CT Automotive Group (LSE:CTA) — Final Results

0:00 Good morning, and welcome to the CT AUTOMOTIVE GROUP PLC Investor Presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab situated in the right hand corner of your screen. Simply type in your questions and press send. Company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Simon Phillips, CEO. Good morning, sir.

0:29 Good morning, everyone, and thank you for joining us today. So I'm Simon Phillips. I'm the CEO and founder of CT AUTOMOTIVE. And with me is Anna Brown, our CFO. So to give you a little bit of background about the company for those investors that don't already know CT AUTOMOTIVE. CT AUTOMOTIVE is an interior business specializing in kinematic parts, illumination electronics, actuators, and vector finishers. Our product range includes things that you see that you see in the car, like things like air vents, armrests, deployable cup holders, in car mood lighting, and panel finishes. So what you can see from the first slide is that is our customer base and and they're well recognized brands. You know, people like Ford, GM, Nissan, Volkswagen, Audi Group, Honda, Tesla, Rivian, Stellantis, and there's even some there's we work with a lot of premium brands like people like Bentley and Lamborghini.

1:31 The business itself can really be sort of characterized by what I would say is high barriers to entry, limited competition, and high technical expertise. It also has long term revenues revenue streams and protected margins. So before COVID, in the ten years run up to Simon, sorry. Just seem to have lost your audio there ever so slightly. Okay. Is it There we go. You're back now. That's great. Thank you. Apologies, everyone. I'm coming from an office in Pune, so the the Wi Fi can be a little bit difficult. So one important thing to understand about the business is our product uniqueness.

2:22 So our products are unique to each vehicle, and we're the only global supplier that once launched into into production, we get revenue streams typically last six years, providing the business with excellent visibility into our forward revenue streams.

2:38 Margins in the business are maintained through open book costings with our customers. Revenue streams come from two forms. One, and the e d and d contracts for design and development, includes things like tuning production lines, etcetera. And and then thereafter, it is the ongoing production revenue. The split ratio in terms of top line turnover is e d and d to production is approximately sort of one to 12. In terms of our manufacturing sort of footprint, so we have a we have a global presence. Our manufacturing plants are are generally located in low cost regions of the world. So that's regions like China, Mexico, and Turkey. We also have distribution centers.

3:23 Those distribution centers are in The UK, The Czech Republic, Spain, Detroit, and Tokyo. And and the purpose of the distribution centers is for us to provide just in time delivery into our OEM customer base. The nature of the business that we're we operate in is always to find better cost benefits for the company to become more efficient. And one of the things that we're doing at the moment is our administration and design functions are led out of our office in Pune, India, which is where I'm coming to you today from. And that helps further reduce our fixed cost base. Growth drivers. So growth in the business is driven by our efficiency and innovation in design and production techniques compared to our competitors, thereby offering low cost prices and the ability then by producing technically advanced products at low costs gives us the opportunity to grow into the market share of the OEMs that you've already seen.

4:25 In terms of geographical distribution of the revenue that you see on the top line, so our sales revenue coming 50% from Europe, 40% from The USA, and 10% from from Asia. Another factor that's helping us really in in terms of general growth is that for most of you guys who are driving cars, you constantly see this increase of the quality of interior content and vehicles. And what we're generally seeing as platforms change from one model to the next is a general increase in dollar value, let's say, per per platform that we operate in.

5:04 So at this point, what we'll do is we'll move on to the investor presentation. I hope that that's given you a bit of background about the business itself. So, Anna, if you could take the next slide. Thank you, Simon. Hello, everyone. I'm Anna Brown. I'm the CFO of CTA AUTOMOTIVE. So I'll take you through the financial highlights first. So as you can see, looking at all of our financial metrics, we have improved in 2023 compared to 2022 across all of our metrics. As our markets reopened in 2023, that helped us to grow revenue up by 15% to CHF one hundred and forty three million in 2023. The gross profit in absolute terms has almost doubled or more than doubled to CHF 30,900,000, and that really was due to benefiting from reopened markets, but also stabilizing direct labor and material costs and importantly, our ability to execute margin improvement initiatives, particularly in the second half twenty twenty three.

6:13 Our underlying EBITDA has also improved from a loss position of EUR 7,100,000 to a profit of EUR 16,100,000, again benefiting from all the improvements at the gross profit level, but also benefiting from normalized container rates and more stringent discipline around foreign exchange. Our underlying PBT improved to CHF 8,300,000 from a loss position of CHF 14,500,000 in 2022. Again, benefiting from all the kind of factors which I have already explained at the gross profit and underlying EBITDA level. We had a strong EBITDA conversion rate to cash of 59%.

7:02 And also we have successfully reduced our net debt from CHF 12,200,000

7:07 to CHF 13,800,000 at the end of twenty twenty three, which benefited from the fundraise, which took place midway through 2023, but also through our ability to generate operating cash in the business. At this point, I will hand over to Simon to cover some operational highlights. Okay. So to take you through some of the operational highlights that we saw in '23. Operations in China did did really great following what was a awful situation of enforced lockdowns in the previous in the previous year. Turkey managed the inflation effectively, and Mexico performed as expected post post start up of what is our new manufacturing plant.

7:52 We streamlined our operations by closing what was an unprofitable facility in The UK. A key focus for us throughout 2023 was implementation and the execution of course automation across our facilities, which significantly enhanced our production efficiency and reduced our costs as we'll be seeing in the gross profit margin later. Additionally, we expanded our India office, which is quickly becoming what I would say is the nerve center of CT AUTOMOTIVE, providing critical support, driving our global operations, and also reducing the overhead costs of the business. We also relocated some production to Ganzhou from our Shenzhen facility, which gives us the the gives us a situation where the labor costs are more competitive there. But also in Ganzhou, we've got higher levels of automation, which resulted in improving our gross margins and driving efficiency as well.

8:54 Moreover, we launched numerous different platforms and programs throughout '23. I suppose most notably was the seven ten forward program out of our Turkey facility, which helped assist in driving that revenue higher. The efficiencies achieved in 2023 will annualize into 2024, read a jump off point of '23. And we are actively working as we speak to further improve those gross profit margins to yield a better result in '24. At this point, I'll pass you back to Anna for so she can take you through the income statement. Thank you, Simon. So let's take you through some of the key financial performance aspects. So looking at the income statement, as I have already mentioned, the revenue has grown by 15% to 143,000,000.

9:53 And as you can see, the growth came both from serial production, which went up to 132,000,000, but also from tooling, which contributed CHF 11,000,000 in 2023 revenue. And that was down to a higher number of projects, which were delivered in 2023. So gross profit, as I already mentioned, benefited from normalized market conditions, more stable direct labor and materials, but also the execution of our margin improvement initiatives during the second half of twenty twenty three, which meant that in absolute terms, gross profit has more than doubled to 30,900,000, which also resulted in an improvement in our gross profit margin to 21.6 compared to 12% last year.

10:51 We also successfully reduced our operating expenses. This was down to, first of all, lower container rates, which went down from almost 13,000 US dollars per container in 2022 down to $6,000 2023.

11:11 We've also deployed some initiatives in terms of rightsizing our overhead base and also more stringent discipline around how we manage our foreign exchange and exposure, which meant that our underlying EBITDA increased to EUR 16,100,000. Our depreciation and amortization remained at very similar levels to 2022 at EUR 5,300,000. We have incurred CHF 2,400,000 of non recurring items. And after taking account of all this, the operating profit settled at CHF 8,400,000 in 2023, which is a significant improvement compared to a loss of $16,800,000 in 2022. After finance costs of $2,500,000 their profit before tax for the year settled at $5,900,000 And after taking account non recurring items, underlying profit before tax resulted in CHF 8,300,000 profit compared to CHF 14,500,000 loss last year.

12:18 We would now like to take you through some of the key bridges. First of all, its revenue bridge, which shows the key building blocks of revenue growth by 15%. So first of all, tooling. Tooling division has delivered 3,900,000 additional revenue in 2023, and that was down to delivering more tooling projects. We've delivered 15 tooling projects in 2023 compared to 12 in 2022. And then you can also see that our production facilities in China, Turkey and Mexico have all been growing during 2023 and contributed overall CHF 14,800,000 in terms of revenue increase.

13:06 Looking at specifically at the programs, so 52 programs were recurring. These are those programs which started production before 2022, and they delivered 9,200,000 additional revenue in 2023. We've also launched four new programs, which started in 2023 and contributed additional $3,000,000 revenue. And one particular program is worth mentioning, because it's quite significant 6,800,000 were generated additional 6,800,000 generated from P33A, which is a program for Mirelli Nissan, which started during 2022. Looking at the gross profit margin bridge.

13:56 So here are the key components, which show the progression from 12% gross profit margin in 'twenty 'twenty two up to 21.6% in 2023.

14:08 Tooling division has contributed 1.6 percentage points. Material cost savings delivered 2.7 percentage point improvement and that was down to normalizing material supply, but also the work which we have done to rationalize and restructure our distribution our supply chain. And in terms of the labor cost savings, these contributed 5.5 percentage points. And the key drivers, as we have already mentioned, were normalized labor conditions in 2023, reduced headcount primarily in China, introduction of automation and robotics towards the second half of twenty twenty three, and also relocation of some of our production programs from Shenzhen to Ganzhou facility in China, which benefits from lower labor cost.

15:10 Underlying EBITDA bridge is showing the key building blocks in terms of the improvement of EBITDA from EUR 7,100,000 loss in 2023 up to EUR 16,100,000 profit. As you can see, in absolute terms, tooling has contributed at the gross profit level of 3,800,000, cereal production SEK 12,200,000 and within that SEK 6,100,000 came from labor cost savings, 3,100,000 came from material cost savings and 3,000,000 were contributed by from margin on additional sales. We also benefited from lower freight costs, 1,700,000 contributed towards the EBITDA improvement as a result of lower freight and also the work which we have done in terms of rationalizing our distribution and supply distribution and logistics chain.

16:15 We have introduced more stringent controls and discipline around managing our foreign exchange exposure. In 2022, we've incurred a foreign exchange loss of 3,800,000, but in 2023, we've managed to contain that volatility and generated a 900,000 profit, a 900,000 foreign exchange gain. And admin headcount cost reduction contributed €900,000 towards the EBITDA improvement.

16:55 Looking at net debt, that has significantly improved from 12,200,000 at the end of twenty twenty two down to 3,800,000 in 2023. The key components were our ability to generate operating cash flow, and that was 8,000,000. We also spent 3,200,000 on CapEx, 5,500,000 on repayment of lease liabilities and interest on our working capital facilities. And we also benefited from the fundraise, which took place mid May last year, which contributed 9,100,000 net of transaction costs. At this point, I will hand you over back to Simon.

17:46 Thanks, Anna. So first of all, let's look at a few of our key operations in China. So our operations in China have been a significant contributor to our overall success in 2023. China contributed roughly about 106,700,000 to our revenue, and that was really driven by a strong recovery in demand post COVID.

18:07 We capitalized post COVID on enforced lockdowns by ramping up production and improving efficiency, which paid a critical role in the revenue growth that you've seen. The The strategic relocation of production to Ganja further enhanced our operational efficiencies, contributing significantly to our gross profit margin bridge that Anna showed earlier. Focused on improvements in our ERP systems has given us improved efficiency in headcount overhead reductions. Our focus on automation and cost management in China has resulted in a substantial labor cost saving, which were which, again, was a key driver to our improved EBITDA. Our operations in China, you could say, have not have thrived, really, since the recovery of post COVID.

18:58 And I fit and that's really sort of showcasing the resilience and the strategic capability of of our our business within that region. So progress on material improvement or margin improvements. So we as you've seen from the EBITDA bridge, we've made substantial progress in our margin improvement initiatives throughout 2023. Automation has been, I would say, the cornerstone of that strategy, significantly sort of enhancing our production efficiency and reducing our labor costs.

19:31 Strategic relocation such as moving production to Ganzhou has further contributed to the cost savings and that operational efficiency. Our I'd say our robust cost control measures have have driven driven significant savings in materials and logistics, and that's resulting in a notable increase in our gross profit margin from 12% to 21.6%. But at this point, I would say it's definitely worth noting again that 70% of our PBT was created in the second six months of the year. So as you can imagine from that, our gross profit margin jump off point was at a higher level in the fourth quarter than average that you saw of 21.6%. These improvements are not just a one time gain. You know, they set a strong foundation for the continued margin enhancement into 2024 and beyond.

20:27 So a review of the operations in Turkey and Mexico. Our Turkey operations contributed about 15,600,000 in revenue. And despite facing the hyper hyperinflation pressure that we saw in '23, our team effectively managed managed the cost and maintained stability. We implemented robust financial controls to mitigate the implication the impact of hyperinflation, ensuring that our operational our operations remains profitable. In Mexico, our post start up performance has been been quite impressive, contributing 9,700,000 in revenue. But one thing worth considering in Mexico at the moment, 9,700,000 revenue is is really just covering our costs. Mexico has been set up to gear up to 30 or $40,000,000, which will start to play out in '25.

21:24 The successful ramp up of the new programs in Mexico has been a key driver of this performance, highlighting our ability to quickly adapt and optimize to new operations in a different location of the world. Both Turkey and Mexico have demonstrated strong operational performances contributing significantly to our overall success in '24.

21:46 So talking about revenue visibility and our new business pipeline. So we have strong revenue visibility going forward, supported by a solid pipeline of new business opportunities. Our long term contracts are recurring revenue streams provided by stable foundations for future growth. We are actively pursuing new projects and partnerships, which are expected to drive additional revenue growth in the next in the coming few years. Our strategic focus on expanding our customer base and entering new markets will further enhance

22:32 Simon, I do apologize. I think we just just had a dip in your connection there. We just lost the last few seconds of that. Okay. Can you hear me again Yes. Absolutely, sir. Thank you. Okay. So just going on to the outlook then. So looking ahead, we're very optimistic about the continued growth and success of CT AUTOMOTIVE. I think historically, we've had a very good track record for that, both in terms of growth, margins and profitability, sadly disrupted during the COVID period, but we strongly believe we're back on target now. The margin improvement achieved in 2023 will continue to benefit us since 2024 with further operation enhancements expected and currently being worked on right now. We are in advanced negotiations for a new debt facility, which will provide us with additional financial flexibility going moving into the future.

23:26 Our focus on innovation and efficiency and expanding our market presence positions us, we believe, very well for '24 and beyond. So we're in our ability to meet market expectations for '24 as we've done it in '23, and we we have a positive outlook for '25 and beyond driven by should the strategic initiatives and strong execution capabilities that you've been able to witness in '23. Just as a a sort of final thing to say, Anna and I are extremely proud of the team efforts resulting in a 70 PBT generate generation in the second half of this year post fundraising and our ability to unlock the chance to be able to drive those margins.

24:16 We've implemented robust systems to prevent future underlying issues and made significant technical accounting adjustments to mitigate FX going forwards. Financial bridge highlights key improvements in turnover and EBITDA executed very efficiently by the management team. And just on, you know, a very last note, I think what we would like to do is we would like to thank our investors for their very confidence in the fundraise and our customers for their unwavering support during the COVID period, which clearly was, you know, a a very very historically difficult time for the business. So on this point, I'd like to pass you back so we can start opening up some of your questions. Fantastic.

25:06 Simon and Anna, thank you very much indeed for the presentation. And ladies and gentlemen, please do continue to submit your questions just using the Q and A tab on the right hand side. Just want the team to take a few moments to review those questions submitted today. I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. Simon and I'm going to just bring your cameras back up. And Simon, if we do get a dip in your connection, we'll switch it off just to keep that audio integrity. Look, we've received a number of questions, both pre submitted throughout today's presentation. If I may just start off with the first question that we've got here, it reads as follows. New business was obviously strong in 2023. How has the new business pipeline developed in 2024? So, I mean, looking into '24 at the moment, I mean, we have got one of the strongest, I'd say, new business pipelines I've known certainly in the period of time that running the business from being a founder. I mean, to give you some sort of examples, the back end of of '24, q we're launching a number of new programs, which include things like Ford Puma, Lincoln Navigator, Ford Explorer, Honda Prolube, Ford Expedition, some additional content on Duke GM, but for the BEV free van that they have.

26:24 IV code, they're launching a a new range of the trucks that they have down in Spain, and we've picked up additional content in on Rivian r one. So between all of those programs, what it really means is that we're not gonna see a huge amount of that revenue coming into in '20 in '24, but going into '25, it puts us in a very strong position. Fantastic. Thank you very much indeed. Next question we've got here. When you win a new program for a car manufacturer, how long does the work typically last for? So, I mean, the the the normal car platform really works like this, that cars are launched. They typically last for about six years, then tends to be a sort of a a mid model year cycle facelift, which which often results in us being able to generate some more e d and d revenue as as as the OEMs try and spruce up the interiors of their cars.

27:22 But the good thing is is that this sort of six year revenue stream that we have from car platforms gives us very good forward visibility of of our earnings, both not just from product components, but also from tuning because tuning and ED and Ds diverts normally about two years in advance of launches. So what that means in terms of our forecasting for '24 and '25, we've got for '24, we you could say we've already locked down our expectations for revenue on e d and d. And and and forecast looks good. The customer schedules are normally firm for quite a few months in advance. You know, we're already midway through this year, so we're pretty confident about '24. Fantastic.

28:07 That's good to hear. Another one we've got here is how key looking forward is robotics to your business, and how quickly can you generate a return for that investment? Okay. So we've we've you know, technology is moving on extremely fast at the moment, and we're deploying it. And and and really one of the strategic advantages, I guess, we have as a business is that we are in Shenzhen. And Shenzhen, China is probably the technological hub of the world right now with regards to robotization, automation of production plants, also to a certain extent, a level of AI and the deployment of AI. So from robotics, we see it as a key factor. The cost point of robotics have come down to to the point where see return on capitals in a year and a half, two years.

28:55 With regards to further reducing labor costs, we're starting to deploy deploy things like AI on vision systems. So I think it's just becoming one of the key factors for our business, not only to allow us to be more cost competitive, but also to allow us to build better quality products more reliably, more consistently. That's great. Thank you. As you can see as well, guys, we've had a number of live questions come through. If you wouldn't mind just clicking on that Q and A tab and just where appropriate to do so, read out the question and give you a response, and I will pick up from you at the end. So we have one question in relation to cost price increases built into the contracts to insulate from inflation.

29:48 Simon, do you want to do you want to answer? So this kind of varies in different parts around the world. But if you take, for example, Turkey, for example, where, obviously, the country's been subjected to quite significant hyperinflation. The OEMs that we deal with, the the way that they've overcome that is that we run escalation system models where the escalator is almost like split into two halves. One half deals with currency of imported materials. The other half is is really dealing with the the cost base within Turkey with regards to Turkish lira and the hyperinflation that's going on in that that part of the world. So the purpose of the escalation system is to ensure that we get stability of margins, and and that has been working very well.

30:35 I mean, with regards to other regions of the world, we tend to work on an open book costings with our customers. So what that effectively does is that if costs go up, then we we we enter negotiations with our customers on materials, things like freight freight freight costs. And and that's generally been passed through quite successfully. But it's a double edged sword because, you know, if costs come down, then our customers run to us and they expect the the associated cost reduction. I think the the important thing for us as a business is to to really ensure stability within the margins that we have. Okay. Then that probably also partially answers the the question, with a large percentage of production from China, what is the strategy for geographic diversification?

31:26 And does this impact margin? Okay. So some full price on that. I mean, the the reason the the specific reason why we're in Turkey is that Turkey as a country has a very high expectation of building content locally produced within their OEM base. So so Turkey is there specifically for that reason. You know, there are geopolitical tensions, and these geopolitical tensions, you know, led to the Trump tariff of 25% from China to to to America. So the reaction from us was to really use all of the skills base that we've we've learned in China to be able to shift production facilities on what is our modular production systems that we do to be able to rapidly set up and deploy new production in Mexico to to deliver into North America.

32:23 And what we're we're we're seeing there really is is is similar sort of gross profit margins to what we're we're making out of China. But but as it stands at the moment, you know, China continues to be really good for us from a perspective of leading edge manufacturing capability and technology and also a good supply platform into into Europe as it stands right now. And and that's really the main sort of focus of China is is shifting product into Southeast Asia and into Europe. There's a question here around the revenue visibility through to 2030 on the back of the tenders one in 2023.

33:25 I mean, just to answer that, really. I mean, as as a business, you you go through product life cycles when you have six year cycles and then renewal of contracts. I would say that the business has been extremely successful of running ongoing contracts. I mean, examples of which is that, for example, in Turkey, we've been producing full transit van over there now for the last fourteen years and winning every consistent new contracts coming up. If you look at, say, what's Nissan Europe, I think we're now on our third generation of Kashkai and Duke, and we're I and we should be going into our in fact, we've already been working with deals with Marelli, who's one of our our best and largest customers, where we're securing the future now all the way out to 2032.

34:18 So in terms of the product life cycle of our business, they're largely refreshed. Hence, the ones that really aren't refreshed, we're almost at the point of just agreeing the contracts out to 2032. So we've got a couple more questions, but they're also about the revenue going forward and pipeline. So hopefully, we have have responded to to these questions already. Fantastic. Thank you very much indeed. And of course, any further questions that do come through, the team will be able to review those and be able to publish responses where appropriate to do so on the Investor e company platform. Before redirecting investors to provide you with their feedback, which has been particularly important to the company, Simon, perhaps I could just ask you for a few closing comments, please.

35:07 Yeah. I would just like to, I guess, say that, you know, this is a business with a history of of doing exceptionally well prior to COVID. You know, COVID hit the auto industry hard. I'd say it hit us particularly hard given the fact that we we do a lot of manufacturing in China. And and, obviously, China went into zero COVID when the rest of the world had recovered. But we believe we're back on a very strong trajectory as we have been historically ever since. And, you know, if any final comments from my side, is simply to, again, thank our team at CT for what was an incredible execution over that period of time. And also, without a doubt, to thank our customers and, in particular, Morelli, who were incredibly supportive for what was a very difficult time.

35:59 Fantastic. Simon, Anna, thanks indeed for updating investors today. Can I please ask investors not to close the session? It should be automatically redirected to provide your feedback in order the team can better understand your views and expectations. It's only taken a few moments to complete, and I know it's greatly valued by the company. On behalf of the management team of CT AUTOMOTIVE GROUP PLC, we'd like to thank you for attending today's presentation. That concludes today's session, and good morning to you all. Thank you.