Welcome to Nemak's second quarter 2022 earnings webcast. Armando Tamez, Nemak's CEO, Alberto Sada, CFO, and Adrian Althoff, Investor Relations Officer, are here this morning 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. I will now turn the call over to Adrian Althoff.
Thank you, operator. Good morning and welcome, everyone. We very much appreciate your participation. Armando Tamez, our CEO, will lead off today's call by providing an overview of business and financial highlights from the quarter. Alberto Sada, our CFO, will then discuss our financial results in more detail. Afterwards, we'll open up for a Q&A session, which participants may access via dial-in or webcast. 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 as a result of new information, future events, or otherwise. I will now turn the call over to Armando Tamez.
Thank you, Adrian. Hello, everyone, and welcome to Nemak's second quarter 2022 earnings webcast. During the quarter, we saw an overall positive trend on the demand side as new product launches and increased customer production supported higher volume amidst a partial easing of semiconductor supply constraints in our industry. At the same time, we took steps to address extraordinary inflationary pressures, including higher energy, raw materials, labor, and transportation costs, making progress with commercial negotiations aimed at mitigating such effects on our results. At the consolidated level, higher volume and aluminum prices drove a 25% top-line improvement on a year-over-year basis. However, the inflation-related dynamics I just described caused EBITDA to finish slightly lower. Our second quarter results reflected the implementation of measures developed in tandem with certain customers to offset inflationary pressures on our business, retroactive to January first of this year.
I would also like to emphasize that we continue to work towards finalizing similar agreements with the rest of the customer base and aim to conclude these negotiations in the third quarter. Meanwhile, on the operational side, we maintain a prudent approach to financial management with a focus on keeping our cost structure lean and optimizing cash flow generation while supporting customer requirements linked to ongoing industry recovery, as well as secular shifts towards vehicle electrification. These efforts help us to reduce leverage from 2.5 to 2.3 times on a sequential basis.
In the recent developments, and as you may have already heard, Fitch and Moody's recently affirmed the rating on Nemak's credit profile while maintaining the respective stable outlooks, citing the company's leading market position, geographical diversification, and confidence in the company's ability to successfully navigate the automotive industry transition to electrification while delivering improved earnings and reducing leverage, among other factors. Moving on to strategy implementation, I am pleased to share that for the quarter, we won contracts across our product lines worth a total of approximately $240 million annually, 95% of which represented incremental business. Regarding our e-mobility and structural applications segment, we won new business for approximately $130 million annually, bringing our order book for these parts to approximately $1.53 billion annually, as we continue to advance faster than expected towards our 2025 target of $2 billion.
Additionally, we were awarded contracts to produce ICE powertrain components for approximately $110 million annually across our regions. Our awarded business for the quarter centers on the adaptation of existing capacity to meet customer requirements. In particular, I would like to emphasize our progress towards harnessing processes and technology that we have traditionally used for ICE applications now to deliver higher value-added solutions for electric vehicles. The main highlights include contracts to produce structural parts in North America and Europe for fully electric SUV of premium OEM customers, along with complex e-motor housings for SUV applications of a leading global manufacturer of fully electric vehicles, representing our first awarded business with this customer to date in Europe. Altogether, this awarded business for EVs represents an important milestone in our efforts to deliver on our targets for growth and transformation in our business to 2030.
Moreover, we continue to pursue a robust pipeline of potential new opportunities focused on EVs, which currently comprises potential business for a total of more than $1.6 billion annually across a variety of highly engineered applications, including battery housings, e-motor housings, and structural parts, among others. Before I conclude, I would like to touch upon our recent step forward in our efforts to advance our ESG performance, reflecting our accountability and our commitment to contribute to the conservation of the environment and the well-being of society. I am very pleased today to announce that we have joined the Aluminum Stewardship Initiative. By implementing the sustainability performance standards, we will comply with a rigorous set of requirements assuring the responsible production, sourcing, and stewardship of aluminum.
In addition, this reinforces our greenhouse gas emission reduction pathway as the standard addresses GHG emissions and entails public disclosures of related data as critical component of transparency. Through our membership in the Aluminum Stewardship Initiative, we not only demonstrate our leadership on key sustainability issues within the aluminum supply chain, but we also contribute to the global effort to drive positive change through collective action. With that, I will now hand off the call to Alberto Sada, Nemak CFO.
Thank you, Armando. Good morning, everyone. First, I would like to provide a recap of Nemak's financial performance and industry trends in the quarter. During the second quarter, our top line showed improvement versus the same period last year, mainly on a combination of higher aluminum, higher volume, and aluminum prices. At the same time, in response to continued inflationary pressures, we implemented agreements with customers, which enable us to offset a portion of this effect, and therefore improve our business performance on a sequential basis. We continue to see signs of industry recovery amidst ongoing supply chain issues, including semiconductor shortages, although trends varied by region. North America showed relative strength, with light vehicle production finishing up 12% in the quarter.
In Europe, light vehicle production was nearly flat year-over-year as OEMs implemented workarounds in response to supply disruptions in the region linked to the war in Ukraine, particularly in wire harnesses. Meanwhile, China was down 16% in the quarter, reflecting that country's zero-COVID policy and enforced lockdowns. Brazil saw a 9% increase as supply chain conditions improved versus the same period of last year. Light vehicle sales trended softer than light vehicle production across the board, as historically low inventory levels, largely attributable to the effects of the global semiconductor shortage, continued to weigh on vehicle availability. At the same time, based on our consultations with customers and industry experts, we continue to see significant pent-up demand in key regions. For instance, U.S. inventory levels remain low, with June marking the eighth straight month that retail inventory closed around the 1 million vehicle mark.
While in Europe, waiting times for new vehicles remain high by historical standards, generally ranging between eight months and a full year. In conclusion, we continue to see vehicle availability as the main driver of sales, with no sign of any material letup on the demand side, despite rising interest rates and evidence of softening general economic conditions. Moving on to our business performance. Volume was 9.8 million equivalent units, 10% higher year-over-year, due mainly to the combined effect of higher customer production in certain regions, as I just described, together with continued contributions of new product launches globally. In turn, revenue benefited mainly from higher volume and aluminum prices, finishing at $1.2 billion, or 25% higher than a year ago.
In terms of top-line drivers, I would like to emphasize that we are pleased with the progress we're making in ramping up our new segment, focused on e-mobility and structural applications, which we continue to expect to generate around $470 million in revenue for the full year 2022. EBITDA in the second quarter was $149 million. Higher volume, commercial negotiations, and cost efficiencies nearly offset the impact of the inflationary environment on our cost structure. Additionally, we experienced a negative translation effect resulting from the depreciation of the euro against the U.S. dollar. Regarding commercial negotiations, we made progress towards implementing agreements aimed at mitigating inflationary effects on our business performance. As a result of these efforts, we concluded negotiations with customers representing approximately 50% of our consolidated revenue, retroactive to January 1st, 2022.
Keep in mind that negotiations are still ongoing, and we believe that we remain well-positioned to complete negotiations across our customer base in the third quarter. Additionally, I would like to emphasize that following the completion of these negotiations, we expect that we'll be able to deliver an EBITDA unitary margin at guidance or higher. During the period, we also continued to deploy a variety of initiatives to optimize costs, expenses, and cash flow generation, which help us to keep strict control of our cost structure amidst these challenging market conditions. Operating income in the quarter was $74 million, reflecting the same factors that affected EBITDA. This figure compares to the $69 million reported in the same period of last year. Net income was $30 million, compared to the $44 million reported in the second quarter of 2021.
This result was mainly related to the same factors affecting operating income. Together with the accounting effects of the depreciation of the euro against the U.S. dollar and higher income taxes. In keeping with our ongoing efforts to support value creation, we continue to implement a prudent financial management strategy, prioritizing capital allocation towards strategic projects linked to vehicle electrification, along with deleveraging. On the CapEx side, we recorded investments of $92 million, 28% higher than in the same period of last year, as we continue to direct investments mainly towards new product launches with a focus on our e-mobility and structural applications segments. As of the end of June, net debt was $1.2 billion, 7% lower than at the end of March 2022, following the reduction of short-term bank debt and exchange rate effects.
Net debt to EBITDA and interest coverage ratios were 2.3 times and 5.1 times respectively, lower and higher compared to the end of the first quarter, respectively. Excluding refinancing costs associated with our bonds issued last year, our interest coverage ratio was 6.7 times. Moving on to the regional results in the quarter. North America volume was 5.3 million equivalent units, 18% higher year-over-year, supported by customer light vehicle production, along with contributions of new product launches on our side. Revenue in turn was $663 million, 44% higher than in the same period of last year, propelled by the higher volumes I just mentioned, together with aluminum prices.
EBITDA was $84 million, which compares to $74 million a year ago, as commercial negotiations helped us to more than offset inflation-related effects in the region. Europe volume was 3.4 million equivalent units, slightly higher year-over-year, as new product launches more than compensated for effects of supply chain constraints on customer light vehicle production. Revenue was $394 million, 3% higher than the $381 million reported in the same period of last year, as volume and aluminum prices more than compensated for effects of the depreciation of the euro against the U.S. dollar. EBITDA was $57 million, 70% lower than a year ago as compensation from customers partly offset effects of inflationary pressures.
Rest of the world volume was 1.2 million equivalent units, 5% higher year-over-year, as improved volume in Brazil more than compensated for softer volumes in China. Revenue during the quarter was $140 million, an increase of 25%, which was mainly due to volume and aluminum prices. EBITDA was $8 million, close to the same level of last year. Thank you for your attention. This concludes my participation. I will now turn the call back over to Adrian to open up the Q&A session.
Thank you, Alberto. We are now ready to move on to the Q&A portion of the event. As a reminder, participants may ask questions directly via dial-in or send questions in writing via web. Operator, please instruct participants calling in on how to place their questions.
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Alfonso Salazar with Scotiabank. You may proceed with your question.
Thank you, everyone. Can you hear me?
Yes. Yep.
Okay. Thank you. I have two questions. The first one has to do with these signs of recovery and the pent-up demand that you talked about. The question that I have is, if it cannot revert, especially the signs of recovery, because of the high inflation, the higher interest rates, the fact that cars are becoming extremely expensive for many buyers, and this disposable income is going to be affected by all this situation, especially I'm thinking of the U.S. that has proved to be resilient during the quarter.
Just wondering, if you think that at some point or what you hear from your OEMs about the fact that pent-up demand, which is expected after so many years of very low sales, you know, if at some point this could be impacted, negatively impacted by the situation that we are facing. Something that it would be interesting to hear what you have to say about that. The second question that I have is regarding the situation in Europe. As you know, the Nord Stream 1 is closed now and is expected to reopen in July 21st. However, there are some valid concerns that it won't happen.
Just wondering if you can tell us what are the implications, if that is the case, and how Nemak would need to adjust production thinking that, you know, aluminum production, chemical production, and certainly automotive production would be, it could be severely impacted if that was the case. Those are the two questions that I have.
Thank you. Thank you, Alfonso. Certainly we are seeing all over the world higher inflation, as you are indicating, also higher interest rates and perhaps also a reduction in disposable income.
Having said all that, what we are seeing, Alfonso, is that the pent-up demand is there. Also another element that we need to consider is, for instance, the availability of vehicles. Today, the inventory levels are at the lowest point in the last 35 years. The inventory level today, to our knowledge, for instance, in North America, is at approximately 24 days. The normal inventory level that customers try to keep before the pandemic was in the range of 80-85 days. We have seen also an increase in used cars because of a lack of availability of new models or new vehicles. That was actually a combination of both elements. First, COVID, and second the shortage of semiconductors.
As we're indicating in our presentation, we are seeing, let's say, a better perspective in terms of availability of semiconductors. Still not 100% sold by our customers. We are seeing that the market is there. The automotive parc in the U.S. today is approximately getting a 12-year-old vehicle. People are again getting tired of having to keep the maintenance on the vehicle. We still believe, and this is in consultation with customers as well as analysts, that the demand will be there even if a potential recession comes. We are not indicating that the volumes will go to 18 million units as it was in 2018, but we believe that volumes will remain strong in North America.
In Europe, as everybody knows, the conflict between Russia and Ukraine is unfortunately affecting the supply chain as well as the inflation. We believe that also there is pent-up demand in Europe that will maintain volumes as we are putting it in our guideline. The second question, Alfonso, you are absolutely right. The Russians are providing maintenance to the gas pipeline. That is, to our understanding, a normal maintenance procedure. We are not aware that they will not restart, for instance, selling or supplying gas to some of the European nations that have already contracts. I think it will be too early for us to tell what will be the implications in the event that they will not, let's say, put back this pipeline.
Certainly we will take the necessary actions in the event that if something like that happens, but we have not seen it in the past.
Just to clarify, in the case of pent-up demand, even if it's not gonna be as strong as it probably was at the beginning in the case that inflation and car prices and financial costs to finance the car purchase increase, even if that is the case, you continue to see pent-up demand in going forward?
Yes. We're seeing a strong demand. Actually, Alfonso, just for the record, we are expecting to finish approximately a little bit less than 1 million additional units in this calendar year over our original guidance in terms of volume. We are seeing, let's say, respectable volumes for the rest of the year. There is something that we could also say. In the event that, for instance, our customers start seeing a recession, I think they will need to go back to some extent to offer incentives and lower prices. I think customers have taken advantage of the scarcity of new vehicles, and they have eliminated all discounts, and even they have been increasing prices.
We believe that it's a matter of time in which customers, if they see that the demand for new vehicles is going down, that they will start providing certain incentives so to maintain at least certain volumes.
Okay, fair enough. Thank you for the answers.
Thank you.
Our next question comes from the line of John Howe with Mizuho. You may proceed with your question.
Hey, good morning, guys. Thank you again for the call. Just to kind of back up for one second, you mentioned you're gonna be able to maintain EBITDA guidance and even exceed it for this year. Can you just. I got on late, and I just wanted to hear those comments once more if you could, please. My other question was answered already. Thanks.
Yeah, for sure, John. What we were saying is that, as we explained, on the previous comments, that with the current negotiations of the inflation adjustments with our customers, what we have done so far and what we're planning to conclude in the next few weeks, we should be able not only to maintain but exceed our unitary EBITDA for the year. If you recall, the unitary EBITDA guidance is $13.6 per equivalent unit. We feel confident that with these negotiations together with the volume performance as well as the cost improvements that we're showing, we should be able to not only meet but maybe slightly exceed this unitary EBITDA.
Okay. At the moment, there's no other changes to your guidance for this year that you announced earlier?
No.
Okay. Do you foresee anything that might, you know, at least at this point, might weigh on that or decision?
Well, no. I think, I mean, we're sticking with our guidance so far. I think, Armando highlighted, from the volume side, we're seeing a fairly good performance. We're confident to meet or even slightly exceed the guidance.
Okay. Thank you very much.
Yeah. In addition to that, we are confident that we're making very good progress in negotiations with our customers to adjust for inflation. I think we will have over the next few weeks a resolution with most of our customers.
Will you announce that to the market?
Sorry, can you repeat that?
Would there be more of a formal announcement to the market when you do have those complete those negotiations?
No, no. Those, I think, are confidential negotiations.
Okay. Okay.
information that we would provide internally, but certainly we're expecting to have a fairly strong third quarter.
Thank you very much.
Thank you.
Our next question comes from the line of Christian Aust with Bernstein Autonomous. You may proceed with your question.
Yes. Hi, good morning. Quick question on the guidance and your comment that you have contracts in place with customers for 50% of the annual sales. Just maybe you can elaborate a little bit on the target for the full year. You want to have contracts or negotiations completed with all customers? And would that cover 100% of the cost, or is there a different number, for example, 70% of the input cost inflation and the remainder is coming from internal measures? That would be my first question.
Yeah. Well, Christian, certainly what we are asking for our customers is as much as we can. At the end, it's gonna be a combination of what we are able to obtain from the customers as inflation adjustments and our cost reduction initiatives. We're quite confident that we should be able to contain a large portion of these effects.
Okay. You cannot give a number in terms of roughly what the split would be?
No, no, I'm sorry, but not at this point. Remember that we're still in negotiation with certain customers, so we need to keep that information.
Okay. Thank you. The second one would be on your bonds. I mean, I'm looking at the cash balance. It looks quite decent. The bonds are trading in the low 70s. Any considerations of maybe buying some of that back?
Yeah, for sure. We've gotten that question multiple times, but what we are favoring right now is really the investment in our projects, in our investment contracts that we have. As you know, we have been quite successful in obtaining new business. We wanna make sure that we're redirecting our cash flow towards our capital expenditures that we need and ultimately to reduce the leverage as well. No intentions at this point to revise bonds.
Okay. Thanks.
Thank you, operator. We will now move on to questions from the web. We have a question from Laisha Zaack from GBM. Laisha asks, "Do you mind repeating the EBITDA per unit that you expect?
Well, as we highlighted, just a few questions ago, we believe that we'll be able to meet or exceed our $13.6 per unit, per equivalent unit of EBITDA for the full year. That was our guidance. We had certain assumptions into that. We believe that we're well positioned to meet that or even slightly exceed it.
The next question comes from Jacob Steinfeld from Ashmore. Jacob asks, "Can you quantify the positive impact in second quarter from the retroactive adjustments from first quarter applied in second quarter? And what percent of your customers have you been able to pass through the cost increases, and by what percent?
Well, as we discussed, we have been able to successfully conclude those negotiations with approximately 50% of our revenue, the customer representing close to 50% of our revenue. Yes, I mean, there is a part of what we gained this quarter was associated with the first quarter. If you do the math and if you do the addition of both, first and second quarter, that will give you an idea of what that total effect would be. To that effect, we're still missing the negotiations of the remaining 50%. That's gonna help us take us to that 13.6 or a little bit higher of EBITDA per unit for the end of the year.
The next question comes from Antonio Gomes from Ninety One. The question is, "Is the semiconductor shortage impacting volumes? Your volumes increased throughout the year-over-year despite weak sales volumes. Is this a case of production coming ahead of sales volumes in the auto market?
Yeah, thank you. Thanks for the question. Certainly, what we are seeing, as it was already presented, we saw due to the conflict in Europe between Russia and Ukraine, there was some interruption in the supply chain, and our customers moved some of the semiconductors that they were using in Europe to North America, and that helped production. In North America now is a little bit more stable. What we are seeing is that, as I indicated, that our customers are certainly improving significantly the availability of semiconductors. Yes, we believe that they will continue working with their key suppliers, trying to get additional capacity to solve once and for all the shortage of semiconductors.
The next question comes from Alan Miranda from REDD Intelligence. According to media reports, there is a shortage of aluminum for the beverage industry. Does this affect the automotive industry, including Nemak, or do you expect it will?
Yes. Thank you, Alan, for that question. At this point, we're not seeing any effect on availability of aluminum. Remember that a large portion of what we procure is secondary aluminum, so it's already on the scrap market. We haven't seen yet any effect of availability of aluminum for any of our operations.
Okay. The next question comes from Andres Cardona from Citi. He says, "It seems there was a relocation of material, raw materials from Europe into North America. Do you expect it to remain the case in the second half of 2022?
Any materials flow from Europe to North America?
Maybe in terms of the semiconductors. Maybe there's improved semiconductor availability in North America.
Well, as I indicated, we saw that our customers, again, had this disruption due to the conflict in Europe, and they moved some of the semiconductors to North America to start building more vehicles and increase, let's say, the offering in this region. We are now seeing more stabilization in terms of the European operations, and we are seeing more stable in both regions.
Okay. Also, the next part of his question, did you see the equivalent of 50% of revenues renegotiated to recognize the inflation cost? Did you confirm that?
Yes. As highlighted, we have reached agreement on approximately 50% of the revenue with such customers.
He also asked you if you can provide color on a working capital outlook for the full year.
Well, yeah, we will continue focusing ourselves to improving as much as we can in working capital. As you may have seen, we continue to have a good performance on that front. We expect to potentially increase it a little bit on the third quarter, but ultimately reduce it at the end of the year due to the regular cycle of our business.
Okay. There are no further questions at this time. With that, we conclude today's event. I would just like to take this opportunity to thank everyone for participating. Please feel free to contact us if you have any follow-up questions or comments, and have a good day.
Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.