Q3 2020 Martinrea International Inc Earnings Call
All participants please standby your meeting is ready to begin.
Good afternoon, ladies and gentlemen, welcome to the 2023rd quarter Conference call instructions for submitting questions will be provided to you later in the call I would now like to turn the call over to Mr. Rob will the board. Please go ahead Sir.
Good afternoon or evening, everyone. Thanks.
Thank you for joining us today.
I always look forward to talking with our shareholders and we hope to inform your well want to answer questions.
We also note that we have many other stakeholders, including many employees on the call.
In our remarks are addressed to them as well as we disseminate or third quarter.
Results and commentary through our network.
With me are bad to Raimo, Martin raise CEO, and President and our Chief Financial Officer, Fred The Toaster.
Today, we will be discussing Martin re's results for the quarter ended September 32020.
I'm going to start with some brief remarks, and some macro commentary on.
On the market.
After my opening remarks, Scott will take you through some highlights and give you his perspective Fred.
Fred will review the financial results I will make some further comments 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.
Yes. This has been released.
Our mdna and financials have been filed on SEDAR and should be available.
These reports provide a detailed overview of our company our operations and strategy.
Our industry and the risks we face we're very open to discussing in her remarks, and we open the queue and eight.
Some highlights of the quarter the state of the industry.
Today, we are addressing the challenges.
Thing about coal with Nineteena related issues, the U.S. election results and progress in our operations.
Those we want you to see how we see the world.
As for usual disclaimer I.
I refer you to the disclaimers in our press release and filed documents.
Our public record.
Which includes an annual information form and Mdna of operating results is available on SEDAR and you may look at the full disclosure record of the company there.
So.
A few general thoughts.
First this is a newly adopted format for US a conference call webcast.
One thing we intend to.
Do on each call is focus on a special topic of interest to us and our stakeholders. It may be a technology for our strategy our special aspect of our business on.
On this call Pat and I are going to comment on our graphene initiative.
How we are using this remarkable material.
And our investment in it we hope you enjoy it.
Second Gen.
The general industry comment.
We were all observers of coal with 19, the health issues, the economic hardships the restart or rebound of our economy. The us election results and so forth.
We have experienced some challenging time.
Just as we saw and experienced with 911 and with the 2008 nine recession.
As I said on our previous calls from an auto industry perspective, there's really three phases to dealing with the pandemic.
First the shutdown phase, which we now seem too fast for the most part second is the restart for.
Comps, which we have seen and has gone pretty well for us as Pat and Fred will talk to.
This has been challenging for the industry, but we have worked hard to launch as smoothly as possible by working on and implementing protocols to keep our people safe and actually ramping up successfully.
The third phase has been to rebuild and then meet demand.
And here the news has been quite good for us so far in the context of U.S sales rates or typically stated use SAR.
There are other metrics, we can use for North America, such as overall production or North American sales.
The us ours, probably the most used proxy and generally the most easily accessible number.
As you can see after a huge downward spike in March and April of this year, there has been a pretty steep resurgence in sales and demand.
In September we had us are above 16 million vehicles.
But in October was also above that level.
We are at a rate fairly close to last year.
To put this sense of normalcy into a longer term perspective going back 15 years sales levels have been 16 million even back then.
And we could go back to the beginning of the century.
The second observation is that inventory levels, especially of the vehicles that are hot sellers remain relatively low and.
And we are not catching up that quickly.
Our rough estimate for us all to consider that with a $17 million or so production rate in North America.
We lost about 3 million vehicles of production in our.
Our industry shutdown period.
It's not that easy for us to build up inventory when they use sars running at current levels.
The story in China is also good in terms of rebound the story in Europe is more mixed with rising cases reintroduction of some locked down measures, although factories and schools remain.
Opened for the most part.
Patent Fred will give the Martin ramp perspective in a moment.
I have a couple of quotes from Jimmy Patterson.
Once as.
We've never seen business better in the car business than right now.
The other says people want to be sure they feel.
As safe and a lot of people feel safer in their own car than they do on a bus or the train.
I want to provide some context.
Jimmy is a legendary Canadian businessman as many of you know he started in business with a car dealership and it was very successful there as in many businesses I'd like Jimmy a lot.
Had the pleasure of serving with Jimmy on the economic Advisory Council advising former finance Minister Jim Flaherty for years and he had some of the most insightful perspectives that I've run across.
When he says that it's time to buy car dealerships because people are buying cars I take note.
The trend he is referring to here.
Is that many are looking to the vehicle differently. These days as a safe mode of transport for one thing.
But also as a place to be free I would submit to be free from wearing a mask and transport to be free from the restrictions we face in public on a bus or a train or even a plane people don't like wearing masks were not made that way.
The trend is that vehicle sales are robust and are very likely to be a robust for a long time.
We have customers telling us they don't have enough product on dealership lots and they are bullish about long term demand.
The fact is we are in a growth industry here in 2020, there may be hiccups, but I'm optimistic.
Our many prognosticators out there in terms of sales and production volumes, including.
Yes wards and many others a lot of been off in their predictions.
Want to go with Jimmy.
And with that a little glimpse at the macro picture Here's Pat.
Thanks, Rob good afternoon, everyone.
As noted in our press release, our positive back to work story continues with Q3 net earnings per share coming in at 57 cents.
End of the range, we discussed in our Q2 call a 40 to 50 cents.
Q3, 2020, adjusted EPS performance represents a third quarter record for the company.
Our operating income margin.
And came in at 7.8% for the third quarter that includes the acquired Mark.
Martin Ray of Telsey group.
Up from 7.1% in Q3 of last year.
Production sales came in at $933 million.
Also inclusive of our margin rate on the Telsey group.
At the high end of our guidance range.
Of $850 million to $950 million.
Excluding the acquired assets from a Tulsa operating income margins for the quarter would have exceeded 9% driven.
Driven by our North American segment.
We were able to produce these strong results on some high volume and mix despite coded as you're aware cobot completely.
We shut down our industry for essentially two months in Q2 without any sales except for our industrial business, which includes our off lightweight products and ventilator stand revenue.
As you can tell automotive production has recovered from the cobot shutdowns more quickly than previously expected and we see this momentum continuing.
Into the fourth quarter.
Our current forecast for Q4 calls for production sales in the range of $900 billion to $1 billion with the mid point similar to what we saw in Q3 and adjusted EPS in the range of 46 to 54 cents.
In North America, it's clear that.
Incomes are pushing to make up lost volume the remainder of the year.
Vehicle inventories remain low, especially related to trucks ltvs and see of these where we are heavily weighted in North America. It is also clear that Europe overall is recovering at a slower pace, although volumes in China continued to be quite robust.
As discussed previously a number of programs were delayed by our customers due to the Q2 cobot shutdowns. This is across multiple customers and some large programs.
These delays will affect some sales and margin enhancements in 2021.
The three to six month delays will have some effect on our launch costs.
Beginning of the upcoming year, but will normalize in the back half as the programs progress toward our original planning.
Notwithstanding our overall operational improvements and program launches continue to go well of course like many in our industry. The higher volumes are stretching plant resources, given the continued cobot beers.
So despite this we have been able to maintain and satisfy a high customer demand. In addition, we've continued to improve our safety performance in our facilities, including protecting the masses with our additional safety protocols for COVID-19 improve.
Impressive overall work for the margin rate team.
You will recall our margin targets at two key components sales of new higher margin products and continued operational improvements for 2021. This includes operational improvements and lean activity. We are instituting for our newly acquired Martin Ranch with Telsey group are.
Our integration activity in this group is going well.
We were slowed in one of the six plants, specifically, Germany by coated but have since been able to get some additional resources, there and start to get to work back on track.
Plant activities that other mattel's locations are progressing as expected we are particularly pleased with our preparation work, including new equipment installation.
One being done at the Tuscaloosa facility Rick.
Recall this facility head open space when we purchased it.
We had won a significant amount of work for the Daimler EBIT to electric vehicle platform just prior to the acquisition yeah.
The acquisition allowed us to avoid building a new facility in saved a significant expenses and having to.
Build and staff and all new plant.
The previously established facility and leadership team has save both time and money.
Aside from providing capacity as needed areas. There were several other strategic reasons, we acquired the metallic assets.
The acquisition.
And helped us to diversify our customer base, adding significant revenues with Daimler and BMW.
And transformed our steel embedding for metal forming group.
I mean, north American player into a global player.
It also enhanced our engineering capabilities in the heart of Germany, allowing us to better support our customers not only in Europe, but.
But also in North America.
Perhaps most importantly, the acquisition enhances our lightweight multi material joining capabilities, which forms the core of our lightweight structures commercial strategy.
To summarize our view of metals that has not changed and we remain excited about the prospects for this business as we look forward.
Quoting activity also continues to increase as volumes normalize I'm happy to announce new business wins totaling $70 million in.
Annualized sales since our last call, including $45 million in propulsion systems for AEP, CA, and general motors $10 million and lightweight structures for general motors and $15 million.
In our industrial group to produce a battery box, but both of those top selling heavy duty truck platform R&D.
Our industrial business is seeing the highest level of quoting activity since my time at Martin there and we see many opportunities to grow this business.
We also expect to see our first fluid products with grafting and.
Production in 2021 a.
Grafting enhance brake line for one of our current OEM customers.
Our customer has tested and approved the product is working with us to convert current production from standard brake lines, the more durable graphing enhance lines.
This improved safety as well because the entire line as per.
Acted with graphene as opposed to pad in targeted areas with protective material, where brake lines can rub against or be exposed to road elements such as gravel.
Aside from greater abrasion protection, our graphing enhance brake line offers the benefits of improved chemical resistance improved performance under high temperatures and not.
Origin at 25% weight reduction versus standard brake lines.
The technology is patent protected and we were able to produce these brake lines using current manufacturing equipment and processes, which minimizes investment.
As a reminder, and Martin Raya, we're big proponents of graphene and its developed.
Management.
Wrapping is proportionally stronger than steel is very light weight is flexible and has better conductivity than copper try.
Transmits heat well and is impermissible qualities and is very durable given the corrosion abrasion and use the resistance properties.
Well there are many existing and potential applications for graphing across a wide variety of end markets, including automotive transportation industrial agricultural and paints as.
As well as Green technologies for electric vehicles, renewable energy and recycled plastics.
Surely a material that will help better the planet.
We are excited about the technology and the potential opportunities that grabbing provides and we intend to capitalize on these opportunities through our investment and nano explore.
It's been quite a year, so far with the Q2 cobot shutdowns to surging volumes in North America that met some of the highest volumes we've ever seen.
Demand is expected to remain strong through the remainder of the year.
The restart has gone as smoothly as we could have expected.
Our safety protocols have been effective and our team members have done a tremendous job of ramping up production and meeting the aggressive volume requirements.
A lot of hard work to the Martin.
Ray of people as the team continues to impress many.
Many thanks and appreciation for your commitment.
Who are great organization.
And with that I'll pass it to Fred.
Thanks, Pat and good afternoon.
I hope, everyone is doing well and staying healthy.
As Patrick noted.
Q3 was a very good quarter for us in the context of the current environment.
On the last call, we indicated that we have likely seen the bottom from production volume standpoint in.
In the Q3 results certainly support this.
To be able to post year over year growth in operating income earnings per share and free cash.
Cash flow in the middle of a pandemic is an achievement. We are all very proud of.
Our operations are now at or near pre corporate activity levels in North America, and China and ramping up in Europe, albeit more gradually.
As Pat noted our team has done a remarkable job in managing the operations and meeting customer requirements.
During the restart.
We thank them for their tireless efforts and dedication during these challenging times.
Taking a closer look at the results total sales in Q3 were essentially flat year over year and down 11%, excluding a $105 million of sales from our recently.
Acquired assets from the Tulsa.
Due largely to overall lower year over year tooling sales.
Production sales were up 10% for tooling sales were down 70% as it generated a higher than normal tooling sales in Q3 of last year.
We did not repeat this year.
Due in part to some new program delays.
Recall that Q3 2019 results were impacted by the way WGN strike.
Which resulted in approximately $20 million and lost production sales during that quarter.
Q3 volumes posted a sharp recovery from the rock bottom levels hit in Q2.
Clearly the automotive industry is bouncing back.
Back more quickly than many expected only a few short months ago.
As Robin Pat touched upon vehicle sales had been robust and inventory levels remain low in North America, particularly on truck as CV and see the platforms.
Where we are more heavily weighted.
This bodes well for future sales.
Yeah.
Our adjusted operating income was $75.5 million, representing a 7.8% margin.
Significant improvement from the loss experience in Q2.
And better than the year ago performance.
As Pat already indicated excluding the operation.
Patients of our new Martin rim of Tulsa group, which had an operating loss of $3.3 million during the quarter.
The 105 million of sales.
Operating income margin would've exceeded 9% very strong result.
Margins were driven by strength in North America reflective of volume and a positive.
The sales mix.
Reduce operating costs.
Lower tooling sales on which we generally earn a little to no margin.
And a $6.6 million benefit from the Canadian unemployment wage subsidy program.
Which we expect to be lower in Q4.
In terms of Europe as noted earlier.
Positive their overall volume recovery there has been slower.
Which is weighing on margins in that segment of our business.
In addition, our operating margin in Europe continues to be negatively impacted by the inclusion of the new German operations acquired from a pasta.
Pat has already addressed their plans and outlook for the acquired the pulse of business.
Yes.
Some logistical challenges put us behind schedule with the integration of the German plant that.
But these are now largely behind us and we continue to feel very good about the acquisition and its prospects for the future.
As a matter of fact, we just completed our annual business planning and budget process.
And.
Based on the current and anticipated volume environment.
We expect the newly acquired Martin ran the Tulsa group to deliver a breakeven operating results next year.
Approach, our original $30 million of EBITDA target a level in 2022.
And exceed that original target by 2023.
Inclusive of the new work.
Maybe one with Daimler on its Eva to platform, which as Pat noted.
We will be launching our new Tuscaloosa facility starting in 2022.
Moving on to earnings quickly.
Q3 earnings per share was a solid 57 cents as Pat noted.
Were a record for Q3.
Driven by our strong margin performance we.
We did not incur any further restructuring costs in Q3.
And we do not currently expect any further such cost during the remainder of 2020.
So we will react to the market as required.
We expect a strong earnings performance to continue into Q.
For for guidance and as Pat outlined earlier.
Free cash flow as defined in our M&A for Q3, 2020 was $102.5 million.
Inclusive of $72.3 million in cash Capex, and a $63.7 million cash inflow.
From working cap.
A portion of the working capital benefit is timing related and will likely normalize during the next couple of quarters.
Notwithstanding our free cash flow performance for the quarter is very strong as production volumes are covered.
The team has done an excellent job managing cash or last number of months.
Given the strong Q3 performance and our positive outlook for Q4.
We believe we are on track to deliver on our expectation at breakeven free cash flow in 2020, if not exceeded.
Due largely to the free cash flow generation during the quarter, we managed to reduce net.
That excluding the impact of IRS 16.
Over $100 million compared to Q2 levels.
Which resulted in a net debt to adjusted EBITDA ratio at the end of the third quarter of 2.21 times and approximately 1.7 times for bank Covenant purposes.
Reflecting our amended credit agreement, allowing us.
Exclude Q2 2020 EBITDA from the calculation.
Our leverage ratio remains within our comfort range and while below our bank covenant maximum of over three times.
At the end of the third quarter, we were essentially back to pre cover 2019 net debt levels and we funded an acquisition during that time.
To a very good results from all accounts and reflective of the strength of the business.
Turning to capital allocation, we believe that our strong balance sheet and during the quarter related downturn in our Swift action to cut costs preserve cash and protective.
On sheet enable us to successfully navigate our way through the crisis.
Positioning us well to take advantage of opportunities as the recovery takes shape.
The opportunities for takeover business or potential acquisitions.
Of course, we will be prudent and allocating capital and our commitment to maintain a strong balance.
In sheet remains a top priority.
While maintaining a strong balance sheet, we will seek opportunities to invest in our business be it organically or through acquisitions, where they make strategic and financial sense.
We will also continue to seek to return capital to shareholders through dividend growth over time.
As well as opportunistic share repurchases.
Overall, we are very pleased with our performance in the third quarter. We believe in the worst of the covered driven downturn is largely in the rearview mirror at this point.
Barring an industry shut down from the second or subsequent wave of covered which we believe is highly unlikely.
We look forward.
More to the future starting with a strong fourth quarter as our Q4 sales and earnings guidance indicates.
Thank you for your attention this afternoon with that and I will turn it back over to Rob.
Thanks Fred.
Pat talked to you about graphene and our product focus there.
Im going.
If you were his vote nano explore and our approach to technology investing R&D product development and M&A.
Nano explore is not just a passive investment for us it's been a very good investments so far but there are many more aspects to this.
We looked at graph.
On a same as it fits with our technology focus and Lightweighting strategy.
We are world leaders in Lightweighting with aluminum in various steels as usual and we intend to be the best Lightweighting company on the planet using these materials and perhaps others graphene is strong it's light and it has all the features Pat talked about and it has a great future.
We believe.
Our initial investment in nano was made in essence to secure a graphene source and to get our feet wet so to speak.
We entered into a supply agreement, where we could work with the material for our product lines and made a small investment.
Then while were working in the early stages with graphene it became clear.
Or that nano could produce graphene and commercial quantities at reasonable cost.
I won't get into all the details nano as a public company on the TSX venture exchange symbol GRA and you can read all about the company on its web site or as public documents is a GM is November 25 in two weeks.
We came.
For the view with Nanosphere seal solution as our poor and the company that in order to take advantage of the graphene opportunity the company had to be able to produce larger quantities of graphene, namely commercial amounts.
As a result nano plan to build a commercial production plant was capacity to produce 4000.
Same tons annually and an ability to scale up from there.
The reality is this large customers are going to buy large quantities they will buy materials by the barrel.
Annual raise the money for this planted a share offering and we were the lead investor.
Now nano had the ability to proceed to build his plan.
Yeah.
One thing we know how to do extremely well in Martin rare is to build and scale of plants. We are masters at it.
And so a contributor to our expertise Rocco.
Rockwell International the head of our flexible manufacturing unit, which includes our industrial division went to nano explore as COO.
When I joined the National Board his chair.
Our lean team HR people and some others all worked with solution an annex for people to develop the company, including its non graphene manufacturing operations, Pat for Ed and our product development and sales team remain available and are involved in our investment and.
Long with this investment we secured exclusivity agreements for graphene on products in our line of business, Although I personally believe the real opportunity for nano explore and graphene generally are in areas that are not necessarily automotive.
By the way the graphene plant has been recently completed and is now operational.
Basically on time and below budget, a great achievement and the nano team has to be congratulated.
We'll now is largest investor sold is block we bought a piece and became nano explores largest investor with an approximate 24% ownership level.
Other large investors in nano explore include fidelity.
The investments I, Q or investment to back tested a pole and BDC as well as search it pretty solid group of financial backing together, we own most of the shares.
Earlier this year in April and all completed and contemplated and completed a share offering to ensure.
Let me add cash for the next couple of years, and we invested our pro rata portion.
So thats, how we came to have this ownership interest, but let me frame. It for you as to how we see the world something I always say in the introduction to our calls.
This is very much a strategic investment for us related to our Lightweighting full.
Sure Yes.
This is very much a kind of R&D investment or a technology investment there are many who believe parts of automotive or not technologically driven unless you are in electric or autonomy as products nothing could be further from the truth.
Lightweighting is one of the leading technology growth areas of this industry or any industry where things.
Hello.
And graphene is a good aspect of that.
And of course graphics capabilities Colby on Lightweighting like for example, conductivity.
Our company does a ton of innovation.
Our focus on process improvement, which is constant is process innovation.
This type of activity.
His innovation at its best.
Further this investment is a form of M&A.
Not necessarily in the traditional sense of buying companies, which we've done.
But to get a key position in a company that we can help to drive growth.
And in my view at least by not owning the company 100% Weve.
We leave it free to really take advantage of all opportunities and not be bound by our current focus which is primarily automotive.
As an aside Pat talked to you about much also which is a form of M&A transaction, but really for us that was in essence, the broadening of our presence by getting six plants in new locations and by getting access.
Yes to among other things some cool technology it.
It was cheaper to buy than build.
We invest in and develop leading edge technology, we make things, we make new things and we make things better that's the core of innovation.
Interestingly on that score our people are showing that one task we can build.
Anything really well and really efficiently as demonstrated by our success in making ventilator stands and mass.
Fred talked about capital allocation, we always say, we invest in our business first while maintaining a strong balance sheet and.
And we will consider M&A of course, but really with metals and nano.
We are really investing in our business.
Let me summarize the cost of our nano explore investment and where the valuation sits as of last week total invested 37, and a half million dollars.
You have today $90 million or so that's pretty good.
We recognized stock price and value.
One change day to day, where we think we have invested well.
By the way I would argue the value of this investment is not being reflected in our stock price and frankly I don't the prospects are either I would think that will change over time.
So let me make a few remarks on our people and co.
Sure for the benefit of our stakeholders.
From a macro perspective, our industry has endured the longest shutdown in its history and everyone has been affected our team has responded well not only in improving our company for the long term, but in our dedication to developing and implementing leading safety protocols and it can.
Contributing to the fight against COVID-19 by building ventilator stands and PE, such as masks for our people and people in our communities.
Just as with the Great financial crisis of 2008, and nine we are already a stronger and more competitive company going forward coming out of the crisis.
It's in times like.
Like these that our focus on culture, and our vision of making peoples lives better by being the best we can be in the products, we make and the services. We provide comes through for US. This is why in our company. We consistently talk about vision mission guiding principles and culture, our people do and hold us accountable to.
To them.
To our lenders. This is who you are lending to.
To our customers. This is who produces for you too.
To our communities. This is how we will care for you too.
To our investors. We believe this culture will drive a great sustainable business for you to invest in.
To all of our stakeholders.
Yes, we treat you the way, we want to be treated and with dignity and respect.
We want to thank our dedicated employees for their great service as well as our shareholders lenders suppliers customers and governments for their hard work and support.
Finally, I want to do a shout out for our industry and some great things happening.
In Canada, and Ontario that are to the benefit of all of us.
The Canadian auto industry has had a great several weeks.
We have had close to $5 billion in OEM announcements, including from Ford re electric vehicles in Oakville.
FCTA re expansion in Windsor and elsewhere.
In GM and reopening offshore to produce is best selling truck and investing in its other plants in Ontario power.
Probably the highest level of divestments announced in our industry in Canada in over a decade.
Further the province of Ontario announced some very positive measures for our industry and manufacturing in general in his budget.
Cutting energy costs and other business related taxes, all to make us more competitive and to encourage investment both.
Both the federal government and a province have also provided financial support to our industry and it will be well rewarded with the benefits of new jobs and all the tax revenues that will be generated directly in India.
Directly our studies show OEM investment payback is under three years.
Both is Martin Rea Executive chair and his co chair of caps a year the Canadian automotive partnership Council, Thanks, and congratulations to our customers our government's flavio well pay of Appia may and Jerry Dyess of uniform.
For for some really good work.
As my colleague Flavio volt pay as stated publicly.
As I have stated publicly this is possible in large part because of the great work done on the Canada US Mexico Free trade agreement by Minister Freeland in the team working together with us and with our industry.
This is good news for all Canadian auto suppliers, including US there's work to win here, which will happen and our Canadian basis solidified really good news, we can keep our plants full and maybe add some work and new jobs.
Now it's time for questions, we see we have shareholders analysts and competitors on the.
Phone, but we may have to be a little careful their answers, but we will answer what we can thank you all for calling.
Thank you.
Now take questions from the telephone lines. If you have a question then you're using a speaker phone. Please lift your handset for making your selection. If you have a question. Please.
Please press star one on your device if keypad if at any time you wish to cancel your question. Please press the pound sign. Please press star one at this time. If you have a question there will be a brief pause of all participants register for questions. Thank you for your patience.
And the first question is from Mark Nebel from Scotiabank.
Please go ahead. Your line is now open.
Hi, Good evening guys all ordering.
Good job on their Easter.
Thank you.
Maybe just a first question on the Tulsa.
Three and a half million dollar operating losses curious about sort of roughly what you had plans for the quarter and.
Yes, as a second question.
Breakeven next year 39, EBITDA 2022, I think is what you said.
Oh is that the big ramp can you maybe just.
An idea sort of when.
It becomes profitable it is done it adds I'll just flip the switch and 2022 and its.
Generating 30 land, so just a better idea of the cadence just for modeling purposes. Thanks.
Yeah. So so the third quarter came in as expected for the.
During the course of group so no surprises there and are.
We're expecting a similar quarter in the fourth.
Fourth quarter as well.
Heading into next year.
So you are correct. So we're targeting breakeven next year for 22 will approach a $30 million EBITDA. So we'll get pretty close and 20 fuel exceeded thats, what our current plans are showing our road map in place.
The bulk of the work.
Required is going to be in our German implants are really focused on that and.
Coming to the co shutdown, so we've been able to turn our attention to that and get people back on on the ground. There. So we're making progress there and.
I envision it to work off kind of like a.
Gradual pace over the course of 21.
So I can't get any more concrete than that but.
Roadmaps, there and we'll continue to work on a quarter over quarter expectations. We just continue to get better.
Sure.
That's helpful I can sort of draw gabel launch there.
Maybe on the subs that subsea just wanted to clarify sort of the the price at 6 million.
In the quarter was that.
The total amount or is that just kind of talking about it and something else you. Yes. So the total for the quarter is.
Just over $9 million.
$3 million of that relates to inactive employees. So as employees are still layoffs, probably in Germany. So the subsea.
Receive essentially is a pass through to cover the cost of those individuals that are in active and on on layoff.
The 6.6 million essentially is the Canadian subsidy and given where volumes were and the fact that we didnt have any lay off during the quarter essentially a direct benefit.
So that was the net benefit for us.
For Q3.
Got it thanks.
Maybe just one last one before I get back in the queue.
Yeah, obviously, good job here and the cost fronts.
Hi, good obviously, it's been a focus for a while but I'm.
Im just curious.
As you think about volumes ramping are continuing to ramp.
And sort of the struck.
For the permanent cost versus what comes back.
Sort of any way to frame that for us I don't know if there's a big structural savings, but any any sort of color would be helpful. Thanks.
We talked a bit about that on the last call obviously weve.
Right size their workforce.
Two.
Call it shut.
Shutdowns as an opportunity to do so and we've.
Come up pretty strong so there is some permanent reductions there.
We are saying that is both.
7% reduction in our workforce.
Some of that is going to be volume related some of it's going to have to come back so structurally anywhere from $20 million to $30 million of savings.
Annually as what on Pegging, we're still working on a few things, but heading into next year.
That's kind of how we envision the permanent reduction in cost.
Okay well thanks.
Thats a good color good job and I'll get back.
Thanks.
Thank you the next question.
Is from Kevin Chiang from C. IVC. Please go ahead.
Hi.
Thanks for taking my question and the cycle embark so let's call it good quarter there.
Let me just looking at your your cash flow generation over the the first nine months of the quarter.
Your cash flow from ops, or basically 100% or just over 100% of your EBITDA. So.
Good conversion rate I know you spoke to some working capital move that as we get through the remainder of the year, but.
When you when you look at what you've done year to date, just wondering how you think about the ability to convert into a higher level of EBITDA.
Cash flow.
The 2021, and 2022, well as you ramp up here just given the performance you've seen year to date.
Yes, so we obviously a nice tailwind on working capital this quarter I noted in my opening remarks that some of that will normalize in the next couple of quarters.
So we manage that that quite well.
We.
He also managed capex.
Well as well so Q2, obviously were.
A pretty low level some of that's come back just based on the fact that we're very focused on some of our launches. So some of that cost is coming through and we'll see something going forward.
I felt pretty good about our ability to capitalize on that and convert.
Yes.
So we're going to probably land the year on capex about $260 million to $270 million.
And that's.
About 20% lower than where we thought we'd be pre code in 2020, and then heading into 21. Some of that is delays and deferrals. So we're going to see some of that come through but where we sit right now actually and I.
So we just completed our annual budget business planning process.
I feel pretty good about our ability to actually keep that flat next year from a capex perspective year over year. So if we're able to do that and expect sales to be much better next year, we should be able to have a decent year free cash flow.
21.
Well that that's.
Color on.
Just a little tough so I don't if there's a way to.
Think about it a little quantify this but.
You spent usnineteen point $5 million of memory serves me correct on the acquisition, but but as you noted it came up a bunch of capacity that you would have had to invest in yourself. If you hadnt made the acquisition.
Got it and try to get a sense that it's a little tough acquisition of level, what the Capex would have been on.
Well for you to build a plant in Alabama for example, and stuff that plant.
Hi, I'm not sure about the yeah, I mean, I just sit greenfields are difficult and it's not even the cost of the.
Just capacity and equipments is building up the workforce and all of the startup costs I mean, we've seen all that and.
And our historical experience and that could be quite substantially.
Southern U.S., especially with all the growth and manufacturing.
It's it's extremely difficult to get.
A talented and.
Nickel workforce in place so the building itself I'd be guessing to tell you how much the building and the property would be the equipment of course is equipment. That's all new.
As part of the program.
But the management team and the workforce are absolutely the Jan and the whole thing.
Okay.
That's helpful.
And maybe just lastly for me.
I found all the graphene commentary very helpful. Then.
You spoke in whatever your slides about.
I guess, whats graphene and nylon coded brake lines and it looks like you've.
You've won a little bit climb, but one of the largest.
Hello.
Do you think.
With the recent alone.
Well push it through a glass ceiling.
In terms of the adoption of golfing with the automotive industrial or what.
One of your competitors as pop logical John well that will be adopting new technology for both the hardest thing deadly that customer.
The customer adoption and once you have that it kind of accelerates from there is that the fueling you have given given the new contract what the 2021.
The granting in brake lines is just scratching the surface of its potential.
One of these places to add graphene.
And isn't polymers pain, which is substantial amount of a vehicle in the tires as well, but a substantial amount of vehicle is plastic.
And of.
Of course the rubber.
So the the amount.
Future volume I should say of this product is.
As announced in measurable right now in my view.
What are the inhibitors of getting started is especially in the automotive arena is testing is key and it took us some time.
To test and qualify the brake lines because automotive is very careful when they add new material.
So that.
It takes a little time of course, and then making sure that there is a supply line that they can rely on.
Which in the past and graphene there hasn't been high volume high volume producer now nano there is a high volume producer so once it gets rolling it.
Thank you.
Some years from now we're talking about this will be an awful lot of graphene in vehicles for many suppliers.
Got it that's that's great color there thats. It from me. Thank you very much.
Q.
Thank you. The next question is from Michael Glen from Raymond James. Please go ahead.
Hey, good evening.
[music].
Can you maybe thanks for the information on Mattel say Ian.
Can you maybe talk about next year Europe as a whole.
Well, what we should think about from that business.
From an operating margin perspective.
Yes, so anywhere.
We're dealing with a couple of headwinds.
Europe segment perspective.
Talked about it earlier.
The volumes are recovering at a slower pace there.
Actually pre covered we're doing some headwinds in Europe and those are somewhat continuing.
So we expect the recovery to continue to be gradual over the course of the rest of this year as well as next year.
So as the volumes start coming back obviously your margins will improve with it.
And then the other big piece to it is the German plant that came on the call. So obviously that's negative in a moment.
And result in.
Turning negative margin for.
For the third quarter, and we expect that to improve over the course of the next summer quarters as we execute on our integration plans for which we have a roadmap at the current time, so expect that to continue to progress and turn positive.
And over.
For the next two to three years no reason why our segment.
European segment can get back to pre covert type margin levels.
So what.
Well it will depend on volumes and obviously the integration is also a key aspect to it.
So the number you gave was that metals.
That had.
Had a negative $3.3 million.
I don't know if that was.
For the group.
Entire all the poll for the entire group Okay.
And the European loss was that.
How did Europe ex the Tulsa.
So what I will say there is is X macassa the margin would have been positive.
Okay.
Okay and then.
Just on on the working cap on the on the free cash flow.
So should we be.
Thank you you're talking about.
Toll free cash for the year, but you look to be positive. Some done the calculation right you are positive free cash for.
For year to date. So is there something do you think that free cash flow would revert back to negative in Q4.
Well the the working.
New capital as I noted as expected to normalize the next couple of quarters.
So.
Feel good about our ability to meet our target, which was breakeven and where we sit right now I feel like we can exceed that.
But the working capital will likely.
A bit of a headwind heading into the year end.
Potentially Q1.
Hello.
Okay, and then when you look at the balance sheet in terms of.
Getting the buyback.
In place again, which one.
Think timing for that makes sense.
We just had our board meetings today will probably address our thinking in the next quarter.
As we think it's prudent for us to.
I cannot make that announcement here.
We just went through our budget process things look really good going forward, which is why I talked about the Jimmy Pattison view of the world.
It's certainly something that's one aspect of our capital allocation strategy.
But it will be on the it will be on the board list for consideration.
In March I guess.
Okay.
Okay. Thanks for taking the questions.
Well.
Thank you. The next question is from Brian Morrison from TD Securities. Please go ahead.
Thanks, very much two questions guys, if I can one maybe.
Housekeeping and the other maybe philosophical but.
In terms of your tooling revenue outlook for 2021 spread I think we are looking at maybe half of what it was in 2019 is that a good assumption I realize it's volatile from year to year.
Yeah.
It's probably going to be a little bit higher than that just given the fact that some of these delays and that's going to.
Get pushed off from 20 to 21, so its probably going be on a little higher than that probably not as high as 1919 was an unusually higher.
But your your estimation there is probably a bit on the low side.
Okay somewhere in the Middle makes sense then.
Okay, and then I guess this is probably a question for Rob So I see your except your excitement with growth with respect to Nanoknife store and I don't necessarily disagree with it but I just want to play Devil's advocate for a second here you are currently trading at four times EBITDA. If you exclude manual explore you're probably three and a half to screen three and three quarter kind.
Forward EBITDA. So just in terms of extracting shareholder value I'm, just curious on your thoughts whether it might be more advantageous here to sign a strategic long term supply agreement and monetize your position or maybe tell us. How you think this could get reflected in the share price. It seems hit new highs every day.
Well.
Sometimes new highs doesn't necessarily can continue forever as you know I think that.
First of all on the first part were really undervalued I think our industry is undervalued I think the multiples will probably expand as people realize that we're kind of in a growth phase and they're seeing movement into cyclicals certain.
Certainly in the last several weeks.
Seeing that.
In terms of in terms of nano we do have a long term supply agreement. So so that was part of the strategic investment as long as we maintain a level of investment and now we've got exclusivity for that in our lines of business and in terms of monetizing I would monetize yet because I.
I think that Thats stocks go up to run as do as bizarre so.
Among other things, we look at investments as well when we buy companies are positions in companies. We take a look at it also from an Investor perspective, I think we are extremely good at investing in this industry are acquisition record has been.
Better than just about anyone and I think that I think that we've got we've got a long way to go and so back to the capital allocation question was previous spoke about.
Share repurchases and so forth our focus is on returning shareholder value to our shareholders.
Years, I'm highly confident that we will do that over the next number of years and if the stocks too cheap, we're just going to buy a bunch of it back.
And eventually make sure that we reward our shareholders. So if you take a look at the one year. The three year. The five year returns when it comes to share price, where we're in the top top part of whatever group.
Group do you want to look at I think we've got we've got runway and I think as we look at the meetings that we had here and the quality of the people that we have in some of the opportunities and the things that we're seeing.
We think we're extremely extremely well positioned and I think we're just getting started.
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Right Okay.
We have seen a lot of companies over the years that had hidden value in these investments and there's no question that you're under appreciated in terms of valuation.
But I think until you monetize that.
It's tough to see how that gets reflected the share price and there is tremendous value there.
Yes, well.
Well I agree, but I'd rather sell.
Well at 10 Bucks than a three.
Understood. Okay, we can talk about it thanks, all right. Thanks.
Thank you once again, please press star one at this time, if you have a question on Coleman.
The next question is from Murray will from Cormark Securities. Please go ahead.
Hi, good evening I'm maybe.
Maybe a quarter ago I think the concern on on the volume increases that you were seeing was maybe feeling backup.
The supply chain is it simply the Saar that you're looking at to feel as confident as you as you come across.
About.
The longevity of this.
The volumes you are seeing now is that is it as simple as that or do you see more.
Longer term trends that that that lead you much more confident than say three or six months ago.
Well that's a great question I think we should all take a shot at it.
One aspect of it.
I actually I actually think that the underlying economy first of all in North America is doing better than the headlines would suggest I think in Canada or 87%.
Capacity. According to CDC I think it's closer to 90% here and people are buying homes and they're buying they are buying.
Vehicles, so big ticket items and I think that's that's.
Thats, a very important in the United States. The unemployment rate is 6.9% I find that incredible incredibly good.
Compared to some of the things that we were anticipating and I think the United States at least from an economic perspective.
Probably.
Finally called a number of things right by by staying open on that so I think there's a lot of underlying value. There. We look at a number of different things I think north American as a region is very strong I think the u_s_m_c is doing very well to support that I think the views of international trade and re shoring manufacturing from places like China and other places in Asia.
It's great I think it's absolutely great for Mexico, which is a fantastic place to manufacture I think we're seeing some of that in Ontario with the analysis talked about so so so I think the fundamentals are good there, but I also think the world's changed and.
And I go back to what Jimmy said and to a certain extent what.
What we're seeing is a really rethinking of of certain philosophies and trends that were put out as gospel.
Over the past whatever period of time urbanization and everyone moving from the suburbs I think I think theres a reversal of that trend there still will be people downtown.
On and so forth, but I think that a lot of people are basically saying I can work a good part of the week from home I can.
I can effectively have a yard I've got a certain amount of freedom.
But im still going to need a vehicle because if I drive 5000 kilometers a year I'm going to need a car for that and I think that you know that supports that supports.
Automotive sales I think that number of people are saying I don't really want to be in mass transit and whether it's a safety issue or whether it's just a restriction issue.
So in that sense. The card gives you gives you a certain amount of safety you can control your environment for you and your family anyone that.
Might be vulnerable I also think that quite frankly, you get freedom in a vehicle and the reality is in our industry. We are building better vehicles more fun vehicles than ever before people like the drive and and I think that trend is a very good one miles driven in the United States and in North America were going up until.
So we we had the.
The pandemic went down for a while and even though miles are down a lot of people are finding a need their vehicle. So I think that I think that the vehicle sales month my personal view vehicle sales are going to be very good production is very good as we reashure in North America, and I think we're going to.
I see a lot of growth over over over the next number of years and I think people like IDH us or way to conservative that's my view.
That's great.
Yes, I also had a question related on the nano explore side can you.
I mean, it's a pretty modest.
Addis part right that you've announced so far that you're launching.
Can you share with us what your views on like I don't know the next four or five product that you think are ripe or at least areas without.
Sort of.
Showing your hand, but can you kind of guidance.
Where you really think.
The low hanging fruit is for you to to use more of that material.
Yes, I guess first I'd argue a little bit that it's not an insignificant part.
With the very high level safety part in a vehicle, which is one of the reasons it took quite a while too.
You go through all the testing cycles that are necessary for Briggs.
Our next venture will be in the fuel line, which were were down the road on with testing now.
Similar.
Similar way of producing and parse fuel lines nylon.
Different materials and in.
When you know.
Mix play.
Plastics and graphene it seems to be one of the best areas, where you can adopt the quickest, but again they have to go through testing cycles and so forth.
But in the industry as a whole I think we are really going to start to see some volume is paint.
In coatings rubbers.
And then of course, the entire interior of the vehicles plastic under the hood any more half of its plastic fuel tanks or plastic in many cases.
The structure of the car tends to be steel and aluminum and.
And I think that will continue for the most part, which we're very happy about but all the interior.
Your pieces of the parts of the vehicle you see granting definitely has.
And its place in the mix that that I think we're being very high volumes in the future.
A lot of those are different different suppliers.
And factor between nano on ourselves.
We're certainly trying to help bridge that.
That activity to the other suppliers so non competitors of course.
The other the other thing that we would say is that now as an industrial group, but but the growth in graphene maybe outside automotive.
To a certain extent a lot of people are.
Looking at it for a lot of different things Thats why I suggested.
For those that are interested tuned into the ATM and listen to cirrhosis presentation at the gym just to get some background.
These these folks are 100% focused on graphene theyre, leading experts in the world on a and B.
Basically.
And quite logically so on this this wireless in our remarks, we agree with it.
In order to in order to capture a market you've got to be or produce AG volume at reasonable cost and that's supposed to producing in test tubes, and and smaller smaller amounts if I'm a big.
If I'm a big customer I want to know that I've got source of supply as Pat said. The other thing is that very often when people are looking to purchase stuff, they say who else is buyer.
And and who else is using it and.
Industries tend to be copycat, when a new product.
Product is being adopted and to a certain extent, we may not be the big big as buyers are users of graphene that's fine with us. If we are if for the amount. We use we're 0.1% of the total somewhere down the road and nano is selling one heck of a lot of graphic.
Great.
Thanks, guys, thanks, and congrats on the quarter.
Thanks.
Thank you there are no further questions registered at this time I will turn the meeting back over to Mr. will de Boer.
Thank you very much thanks for the questions. Thanks for spending some time on evening I just want to end with a couple of couple of thoughts.
It's on on some individuals the first one is very sad, we're dedicating our call.
Enrollment ironic Roman as long time director head of our each RCC in a very good friend he's been fighting cancer for some time and unfortunately passed away last weekend. So.
So our hearts and condolences.
As the company and in our community go out to his wife coffee and some Robert.
Roman with respect to unload member of the Martin Ranch family, who served us and the shareholders with distinction he has been with US since 2014 and it will certainly be missed but we will continue to run our board and company is we would have wished with dignity in respect to your.
Well, we will Miss a good friend.
A second person, we want to shout out or talk about is.
One of our directors Molly short get.
Just one.
Gerhard Hertzberg gold medalist Canada's top scientist weaker.
We congratulate her she got a nice gold medal.
Metal, which you showed us at our director meetings today, which was great.
Molly used to be Ontario's chief scientist for while but she's she's extremely.
Great person and a great innovator part.
Part of the call, we talked about technology, and our approach to technology and how we focus on that in our business.
And elsewhere and and the fact that one of our directors to win this prize shows once again, our commitment to the tech.
Technology field.
And then a third person and that's when we'd also like to congratulate Megan Hunter, our SVP of procurement supply chain ops was just.
Just awarded.
In a word as a recipient of the 100, leaving women by automotive news, which is quite an achievement we congratulate her.
And and we hope that our remarks and these people showed a wonderful people, we associate with in our organization.
I want to thank everyone for the call if anyone has any questions.
All any of us.
At the numbers in the press release have agreed.
Thank you.
Just now ended please disconnect your lines at this time and we thank you for your participation.
This conference is no longer being recorded Nols as you promoted coffeehouse it does.
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Sorry, 50 for them.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Okay.
If it had been for autonomy.
Okay. She was feeling.
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Yes.
Okay fair enough on 15th please.
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Yes, it does.
And our country with funding.
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Office before.
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Okay. She was funding.
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Fifth Stifel. Please.
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At this time thank you.
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