Management Discussion and Analysis of the Financial Condition and Results of Operations for the nine months period ended September 30, 2018
Gestamp Automoción, S.A.
October 22, 2018
1. PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Financial information and operational data
Unless otherwise indicated, all financial information in this report has been prepared in accordance with IFRS applicable at the relevant date and is presented in Euros. IFRS differs in certain significant respects from generally accepted accounting principles in the US.
We have presented certain information in this report that has not been prepared in accordance with IFRS or any other accounting standards. As used in this report, this information includes "EBITDA", which represents operating profit before amortization, impairment and depreciation.
This report also contains other measures such as: cash, cash equivalent and current financial assets, total financial debt and net financial debt, growth at constant exchange rates, and capex split by categories. We present these non-IFRS measures because we believe that they and similar measures are widely used by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity.
In particular, we believe that EBITDA is meaningful for investors because it provides an analysis of our operating results, profitability and ability to service debt and because EBITDA is used by our chief operating decision makers to track our business evolution, establish operational and strategic targets and make important business decisions. To facilitate the analysis of our operations, this indicator excludes amortization, impairment and depreciation expenses from operating profit in order to eliminate the impact of general long-term capital investment. Although we are presenting this measure to enhance the understanding of our historical operating performance, EBITDA should not be considered an alternative to operating profit as an indicator of our operating performance, or an alternative to cash flows from operating activities as a measure of our liquidity. Growth at constant exchange rates is a numerical translation of our figures from local currencies to euros, and not a description of the situation if the currencies had not moved, as this could have had some other implications on the economy and our business situation and contracts. Capex split in categories is a management judgement, and should not be considered as a substitute for additions of tangible and intangible assets, nor depreciation and amortization. The presentation of these measures is not intended to and does not comply with the reporting requirements of the SEC; compliance with its requirements would require us to make changes to the presentation of this information.
Rounding adjustments have been made in calculating some of the financial information included in this report. Figures shown as totals in some tables and elsewhere may not be exact arithmetic aggregations of the figures that precede them.
In this report, we may rely on and refer to information regarding our business and the market in which we operate and compete. We have obtained this information from various third party sources, including providers of industry data, discussions with our customers and our own internal estimates. We cannot assure that any of this information is accurate or correctly reflects our position in the industry, and none of our internal surveys or information has been verified by any independent sources. We do not make any representation or warranty as to the accuracy or completeness of any such information set forth in this report.
Forward looking statements and other qualifications
The following discussion and analysis is based on and should be read in conjunction with our historical financials included elsewhere in this quarterly report. Certain capitalized terms used herein have the meaning set out in the offering memorandum for our senior secured notes due 2023.
The discussion includes forward looking statements, which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties, which could cause actual events or conditions to differ materially from those implied herein. Please be cautioned not to place undue reliance on these forward looking statements. These forward statements are made as of the date of this report and are not intended to give any assurance as to future results.
Adjustment for inflation in Argentina
During the third quarter of 2018 the inflation indicators for Argentina, and especially the Índice de Precios Internos al por Mayor (IPIM), have shown accumulated inflation in three years exceeding 100% and there are no qualitative aspects that mitigate the situation; therefore Argentina should be considered as a hyperinflationary economy, and therefore IASS 29 should be applied.
The inflation adjustment recorded on Argentine companies has impacted our figures of sales and EBITDA in euro terms in the first nine months of 2018, for an amount of -34.8 million euros for sales, and -4.7 million euros for the EBITDA, while in the third quarter of 2018 the effect is -18.1 million euros sales and -2.4 million euros EBITDA. Additionally, the impact on the financial expenses stands at 2.7 million euros (1.4 million euros in Q3) and on the Attributable Profit reaches -6.6 million euros (-3.2 million euros in Q3).
The impact of the application of the adjustment for hyperinflation in Argentina is calculated from January 1, 2018 and therefore has been distributed between each quarter of the year 2018.
BUSINESS PERFORMANCE AND RESULT
The macroeconomic outlook continues to be solid although the IMF (WEO IMF as of October 9th, 2018) has revised global growth forecasts slightly downwards to 3.7% in 2018 and 2019, but still above historical averages.
In this context, ongoing auto market uncertainties have led to a 1.9% decline in global light vehicle production in Q3 2018 (according to IHS as of October 2018). Current auto market news flow continues to be around WLTP (Worldwide Harmonized Light Vehicle Test Procedure), Trade Tensions, China and Emerging Markets, which are the key topics leading the uncertainties in the market. WLTP has negatively impacted Q3 production volumes but a recovery is expected in the coming months. The outcome of the recently announced NAFTA agreement seems to have had less impact than what was initially expected. China has seen a slowdown over the past three months but outlook for 2018E remains solid and with good growth prospects for 2019E. Emerging Markets impacted by FX headwinds as a result of the current to macroeconomic situation but healthy auto production growth still expected. OEMs continue to launch new EV programs (Audi e-tron, Mercedes EQC, etc.) which provides new business opportunities for which Gestamp is well positioned given its expertise in offering lightweight solutions.
Despite the aforementioned auto market uncertainties seen during Q3 2018, the first nine months of 2018 have experienced a 1.1% increase. During the first nine months growth in Gestamp's footprint was mainly driven by Mercosur (+7.6%), Eastern Europe (+3.5%) and Asia
(+1.8%). According to IHS (as of October 2018), auto production is expected to grow at 0.9% in 2018E and 2.4% in 2019E.
Gestamp's performance for the first nine months of 2018 has been in line with our expectations,
despite having experienced a more challenging Q3 than expected as a result of the aforementioned underlying market conditions. Growth in the first nine months of 2018 has been driven by good volumes of existing programs and the ramp-up of new projects, especially in NAFTA, Eastern Europe and Mercosur but partially offset by deeper impact of FX headwinds. Revenues increased by 2.5% (8.9% at constant FX) and in terms of profitability, EBITDA grew by 8.6% on reported basis, with a higher growth of 16.8% at constant FX, driving EBITDA margin to 11.1%. Net Income grew by 7.0% during the first nine months of 2018.
During Q3 2018, Revenues increased by 1.1%, or 7.6% at constant FX, and EBITDA grew at 11.9% (22.2% at constant FX). Gestamp has continued to invest in strategic projects by increasing its global footprint with the opening of 6 new facilities year to date, including the new Matsusaka plant in Japan which will be inaugurated later this week.
Gestamp Revenue Growth at Constant FX vs. Market Production Growth in Gestamp's Footprint
During the first nine months of 2018 Gestamp has outperformed market production volume growth on a constant currency basis (in its production footprint - IHS data as of October 2018) by 7.8 percentage points.
During the first nine months of 2018, five new plants have been added to our footprint and the opening of the new Matsusaka plant at the end of October 2018 will increase the number of plants openings to six. These additions demonstrate Gestamp's continued focus on delivering on its strategy and strengthening the relationship with its customers.
The addition of BHAP's plant in Beijing resulting from the JV announced on Jan. 25th, 2018 is subject to approval from the Chinese special commission SASAC, as well as to competition and other government authorities