Q4 2019 Earnings Call
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On slide deck today, not only did you see.
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All participants please standby your conference is ready to begin.
Good afternoon, ladies and gentlemen, welcome to the Martin.
National fourth quarter.
Results for 29 team conference call instructions for submitting questions will be provided to you later in the call.
Good afternoon, everyone.
Thank you were joining us today, we always look forward to talking with our shareholders and we hope to inform you will 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 or annual results and commentary through our network.
Me this afternoon and tried to Raimo Mercury as CEO, and president and our CFO Freddie Tosto.
Today, we will be discussing Martin ranch results for the quarter near ended December 31, 29 team.
I will make some opening remarks, Pat will make operational and strategic common so give me his perspective.
Fred will review the financial results I will finish with some general closing comments and go over some of the great things that are happening here Martin Ranch and then we'll open the call for questions and we will endeavor to answer them.
Our press release with key financial information discussed on a fairly detailed basis has been released or Mdna, Hey, I ask them full financials have been filed on SEDAR and should be available. These reports for write a detailed overview of our company our operations and strategy and our industry in a risks we face.
Given the detailed in our press release in filed documents our formal remarks on the call today will be generally overview in nature.
We're very open to discussing in her remarks, and we hope in the queue in a some highlights of the quarter or year. The state of the industry today, how we are 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 and filed documents are public record, which includes an <unk>.
And Mdna of operating results is available on SEDAR you may look at the full disclosure record of the company there.
Welcome to 2020.
A year, which we look forward to with great anticipation as we intend to continue to develop their apply or one Martin rare culture in our business.
The view to improving our financial performance continuing to improve our leading safety and quality metrics delighting, our customers satisfying our employees performing for shareholders and leading the way and good corporate citizenship and our communities.
Even in a challenging environment in terms of some of the geopolitical trade Corona virus and economic issues. We all face some will continue to perform well as we did in 2019 in the years before that and here to tell you all about it is pot.
Thanks, Rob.
Good afternoon, everyone have you saw in our press release, our Q4 adjusted net earnings per share came in at 42 cents within our guidance Q4 production sales came within our guidance as well, but we did not see as much of the increase as expected from general Motors post strike.
Our adjusted operating income margin for the quarter was 5.6% lower year over year due to the effect of the GM strike as well as higher than normal normal tooling sales.
For the year, we achieved an operating income of 7.5%. This despite the previously mentioned strike.
Actually a very strong year, if we were to adjust out the strike in the higher tooling sales operating income margin would have landed at over 8% for our pre strike plan.
For the full year 2019, when our highest S to date coming in at $2.27.
Our net debt excluding I FRS 16 ended the year at $663 million.
Our net debt to adjusted EBITDA ratio ended the year at 1.41 times. So we continue to stay within the 1.5 times range plus or minus.
And this despite the significant amount of share buybacks.
Production sales for Q4 came in at 787 million within our range 750 810 million.
As it continues to be volume pressure in Europe and China.
North American trucks, Cvs and actually these continue to have good sales levels, which is where we are heavier weighted.
For Q1, adjusted EPS is projected to be between 60, and 65 cents reflective of some volume softness in certain areas of Europe, and including the impact the Corona virus is having on China vehicle production actually given some of the headwinds good projection from an earnings perspective to kick off 2020.
Q1 guidance also includes a one month of results from our just closed the acquisition of Mattel's, the structural components business, which I will discuss in more detail momentarily.
The business is expected to be slightly negative to earnings at the onset and transform into a positive earnings run rate by the end of the year, obviously subject to volumes some restructuring that needs to be complete and we wrap our arms around the operations.
Auction sales are projected to be between 860 910 million.
We have a good number of launches in 2020, though a number of programs were delayed as I discuss the last call. This means more launches in the latter part of the year as well as into 2021.
New business wins for Q4 as noted in our press release came in at 140 million and annualized revenue at peak volume.
First in our lightweight structures group, we continue to increase our book of business with Toyota This timing when control arms for the Toyota Tacoma pickup truck.
This is our first win in the Toyota chassis space, including Engineering and design development, a great step forward with a new customer as previously announced in our lightweight structures group, we want to approximately $100 million the body in white work, the new Daimler EBIT to electric vehicle platform. We're very excited about this when due to the number of joining technique.
Allergies, the vehicle will employ with multiple materials.
This product will be built at our new Tuscaloosa plant near the Daimler U.S. location.
This is one of the facilities that will come with our recent acquisition.
In our propulsion systems group, we won $30 million of work with is that as group.
Well the machining one of the current transmission housings in both casting machining. The next generation model looking back on 2019, we successfully launched a number of products, including the T. One Xx Silverado Ford Explorer Mercedes a class vehicle Chevy Blazer, new forward Vsix engine vole Isix engine among men.
Any others.
The most recent this past fall was the forward escape effecting four of our locations at various levels at the current time the vehicle production numbers are lower than expected due to external factors unrelated to us, but including parts supply.
We expect this to be resolved in anticipate volumes to increase on this product in the near future.
Launches and program management continued to be at the forefront and we continue to improve our ability to deliver quality on time.
As we look back on 2019, the fifth year of our Maria 2.0 strategy, we have a lot of the good news to reflect on.
Starting with safety.
A 72% improvement over the last five years in quality, 34% improvement in the same timeframe.
Annual adjusted EPS has grown from 98 cents EPS to $2.27.
Earnings per share.
Net debt to adjusted EBITDA ratio from approximately 2.6 times down to 1.4 times, including a significant amount of share buybacks.
Our operating income margin from 4% to nearly 8% again, if not for the GM strike in 2019.
We will stay focused on our core and continue to improve at an even faster pace as we enter 2020, we will take the next steps to responsibly grow the enterprise, while continuing to improve our base business with our lean activities.
We have taken a numerous steps to support our project breakthrough strategy over the past year, including more engineering and soon to launch multi material aluminum sub frames, our first multi material cradle and using joining technologies at a high volume for a multi material body in white production product.
To accelerate this we recently announced the acquisition of Mattel's, a structural components for passenger car business.
As previously noted some key points, but let me touch on a few benefits once again, maybe was slightly more granularity.
As we've discussed in the past there are a number of things Mart Ray I wanted to accomplish with both our initial 2.0 plan as well as our recently shared project breakthrough strategy.
Our first priority had been to take a young fast growing company and put systems in place to assure financial technical and cultural strength.
Any business capability to engineered flawlessly launched profitable quality products to our customers. The journey to improved this quarter does not end in fact, despite our consistent improvement in my view. We are still just getting started the improvement has been consistent and strong and then the past few years, we have formulated our next phase two.
Can you to follow our operational improvement plan, well, putting more emphasis on new product capability and technology in order to grow our customer base revenue and support our plan to be a great long term company.
The acquisition to metastasis structural components for passenger car business does a number of things to support this breakthrough thinking it diversifies, our customer base, adding significant revenue of two key customers.
Our steel metal forming group moves from a north American player to a global player with locations near a number of our aluminum plants, which in turn supports our multi material aluminum and steel lightweight strategy.
We finished strong reputable engineering group in the heart of Germany, not only continue to support the European customers, but also some north American customers as well.
Along with adding engineering capability will enhance our lightweight multi material joining technology in area that facility in Germany has accelerated and has in some cases put into production as you can see we're excited about this acquisition, it's much more than $400 million in additional revenue.
Of course, there's always challenges with an acquisition after all many fail and taking full advantage of these opportunities.
Martin Ray is no stranger to acquisitions. After all this is how we came into being.
We have developed the top notch integration team eating our strong program management thinking as our approach.
Our strategy is did not take over blindly and this potential opportunity instead, we have and will continue to dig deep and assure we absorb the attributes as well as the revenue and capacity to strengthen our company as we grow it.
I'm really excited for 2020 proud of the Martin Ray of team accomplishments and thankful to be part of it.
With that I'll pass it to Fred.
Thanks, Pat and good afternoon.
As Pat already noted Q4 production sales and adjusted net earnings per share both came in within the range of our previously announced guidance so very much in line with expectations.
As reflected in our sales and earnings guidance Q4 production sales and adjusted earnings were both down year over year due largely to the impact you weigh W. strike a general motors had on North American financial results for the quarter.
This was partially offset by some very strong results in our rest of world operating segment margins for which came in at a healthy level for the quarter generally consistent with the third quarter due to a positive sales mix lower launch related costs and productivity and efficiency improvements across the operating facilities in the segment.
Operating margins and the rest of World segment are expected to normalize in 2020 as a product mix in the segment is expected to change customer pricing as adjusted to reflect competitive forces in volumes are challenged in particular with the recent krona virus matter as direct impact on production in our facilities in China.
Across the virus is clearly having an impact on Q on production levels in China.
Beyond Q1, it is unclear on how deep the impact gets in the extent to which it impacts of global supply chains and production levels outside of China.
We are obviously, keeping a close sign the matter along with the rest of the world.
React accordingly.
Notwithstanding our operations and the rest of world, albeit a relatively small portion of our business performed well for us in 2019.
We definitely showed some nice progress this past year.
As it relates to Europe operating margins were down in the fourth quarter due largely to loss contribution from the volume headwinds, we had been and are facing in that region overall negative sales mix.
Losing volume in Europe tends to translate into a more significant bottom line impact compared to other parts of the world as our ability to flex costs in Europe, and particularly in a place like Germany is somewhat limited due to the fixed nature of the overall cost structure.
As noted the W. Jim strike ended during the fourth quarter at the end of October, but ultimately it did end up having a relatively significant impact on our 2019 financial results.
As a result for the strike we lost about 20 million in production sales in Q3.
And another approximately 65 million in Q4, so as you can see the impact was significant.
Right originally expected them most of the loss volume will be made up over time. However that has not been the case debate as they have not yet seen much increase post strike volume from Jim as Patrick noted.
Outside of the strike 2019 was a very good year from Martin ramp.
Overall, I'm very pleased with our 2019 financial performance, especially when you take into consideration some of the headwinds we and the industry faced during the year.
To summarize some of the financial highlights for 2019.
We recorded increased sales of just under 3.9 billion inclusive of higher tooling sales, which inherently reflects the strong pipeline, a new and replacement business.
Sales grew year over year, increasing approximately 5.5% on the oil overall industry was generally flat and down in some areas.
But for the way WGN strike, we would have improved adjusted net earnings for the 10th year in a row.
We generated adjusted net earnings of approximately 180 million our fully diluted adjusted net earnings per share 2027 cents. The best adjusted EPS performance in the company's history.
But for the strike and higher tooling sales our adjusted operating income margin would have increased again in 2019 north of 8% showing continued improvement from about 4% in 2014 as Patrick noted.
Our operating margin has progressed nicely over the past five years outperformed most industry players.
Our absolute basis, our operating margins were now higher than many of our direct competitors in the areas in which we compete and in terms of general automotive parts supplies suppliers.
Our balance sheet remains strong and in 2019 at a net debt to adjusted EBITDA ratio of 1.41 times, excluding our for 16.
In much within our targeted range, despite paying dividends funding a significant amount of share buybacks and increasing our investment announced four during 2019.
We now own approximately 25% nano explore and are very excited about its prospects.
We have a strong balance sheet for this industry and are committed to keeping it that way.
Another important positive this past year was our free cash flow profile.
We have been very consistent with our messaging on this topic, we have said for quite some time.
We see our free cash flow profile turned positive in 2019 and that is exactly what happened.
We generated free cash flow as defined and reconciled in our Mdna 127 million in 2019, a very healthy number with 51 million of that generated in Q4 aided by a decrease in tooling related working capital.
With the cash and generally used to pay dividends and buyback shares make our incremental investments in animal explore and pay down debt.
So overall, a very good result, and very much consistent with what we've been saying.
Our company's clearly, becoming a significant cash flow generator.
As you can tell we're very happy with the overall progress, we're making as an organization and our ability to deliver in particularly in this very volatile environment.
We keep getting stronger every year in 2019 was no exception.
We expect to get even stronger 2020 as it continues to progress as an organization, including adding the structural components business. Some of it also to our portfolio and Taco a challenge in front of us and the industry head on.
As a result of them the tallest acquisition and to some extent the current volatile market outlook, we're updating our 2021 targets as previously provided.
With the addition of the pneumococcal business, we're projecting sales to approximately $4.4 billion 2021.
Subject of course, the overall market volumes.
And while operating margins are anticipated to increase in 2020 from 2019, we are targeting adjusted operating income margin somewhere north of 8% and 2021.
Based on our based on our anticipated new mix of business inclusive of Macassa.
I'd like to thank the Maria team for their hard work and dedication as I said, so many times before we're making a difference.
I'd also like to take this opportunity to welcome the employees from a positive to our family.
You are in good hands were very excited about this acquisition and as prospects for the future.
Thank you with that and I'll turn it back over to Rob.
Thanks Fred.
Some comments on capital our industry and culture.
Let me start with an update on capital allocation.
As you can see from our press releases and pass discussion.
We have won a lot of new business over the past two years.
That's a lot of new business to launch some of his on new models. Some of it is conquest business of course, we continue to win repeat business to that implies a few things first our customers are rewarding us with new work because of our product offering and performance in quality delivery and competitiveness.
Second in terms of capital allocation investments, we've been making in our business have been bearing fruit and further we will continue to invest in our own business. This will continue to be our priority, there's clearly tremendous value to it.
With the recent acquisition, we should have well over 4 billion in revenues this year and there will be more organic growth beyond 2020.
With topline growth given our discipline on financial return hurdle rates, our bottom line will grow to.
Note that this growth is over and increasingly broad range of customers over many geographies, especially outside Canada.
Over a broad range of vehicles internal combustion engine electric hybrid opportunities abound.
That is our primary focus as a use of cash.
Many people have asked us about M&A opportunities for the past few years. We've stated we've seen a lot of what I would call noise, but we are clearly not averse to M&A activity. After all we've done it many times in our past and now we've just done it again.
We generally apply a build or buy scenario and where it is cheaper and faster to buy the build we do so, especially if there are cheap assets available even fixing to do.
We have been fixing very well as our margin improvement it tests and we will do so two on them at Tulsa assets over time.
Today, we certainly remain willing to look at opportunities, but we feel it is very important to be disciplined and to by prudently.
Note that we have always invested in and we'll invest in technologies or products that support our business. We increased our investment in annual explore in 2019 for example, and we're excited about that and the future of graphene in our products and in general.
In terms of our debt levels, we like and have a strong balance sheet. This is helpful. Not just from a funding perspective, but our customers frankly like.
Companies with financial strength. They know we are there for the long term.
Believe me this industry as long memories and customer still don't like overleveraged suppliers. So we will maintain a strong balance sheet, even as we fund our internal growth and make strategic investments or acquisitions.
In terms of returning capital to shareholders as you recall, we increased our dividend in 2018 and that is represented some increased return we are announcing entries to our dividend again today, reflecting our confidence in our business and our desire to increase shareholder return when we can.
The total increases not large in dollar terms admittedly, but the percentage increases over 10% as well we purchased about 4.8 million of our outstanding common shares are about 5.7% of our float in 2019.
We promised we would buy back some shares is a good investment of capital while still funding our growth taking advantage of investment opportunities and maintaining a strong balance sheet. We have kept our promise on all accounts.
Since we started buying back shares in 2018, we've repurchased over 7 million shares about 8% of our outstanding amount. This rewards our shareholders with a higher portion of ownership of our company higher EPS and less dilution of earnings.
Our intention at this time is that subject to all the points I just made we will be back in the market on our normal course issuer bid next week till the end of the first quarter when we enter blackout.
We will likely be renewing our normal course issuer bid in August.
In terms of the industry, let me talking with that for a second volumes for the most part were fairly flat to negative across our markets over the past year and the times of robust year over year growth maybe over at least in some areas. Nevertheless volumes are at a very healthy level today in particular in North America, where the majority of our business resides.
Volumes in Europe are off a bit but should be flattish.
Right now volumes are often China, especially as the Corona viruses weighed on the industry not only has production slowed but people aren't buying cars.
We expect this crisis to be over at some point, but volumes will be off in China, and the lack of China production has affected and will affect global production in varying degrees.
For many prognostications about overall volumes in 2020.
But I think it is safe to say they may be flattish to down in 2020.
Many car companies and auto parts companies are tempering their guidance as a result.
We only give specific guidance on a quarterly basis as Pat has done today and on an overall long term basis, we remain bullish that overtime, our revenues profits cash flow and margins will increase.
Gave you our thoughts about 2021.
Longer term I believe the Corona virus event, coupled with the trade disputes we have seen may call because all of US to review our supply chains. For example, I think this will add to a trend towards local insourcing, our reassuring to North America, which frankly could be very good for us.
In addition to the usual industry challenges in 2019, we dealt with and are continuing to deal with some broader issues, but there have been some positive developments, especially on trade.
We're pleased with the signing and pending ratification by Canada of the U_s_m_c eight as the updated form of NAFTA is generally termed.
We were very busy with a variety of governments and industry participants in the negotiations and we believe the signed agreement is a good one with some potential opportunities for north American suppliers, such as ourselves because of the North American rules of origin provisions.
In terms of broader tariff and trade discussions involving the United States, China and others. There was a lot of negotiating in 2019, but there seem to be some trade stability by year end.
Martin Ranch as a small presence in China overall, but there is opportunity there if the risks can be addressed.
On a positive note as we have always stated challenges present opportunities to nimble entrepreneurial lean and resilient companies with great people and we believe we have shown an ability to take advantage of opportunities over the years, we get stronger through meeting challenges well bring it on.
Finally, a couple of thoughts about culture, we talk about culture, a lot of Martin ranch, why because of matters and matters a lot it matters to us, but most importantly, it matters to our people here at Martin ramp.
Over 90% of our employees worldwide report in our employee surveys that they know our vision mission and principles that as a telling statistic employees or from all of our plants and two major corporate offices in nine countries on four continents and included recent hires and those who have been with us for many years.
Our culture is having a profound impact on our company in our people and on us.
So we take it very seriously.
Peter Drucker once said culture, each strategy for breakfast and we think is right.
I'm not going to repeat our vision mission and principles, but rest assured they are all over our company and published documents I refer you to our report to shareholders. We just filed we will posted on our website.
We live these every day they are not just for show.
Nor do we don't stop with the vision mission to get 10 guiding principles, we have articulated in a cohesive yet simple way our company culture comprise comprised of entrepreneurship lean manufacturing principles and the Golden rule philosophy core to our 10 guiding principles.
The company has been entrepreneurial and major since inception, a company that has embraced characteristics of encouraging executives general managers and all employees to act and think like an owner with a stake in the enterprise supporting it can do attitude promoting an ability and willingness to urgently get things done acting to avoid unnecessary Bureau.
Accuracy, developing an ability to learn from mistakes openly and constructively and the trust of working in a team.
As a company we embrace new initiatives every day, we focus on new products, New technologies, new locations in new ways of doing things consistently.
Our strategic investment in nano explore are embracing of new technologies and our acquisitions in 2019 reflect our entrepreneurial character.
The company embraces lean thinking as part of its culture to simply stated the lean thinking way is a focus on eliminating waste in all aspects of the company's business and operations.
The elimination of waste allows us to takeout unnecessary costs, thereby making us competitive and enables us to see problems. So we can fix and our operations more easily it allows us to simplify processes. So that we have safer cleaner more efficient or more sustainable workplaces is a culture of.
Prudent in whatever we do our improving quality and safety and our growth in margins are all products of lean thinking.
At the core of our one Martin Rant culture is a golden rule philosophy based on treating others. The way we want to be treated with dignity in respect, but more also means following our 10 guiding principles and our business in operations and how we deal with our customers employee supplier stakeholders, which include lenders and shareholders and our communities.
Being leaner being entrepreneurial is not enough. These cultural elements overlap, but are tied together with a golden rule approach.
We make people's lives better and what we do and we can only do that with a service oriented approach to our work and our colleagues at work and all those who deal with in our work it's not about me it's about a week.
At Martin Ranch, we believe that our culture is and will be a sustainable competitive advantage for the company over the long term and we believe it has driven the improving financial safety and quality performance over the past several years.
Our to be sustainable for long term accompany has to be profitable safe build great products take care of its customers in people and have a culture that has embraced by the people.
Sustainable companies with great cultures will be around for a long time, regardless of industry changes new technologies disputes or potential pandemic issues. We believe we have a company poised to excel over the next decade and beyond and we and our people are committed to that.
We thank all our stakeholders for their support we will continue to do our best for you in 2020 next decade and beyond we will have a great future together.
Now it's time for questions. We see we have shareholders analysts and competitors on the phone. So may have to be a little careful with their answers, but we'll answer where we can thank you all for color.
Thank you.
I'll be taking questions from the telephone line.
If you have a question.
Speakerphone, please lift your handset.
Please press star one on your telephone keypad, if you have a question.
The cancer Please press the pound.
Again, Please press star one on your telephone keypad at this time, if you have a question.
Our first question is from Kevin Chiang.
Thanks.
Please go ahead. Your line is now open.
Thanks, Good evening, Thanks for taking my questions, maybe just starting off the clarification question it sounds like.
I guess the post strike volumes from GE came in lighter than you expected in Q4 does that suggest as a little bit of a bleed into 2020 or or these volumes or these volumes.
Okay.
We shouldn't expect to materialize at any at any point in time really.
Well.
I think it's two things one.
I believe they probably had.
Built ahead in some anticipation of the strike last year.
And we recognize.
But.
The outlook right now for those for their key products is actually still pretty good their inventories are relatively low so whether you call that overhang from 19 or at least a decent outlook for volume.
This year I think that the silverado.
Platform that is launching off of it relatively soon.
Equinox.
We'll continue to do very well this year, so some of that could be.
Hang over from 19 or just that the outlook is very positive right now.
That's helpful.
If memory serves me correct.
Your acquisition of a tall, so I think its breakeven EBITDA this year.
30 million.
EBITDA in 2021 is that still is that still the right way to.
Two.
To think about it and then.
That is if I have my numbers correct longer term can you get materials margins similar to your corporate average.
Prior to this acquisition or is that.
Is that a glass ceiling for that for that asset.
Yes, just the first part so we outlined what our expectations from its also in our December press release of from that perspective, nothing has changed so breakeven.
EBITDA in 20.
And 30 million positive and.
21 still stands from our viewpoint at this point, we just closed so obvious going again, a little more detail as we jump in.
So that is correct.
As far as.
Improving to the level, where we're at the mean, even in our inside our own company. We have variations from plant the plan and I'm sure that telcel will be some of that.
We don't expect it over a long period of time to drag our average certainly.
This year and into next there'll be some work but.
Overtime I would expect the plans performance to progress just like our plans have in Monterrey classic.
And just last one for me.
It should the color on the balance sheets.
Great spot, you've obviously been aggressive on the buyback and you just raise the dividend.
Sounds like you'll be aggressive on the buyback.
What's this.
Yes.
This call is over.
But when I looked at what Continental gave last night or this morning for us.
Pretty subdued outlook for the auto sector, especially in the first half given a lot of stuff you mentioned quota virus.
Just maybe a weakening economy, even if it's temporary given given the outbreak.
How do you feel balancing the balance sheet the buyback.
Taking a strong balance sheet.
Given some of your some of these other suppliers seem to have a much more.
Bearish near term outlook at least for global auto production looks like.
And given some of the comments you made earlier around Roger capital allocation.
Yes, I think I'll take a little piece of your question here relative to volumes.
Certainly as we said, we're seeing slowdown in certain mixes in Europe, we expect that will continue.
In China.
We expect that to continue to be.
Lower than it had been.
This is kind of outside of the virus, because not sure where that holdings going to go but.
Regardless of that keeping in mind, we are still pretty heavy in North America.
Though that the Tulsa acquisition gives us a better footprint I mean, you still look at our volume.
Hi, Seventys in North America on platforms that are very popular.
So I think that regardless what happens worldwide.
North America is going to probably do the best whether it's going to do as well as it's been during the last few years not time will tell but.
But certainly I think it will perform.
Better than the rest of the world again, this year and the platforms that are going to before perform are going to be trucks.
So so from that point of view on our product, we still feel pretty good about it.
So a couple a couple of things obviously.
On a virus along with everyone else's a human issue we have.
People in different place, including in China, Although we don't have a big presence, we're taking taking all the precautions obviously.
We want to.
To have.
Good result for monitoring of course.
That lends an element of conservatism and caution everything.
Having said that at some point.
Mystery, that's not going away, it's got its challenges that come from time to time over the past two or three years. I mean, we've had we've had apocalyptic comments on trade issues u_s_m_c all that type of stuff.
I think that I think we've got to put stuff in perspective here. This is this industry the side.
What we think is theres going to be.
We're working through the Corona virus issue, we do think that the trade issues a lot of people have been rethinking and we think it's a very good future for regional trade.
Areas, So our China plants in China for China, Our North American plants in North America for North America for most part and I think it's a tremendous opportunity for North America in terms of rejiggering of supply chains, especially through Mexico, and I think Europe scar do some regional supply chains as well and that is perhaps the biggest launch.
Fallout from what we're going to see here and I think that could be very healthy for the industry from our perspective, our focus we've been through many challenges over the last 18 19 years and if you are entrepreneurial if your lean if you're looking for opportunities and so forth.
The question on all these things as who handles it best these people are still going to buy vehicles people are still may parts for vehicles and at the end of the day. Some people in these circumstances are going to be challenged to meet the challenge and some people.
Be poised to take advantage and grow their business and that's what we've always tried to do I think we've done a pretty successfully.
That's good color and then congrats on a full quarter there.
Yes.
Yes.
Once again, please press star one on your telephone keypad at this time, if you have a question.
Our next question is from Michael Glenn with Raymond James. Please go ahead. Your line is now open.
Hi, good evening, Thanks for taking my questions, maybe just to start off.
You talked about.
Operating profit maybe normalizing next year.
We see margins for very high.
Can you just give a little but to be closer to.
North America next year sort of.
What we should be thinking about.
I think.
At this specific couple of really strong cores in rest of world.
We expect some pricing pressures into 20, some mix differences and obviously some some volume headwinds in particular as it relates as Kroners oil and then my opening remarks.
So a normalization was always envisioned in that region. So it's not necessarily unexpected from our perspective, but you'll start seeing that in Q1 and going forward.
In terms of longer term is still a very small segment for us.
Valving and.
Swings quarter over quarter tend to be very noticeable.
But longer term when we continue to grow the business and some more coming online.
Second our aluminum facility.
We expect the margin profile.
It would be more consistent North America in Europe, and potentially going a little higher.
So we'll see how that plays out, but it'll be a healthy region for us longer term.
Okay, that's great.
And then for Capex next year did did you guys provided number.
So we were prior to the palace acquisition, we are actually projecting to actually be down year over year.
So we went through a business planning processes in the last year and made some adjustments and so forth.
But when you layer and the cost we're going to probably would be more consistent year over year. So I would say again very similar guidance is 19 around 300 million of Capex.
Okay.
And then.
Hi.
Thank you.
Looking at your business segments.
Performing.
Fluid management aluminum components, and we're thinking we see a lot of commentary.
Huge day yesterday, describing their electric fully electric future, we think of your those three business segments.
Some of the Oems in terms of the evolution.
Obviously, there is theres some product.
That might see some pressure kidney how do we think about each segment.
Where you see gains and maybe some losses.
As that market evolves.
Our lightweight structures business, which is our largest business.
Where the Mattel's acquisition will go as well I think we're going to continue to see that.
Form well, even better as you as you go down the line.
The need for light weighting becomes even more important because of the distance issues and so forth.
Higher use of aluminum potentially mixed with high strength steels. So thats why we always are talking about joining technologies and with the purchase we just made.
Mattel so they have some unique joining technologies married with ours, we think we're going to really advance and our ability to build multi material product, which which we see as the future because an all aluminum vehicle so expensive.
And it all steel vehicles lot less money, but but to heavy so we see a lot more mixing going forward. So I think we'll really see them the best growth there.
And our aluminum business as a whole I think we'll do well, though I think you'll see a shift away from engine blocks as much more into battery trays and engine or motor housings and more structural parts.
And then there's always been a debate about what's going to happen to the fluids business. So fluids business is basically fuel and brake don't see a huge impact on break we sell breaks lines to Tesla now.
And.
Hi electric vehicles for some time.
We are trying to emphasize more thermal management in our fluids group.
Picked up some new products over time and continue to focus more there so as fuel wine portion of the business.
Starts to decline, we would anticipate will replace that with a lot more thermal management and we look at a lot of the battery technology thermal management demands are much higher so.
No I think the fluids business is a great business I certainly don't see it.
Dropping off the Earth anytime soon and.
I see many many profitable years ahead, mostly in North America, where again, we're very heavy with fluids business. So.
If any of them, you'll see a changed in that segment more the aluminum and the Lightweighting space I think you're going to see accelerate and in our strategy and our investment.
The way we're approaching it as we're moving in our lightweight structures grew very fast related to heelys.
And hybrid vehicles, and we're taking a little slower in our in our propulsion group mainly for that reason is understanding where things and how fast they are going to go theres a lot of energy around pardon the pun energy around electric vehicles.
But how fast in the volumes.
Still very questionable and I think we need to be really smart, which ones, we focus on and how fast we think they're going to come because investment levels. As you know are extremely high.
And so far with maybe the exception of Tesla Nobody's hit the Mark.
In sales.
So lot of work to be done there and we were going to be smart about it just like we've been smart in China, frankly, as we go forward.
And.
A lot to.
Companies talk about product are you seeing.
Opportunities yourself too.
Participate in some of those easy launches to.
Absolutely, we we've got product on electric vehicles now some of the bigger programs, we wonder in China, there in the future spread referred to so generally we announced that a year or so ago.
And we expect that electric vehicles in China will probably the quickest so it's a good place to be.
We announced.
And this announcement the EBIT too which is the Daimler.
It's a global platform is going to be built in the United States and we won.
Work on that that's pretty complex multi material.
Needs the unique joining technologies I talked about will be utilized there.
So, yes and on the Maki that Ford announced we have some so good work on there and Thats, a multi material sub frame, where we bring steel and hollow aluminum together, that's a very unique process.
So we're allowed to add a lot of what this lightweighting strategy is that we're bringing to the table on some of these new products, but again you got to be choosy about.
What is the volume really going to be in be smarter about how much you're going to invest in that and so we're so far I think being pretty smart about it.
We have a good chart, our investor presentation, which will be posting which basically shows that our book of business is evolving with the market. So if you look at it just today, we're about 95% ice platforms, while 5%.
Hybrid platforms in five years, we project about 23% on verified platforms based on what we're winning which follows the market. So at the end of the day.
If you're looking at our revenue sense, you want to you want to be along with the market you don't want a disproportion later on on electric vehicles.
Our only 10% at March 30% your product.
Her vehicles for our only 10% in the market so I.
Being pretty careful to follow that.
You got to follow the real numbers as opposed to the rhetoric.
Okay and then.
Regions in which were those vehicles are produced and sold also very important because the world is going to go as I said earlier down the electric road much different speed I believe.
Okay.
That's a great information thanks.
For taking the questions.
Okay.
Thank you Sir our next question from Peter Sklar with BMO capital markets. Please go ahead. Your line is now open.
Could you explain what's going on with these escape.
So what exactly is going on on the production of the vehicle.
Well in the in the.
There was a slow start up as you know part of that was due to some engineering changes that were made.
Specifically on our part of the product, but but in other areas. So the launch overall was was put off till later in the year than originally planned.
My understanding is.
There are some supply issues from another supplier I don't know which one.
But it's in been inhibiting some of that production that was compounded we noticed this right away the current a virus.
Ugly in China that was compounded.
By that so I think there.
Primary issues at least at this point, our supply issues that and again influenced by the krona virus.
But yeah, we have not been satisfied with.
What we expected out of out of that car, so far but again, if you don't have apart it only takes one so.
I know, they're working hard at getting those supply lines corrected.
Well the virus goes I guess, we'll wait and see but but.
Our anticipation is that volume will come back in the spring of this year.
With your launch Shelbyville.
With our launch Yeah, I'm really happy with as there was an all new line.
One of our new flex lines, which I talked a lot about we can run for different.
For different.
Models, if you will have.
Of that base vehicle.
Lecture not electric hybrid traditional all in the same line so it's pretty unique.
And in fact, I think that line helped us win some other business with some other customers soon after because of its unique design, so I'm pretty happy with.
Okay and then the other thing.
Is.
These new emission regulations.
Became effective in Europe this year.
I'm just wondering if you have any views on how that's going to impact European vehicle production volumes if at all.
Well.
Sam 100% familiar with what with what past where other than the one of our customers believes in it makes some sense, we talk with them last year about what was going on in Europe and the volumes as they said simply we believe a lot of people in Europe are having try.
I will deciding what to buy.
Because the laws have fluctuated in some local areas, where city would say nothing except electric cars and new government gets in and this will happen in Madrid in fact.
Hey, let's cars back and again so.
By an electric car now and not lose the volume value of my diesel and or gas car or do I go ahead and by another diesel or gas car, believing that the electric vehicles still a long way off and basically what some believe is that everybody just kind of waiting to decide what to do.
Do and have a lot of anxiety about their purchase because they don't want the car they have the lose all its value.
As things go electric we might see this happened in other parts of the world at some point.
When you go from from one to the other but.
Certainly that would be that story makes sense to me.
Whether that's true or not I don't know.
But there seems to be pent up demand.
In the market, but a lot of anxiety about what to get.
Okay. Thanks for your comment.
Thank you.
Thank you.
Please press star one at this time a question. Our next question from Brian Morrison TD Securities. Please go ahead. Your line is now open.
Yes, thanks, very much Fred can you just break down the $400 million revenue by geographic segment from Intel Sofia, North American Europe and.
In rest of World and then maybe Pat can you just talked about the key issues in the restructuring initiatives.
I have to take place at Mattel so they get it from breakeven.
$1.20 21.
Yeah, so 60% and in Europe.
And about.
25, 30% North America than the rest of the China South Africa.
Roughly.
Thank you.
So is the other half the question again. Please yeah I was just wondering if you can you just talked about the issues that are currently taking place and Mattel's, It's got breakeven EBITDA and just the restructuring issues what needs to take place to drive that $39 over the next year.
You know, it's it's really early to get into anything specific because we got it on got it on Sunday Monday morning, We basically sent our integration teams and and we're making that assessment now of course.
During the due diligence phase we spent time in the plants.
But it's a lot harder to.
Understand what you need to do until you can dig into everything and so that's what we're doing now.
Operationally just from my observations I've been at two of the the two major plants. There is a lot of good opportunity to to improve the operation improved the material flow.
The good news is they've made some wise investments and equipment the equipment that that they had bought over the last five years pretty good but the layouts and the material flow in the plants I think has a lot of opportunity that we can have a good influence on so I think that will be one of our first steps.
Take a lot of the waste out and we know the biggest challenge is going to be Germany.
But.
I think the rest of plants than they are a little smaller probably come along quicker.
Okay and then just in terms of your 2020 operating margin I think in the release is expected to improve from.
As a percent this year I think that's inclusive in the tells US. So I think that means your legacy operations should be around.
<unk> percent plus in 2020 is that correct.
North American volumes that you are assuming.
And that guide, yes, so we base, our projections and budgets on I address so they're essentially projecting a fairly flat environment in North American next year.
So that's kind of the the baseline.
And I think you're kind of in the ballpark I mean, I think would drag the margin in 2019 significantly was the strike and assuming that somebody that doesn't happen again in 2020, meaning that in itself will create an uplift year over year.
So I think I think you craving be driven by North America I think.
Europe, we're doing some headwinds there so we'll see how that plays out but.
You know there may be some drag there and also there's a big Chuck on the Tulsa business come in there.
Talked about the rest of world already so I think you're in the Zip code.
Your thinking.
And last one Fred maybe just in terms of the tooling sales.
Probably a little over $400 million. This year, what do we think for 2020 I think next year to be somewhat more normal. So if you look historically, we've been somewhere between two and 250, so I'm thinking something in the range of to 51 caveat there as it so volatile customers per show.
Dates milestones and feedbacks, perhaps get pushed out so very cautious with provided from guidance on there, but something around 250, I'm not expecting another 400 million year next year, that's for sure, but 250, maybe a little bit more a little bit less but in that in that ballpark.
For margins into.
Correct, yes. Thank you.
Thank you we have no more questions registered at this time I would now like to turn the meeting back over to Mr. Baltimore.
Thanks, very much everyone for us cutting into your dinnertime.
We thank you for your questions all of US are available at any time I feel free to contact us and that's on the press release in terms of our number and.
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