And a very well-balanced profitability across geographies. We always mention this, but we have to emphasize it. This reinforces the strength and the stability of the group's margins. Talking about cash flow, we see a third quarter in which there have been no corporate transactions or M&As with the only highlight of the final dividend paid out in July, amounting to EUR 56 million. In the year-to-date, CIE has generated EUR 409 million in operating cash, which is equivalent to a conversion of more than 71% above the 65% earmarked in our guidance and operating cash generation that is extremely high which continues to enable us to execute our capital allocation priorities in parallel, we can move forward in the integration of new companies as we've done with the acquisition of Altec at the beginning of the year. We can continue to remunerate the shareholder on an increasing basis we can boost the growth -- organic growth. This year, we have an investment in growth CapEx of EUR 47 million in the third quarter and EUR 132 million altogether. So all in all, the group's net financial debt, which stands at EUR 940 million with DFN EBITDA ratio of approximately 1.2x, which without the corporate operations, it would be below 1, virtually at historic lows. We're coming to the end of the conference. So I would just like to finish by focusing not on today, but on the future, and reiterate with confidence and optimism that we're going to deliver the objectives committed to in our 2026, '27 guidance and it's compliance that we believe should be underlined. We believe it's particularly relevant in the current sectoral context in which some of the main European suppliers have scaled back their forecast as we've seen in the last few days. And this highlights the strength of our business model. So we finish up on a positive note and now open up our question time. Thank you very much for your attention.

We start the questions and put them together by themes to make it easier for everyone. First question on how we protect our margins in this inflationary context or negotiation is more difficult with OEMs than in the past. We've gone through situations like this and questions like this not so long ago, if you remember, in 2002, we had peak inflation in materials and in energy, specifically with the Ukraine war in Europe. So yes, there are significant negotiations with the clients, but remember that for materials, we have the pass-through and indexing clauses and other issues such as energy, we have 1 of negotiations with our track record shows an extremely high level of recovery with fixed lines that understand the situation. So we're going to continue to monitor and hope to have good news has happened with the negotiations at the end of 2022, '23. A specific question on the Brazil margins, which have been particularly strong in Q3. Is that sustainable? What's behind the high margins in Brazil? And is it sustainable in the short term? That's a question that's difficult to answer. And we usually always give the same answer, 1 quarter is just a sign, I think that we have to look at the cumulative figure for the 9 months. This as a trend. We are looking at Brazil, which is tractive above the global margins for the group, which reflects a geography where not everyone feels comfortable, a geography where there are many actors, especially foreign actors, that invested in Brazil in the past, but it hasn't worked out. They don't feel comfortable with the Brazilian business culture with volumes, which perhaps they expected to be higher to get a return on their investments, which they're not obtaining. And we, with an impressively good local management to feel very comfortable. We continue to pick up our market share at a very significant rate. And this is reflected in a profitability that make 2 things happen. Brazil is gaining weight in the total of CIE. And secondly, these margins are above the average global margins, and we expect this to continue. Continuing with Brazil, we're asked about the Chinese OEMs that are localizing and our status with them. There's not much new, I'm afraid. A few days ago, we were talking to our Brazilian executives, and they confirmed that we are not only approved as potential suppliers for some Chinese suppliers, but we are putting out tenders, but we haven't picked up any project yet. We have to be honest. But meanwhile, we believe that measures -- and I think I mentioned it during the presentation, measures such as the tariff imposed on vehicle imports under CKD, and we start in 2027. We feel that the economic rationale is that this should speed up local production. So we'll monitor this because this is the great window of opportunity. It's also true, and I'm going to be very honest. It's also true that we have to understand that when you start to localize you often start with elements such as tires or glass. We're not initially local, but we expect to be there in the second round, and that's what we're working on. Regarding Europe, where many players and suppliers had a poor performance recently. What gives us that outer performance. It's a good question because I don't think that the answer is particularly obvious. That positive growth of CIA in Europe. That outperformance with regard to the market is the net result of the positive and negative factors, and we have to put them all on the table. The pressure of the growing penetration of Chinese suppliers in sales in Europe and the pressure from the Chinese increase in their CKDs in European production, which takes away market share from us is clearly a negative factor. But we have a positive factor that not only offsets it, but provides a positive net. And that's the consolidation of the market share, the reduction of the panel of suppliers, the selection, the Darwinism, let's say, that's taking place among suppliers in Europe. And this means that we're concentrating that market share that others in financial situations that are not as good, are losing out on. So I think that it's the net of the positive and negative effects that give us a positive result. On the other hand we have seen the -- nothing worrying. I have to start by saying that nothing worrying. I think I said it and I'm going to repeat it that we have the absolute conviction that its situation that's going to turn around in the coming quarters when there's a context of greater visibility. Having said this, the underperformance has been there for a couple of quarters. It's true, the underperformance in North America. Let's look at the context. We have a very volatile environment and I said that there was a weakness in U.S. demand, which is very significant, an increase in fuel prices, and this has a direct impact on production in the U.S. and Mexico. You know that we are in Mexican and exports from Mexico to the United States have fallen. And I added that we have an especially demanding base at CIE and an additional loss in some volumes in Mexico due to some one-off decisions made by some customers where they've moved part of the production, but it's not at all worrying. And as I said, we're going to turn the situation around. But there's a little bit of everything. There may be also a slight change in the market mix towards hybrid vehicles and a little bit more weight from the Asian manufacturers where we're less represented in North America. But above all and above everything else, our interpretation of the situation has to do with a very volatile market environment and a very uncertain environment around the revision of the USMCA. This is constraining the decisions on production allocation manufacture decisions, especially in Mexico. And this is a complicated context that we're sure is going to turn around in the coming quarters. Regarding the CapEx in India that you referred to in the recent India call, there have been some focuses on inorganic growth and more CapEx in the future. Could you give us more color on that? I'm delighted that people also listen to the CIA India results conference call. What can I say about that 8%? Well, first of all, that our investments don't have the same intensity over sales in the various regions. That's obvious. For instance, last year, in North America, we invested almost 6%. And in Europe, we invested 4%. Well, these are market context, growth context and investments with a different degree of intensity. This comment -- I think they explained it, but I'm also going to try to explain it a little. It's a comment about India being 1 of the CIE areas with a strategic priority and an investment priority where in the past years, you know that we've dedicated important resources with significant capacity expansions in practically all the divisions, all the technologies. And remember that is market that is growing at a rate of 2%, and we're outperforming. That's a lot of growth, and it needs investment. And that 8% they mentioned, which may be 7%, 8% or whatever, what it implies is an increase in capacity. I think that they even mentioned a project to increase capacity for the Jakan tank presses. And there are a number of growth projects that could lead to new greenfields. And I'm not going to break the news and it will be explained when it makes sense to do so in the coming quarters, but that's the context, that strategic priority that CIA has with a market, which without a doubt is growing. Without a doubt, it's gaining weight in world production. And we following the pace. But as a figure to give you an idea, India is approximately 7% of world production. And in the coming years, it will be over 8%. It's gaining weight, so we're there to make the most of it. We are asked about regulatory news in Europe, both the Industrial acceleration emissions, et cetera. Well, I mentioned 2 things that we feel among the most important in what's going on, that agreement between Brussels and peaking or pre-agreement between Brussels and Peking. You set limits on imports would be 350,000 imported hybrid cars into Europe. And I'd like to remind you to provide a context, the tariffs on Chinese cars into Europe, apply only to electric vehicles. They don't apply to hybrid vehicles or to combustion engine vehicles or to the CKD cars that come in. So in that scheme of things, in the last 2 years since the tariffs were implemented, there has been a significant growth from China in imports of hybrid and combustion engine car that don't have a tariff. And what the EU is trying to do now is to establish a limit on that. and there's going to be a hard cap. It's not that there's going to be an initial tariff after car #350,001, there's going to be a hard cap, no additional cars can be added, but we're awaiting regulatory clarifications in the coming weeks. And we'll see how it goes. And I think I also mentioned the Industrial Accelerator Act and the new agreement between France and Germany, which I think is extremely important. For the first time, we have the feeling that the various European countries and 2 major automotive powers are starting to row in the same direction. On the 1 hand, France has agreed to increase the flexibility of the CO2 emission reductions from 100% to 90% in 2025 without compensating for the other 10%. And Germany has expected to strengthen the local European requirements when before because on the conflict of interest, of manufacturers and major Tier 1s in China, they were less favorable to this, and now they are defending it. So now they do understand that there needs to be a significant part of local content. So the unofficial forecast, the unofficial forecast is that the European Environment Commission plans to vote on this context on November 4. The text should then go through the European Parliament in mid-December, more or less. And the approval process would be put to the European Council, all the bureaucratic process in Europe as usual, which probably means that the Industrial Accelerator Act in its best version could be approved in the first quarter of 2027. That's not bad if that's the case when not so long ago, we were saying that it could be ready by the end of 2027 in view of the disagreement between the major powers. And I think that this summarizes the European regulatory news. And now we're asked about news in the M&A area. And where are we in the various processes, active, very active. Active, very active. I'm looking for the right word and with the optimism of being able to give some good news in the near future. And we're asked about the guidance. Bearing in mind that we've had such a good first 9 months, why only confirm and not expand insatiable as usual. I think that in the current term market context, where the only headlines we read every day are profit warnings and downscaling of forecast, maintaining the guidance that deserves a gold medal. And linked to this, what do we think about the Bloomberg consensus, most recent one. Well, I saw this morning the Bloomberg Consensus to get ready just in case. And I think that our analysts haven't listened to the conference results from the second quarter, and I haven't listened to our CEO because the Bloomberg Consensus is practically the same as in June. And I think [indiscernible] is very explicit about the fact that in sales and operating margins, EBITDA and EBIT, he felt comfortable, but he felt that the nonoperating costs in the P&L were undervalued. And since I've seen the consensus hasn't changed, that's why I think that they haven't listened much to Jesus Mary's words. And I think that a revision will need to be made. And in view of the share price, why not share buyback program. We've never said no to that. I've never heard anybody say no. We've shown during our history that we know how to remunerate the shareholder in all the various modalities with a dividend. Yes, nobody has said no. Well, these are the questions we had. Well, great. Thank you all very much for your attention. And you know that we're here to follow up on any other questions.