Q4 2020 Martinrea International Inc Earnings Call
All participants your meeting is ready to begin.
Good afternoon, ladies and gentlemen, welcome to the 2024th quarter and year end 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. Robert The Board. Please go ahead Sir.
Good afternoon, everyone.
Thank you for joining us today, we always look forward to talking with our shareholders and we hope to inform you well and answer questions.
Also note that we have many other stakeholders, including many employees on the call and our remarks are addressed the them as well as we disseminate our annual results and commentary through our network.
With me. This afternoon are Pat to Raimo, Martin reign, as CEO, and President and our Chief Financial Officer, Fred The Tosto.
Today, we will be discussing Martin raises the results for the quarter and year ended December 31, 2020 I.
I will make some opening remarks about 2020 and some highlights from a unique year.
Pat will make operational and strategic comments and give you his perspective, Fred will review the financial results 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.
Our MD&A.
The full financials have been or are being filed on SEDAR. These.
These reports provide a detailed overview of our company, our operations and strategy and our industry and the risks we face we are very open to discussing in our remarks, and we hope in the Q&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 our public record, which includes an annual information form and MD&A of operating results is available on SEDAR you may look at the full disclosure of record of the company there.
Yeah.
Welcome to 2020 one.
The year of hope of opportunity and better days ahead.
These are welcome words for many after the unique challenges of 2020, most of which related to the impact of the COVID-19, pandemic and the shutdowns and lockdowns related to it.
The past year saw challenges that were not foreseen a year ago, including an unprecedented shutdown of our industry and most of our customers worldwide for months, where our revenues dropped precipitously close to zero.
And many were talking about the very survival of many in our industry.
Talk about sustainability morphed into talk about survival.
Some might argue there's not much good to say about such a stressful year and yet we believe that this may have been our finest hour to date as a company. We are still very proud of how our people and our company responded to the crisis and the fact that we ended the year stronger and more focused than ever on our long term success and future.
Our vision is making lives better by being the best we can be in the products, we make and the services we provide.
This was a year that we put that vision to the test.
In terms of making lives better our first focus is on our people those who serve our company every day is our employees.
And the pandemic our top priority is to keep our people safe.
We are in the central industry and across the World, we have not for the most part been subject to government and pull of shutdowns.
But we need to keep our people safe.
Not only muster of people be safe, but they must feel safe. They must know that we have their interest at heart.
It's also a critical part of our Golden rule of culture to treat people the way we want to be treated.
And so safety was and is our focus with.
We developed and work with our industry to develop leading safety protocols for our plants, we put them into practice within days of the declaration of COVID-19 as of pandemic.
We always practice of safety and seek to lead the industry, but this of course was the special case.
We are happy to say that we've had an outstanding record in our plants with our safety protocols. Many of our people of stated they feel safer at work than any place other than home.
And our safety protocols have been used in many other industries and workplaces.
We are proud to say the we do not have any required incidence of implant transmission of COVID-19.
At the same time, our hearts reach out to some of our people in Mexico, who contracted COVID-19 in the community and passed away and to those who have had family members or loved ones, who have been lost.
We also found ways to assist our communities in the fight against COVID-19.
While never having made medical equipment before we contributed to the effort to provide sufficient ventilators by making over 70000 ventilator stance.
There is now of surplus.
We knew that there was the need for masks and so we learned to make masks and now can make over 100000 level III medical masks per day if needed.
We provided masks to all our people do their families and communities all over the world.
We have made monetary and in kind contributions to charities food banks schools churches and people who are in need that we could help.
Our people pitched in and contributor with their time effort and money.
In the spring with the shutdowns of our industry, we have to take extreme measures to cut costs and we laid off almost 14000 people on a temporary basis. This may have been the toughest decision we ever had to make it Martin ramp, but it was necessary to ensure our company's survival as.
And one of the best times in our history was the process of bringing them back to.
Today most of our people are now back in some plants are expanding as we launch new work.
It has been said wisely that the best social policy is to give someone the job our people need to have work meaningful work and an ability to sustain themselves and their families economically by coming to work, we did that and we are proud of it.
We talk about culture of lot of Martin ran because of the matter so much to us in 'twenty 'twenty, we put much of what we talk about into practice, our central Golden rule philosophy was core to our actions at the same time, we remain true to our lean thinking philosophy into our entrepreneurial character.
All were exemplified in our key metrics.
Here are some highlights of the year the full range of found in our annual information form and year end releases.
Our revenues rebounded in the second half of 'twenty 'twenty to almost normal levels and our second half results showed record earnings both of our third and fourth quarter results had record adjusted earnings per share.
Despite the cash losses and borrowings we had to make in the first half of the year before our industry restarted production in June we ended the year with a strong balance sheet similar to the very strong balance sheet. We had at the end of 2019.
Our lending relationships are excellent as demonstrated by lender support during the year, we have always treated our lenders as partners, we were able to expand our facility in order to ensure we had sufficient liquidity during the pandemic, we had a fairly unique arrangement with our lenders where they treated our second quarter. The one with pandemic related law.
<unk> is a one time event it could be ignored for bank covenant purposes. Thank you for your support.
After the stock price decline in the early days of the pandemic Martin Ray of shares ended 2020 on a positive note higher than the year end closing price of 2019, bringing value to our shareholders in a pandemic year.
Even during the shutdowns of our management team met daily to look at process improvements. So that we can come back more efficiently than before never let a crisis go to waste. We believe that these improvements will help Martin ran for years to come.
In addition of COVID-19 safety measures, we continued to improve on a regular safety metrics looking to provide our employees with the safe work environment.
Our total recordable injury frequency measures were down 25% and our lost time injury frequency measures were down 19% for the year over the last six years, they were down 81% and 72% respectively. This is great progress and we are significantly better than industry average with the goal to be the industry leader.
Note that safety is not just important as the safety measure, but we believe good safety measures help illustrate efficiency lean activity less waste and of course care for our people.
We are a technology company.
And we had much success in internal technology improvements and process innovations.
We also introduced some great new products, including of graphene enhanced break line now approved for customer use of 'twenty 'twenty. One the we believe is leading edge.
Our partnership with nano explore the world's leading producer of graphene as of technological breakthrough strategy also.
We had two very successful investments in 2020, our investment of nano explorer, which we increased during the year has increased in value by over $80 million as we remain its largest shareholder.
Our purchase of several metallic plants from of Tulsa during the pandemic increased our metallic footprint in Europe, China, and Mexico, and South Africa, and brought us new metal related technologies we.
We believe the value of the assets and what they will bring over the years of significantly higher than the modest purchase price.
We've been very involved with national state and provincial governments in Canada, the United States, Mexico, and Europe, and dealing with government policy and support proper protocols border issues trade issues testing and screening and vaccination policy.
Our industry of the automotive industry is the largest manufacturing industry on Earth.
And it is incumbent on us to lead the way out of both health and economic challenges. We are pleased at our industry performance and Martin Ranch contribution to it many of worked tirelessly and productively to return our societies to something resembling normalcy, it's coming.
And as noted earlier, we believe we strengthen our culture in the face of challenges. We believe there of 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 in the past.
In order to be sustainable for the long term a company has to be profitable safe Bill great products take care of its customers and people and have a culture that is embraced by the people.
Sustainable companies with great cultures will be around for a long time.
We believe we have of company poised to excel in 'twenty 'twenty, one 'twenty 'twenty, two and beyond and we are committed to deliver for our shareholders and all of our stakeholders. We thank you for your ongoing support we are of great future together.
And now here's Pat.
Thanks, Rob Hello, everyone.
As noted in our press release, our strong momentum continued in Q4 with volumes that have not let up and margins above year ago levels are.
Our Q4 adjusted net earnings per share came in at 55 cents just above the high end of our guidance range that we discussed on our Q3 call of 46 to 54 cents.
Our adjusted operating income margin for Q4 was 6.2% inclusive of our acquired Martin Raya, The Telsey group.
Up from 5.6% from Q4 of last year production sales came in at 982 million also inclusive of our Martin RASM of Telsey group on the higher side of our range of 900 million two of $1 billion.
Excluding the acquired assets of Mattel's, the adjusted operating income margin for the fourth quarter would have exceeded 7% led by our North America and rest of the world segments.
A good result, despite the renewed upward COVID-19 trend. This past November and December were Mexico, and Germany were hit, particularly hard and some of the key facilities impeding some integration and launch activities.
Looking at our operations currently we are seeing tremendous fluctuations in releases from many customers.
This is a combination of the chip shortages and harsh winter weather in the southwest U S, all causing significant downtime to our customers.
In Mexico, most customer salt production downtime due to the lack of natural gas caused by the winter weather in Texas the.
The weather of natural grass problems have subsided, but the chip shortage will persist for some time.
In the short term these issues are creating many disruptions to the automotive supply chain in Q1.
Automakers are prioritizing production of high demand higher margin trucks and Suvs. Some of these platforms of stopped production for weeks at a time. These stoppages will have an effect on our Q1 results temporary losses include key products like the equinox escape and even some large trucks and Suvs.
The good news is that overall demand is strong and we believe the Oems will make up as much production as possible in the back half of 2021.
The low inventories could carry well into 'twenty, 'twenty, two which would support high levels of demand for much longer.
As I alluded to earlier Lockdowns and other public health restrictions due to COVID-19 pandemic. The later integration and restructuring efforts of Martin <unk> operations and book Nice that Germany.
Which carried over into the early part of this year by our longer term prospects for this business are unchanged. Our progress has been slowed mainly due to the continuing travel restrictions.
As discussed on our last call we have a front end loaded launch schedule in 2021.
Some of which is due to the 'twenty 'twenty pandemic related to delays while other launches were targeted for early 2021.
Hi content launches include the Nissan Pathfinder and road, the new Jeep Grand Cherokee and Grand Wagoneer, The Ford Marquee Mustang, the new Volvo XC 40, and the Mercedes C class at our recently acquired MIT Tulsa plant in Germany, all part of our lightweight structures commercial group.
In our propulsion systems commercial group, Inc.
<unk> had a number of big launches as well, including the day $35 six cylinder engine for the Ford F 150.
The class a daimler transmission.
And significant brake and fuel content on the Jeep Grand Cherokee.
And our flexible manufacturing group, we are launching product for the new Ford Maverick Gms electric commercial van and in of Zuzu truck as well as various industrial products for John Deere and Caterpillar. Some of these product launches are in our plants in Mexico and Germany.
Those are always a lot of work and launches in countries that had been highly affected by the pandemic are even more challenging despite this and for the most part we've had great success.
Though between the pandemic chip shortages and the weather I'd say I've never seen people worked so hard to claw for success to keep new product flowing I'm very proud of the tremendous ongoing efforts of our Martin Ray of teams.
Order and quoting activity remains high with $115 million in new business awarded since our last call. This includes $75 million in lightweight structures with our various customers, including BMW Volvo G M, Audi and Toyota $10 million and propulsion systems for Tesla.
And $30 million and our flexible manufacturing group with various customers, including Volvo, John Deere and General Motors.
Of the $115 million in total new business awarded during the quarter 45 million relates to pure electric vehicle platforms, including Gms, New EDI Hummer, the Tesla model Y and the Audi E. Six.
Looking forward I wouldn't be me, if I didn't discuss our progress on graphene into our nano investment.
The recently invested another $4 million and nano explore bringing the adjusted cost base of our investment to $41.5 million.
This compares to a current market capitalization of $130 million based on the closing price of $3 70 widen sense on.
During 25th for a total return of 213%, which we're happy about.
Of course.
As we mentioned on our last call our relationship of nano explorer goes much deeper than our financial investment.
Ah graphene enhanced brake lines are on schedule to begin vehicles. This year. There has been of virtual cornucopia of interest in this product from multiple customers.
Currently graphene enhanced fuel lines are underdevelopment and Theres a lot of interest in this product as well.
We've been asked on multiple occasions, but electrification will do to our product lineup the ore.
Our business is largely agnostic to electrification, but let's go a bit deeper.
Starting with where we're at and where we're going with Evs.
Today, just under 10% of our book of business is tied to EV or hybrid platforms. We see this increasing to 25% over the next five years.
The expected shipped is broadly in line with IHS assumptions regarding E D adoption rates in various regions Asia, leading the transition followed by Europe with North America, moving more slowly, though we expect this may accelerate based on recent customer announcements.
We have already won meaningful business on some key electric and hybrid programs, including the Daimler E D a to <unk>.
<unk> P. M E. One Ford Mach E. G M E D Hummer Tesla model Y and the Audi premium platinum electric platforms.
And we expect the pace of EDI wins to only accelerate.
Looking at this evolution from a product standpoint, if you're some of their products, we produce in our lightweight structures propulsion systems and flexible manufacturing group divisions, roughly 80% of our current products are completely agnostic to the propulsion system be it ice hybrid or pier E D.
For the remaining 20% assuming the world goes 100% electric the need for engine blocks and fuel lines dissipates at a relative rate.
However, what is lost with these products can be made up with other products specific to EV platforms, such as battery trays electric motor housings and thermal management systems.
We've already won some of these products and we are in production with battery trays.
We have taken a detailed product by product look at our business and based on current and future products. We project that our opportunity on pure electric vehicle as measured by the addressable content per vehicle is actually greater than on an ice platform statistically we estimate our total addressable content per vehicle.
On an EV platform to be of roughly 21 50 to $3800.
Compared to 2000 to $3300 a nice platform.
Part of the reason is due to the more complex higher value added nature of EDA components compared to the ice counterparts.
Equally important here is that the majority of our heavy capital is flexible specifically high and low pressure casting machines stamping presses, well blinds brake tube rolling in assembly extrusion lines as well as suspension of assembly equipment.
As we've said for years, the move to EV can benefit our business without detriment in our capital investments.
For more details on this topic. Please see this quarter's investor newsletter, titled Martin Ranch position in an electric future.
In the Investor Relations section of our website.
On that note I'd like to thank the Martin Red team for their continued commitment with all the key launches the high volumes as well as managing so much change in these very dynamic times.
And with that I'll pass it to Fred.
Thanks, Pat and good evening everyone.
As Pat mentioned Q4 was the very strong quarter for us.
Our record fourth quarter from an adjusted EPS perspective with.
With sales adjusted operating income and EBITDA margins and adjusted EPS above year ago levels and in line with expectations.
We're operating at or near pre Covid demand levels in North America, and China with a slow ramp up in Europe, which.
Which is quite impressive considering our industry essentially ground to a halt around this time last year.
As previously noted our team has done an outstanding job managing through a very challenging period.
Thank them for their hard work and dedication to organization.
They've got a closer look at the Q4 results.
Total sales in Q4 were up approximately 17%.
Year over year, or approximately 5%, excluding $108 million of sales from our recently acquired Martin room of Tulsa Group.
We achieved this result, despite the 25% decline in tooling sales off of very high level in Q4 19.
As production sales increased 25 per cent.
Recall that Q4 19 results were impacted by the UAW GM strike, which resulted in approximately $65 million in lost production sales during that quarter.
Volumes of recovered sharply from the rock bottom levels hit in Q2.
Clearly the automotive industry has bounce back more quickly than many expected.
Vehicle sales have been robust the man is high.
The new vehicle inventory levels remain low in North America, particularly on truck SUV and CV platforms.
We have the majority of our platform exposure.
This bodes well for future sales.
Adjusted operating income of $66 $1 million, representing a six 2% margin.
An increase or the 5.6% margin, we generate in the year ago quarter.
Excluding the operations of our recently acquired Martin room of total group.
Which had an operating loss of $3 9 million during the quarter on $108 million of sales.
Adjusted operating income margin would have exceeded 7%.
Margins were driven by our North American operations, reflecting strong volumes and a positive year or sales mix.
Lower tooling sales, which typically earn low margins.
The productivity and efficiency improvements across the organization.
Partially offset by operational launch related inefficiencies of certain operating facilities.
Some of which can be attributed to the ever changing COVID-19 pandemic.
And the operational challenges that have come with it.
Government wage subsidies for active employees totaling $2.1 million also helped on the ear basis, though as expected the impact was much lower compared to the previous quarter.
In Europe, we generated positive operating income an improvement over the loss generated in Q3.
The margins remain well below potential, reflecting a slower volume recovery.
And pandemic related delays of the integration of our German Martin room of Tulsa operations as previously mentioned by Pat.
These integration delays are likely to delay the Marin room of Tulsa group, achieving at the breakeven EBIT target in 2020 one.
Notwithstanding the longer term outlook for the acquired business is still intact.
We continue to feel very good about the acquisition and its prospects for the future.
The rest of the World segment continues to generate strong results hitting of healthy 12, 9% operating margin in Q4.
The level of indicative of the long term potential of the business.
Moving onto earnings quickly Q.
Q4, adjusted net earnings per share was a solid 55 cents as Pat noted a record for Q4.
Driven by our sales and margin profile for the quarter.
The lower effective tax rate also contributed to the EPS for the quarter.
Going forward, we expect the tax rate to normalize in approximate annual rate of 27% to 20%.
Subject of course, the mix of earnings and any changes to the tax rates in any of the countries we operate in.
Free cash flow as defined in our MD&A for Q4, 2020 was essentially breakeven for the quarter.
Inclusive of $100.4 million in cash Capex.
Certain new program capital additions previously delayed during the second quarter of Covid related shutdowns moved into the back half of the year and particularly of the fourth quarter as preparations for new program launches resumed.
As things got back to normal from a program cadence perspective.
Capex additions for the year were $303 million, including $21 million of Capex related to the acquired Martin ran the Tulsa operations.
Capex for 2020, one is now expected to increase to approximately $325 million.
Including the main room of Martin room of Tulsa Group base.
Based on our current backlog of business.
Inclusive of some recent new business wins cash.
<unk> required for a number of customer driven engineering changes.
And additional capacity to be put in place due to strong or stronger than expected volumes.
And as a result of some spend moving into 'twenty one from 'twenty.
Further recall that in Q3, we benefited from a large inflow of production related of working cap.
We indicated on the last call that a portion of it was timing related and will reverse in coming quarters.
While it did but the increase in production related working capital was substantially offset by a further decrease in tooling related working capital, which again is expected to normalize over the next couple of quarters.
Notwithstanding 2020 full year free cash flow of strong.
Ending the year at $62 million far exceeding our original expectation of the breakeven a.
The strong resolve by all accounts, especially when you consider the COVID-19 related headwinds the company faced during the year.
Further our balance sheet continues to be strong.
Given our end of the year net debt position, which was essentially flat compared to Q3 levels.
And continued strong EBITDA performance.
We were able to further reduce our net debt to adjusted EBITDA ratio to two point of one one times.
And the approximately 1.6 times for bank Covenant purposes.
Reflecting our amended credit agreement, allowing us to exclude Q2, 'twenty 'twenty EBITDA from the calculation.
Our leverage ratio remains within our comfort range and well below our bank covenant maximum of three times.
We ended the year essentially back of pre COVID-19, net debt levels and we funded an acquisition during that time among other things.
A very good result, and reflective of the strength of the business.
Finally looking forward.
While our performance in the fourth quarter was strong our business continues to face some challenges, which Pat discussed earlier.
Raw material shortages is another headwind, we and the industry are currently dealing with.
Which has driven material costs up significantly.
In particular as it relates to the price of steel and aluminum.
These higher commodity costs do not necessarily directly impact our steel metal forming business.
Since we are predominantly an OEM resell programs.
But it does impact our aluminum business on a temporary basis.
Our sales contracts in aluminum of mechanisms in place the treat the cost of aluminum is pass through but proportionately, increasing our customer pricing when the cost of aluminum increases.
And vice versa when of decreases.
It is done at set times during the year on average every three months.
So when the price of aluminum goes up suddenly like it did near the end of 'twenty 'twenty.
We are negatively impacted four on average three months until our pricing to our customer that gets adjusted up to reflect the higher commodity costs.
In our aluminum business, we referred to this as temporary lag.
The impact from this temporary lag on Q1 is projected to be approximately $8 million are both 78 tenths of share.
This cost headwind will essentially disappear and balance of in Q2 and could actually turn into a tailwind, albeit of temporary one if commodity prices drop at some point.
As a result, reflecting this temporary lag as well as some of the other headwinds Pat alluded to earlier.
Including incremental launch related costs, driven by the high volume of launch activity.
And the volume Choppiness, resulting from the shortage of semiconductor chips the.
We expect first quarter production sales to be in the range of $900 million and $1 billion.
And adjusted net earnings per share to be in the range of 36 and 44 cents.
Excluding the material temporary lag in our aluminum business, our Q1 EPS guidance range would be approximately seven day since higher.
The strong quarter, considering the challenging environment.
While these headwinds will impact our results in Q1.
The good news is underlying demand remains strong.
Since Q2 vehicles sales have been robust and.
And as noted earlier vehicle inventory levels continue to remain low which should continue to drive production for the foreseeable future.
The fact is we are a growth industry.
There may be hiccups, along the way like the semiconductor issue. The industry is currently faced with.
But we are optimistic about the future and the longer term outlook for the business and the industry.
As such looking at the remainder of the year beyond Q1.
Subject of course, the overall volumes and the extent of the impact the semiconductor issue will have on production volumes.
In particular as it relates to how much lost volume Oems will make up later in the year once the chip supply stabilizes.
We currently expect 'twenty 'twenty, one total sales, including tooling sales to approximate 2019 levels in.
In 2020, one adjusted EPS to approach 2019 levels.
Inclusive of the recently acquired Martin room of the Tulsa Group.
And beyond 'twenty 'twenty, one, we see sales and earnings growth continuing.
We expect 'twenty 'twenty two to be better than 'twenty, 'twenty, one with sales and earnings expected to exceed 2019 levels.
And 20 of 23 to show topline and bottom line growth from 'twenty to 'twenty two levels of.
As our backlog of business takes hold and new program launches ramp up and reach mature volumes the.
The future is bright and full of opportunity.
In closing overall, we are very pleased with our performance in the fourth quarter and a very positive about the future.
While the business and industry are facing some near term challenges.
We remain fully confident in our team as well as the longer term prospects and outlook for the business.
That concludes our remarks.
Thank you for your attention this evening.
Now it is time for questions.
We see we have shareholders analysts and competitors on the on the phone.
So when they have to be a little careful here.
But we will answer what we can.
Thank you for calling.
Thank you.
We will now take questions from the telephone line.
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The first question is from Michael Glen from Raymond James. Please go ahead.
Hey, good.
Good evening everybody.
Fred.
Thank you said did you can you repeat the Capex for next year did you say it was $325 million next year.
Plenty of Oxy at approximately 325 million yes.
Okay. So that.
It feels like that's an incremental bump from what will what at least I was thinking of can you.
But like in terms of that ramp up is there some delta there in terms of some added programs that we're thinking about.
Yeah. So oh line of some opening remarks, there's really four drivers to it.
We've on some increment of new business that was not originally contemplated in our original estimates so that drove some some projected capex.
We're also seeing a fair number of engineering changes of some of our existing of programs that are are.
Planning to launch a and that's driving some additional capital as well so once you've been awarded the business.
Ah Theres changes in our requires capital you're obligated to follow through with that.
The third thing is is theres, some visual capacity that we need to put in place in certain spots are just based on the stronger than expected volumes. So that's come into play.
The last day Theres been some amount of spend that has moved from 'twenty to 'twenty. One so we're seeing a bit of of compression for 'twenty. One just based on those factors.
Okay.
With that higher.
Right.
Capex spend.
For next year out of free cash basis are we looking at something closer to breakeven and then on free cash flow.
Yeah, you're you're probably close so there's a couple of things. So there's the the capex that's the factoring in and out of one thing I'll add with the Capex of our longer term view of Capex remains.
It remains intact, we do believe that it will start normalizing coming down I think youre just seeing some compression in 'twenty, one that's that's getting hitting us.
And the other thing I'll note is as you know we did perform better a better than expected in 2020 from of free cash flow perspective, and that was on on the back of the tooling related working capital. So I've talked about this the last couple of quarters.
So we ended up coming in better than expected. So that was a tailwind for us we did a good job of managing that but that will normalize at some point unexpected over the next couple of quarters.
And I will act as a bit of a headwind of working capital headwind in 'twenty. One so based on those two factors and the current outlook I think we'll be in and around breakeven free cash flow.
And then once the 22 comes around that's poised to be a fairly strong year and there's no reason why we can get back to 2019 levels in 2022.
Okay, and then just one more just just curious with with all of these Canadian investments being announced I think in Ingersoll is going under some transition Oakville.
For the Oakville in Oshawa like how do you guys feel about your ability to participate as those plants changeover of their programs and moving more towards TV.
Certainly this.
This is Pat by the way certainly as those programs get formed if you will you know some of these.
Discussions that the actual model and timing has not been laid out.
But.
Certainly our expectation is we have capacity here, we're servicing those plants now with the Canadian capacity. So the expectation would be we'd have a very good position to win some of the new work as it's announced and we received the Rfps and so forth. It's still a little early in some cases.
And at least a few examples of the current models had been extended.
In order to create time to develop those vehicles.
So again, we're not a we haven't been privy to a lot of what's going to be coming but the eight we anticipate that we will participate.
As a percent as much as we do now.
How much volume it will be is yet to be determined from the customer.
Just on a broader perspective, we're very.
Appreciative of the continuing.
The strength I guess of the Canadian auto sector, one of the concerns.
Expressed a lot is that a lessor of Canadian footprint.
Is something that you know of.
As an issue for Canadian plants, we're largely agnostic because we produce for our customers wherever they are and actually about 80, 85% of our soul of our revenues are outside of Canada, right now but of course, we like to produce well for all our plants. So the fact that these various Oems of increased their commitment.
It means that we're gonna of plants gone gone down the road in the future and and you avoid the speculation of whats going to happen of foreign Oakville, what's going to happen to Windsor. So we've been part of that discussion with the feds and the province, and everything else and we think that's overall a good thing the other thing is the.
The focus on electrification given some of the stuff that Pat talked about.
It is in his remarks are good for that that aspect of our business and the fact that we're local and can work with those people on electrification programs. So the good thing.
Okay I'll begin I would expect that the capital that we have invested in those plants for the most part will be able, especially the flexible capital that we've talked about in the past.
Slide pretty readily.
Okay. Thanks, a lot of I'll go back into queue.
Thank you.
Thank you.
The next question is from Brian Morrison of from TD Securities. Please go ahead.
Mr. Moorhead, Please make sure your line is muted.
I apologize it wasn't me that good evening guys.
The first first question in terms of the guide for.
For 2021 can you just talk about what your North American production volume forecast is and then I understand the headwind of the chip shortage in the first half of the year.
Similar to some of your peers do you anticipate that to be made up in totality in the second half of the year.
In terms of of 21, we forecast and budget based on IHS.
We make some adjustments depending on the information that we are direct we attained from the customer, but broadly speaking IHS is driving our outlook and as it relates to the chip shortage I mean, it's a bit of a moving target the back of the first half of the year as Caribbean impacted our Q1 significantly and we're expecting our impact on the second quarter.
The back half of the year should get better you know we're being told the volumes will be made up. The question is as you know whether it'll be made up in the back half year.
And that's an open question and the my my personal view is as this could probably be difficult to make it all up this year.
But that will likely come into play in 'twenty two.
And in health of the lungs in that year.
Okay.
The reality is that for a number of people and this probably came from some of some of the people in the in the business the kind of underestimated the impact of the chips.
And in the first quarter, that's kind of the way it came through and we think it's going to have an impact from the first quarter. As we said also in the second quarter, but the long term view is demand is still strong.
Inventories are still low we're going to see a pretty robust production program and sales program heading through the next two and a two and a half two and a half years and just to give a sense of the of the chip issue.
Take a look at all of the OEM announcements, there's like a 100 weeks down in Q1 from various customers, including places like Cammy, which are down basically till the middle of April which of good program for us when you have that situation youre not getting revenues of profit and that's what they're going to sell those vehicles over time and that's going to be a good thing we look at it as kind of.
Like the rotating strike nature of what happened with G. M. At the end of 2019 are a little bit of B.
Quote one of shutting down some clients last year.
Right it moving onto Matassa I heard in your prepared comments you don't plan on reaching your 2020 EBITDA breakeven in 'twenty. One does the does the positive $30 million in 2022 does that still hold and then is it fair to say that the tall says of about 100 basis point drag on the operating margin this year, which would probably imply that.
Youre going to get somewhere in the neighborhood of 9% operating margin ex metallics in the second half does that does that all sound correct Hugh.
So first off in terms of.
The Tulsa and it really the are the core activity here is in the German plant the other.
Facilities that we acquired are actually doing quite well. So the task has always been and continues to be tuning around that facility and all of these travel restrictions of endemic related delays and so forth. The you know ive always had pushed that back a few times we've done a number of these in the past and we're really good at it but we've never done one in the middle of the pandemic.
So it's created some some challenges and some further delays here with.
That said the longer term outlook for the business are still intact.
Assuming things open up and we're able to get people in and get the activity of moving we believe we can potentially hit the 30 million next year, when I ready to give up on that yet.
Just a matter of all of the next few months ago.
And I anticipate that over the course of the or you know things there will get better and then you know the expectation is as you know near the back half of the near the end of the year on a run rate basis. We are we may end up being positive.
And if you exclude the policy I mean, if you look at our Q3 margins I mean, they were north of 9%.
This quarter of little less so, but the yeah. The rest of the business has been doing quite well in this volume environment.
I can reiterate what Fred said about the five of the six plants are actually have come around quicker than we expected which is good news.
But the you know every time I talk about the fact that we're going to get some people over there and get busy and the pandemic actually gets a little better overall it seems like the borders get harder to cross and it's been very frustrating and slow, but we do have people there now and we are making progress but.
It's just not super predictable relative to being able to get people in and out of there the way we need to.
Right.
Just a very brief comment on the borders like the.
The chaos at the borders from our various lockdown, our regulators and everything else is an incredible pain for our industry and its quite frankly ridiculous everything's getting better ex.
For the government policy that we're seeing it is just absolutely outrageous and we've expressed that view.
Seeing a tremendous opening in the United States a lot of different places we stayed open as an industry in terms of production.
But.
When you have issues, sending people and the Germany, because they can come back and get quarantined for 14 days.
In a hotel somewhere it's just simply outrageous and.
I'd say that just about everyone in our industry is saying the same things we're just it's.
It's time to move on very good things happening.
And we've got of recognize that.
Okay. Thank you for that my last question is on.
Probably for Fred in terms of the cost savings. He took some that you benefited in the second half of the year I would share from some temporary cost savings such as travel I'm sure. Some of these temporary savings became permanent you also took some restructuring initiatives, maybe just ballpark what the contribution of your cost saving initiatives are to your operating margin and then lastly, just maybe.
Give us an update on what your tubing sales for 2021 should be about.
So in terms of the cost savings are we talked about this on the last call and I don't think the of your there has changed.
We reduced the book seven per cent of our work force across the board and the represented.
Among other things of about $20 million to $30 million of cost savings. So nothing of that perspective has changed so that benefit continues to be there.
And it's reflected in our our margins excluding them of Tulsa group as you noted earlier.
And in terms of tooling sales.
Obviously this year was a little lower than we had anticipated this past year of 2020 just.
Just based on some of the delays that's coming off of very high year in 2019, I don't see us getting back to that level in 'twenty, one, but it would probably be something more normal.
You know in the range of 200 of $250 million give or take and again, that's quite volatile as well just based off of the P.
P Pops and timings and so forth.
So it's not always easy to predict.
Sorry did you say $250 million.
Yeah, 200 of 250 million correct.
Alright, Thank you very much of your response.
Okay. Thanks.
Thank you.
And the next question is from Mark Neville from Scotia Bank. Please go ahead.
Hey, good evening everyone.
Alright.
Hey, guys.
Maybe asking the Tulsa question I guess the different lenders with the.
The the breakeven maybe being pushed out.
And then from 2022, I guess, roughly how far or how many months of how far behind you think you've sort of are.
At this point.
I would say broadly speaking.
And again, so just in the backup of sex. So we've outlined the the task here the activities.
So we're doing whatever we can to get people to help.
Pushed these along and it's been very spotty again, you get people in there for a period of time, then you're going to come back and then you can get them back in and it's very difficult to maintain some continuity of their.
If I were compare it the way we manage the mention of the turnaround we had at presence. There every day for 12 months and we have not been able to do that here anywhere near that.
So say on average it's hard to peg how far behind the R. But I would say you know anywhere from four to six months give or take.
And you know as soon as things open up I I anticipate that the activity will accelerate.
Okay.
Okay.
I guess just on that.
I guess I'm thinking me they go from there.
The $30 million.
I presume, it's not sort of all dependent on.
The actions just borne planting is there some sort of volume assumptions in there and sort of mix just curious what else sort of bridges the gap from zero to $30 million of operationally, it's it's really the German facility, but the other aspect to it as well is as you know theres a backlog of business that we're going to be launching there as well. So some of that business will be coming online over the next couple of years and.
The that will will help.
You know turn the margin profile to what we're more accustomed to.
Okay.
Maybe just some of the raw materials.
Just so I understand again, it's all aluminum the the Q1 hit or the Q1 impact.
So I understand the pass through or is it sort of.
Is that on 100 per cent of I guess, the business or is it certain percentage and the rest of you Gotta go negotiate I'm just curious how it works.
The vast majority of our aluminum contracts have are these type of adjustment mechanisms in place. So I would say 100 per cent of our aluminum business is subject to this the temporary lag.
Alright, okay.
Maybe just one question on the EBITDA, just so I understand it.
I've got the C. P vs higher and again theres certain products, obviously the debt go away.
The engine blocks, but the stuff that sort of is incremental battery trays. I think you just mentioned a motor housings and the terminal terminal.
So you have product or your per your you are producing sort of the battery crazy one contract. So you won't work.
For the the matter of housing the motor Housings and terminals is that correct. Yes, we have thermal products, we have the battery trays and production of and we've won the motor housing. It just it's an engineering now it hasnt been launched.
So in each of these areas we have we have.
The different phases of progress, but it is ongoing.
Okay.
But again I guess.
Just sort of on the C. P. The sort of potential is there I was there anything in there is that Youre not you you haven't won any business that sort of.
Yeah, that's sort of makes up the CP V of getting there or is it all of this that and you have real real contracts today.
We have real contracts and have RF RF skews and we have production. So we've pretty much on the products that we discussed now theres many products that were not going to build but we don't build yet but the.
But for the things that we discussed on the call, yes, and generally what we say we something it's because we have of contract work.
Yeah.
And then I guess the big.
One of the big win.
One of the most of one.
One of the most interesting wins, we had as of motor housing you know it's interesting.
When you look compare an engine blocks of motor housing and engine block weighs a lot more as you say well geez, that's outside of our product of habit, but we get paid for complexity more than we get paid for weight because as Fred said you know the aluminum passes through ultimately so of complexity is important and things like motor houses can be very complex parts. So so they can be lucrative it.
Thanks.
Alright, I appreciate that more because of the cold or up.
[laughter].
[laughter].
Yeah.
Thank you.
And the next question is from Peter Sklar from BMO capital markets. Please go ahead.
Pat on the.
The the metallics of plant in Germany, I Wonder if you can describe from an operational perspective.
Like what the issues are is it processes or labor or the capital you have in the plants.
Rising capacity utilization.
What exactly are the issues there.
Pretty much described the law.
I mean, a lot of golf.
Different pieces.
Tell you if you compare it to two of our other plants and I'm being serious we had all of those all of those issues and we have opportunities.
Good news is.
A month ago, the Guy who runs the Metallics group came back from Germany. He was able to get in there and we went through his report.
And there's a significant amount of low hanging fruit, but it takes resources to help.
Get that plant in line with the way we run things.
And we just haven't been able to get them. There. So it's not going to take a lot of capital to two.
Improve the situation, it's going to take a lot of practice there is excess labor for sure.
And the scrap and those types of things, we do have some pricing issues some of which we're going to be able to address as it turns out so.
We're going to get there, it's just been having the right people there.
For the right amount of time as Fred said when when measured it was was the.
Resolved.
The team there for over a year and we haven't been able to do that but that we will be able to do that we have a lot of people lined up we have people there now.
It's just getting them back and forth, that's really become a headache for a lot of folks.
He said a lot of anxiety when youre coming back from from Germany. After being someplace per month I'm wondering if you have to spend two weeks in a hotel.
I'll get to see her family. So most of those things stress a lot of people out of town and I also don't from those.
Kind of the fact that the rest of the plants, we acquired are doing quite well and you're very well financed China are performing of all financially one of Mexico is doing quite well one of the Tuscaloosa and the ramping up Big program, there and it will be.
A key contributor to our portfolio of down the road.
So we're quite happy with the overall picture, but we knew from the beginning of that Oh, The task was Germany and we're on it.
Okay.
Wanted to move on to the soul of semiconductor issue IHS has been kind of quiet so far on their Q2 production outlook. So I'm. Just wondering are you seeing the Q2 releases yet and do you have the view on.
How bad it could be in Q2.
Yes.
The problem Peter is the changes.
Even in the last two days, it's changed substantially and it's not something we're getting a lot of warning about a.
A couple of days out they will announce next week were down so I think there the part of the problem is the reason, they're not talking about it is because.
The industry from the Oems are very blind to this and their notification.
Of receiving the semiconductors is is the only like a week out from what I understand so they don't have line of sight themselves and therefore, they can't tell the supply base.
And I think everybody is afraid to guess at this point.
My guess, which I'm not afraid to make because that's all it is is I guess is that we're gonna be bumpy.
In the Q2.
How long into Q2 or whether it goes in the Q3, it's hard to say right as a matter of fact, I mean, it's already flowed into Q2 because earlier this week, Jim announced the Kemi April mid April of Fairfax dominate April S of feed downs at the end of March right. So net.
We're going to see more certainly.
Having said that this problem will resolve itself when you go out when you've got the the whitehouse, having discussions with Taiwan, saying that.
Your semiconductor company, which is the largest producer in the world should be thinking about focusing on making parts for the automotive industry.
And we'd really appreciate that probably tied suddenly to the fact of having aircraft carriers and the CS or out of Taiwan in the South China Sea.
Youre going to get some youre going to get some.
So some some focus I think and that's.
That's the first thought the set the second observation is some of this lumpiness. It's it's all kind of pandemic and lockdown related right like we know that the chip.
Chipmakers basically you are trying to sell their capacity they thought that they had extra capacity.
And would have extra capacity for a while sort of the Oems and so it's an adjustment in the supply chain just as we've seen adjustments at a number of places, including steel and aluminum.
Yes, and it's not just it's not just the chips. It's it's a lot of materials that are under stress a lot of raw materials and.
The good news is is that the they're getting some time to adjust but I think if you didn't have the chip shortage, there would probably be of steel shortage on the aluminum shortage right behind it are probably even more likely of resin shortage.
Right Okay.
I'm afraid I just wanted to ask you like I think the depreciation level in the fourth quarter kind of jumped to a new level.
Was there just some catch up from the earlier quarters of the year or is the depreciation charge in the fourth quarter of the new level.
So we had some of some some new equipment come on line with a with some launches so that for.
For the most part of what drove it.
And I would expect that the continues so that would be a new baseline.
Okay.
And then just lastly.
Im looking correctly like it looks like Europe had quite a bounce back quarter in terms of profitability you know relative to where you were in the.
In the earlier quarters of the year and so I'm just wondering if you can talk like what happened there for such a strong results in Europe.
Yes, I mean, ultimately it was driven by volume so the the recovery in Europe has lagged North America the and.
In China.
And sequentially, we saw higher volume in Q4 compared to Q3, so that's really what drove it from the Tulsa facility and there I would say it was similar quarter over quarter. So it was really volume driven and in the rest of our business.
Okay. Thanks, so much that's all my questions. Thank you. Thank you.
Thank you.
Once again, please press star one on the devices keypad, if you have a question.
And the next question is from Christopher <unk> from CIBC. Please go ahead.
Alright, thanks for taking my call.
You've made good progress delevering over the past few quarters could you discuss how you think about share buyback and returning cash to shareholders of this closed.
All of its something in terms of capital allocation. We have basically said first investing the business keep a strong balance sheet.
And look at.
Certain investments, including technology investments and then look at distributions to shareholders. So I think of something that we'll talk about.
I don't think we're going to do.
Buyback in the first half of the year, we will see where we go.
Think that.
And this is talking a lot of a lot of our people and one of our shareholders as well I think we've said we were comfortable at the one five to one range in terms of debt.
EBITDA.
And that's the place we'd like to be where they're pretty well for bank covenant purposes, but we want to we want to be comfortable air before we were you assess some of the things that we're doing.
I hope that's it.
It's a bit of a fuzzy answer, but certainly something that we that we.
Bear in mind, we just we just think of it and we're still in a pandemic.
And we've got a lot of launches we see some uncertainty in that type of stuff. So we want to be prudent.
And Thats, our thinking right now.
That makes sense and just on Capex.
I'm, just wondering where you think of your Capex intensity normalizes out too and if you think you can get to maybe a mid single digit percentage of revenue closer to where some of your peers are.
Yeah, that's the the target.
Again, it's always subject.
Now to new business wins so.
It's good news bad So you know the fact that we have capex needs of winning work.
But.
Some of the vessels, we made some of the flexible lines that we've put in place and some of this next gen product comes up.
We expect that the our capex profile will normalize to something more comparable to our peer group.
Great.
That's great and then I was just wondering on your on your cash flow from operations.
Pretty much out of 100% conversion rate from EBITDA and I realize there will be some some moving parts of the working capital over the next year.
But do you think of 100% conversion of sustainable long term.
Well with some growth.
Some working capital headwinds are obviously I mean as you continue to grow and we do expect some growth in our business heading into next year I noted earlier, we got this tooling related working capital.
Headwind again that is somewhat volatile, but I do expect it to normalize at some point. So you won't see a similar conversion next year.
But it should improve in 'twenty two.
Great. Thanks, that's it from me. Thank you. Thank you.
Thank you.
No further questions at this time I would like to turn the meeting back to Mr. Lu the bar.
Well. Thank you very much everyone for participating on the call. If any of you have any questions or would like to discuss any issues of concern Martin rats.
Feel free to contact.
Any of us or Neil Forster at 467, 49 0314. Thank you have a great evening.
Thank you the.
The conference has now ended please disconnect. Your line is at this time and we thank you for your participation.