CT Automotive positive trading, efficiency initiatives delivering margin improvement

CT Automotive Group
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CT Automotive (LON:CTA), a leading designer, developer and supplier of interior components to the global automotive industry, today announced its results for the half year ended 30 June 2023 (“H1 2023”).

Simon Phillips, Chief Executive Officer of CT Automotive, commented:

“We are pleased with our first half performance. We drove strong revenue growth, returned to profitability and strengthened our balance sheet. Production volumes at the Group’s facilities have recovered rapidly and we are making good progress with our margin enhancement initiatives.

CT Automotive is well-positioned to capitalise on the continued recovery in global automotive end-markets and our improved operating environment. Whilst cognisant of the macroeconomic uncertainty, the Board remains confident of meeting full year expectations.”

Financial highlights

  H1 23RestatedH1 22
 $m$m
Revenue68.254.2
Gross profit17.810.5
Underlying EBITDA*6.7(4.6)
Underlying profit/(loss) before taxation*2.5(8.4)
Profit/(loss) before taxation1.3(9.0)
Earnings/(loss) per share1.7c(15.2)c
Net debt9.020.2

* Adjusted for non-underlying items as explained in Notes 4 and 13 of the condensed consolidated financial statements

Note: H1 2023 and H1 2022 are presented as continuing operations excluding UK discontinued operations. H1 2022 has been restated for prior period adjustments as explained in Note 15 of the condensed consolidated financial statements

·    Encouraging trading performance in H1 2023 as global production volumes recovered and automotive supply chain issues eased

·    Revenues for H1 2023 ahead of the Board’s expectations up 26% at $68.2m

·    Production revenue up 26% at $65.8m, reflecting the improved trading environment

·    Tooling revenue expected to be second-half weighted reflecting the timing of customer projects, with strong visibility on projects due to complete in H2 2023

·    Gross profit margins up to 26% (H1 2022: 19%), driven by a combination of higher revenue, stable production schedules, restructuring and efficiency initiatives

·    Balance sheet strengthened following the fundraising of $9.6m in May 2023

Operational highlights

·    Efficiency initiatives in China and Türkiye progressing as planned and are expected to deliver additional savings in H2 2023, further improving operating margins

·    Impact of hyperinflation in Türkiye partially offset by improved pricing and cost escalation system implemented with key customers

·    Performance of our new facility in Mexico is on track, with the plant generating $4.8m revenue during H1 2023 

·    Improvement in Group distribution and logistics recovered as supply chains and container rates normalised

Current trading and outlook

·    We are encouraged by stabilising order volumes, pricing and inventory patterns since the start of FY23 and entered H2 2023 with good visibility

·    Notable increase in customer Requests For Quotes towards the end of H1 2023, resulting in 5 new production program wins in Q3 to date worth a total annual production turnover of $9.4m and tooling business awards of $6.9m

·    While macroeconomic uncertainty remains, there are continued signs that customer schedules are strengthening as original equipment manufacturers’ (OEMs) automotive supply chain issues are continuing to improve

·    The Board remains confident of underlying margin run rate progression in H2 2023, supported by continued benefits expected from the Group’s efficiency initiatives

·    As a result, the Board is confident in achieving its expectations for FY23

CT Automotive is engaged in the design, development and manufacture of bespoke automotive interior finishes (for example, dashboard panels and fascia finishes) and kinematic assemblies (for example, air registers, arm rests, deployable cup holders and storage systems), as well as their associated tooling, for the world’s leading automotive original equipment suppliers (“OEMs”) and global Tier One manufacturers.

The Group is headquartered in the UK with a low cost manufacturing footprint. Key production facilities are located in Shenzhen and Ganzhou, China complemented by additional manufacturing facilities in Mexico, Türkiye and Czechia.

CT Automotive’s operating model enables it to pursue a price leadership strategy, supplying high quality parts to customers at a lower overall landed cost than competitors. This has helped the Group build a high-quality portfolio of OEM customers, both directly and via Tier One suppliers including Forvia and Marelli. End customers include volume manufacturers, such as Nissan and Ford, and luxury car brands such as Bentley and Lamborghini. In addition, the Group supplies electric car manufacturers, including Lucid. It is also working with e.Go Mobile, a German manufacturer which plans to launch a series of small electric vehicles for the budget end of the market.

The Group currently supplies component part types to over 47 different models for 19 OEMs. Since its formation, the Group has been the only significant new entrant into the market, which is characterised by high barriers to entry.

Use of alternative performance measures

The commentary uses alternative performance measures, which are described as “Underlying”. An explanation of the items identified as non-underlying and that have been adjusted can be found in Notes 4 and 13 of the condensed consolidated financial statements.  Non-underlying items are items which due to their one-off, non-trading and non-recurring nature, have been separately classified by the Directors in order to draw them to the attention of the reader and allow for a greater understanding of the operating performance of the Group. 

Strategic and Operational Review

Positive trading performance

The Group’s trading performance in the first half of the year has been encouraging as global production volumes continued to recover and automotive supply chain issues eased.

Q1 2023 was characterised by low tendering activity as large OEMs began re-evaluating their post Covid strategies, in particular regarding their EV platforms. There was a notable increase in customer Requests For Quotes towards the end of H1 2023.  This resulted in 5 new production program wins in Q3 to date with a total production annualised turnover of $9.4m and tooling business awards of $6.9m.

Revenues for H1 2023 were ahead of the Board’s expectations at $68.2m, made up of $65.8m of production revenue (H1 2022: $52.3m) and $2.3m of tooling revenue (H1 2022: $1.9m). This was up 26% on a continuing basis compared to H1 2022 ($54.2m, excluding discontinued UK revenue of $3.0m).

Our tooling revenue is generated from the design and development of new programs, with 5 projects completing during H1 2023, generating $2.3m of tooling revenue (H1 2022: $1.9m). Our internal toolroom is fully utilised and ensures maximum product control and margins. Tooling revenue is expected to be weighted towards the second half this year reflecting the timing of customers’ product launches and start of production. Currently, 11 projects are underway and are due to complete in H2 2023 with an expected revenue of c.$8-10m.

Gross margins have continued to improve and reached 26% (H1 2022: 19%) as the Group’s ongoing efficiency initiatives in China and Türkiye progressed as planned. China represents 70% of our global production volumes  and consequently remains the main focus of our margin improvement initiatives. These initiatives include the restructuring of tooling operations and manufacturing footprint, supplier and logistics rationalisation, as well as automation initiatives which are on track for H2 2023 implementation and will deliver further savings. As part of restructuring our manufacturing footprint, we are continuing to gradually consolidate some of our production lines in China to Ganzhou, benefitting from comparatively lower labour costs. We remain on track to deliver the margin improvement plan across the second half of 2023, with automation being a key driver.

The economic environment in Türkiye has continued to be impacted by hyperinflation.  An improved pricing and cost escalation system with key customers, aimed at compensating for local inflation and the devaluation of the Turkish Lira, has been effective in protecting local operations.

The new production facility in Mexico, which we opened in late 2022 to support our North American customers, has performed as planned, generating $4.8m revenue during H1 2023. Further growth is expected as the factory continues to scale up with new project launches scheduled for Q1 2024.

Strengthened balance sheet to support growth initiatives

On 27 April 2023, we were pleased to announce the result of a placing, which secured c.$9.6m of gross proceeds from new and existing shareholders.

The net proceeds of the fundraise are being primarily used to strengthen the balance sheet and to provide the Group with the flexibility to take advantage of new pipeline opportunities as the business positions itself for further growth. A small portion of the net proceeds will be used to facilitate further efficiency savings, including through investment in injection moulding production processes and robotics.

At the half-year end the net debt reduced to $9.0m (30 June 2022: $20.2m; 31 December 2022: $12.2m).

People

Our performance during this period of recovery and efficiency initiatives would not have been possible without the dedication, enthusiasm and expertise of our people. They are critical to the continued evolution of the business.

We continue to invest in our systems and processes to ensure our people are safe, empowered and have sufficient opportunities to develop their careers while supporting the Group’s long-term goals.

Board changes

A number of important changes to the Board structure and roles were made in H1 2023 to support the business.   

We were pleased to appoint Anna Brown as CFO at the end of April 2023. Anna has substantial listed company and financial experience, and has made an immediate impact as we continue to improve governance and execute our growth strategy.

In July 2023 Ray Bench was appointed as Non-Executive Chairman, while Simon Phillips took on the role of Chief Executive Officer.  Scott McKenzie, previously Chief Executive Officer, stepped down from the Board to a new role as Chief Operating Officer, Sales and Product Development.

Francesca Ecsery was appointed Senior Independent Non-Executive while Nick Timberlake joined the Board as a Non-Executive Director.

In August 2023, we also announced the appointment of Geraint Davies as an independent Non-Executive Director, joining our Board on 18 September 2023 as a Chair of the Audit & Risk Committee. He brings over 30 years’ experience as a Partner in the “Big Four” accounting firms, working with global businesses in manufacturing, real estate, mining, distribution and financial services.

Outlook

The Board anticipates customer schedules to support continued strong demand in H2 2023, alongside stabilising pricing and inventory patterns. Trading since 30 June 2023 has been in line with the Board’s expectations.

We are expecting to recognise c.$8-10m of revenue from the tooling projects which are due to complete in H2 2023, subject to customer-led timings for the start of production.  H2 2023 gross margins are expected to further improve in line with the ongoing margin improvement plan.

Looking further ahead, the Board is mindful of the possibility that the continuing macroeconomic uncertainty with regards to interest rates and inflation may result in a softening of demand leading into 2024. That said, whilst volumes and demand remain strong compared to the pandemic period, automotive sector global production is still at least 7% lower compared to 2019 levels.

The Board remains confident of underlying margin run rate progression in H2 2023 and of achieving its expectations for FY23, supported by the benefit expected from the Group’s efficiency initiatives.

Financial review

Revenue and margins

Total Group revenue for H1 2023 was $68.2m, up 26% on a continuing basis compared to H1 2022 ($54.2m, excluding discontinued UK revenue of $3.0m), as customer volumes and production schedules strengthened and automotive supply chain issues eased. Growth came from both improvement in production revenue which increased by 26% from $52.3m to $65.8m and an increase in tooling revenue from $1.9m to $2.3m.

Gross profit increased to $17.8m (H1 2022: $10.5m) and gross margins continued to improve and reached 26% (H1 2022: 19%) on the back of improved trading conditions and the Group’s ongoing efficiency initiatives in China and Türkiye which started to deliver savings. These initiatives include the restructuring of tooling operations and manufacturing footprint, supplier and logistics rationalisation as well as automation initiatives which are on track for H2 2023 implementation.

Non-underlying items

During the first half of 2023 the Group recognised non-underlying items of $1.2m (H1 2022: $0.7m). These items primarily related to costs of $0.9m (H1 2022: nil) in connection with restructuring and margin improvement initiatives.  These costs included redundancies while optimising our manufacturing footprint in China and Türkiye ($0.1m), a write down of unviable stock as part of destocking and distribution centre rationalisation programme ($0.3m) and a $0.5m charge in relation to previously completed tooling projects. 

The Group has been undertaking an exercise to improve reporting and governance.  This has resulted in a change in the method to estimate tooling overheads and, as a result of applying this new accounting estimate, the Group is releasing production overheads in relation to tooling projects that were capitalised in prior periods. The amount for the current financial period is $0.3m (H1 2022: nil). 

This change is expected to result in a non-underlying charge of $1.8m for the full year as the Group releases the previously capitalised production overheads as tooling projects are completed in the current year, with the full amount to be released in FY23.  There is no cash impact.  Following the full release in the current year, the change will have no further impact on future periods.

For further details, see Notes 4 and 13 of the condensed consolidated financial statements.

EBITDA and operating result

H1 2023 underlying EBITDA was $6.7m (H1 2022: $4.6m loss) while reported EBITDA was $5.4m (H1 2022: $5.2m loss) as a result of improved gross profit and after taking account of distribution expenses of $2.7m (H1 2022: $4.0m) and administrative expenses of $13.0m (H1 2022: $15.0m). A $1.3m reduction in distribution expenses was due to container rates settling to pre-covid levels.

During H1 2023 the Group benefitted from $0.3m of foreign exchange gains (H1 2022: $2.6m loss) due to favourable exchange rate movements primarily against the US$. These are included in administrative expenses. 

Depreciation and amortisation charges remained at similar levels for the year at $3.0m (H1 2022: $3.0m).  Therefore, the resulting underlying operating profit was $3.7m (H1 2002: $7.5m loss) and reported operating profit was $2.4m (H1 2022: $8.2m loss).

Discontinued operations

During FY22, the Group announced the closure of Chinatool Automotive Systems Limited, a production facility in Newton Aycliffe, UK, which was impacted by severe labour shortages and inflationary increases in energy costs and wages. The formal liquidation process is currently underway. Loss for the period attributable to the discontinued operations was $0.4m (H1 2022: $0.7m loss) and primarily related to translational foreign exchange losses on the £ denominated balance sheet items.

Prior period restatement

As previously disclosed in the 2022 Annual Report, during the preparation of  FY22 year-end accounts, the Group identified prior period adjustments in relation to calculating the FY21 year-end inventory and transfer of tooling assets from the Group balance sheet to cost of sales upon the sale to the customer. Posting of the adjustments to FY21 year-end balance sheet had a knock-on effect on previously announced H1 2022 results. 

The impact of posting the inventory adjustment resulted in an increase in the cost of sales in the period to 30 June 2022 by $1.1m and reduced inventories as at 30 June 2022 by $9.4m. The impact of posting the tooling adjustment resulted in the value reported in the cost of sales for the period to 30 June 2022 reducing by $0.4m and the value of property, plant and equipment decreasing by $2.2m.  Therefore, the overall impact of prior period adjustments is an increase in the cost of sales for the period to 30 June 2022 by $0.7m and a reduction in net assets as at 30 June 2022 by $11.6m with a corresponding reduction in brought forward reserves of $10.9m.

Impact of hyperinflation

Applying the hyperinflation standard (IAS 29) in relation to Turkish operations resulted in an increase in Group revenue by $0.5m (H1 2022: $0.7m increase) and nil impact on Group EBITDA (H1 2022: $0.6m loss).

Capital structure, working capital and interest

Since December 2022 year end, the Group saw its net asset value increase to $11.1m (FY22: $2.6m) supported by the fundraise in May 2023 which generated net proceeds of $9.1m.

Non-current assets reduced to $16.9m (FY22: $19.9m), mainly reflecting a $3.0m (H1 2022: $3.0m) depreciation charge in relation to PPE, right of use assets and intangible assets. 

During H1 2023, the Group saw a $6.9m increase in its current assets. This was primarily driven by an increase in trade debtors as the customer payment terms reverted back to normal and the proceeds of the fundraise, partially offset by the decrease in finished goods as the Group undertook a destocking exercise and distribution centre rationalisation programme. Trade and other payables reduced by $2.2m during H1 2023 as supplier payments have returned to normal and a portion of proceeds from the fundraise has been used to pay down suppliers in China and the UK.

The Group has continued to prudently manage its working capital by utilising available debt facilities and the proceeds of the fundraise. Cash and cash equivalents as at 30 June 2023 were $7.6m (FY22: $4.8m).  Net debt as at 30 June 2023 was $9.0m (FY22: $12.2m) and included bank overdrafts, amounts drawn on the Group’s trade loans and invoice finance facilities with HSBC. After taking account of current and non-current IFRS 16 lease liabilities, net debt as at 30 June was $19.2m (FY22: $24.2m).

The Group uses HSBC post-dispatch trade loans and invoice financing facilities as an additional working capital lever. As at 30 June 2023 the amounts drawn on the Group’s trade loans and invoice finance facilities were $15.5m (FY22: $16.7m) against a total facility of c.$22m.  Net finance costs increased to $1.1m (H1 2022: $0.8m) reflecting significantly higher UK interest rates.

On 27 April 2023 the Group announced a placing, raising total gross proceeds of $9.6m. The net proceeds of the fundraise of $9.1m have predominately been used to strengthen the balance sheet and to provide the Group with the flexibility to take advantage of growth opportunities. Additionally, a small portion of the net proceeds has been deployed to realise further efficiency savings, including through investment in injection moulding production processes and robotics.

Risks

The Board considers strategic and external, operational, financial and compliance risks and monitors them on a regular basis. Key risks and their mitigations were included on pages 32 to 37 of the 2022 Annual Report published on 15 June 2023 and there are no material changes since that date.

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CT Automotive Group plc (LON:CTA) has issued a trading update, announcing its return to profit in FY23 and expecting revenue of not less than $140 million. The group's balance sheet has also strengthened, and it enters FY24 with strong order volumes and visibility of future revenue.

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