Q3 2019 Earnings Call

All participants thank you for spending by the conference is ready to begin.

Good afternoon, ladies and gentlemen, welcome to the Martin <unk> International third quarter results for 2019 conference call.

Instructions for submitting questions will be provided to you later in the call.

Good afternoon, everyone.

Thank you for joining us today.

We always look forward to talking with our shareholders and we hope to inform your well on answer questions.

Also note that we have many other stakeholders, including many employees on the call and our remarks are addressed to them as well as we disseminate our financial results and commentary through our network.

With me this afternoon or about to Raimo, Martin Ray as CEO and President.

And our CFO Freddie toll stone.

So just finished our board meeting an annual budget meeting how does on the board of the Oh, Yes, safe and they have their annual meeting in conifer starting to God morning, as a result, we're talking too late in the day today.

We'll be discussing Maria's results for the quarter ended Septemberthirty 2019.

Fred and then I will make some brief comments and then we'll open the call for questions and will endeavor to answer them.

Our press release with key financial information discussed on a fairly detailed basis has been released our mdna in full financials have been filed on SEDAR and should be available.

These reports provided detailed overview of our company or operations and strategy and our industry in their risks we face.

We're very open to discussing in her remarks, and we opened the Q any some highlights of the quarter. The state of the industry today, how we're addressing the challenges and progress in our operations.

As always we want you to see how we see the world.

As for our usual disclaimer I refer you to the disclaimers in our press release in the filed documents are public record, which includes a <unk> form and Mdna of operating results is available on SEDAR. You may look at the full disclosure record of the company there and now here's Todd Thanks, Rob Good afternoon, all there's not enough.

Yes really start good story continues as Q3 adjusted net earnings per share coming in at 53 cents in the range. We discussed in our Q you call. It 53 57 cents.

Q3, 2019 performance represents our best third quarter to date.

Our adjusted operating income margin came in at 7.1% the third quarter up from 6.9% in Q3 of last year production sales of 847 million.

As compared to our guidance of either 20 860 million.

We were able to produce the results. Despite the impact of the September portion of the GM spread.

The impact from GM strike was offset with a lot of that effort in Q3.

In Q4, the strike, but longer than anticipated her full month without sales from one of our largest customers could not be offset this has been compounded by softening sales in Europe , and China as well as a little bit in North America.

Due to the strike and softer market, we've reduced our Q4 expectations. Our current forecast briefly yes. In Q4 is between 35 to 45 cents.

The wider ranges due to the unknown make up volume effects idea.

It's clearly are pushing to make up what's possible the remainder of the year, but the line of sight is not 100%.

We'll not be possible for him to make up the volume loss during the strike by the end of the year, what's not made up in 19, we believe will be made up in Q1 Q2 20 twond.

Our sales ready for Q4 is 70 that need to 810 million again, the primary here, but being the GM volume recovery.

Q4 is a temporary situation and expect to recover the majority of the loss volume somewhere between now and possibly in Q2 of next year.

Other than the G.M. strike 2019 has been a great year overall operations continuing to improve and launches on the whole going well.

Our outlook shows sales slowing in Europe . This is particularly noticeable JLR one of our larger European customers. The situation is possibly compounded by Brexit. In addition, we're also seeing some lower volumes in Q4 from Diana.

Well, a softening sales primarily outside of North America, we are experiencing several new program delays from our customers.

This across multiple customers and for us large programs. These delays will affect our targeted sales and margin improvements in 2020, you will recall, our 2019 2020 margin targets have two key components sales of new higher margin products and continued operational improvements.

For 2020. This includes sales of 4 billion or more.

And continued operational improvements led by our lean activities and our operation as well as great launches.

Our new programs come in with a benefit a meeting or exceeding our established hurdle rates, making new work more profitable.

I'm happy to report, our lean activity and launches continue to go well I'm, particularly pleased with the operational improvements.

Our view some of our plans are now benchmark in the industry.

That portion of our plan remains on schedule and within our control.

Related to our customers, we are seeing many new program delays and slower ramp ups than originally planned.

Most of the delays or six to nine months moving out over 200 million. Some projected production sales originally planned for 2020 into 2021.

The delayed programs include the Jeep Grand Cherokee Miss on road Pathfinder Inboards, new product in the Hermosillo Assembly plant met to replace the board fusion.

All of which are large and impactful programs for us.

These programs represent in excess of $400 million, a full annualized sales at the volumes.

Our new model sales well launch has more margin than most current production.

The retiming of our customer new model introductions will push our 20 24 billion sales target in 2021, along with that our target a 9% operating income will move into 2021 as well.

Despite the expected flat sales and delayed launches a new programs, we expect our margin to improve year over year exceeding our original 8% targets for 2020, assuming customer programs remain on schedule.

It's been a challenging you months between the GM striking some softening volumes I'm very proud of the teams response to the volume shortfalls, reducing cost flexing labor, where possible and making improvements on the operation at even a faster pace.

Finding cost savings throughout the enterprise to bring in a record Q3.

The other great team willing and able to do whatever is necessary to keep the go forward momentum at Martin Ray.

And it's great to be a part of it. Thanks again for all your hard work.

With that I'm going to handed over to Fred Thanks, Pat as Pat as already noted the third quarter was another strong quarter for US a record third quarter from a sales and earnings perspective.

Q3 production sales and adjusted net earnings per share both came in within the range of our previously announced guidance and this despite the disruption on the gym strike for two weeks during the month in September .

Hi. This is there any noted the team did a great job are reacting to the headwind, resulting from the strike.

Delivering Q3 earnings inline with expectations.

Aided by strong results in a rest of world segment.

However, as proud as already noted the impact of the strike from Q4 was far greater and cannot be offset compound and some by some other volume headwinds.

Easy when your largest customer as a significant work stoppage for an extended period of time.

As a result of the strike, we lost about 20 million to production cells in September .

Yes, and 70 million in October so overall the impact was significant.

We're obviously happy to strengthen our who was a temporary blip. We expect most of the lost volume made up over time, just on the fourth quarters. It can talk about Q4 guidance.

Simon along and put the matter behind us.

Outside of the strike 2019 hadn't been and will be a good year from Andrea.

Overall I'm very pleased with the Q3 year to date financial performance, we delivered solid adjusted margin and earnings real much line the expectations. Despite a volatile global environment in Germany outperforming their favorite from margin perspective.

Our Q3 year to date adjusted operating income margin was 8% and this despite the September impact from the gym strike.

And normally high tooling sales, which tend to be a low or no margins.

We're very much training to be north of 8% for the year before the straight kicked in in line with our 2019 target.

And this despite some overall softness in bonds of crop predominately outside of North America.

As such we are very happy with the overall progress, you're making as an organization and our ability to deliver.

Keep getting stronger every year in 2019 is no exception.

I do like to thank the marner team for their hard work and dedication.

So many times before we are making a difference.

Another important positive this year has been our free cash flow profile.

We have been very consistent with their messaging on this topic, we have set for quite some time, there you start seeing or free cash flow profile turned positive in 2019.

And I'm happy to report that our year to date performance reflects that.

We were free cash flow positive in Q2 and again in Q3.

We generated free cash flow as defined in R&D name.

39 million in Q3.

75 million year to date.

The cash generally used to buy back shares make some incremental investments and nano explore paid on that.

So overall a good result, a line what we've been saying.

Expect this positive trend to continue heading into 2020 as promised.

And in line with our New Board approved annual business plans.

Lastly, I just wanted to touch upon our balance sheet for a moment, which continues to be strong.

Our net debt decreased during the quarter with net debt to trailing 12 months adjusted EBITDA, excluding the impact of life for a 16, ending the quarter 1.4, or five times very much in line with their targeted range.

We have a strong balance sheet within this industry and are committed to keeping it that way.

The strong balance sheet. In addition to providing us the flexibility to invest for growth and capitalize on opportunities helps us with their customers.

Our customers frankly like companies was financial strength as they know where there for the long term.

Also creates opportunities on customers have supplier problems than you saw we can and are there to help them like we have done so many times before.

As such we will continue to maintain a strong balance sheet as we execute on our capital allocation strategy.

Thank you with that and I'll turn you back over to Rob.

Thanks Fred.

Some very brief comments on our industry.

The industry has been seeing some challenges, but we believe we're seeing some positive signs now trade issues for North American for China, and Brexit are showing positive signs of getting resolved u_s_m_c a may get signed this year, we'll see.

Labor issues are also getting resolved this the GM strike is over and there is a deal coming for the other Oems also both have been issues facing the industry.

The underlying economy in North American elsewhere, it's showing resiliency some positive sign such as low interest rates also I think we may be seeing some positive sentiment in the public markets.

Dealer still go by vehicles and a lot of those vehicles will have our product on them.

Volumes, while off are still pretty good we should be able to make money in this environment. Good money with our strong financial performance and cash flow. We will continue to invest in the business maintained a strong balance sheet make solid strategic investments and acquisitions, where appropriate and invest in ourselves by repurchasing shares where it makes sense.

And the third quarter, we did renew our normal course issuer bid and bought over a million shares.

We also increased our investment in nano explore.

We believe our company is performing very well on an absolute and relative basis, and the challenges and opportunities in the industry provide opportunities for us.

In a flat overall market this company and our team are doing a fantastic job evidenced both by our absolute results and our improvements in key metrics relative to our peers. We continue to write a great story, our team is delivering well I would like to thank our people for their efforts and our customers for their support.

Now it's time for questions. We see we have shareholders analysts some competitors on the phone. So we may have to be a little careful what our answers, but we will answer where we can thank you all for color.

Thank you well im asking questions from the telephone lines.

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We have a question from Peter Sklar from BMO capital markets can you go ahead.

[noise] at some questions about your geographic segmented reporting so.

Your European operating profit I believe it.

Essentially doubled year over year.

And.

So I'm just.

Adjusted basis.

If you can talk about what's going on in Europe .

Yes Europe .

<unk> increased substantially year over year.

In Q3 last year.

Quarter was impacted by higher than normal launch costs, some mix issues and we also.

Yeah.

During that quarter. So it was abnormally low.

So that's kind of explain the baseline and then increase.

<unk> percent for the quarter.

Acentia is driven by improvements lower launch costs and then some positive mix.

And we've been at the 8% range in the past.

Thing is is a European segment is not that big in the Grand scheme of things for us So when theres movements there they become more visible.

And that's why you kind of <unk>.

Flux in the quarter I was positive.

Nonetheless, it was.

Okay, and then similarly peer rest of world.

Segment on an adjusted basis I believe it was 6.7 million of operating profit I don't believe it's ever come anywhere close to that level.

Profit so I'm just wondering what.

The story there.

Similar story, there, it's even smaller so when there's a movement.

Very noticeable and.

I don't want to get into a specific margin discussions by program or customer there, but we had very positive mix.

During the quarter that a that help margins in that segment. In addition to that as you know we also perform some restructuring and Brazil.

It was in our China foods facility.

Earlier, this year and we're starting to see some benefits coming from that.

Okay.

Yeah, I just wanted to ask.

In terms of the operating profit of your North American segment.

Like we know the.

Back to the GM strike.

Taking that into account where are you satisfied with the level of profitability in that segment or were there any issues during the quarter.

I would say generally speaking we're satisfied as we know what an opening remarks.

Good job <unk> strike headwinds other variable that played into our margin percentage in North America is the higher than expected tooling sales. So we've been talking about that the last couple of quarters.

Some of that came in in Q3, I'm expecting more to come in in Q4. So for the year tooling sales are going to be abnormally high.

Let's call it in around 400 million and that's a anywhere from 100 200 million higher than our normal levels.

So that's impacting the percentage, but overall I think North America.

You know reacted as best as it could in terms of as it relates to segment headwinds, resulting from the gym strike.

Okay. Thanks, very much thank you.

Thank you. The next question from Kevin Chiang from CBC. Please go ahead.

Hi, Thanks for taking my question and and I apologize. If you you mentioned this in your prepared remarks earlier.

Just as you look into 2020, you have some some targets in terms of sales and margins and just wondering how you think about side as we enter into next year, especially as you think of that some of that loss Jim worked potentially.

Being a tailwind next year it sounds like as you may go for some of the lost production.

We'll see some of that made up like we said this year, we know they're going to push as much as they can into the fourth quarter, but certainly they're not going to be able to make the impact that they lost so we expect to see that in the first quarter and into the second quarter. Most likely inventories are terrible by any means for for those.

Goals so.

I think there'll be smart about it and try to do it.

Why easily from a cost point of view.

Certainly we expect to see I don't know, if it's going to be a significant increase or the level. It through the two quarters, but I, certainly think especially on the trucks that they're going to do whatever they can to make those out.

And I guess like the the 4 billion in topline and roughly 9% things over 9% EBIT margin those are still.

Based on what you see with GM in your overall macro view those are still achievable targets. So in 2020.

I think the bigger problem in 2020 years, we've had some substantial delays from some key programs and as I stated in the the new products. They meet our new hurdle rates and so they're more profitable overall.

We've had delays of what's going to be an annualized basis over $400 million a year. So that's going to potentially at least unless we see some some other tailwinds.

Push the 4 billion into 2021, which would carry the 9% into 2021, 8%.

Originally had targeted for 2020, we'll continue to I think exceed that.

But the 9% will be very volume dependent and these launches have already been announced is delayed so I don't see that changing by any means.

Another big these are big programs for us as well.

That's helpful color and then just on Europe . When you look into next year with the new CEO to regulations.

You have a sense of how that I know you're sort of a huge part of your business, but how you see that playing out and.

You feel Oems to prepare their or.

Back to a heightened level of volatility.

As you look at the next 12 months in that continent.

In North America, I don't see an impact.

We see a lot of already queues on electric vehicles, and we're we're bidding on a number of those but.

Those aren't something that or that you're going to see any massive change in the next few years.

I think you'll see Europe is being more reactive to that to those things certainly as we know China is as well.

But I'd say for 2020, I don't see anything significant.

And just last one from me. Thank you for then just last one from me your your your investments and now I know explored you can you remind me or you are you are you working on anything with them or or is this just a an equity investment in a company. That's that's advancing a work in graphene or you're preparing to do anything with them in any color that it would be helpful.

So we're big believer in the in the material. So we're definitely an investor but we're also working on a number of products. My expectation is we'll see potentially one of those products are available for sale in 2020, if all those.

Based on our testing, so far which implies we'll be ready.

Yeah.

From the Investor side, we're encouraged by the prospects.

As we noted we increased our.

Our ship level in the company to 25% separate and apart from that.

Agreements.

On a number of products.

That's very helpful. Thank you very much.

Thank you once again, you me press Star one question.

This concludes today's question and answer session I would like to turn the meeting backwards I missed the bar.

Well. Thank you very much appreciate I appreciate the people that came on the call for the eating once again I said, we normally do the call in the morning.

Some industry commitments.

The questions of any of US a phone numbers on the press release feel free to call that Fred or me greatly.

Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.

This conference is no longer being recorded no hedges promoted coffeehouse at that there won't be.