Q1 2021 Martinrea International Inc Earnings Call
All participants please standby your conference is ready to begin.
Afternoon, ladies and gentlemen, welcome to the <unk> 2021 first 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.
Please go ahead Sir.
Good afternoon and evening everyone.
You for joining us today, we always look forward to talking with our shareholders and we hope to inform you well and answer questions.
We also note that we have many other stakeholders, including many employees on the call and our remarks are addressed to them as well as we disseminate our results and commentary through our network.
With me are path to Raimo pardon me as CEO, and President and our CFO Fred di Tosto.
Today, we will be discussing Martin ranch results for the quarter ended March 31 2021.
I will make some opening remarks and also address our capital allocation framework.
Each quarter, we are going to go in depth on a topic or to <unk>.
Last year, we dove, a little deeper on technology.
Last call. It was electrification this quarter will be capital allocation Volta explore and the companys growth over the next few years.
After me Pat will make operational and strategic comments give you his perspective on our Volta explore initiative working with our friends at nano explorer.
Fred will review the financial results and outline our guidance and then we will 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 and full financials have been or are being filed on SEDAR.
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 open the Q&A some highlights of the quarter. The state of the industry today, how we are addressing the challenges and progress on our operations.
As always we want you to see how we see the world.
Frankly, we wanna be of trusted source of commentary for you and we believe we are.
In our last call. For example, we said the semiconductor chip issue was a major supply concerns and we've heard numbers in the first half of the year.
Better in the second half and beyond.
A number of others said it was a blip.
While it is not a blip, it's more than a blip, it's more of like a blimp.
At the same time, we are very positive about the macro environment for our industry and for us over the next several years and we think we'll be right.
As for our usual disclaimer I refer you to the disclaimers in our press release and filed documents.
Yes.
As you know I like to talk about culture. This evening I won't do that but out of habit and because it is so important I put up the slide our culture as a feature of every investor presentation. It is core to what we do and it will drive continuing in future sustainability and success.
We had a solid quarter as advertised we made progress in many areas of made decent money not as much as we're going to make on our future and we invested in our business because it makes sense to grow our company and increase revenues profit and cash flow over time.
So with that in mind, I'm going to spend a little time on capital allocation and capital spending.
After our last call we heard some concern about capex well, let's talk about that.
I should note that we have prepared an investor newsletter on our approach to capital allocation, which will be posted on our website.
Neil Forster, who has been bolt on auto analyst and Investor with Franklin Templeton has set out of our thinking very nicely for you.
And any business how the company allocates its capital is among the most important decisions management has to make capital allocation is equally as important as operational decision, making and execution.
And we have to be effective at both to ensure our organization prospers or even survives over the long run.
Profitable businesses with strong operating track records can be derailed by a poor capital allocation strategy. Therefore, it's critical that we get this part of the corporate strategy right.
At Martin ran we spent a lot of time thinking about capital allocation.
Our overarching priority is quite simple to generate long term positive returns for our shareholders.
Generating returns is part of our mission.
In that sense, we are no different than an investment manager running of mutual funds pension plan, our endowment fund.
Or an individual investor managing his or her own portfolio I'm, an investor myself I've been doing it probably longer than most of the people on this call given my age.
<unk> shares in whole companies and Italian of truth I'd be happy to compare notes on track records, but that's another story and some we hear invest where the return potential makes the most sense.
We are committed to the long term sustainability of our company in line with our vision mission and principles. We're all owners, increasing our holdings of shares and equity based investments over each of the prior five years with minimum shareholding requirements and a robust equity share ownership program in.
In 2020 and in 2021 to date, we have met the challenge of the pandemic head on and today. We are a strong of company as we have ever been because we are owners and behave like owners.
Taking a closer look our capital allocation framework is as shown on this chart.
While maintaining a strong balance sheet, we seek to invest in growth and maintenance opportunities that have the potential to generate strong returns for our shareholders.
This can take the form of organic capital investments and research and development of initiatives as well as acquisitions that make strategic and financial sense.
These priorities are driven by a disciplined internal rate of return or IRR.
Return on invested capital or ROIC C framework that is we choose the options that have the highest expected returns over the long term.
In a nutshell Martin Ray has industry, leading returns on invested capital demonstrates that we're investing well.
In late 2014, Pat joined Us as President and CEO, and we embarked on our lean transformation, Germany journey of period, we referred to as Martin rate of two point al.
Over the next five years adjusted operating income margin nearly doubled to seven 5% in 2019 over 8% excluding the impact of the 2019 G. M strike you may recall.
Putting us up among the top in our peer group.
We achieved this through a combination of plant level operating improvements and our lean manufacturing practices and a more disciplined go to market approach adhering to a strict IRR hurdle rate and quoting new business, which has generated ROIC sees there are among the best in our peer group demonstrating our effectiveness when it comes to capital allocation.
As this chart shows.
So let's talk about free cash flow playing the long game.
Free cash flow is an important metric in assessing the merits of any investment is a key element for many investors from any of you and ultimately a key driver of evaluation of the value of an investment is equal to the present value of its future cash flows discounted at the appropriate cost of capital.
Importantly, the cash generating potential of of business must be looked at through of long term lengths of.
The company May of options to invest capital in high return organic growth opportunities that will provide a steady stream of free cash flow in future years.
Are those investments reduce free cash flow initially.
Working capital flows can also be unpredictable over short time periods skewing the true cash flow picture.
When allocating capital it is incumbent on us to play the long game and not be distracted by near term ebbs and flows.
Ultimately companies that generate strong roissy tend.
Tend to generate strong free cash flow over time, we have a strong ROI see.
Ah Martin or a 2.0 journey is also included substantial capital investment.
Mostly related to investments in our steel metal forming operations to make our production lines more flexible.
As well as long term capacity investments to support growth in our aluminum casting business.
Notwithstanding we hit an inflection point in 2019, where we generated over $100 million on free cash flow.
Although the COVID-19 pandemic has impacted our continued progress in this area, we still managed to generate over $60 million in free cash flow and of COVID-19 disrupted twenty-twenty quite an accomplishment.
This year were expecting capex to increase from 2020 levels, leading to an expected breakeven free cash flow profile in 2021 day.
Driven by new business wins capital required for a number of customer driven engineering changes and additional capacity to be put in place due to stronger than expected volumes and.
And some spending moving into 2020, one from 'twenty 'twenty four.
Fred will talk further on future cash flow salt leave this topic at that.
What about acquisitions.
Our acquisition strategy is disciplined and has served us well over time.
Historically, our acquisition strategy has revolved around acquiring businesses that broaden our product offering technology footprint or our customer base.
They helped us grow rapidly from a startup to a company with $4 billion in revenues of true growth story.
Primarily these were distressed assets, requiring investment and resources to turn around.
We were able to acquire these companies cheaply and restructure the operations.
Thereby putting them on a more sustainable path.
We have proven our effectiveness of turning around struggling businesses, where prudent and disciplined buyers and it's a big part of how we built our organization.
Our acquisition strategy has evolved over the years the evaluation remains a key component.
Great companies can end up being bad acquisitions, if you pay too much so.
So we are selective and prudent in our approach base.
Basically we look for companies that can help us achieve some combination of advancing our light weighting strategy.
Answering our product and technical capabilities.
And diversifying our customer base.
And we look to acquire these companies at reasonable to attractive valuations.
While I won't get into it further here our investments in Mittal says assets and of nano explore are proven to be great investments to maintain and grow our business.
Our strong balance sheet is paramount as it gives us the confidence and ability to withstand downturns, if and when they arise like during the great recession of 2008, and 2009 and more recently the COVID-19 shutdowns of 2020.
Our customers also prefer to deal with suppliers, who are financially sound that they know will be around to serve them in the long run. So a strong balance sheet is fundamental to maintaining and growing our business we.
We believe our targeted net debt to adjusted EBITDA ratio of approximately 1.5 times is appropriate for our business as it represents a level that allows us to manage downside risk, while maintaining the flexibility to invest for growth.
The COVID-19 pandemic highlighted the importance of our strong balance sheet and strong lending relationships.
It also showcased our ability to manage through a crisis and a period full of uncertainty.
Our strong financial position, leading into the COVID-19 downturn as well as actions we took on the form of cost reductions from temporary layoffs salary reductions and capex reductions as well as liquidity actions to increase credit availability allowed us to navigate through the crisis in a position of strength.
The final component of our capital allocation strategy is returning capital to shareholders in the form of share repurchases and dividend growth overtime.
While our dividend rate is higher than many in our industry, we pay of approximately $16 million on dividends annually, representing a modest cash outlay, given the scope of our business.
While we seek to reward our investors with a steady stream of dividend income our views of share buybacks represent a more compelling opportunity as we believe our stock is undervalued.
As such return of capital is more likely to be focused on buybacks at this juncture as they offer better return potential.
We've been active with our share repurchase program in the past.
Between 2018 through 2020, we repurchased eight per cent of the company's outstanding shares for $83 million or so.
When the pandemic hit in 2020, we suspended our formal normal course issuer bid of prudent move to preserve cash power.
However, we did maintain our dividend in fall.
It's now May 2021 we're still in the midst of a third wave of the pandemic.
There are still many closures or lockdowns including of borders.
And the industry is facing many supply shortages, particularly related to the semiconductor chips.
We are seeing many customer shutdowns and an uncertain outlook for the next several months.
While we continue to invest in our business maintain our dividend and keep our balance sheet strong we're not recommencing our share repurchases. This spring, but do anticipate filing for a normal course issuer bid by the fall of 2021.
Philosophically, we like buybacks as we think our shares are attractively valued and represent a great investment opportunity, but we're going to be prudent with our cash in the midst of pandemic uncertainty and chip and other supplier issues, while still investing in the future of our company.
In conclusion, we believe our capital allocation strategy provides the right mix between investing in the future of our company, while putting it in a strong financial position through prudent balance sheet management.
It also seeks to reward our shareholders for their continued support in the form of returning capital to them through dividends and share buybacks in summary, our capital allocation framework is core to our overall corporate strategy and should enable us to drive meaningful and substantial growth in revenues earnings and free cash flow and of medium and long term.
Now here's Todd.
Thanks, Rob Hello, everyone as noted in our press release, our Q1 adjusted net earnings per share came in at 41 cents, but then our guidance range that we discussed on our Q4 call of 36 to <unk> 44 cents or adjusted operating income margin for Q1 came in at 4.9% Inc.
<unk> of our acquired Martin Ram of Tulsa Group down from five 8% in Q1 of last year production sales came in at $924 million also inclusive of our Mattel's Subaru.
At the low end of the range of $900 billion to $1 billion.
First quarter results were impacted by some short term headwinds, including the industry wide shortage of semiconductor chips and the previously discussed lag and pass through of higher aluminum costs.
I itself intact, and adjusted EPS by approximately eight cents.
Excluding the lag our EPS would be in the 48 to 49 cent range well ahead of our prior year results.
We are managing through a substantial amount of new business launch activity, including large programs such as the Nissan Pathfinder and Rogue the new Jeep Grand Cherokee the Grand Wagoneer, The Ford Mustang Mach E and Mercedes C class and the class eight Daimler transmission to name a few.
Last the emerging third wave of COVID-19 cases, as presenting additional short term challenges in some locations regardless of our launches are coming along as planned and our performance has been strong in this environment.
More importantly, the longer term picture is very solid U S. Auto demand has been trending near record levels in recent months and.
In the 18th to eight can of half million Saar range and inventories are the lowest I've seen in my memory.
We believe this sets the stage for a prolonged period of strong production growth once supply chain pressures ease.
We're very confident in our future as our strong guidance implies which federal review in more detail momentarily.
Turning to our operations, we are experienced short term disruptions and customary leases continue to fluctuate due to the shortage of semiconductors and others supply constraints.
These disruptions will continue to impact the industry results in Q2.
These temporary shortages impact key products like equinox escape and even some larger trucks and Suvs.
Visibility is somewhat limited as oftentimes, we receive only short notice of production shutdowns from our customers.
Currently industry observers such as IHS expect supply chain pressures to ease in the latter part of the year.
<unk> volumes are likely to recover next year.
The good news continues to be the market, which will remain strong as demand is high and inventories are low.
This will support production growth once supply challenges abate as I alluded to earlier.
On the last few calls we mentioned of Lockdowns and related public health restrictions due to the pandemic have delayed our integration and restructuring efforts at our Martin Ray on the Tulsa operation and book Nice debt, Germany.
I'm now happy to report that these activities continue to ramp up and we are making good progress getting the business up to our operating and financial standards.
We have managed to get a good number of resources from North America into Germany. Some on long term of assignments to support the integration.
Order and quoting activity continues to be at a high level with 130 million of new business awarded since our last call. This includes approximately $90 million in lightweight structures with various customers, including general Motors, Toyota and Tesla $35 million in our propulsion systems.
With General Motors still Anthos N G E C.
And we have been awarded our first contract with J L G and our flexible manufacturing group.
The pace of New business awards, and our schedule of launch activity gives us tremendous confidence in our outlook over the next few years once the industry gets past the near term supply issues.
I would be remiss, if I didn't discuss bolt on explore our new EV battery joint venture with nano explorer.
Both of explorer will initially build a one megawatt hour of demonstration facility in Montreal, Canada with the purpose of proving our new technology with graphene enhanced lithium ion batteries.
We expect the demonstration facility will be operational by early next year.
Once were satisfied with the results the JV intends to build and commission a 10 gigawatt hour manufacturing facility.
Martin Raya in nano explorer will initially contribute $4 million each in start up capital.
And up to another 6 million each as the development funding is required.
We expect a go no go decision to be made later next year I'm, the chairman of bolt on explorer and Ceruse.
And as of poor founder and CEO of Nano explorer is the joint ventures C E O.
We are excited about bolt to explore and its prospects as we believe graphene enhanced batteries can provide some significant advantages over competing products in the marketplace.
Plea put scrapping has the ability to enhance charging time and driving range specifically the high conductivity of graphene allows the battery to be charged faster while energy density has improved through the use of graphene and silicon anodes.
Silicon has been proven to be about 10 times more efficient than graphite anodes. The current challenge with Silicon Anodes is they have a limited life.
As the silicon expands and eventually fractures when charged.
Graphene can be used to coat, the silicon spheres, which will reduce the swelling and prevent fracturing, thereby improving energy density and extending battery life and driving range.
Grabbing enhance batteries are also potentially safer as graphene as highest thermal conductivity provides greater temperature control, which reduces the risk of fires.
This makes our graphene battery technology unique Volta.
Both of explore also has the potential to fill missing piece of the Canadian EV supply chain. The domestic production of EV batteries. This is noteworthy given the government's E D ambitions and recent OEM announcements regarding the production of electric vehicles in Canada.
There are currently of number of concerns of EV batteries on the market today fire risk charging time and its impact on capacity driving range and battery life.
Our work to date shows a graphene enhanced battery will improve all of these current challenges some significantly.
On the last call. We spent a lot of time talking about what the industry transition to electric vehicles would look like for our business.
As a reminder, we project our opportunity on pure electric vehicles as measured by the addressable content per vehicle.
Is greater on an EV versus a nice platform due to more complex higher value added components compared to their ice counterparts.
Just as important is the fact that our current installed capacity is flexible and will be employed on new EV products such as battery housings.
With no material change, so whether it's an agnostic product or an EV specific product. This.
Of this transition can benefit the business without negatively impacting our return on invested capital.
Taking a closer look roughly 80% of our current products are completely agnostic to the propulsion system be it ice hybrid or pier E D. On.
On the mentally these products do not change.
Vehicles need body structures suspensions and brake lines, regardless of how they are propelled.
For the remaining 20% and assuming the world goes 100 per cent electric propulsion products, such as engine blocks and fuel lines would disappear, but would be replaced with other products specific to EV platforms, such as battery trays electric motor housings as well as thermal management systems. We have won some of these products.
We are already in production with battery trays.
On that note I'd like to thank the entire Martin Ray of team for their continued dedication and commitment in the face of industry supply shortages and other near term challenges with that I'll pass it to Fred.
Thanks, Pat and good evening everyone.
As Pat discussed we faced some headwinds in Q1 from some temporary factors.
<unk> delayed pricing pass through of higher aluminum costs as well as a global on semiconductor shortage, which impacted volumes of some key customers.
We continue to work through the many challenges depend amicus put in front of us and the industry.
Our team has performed admirably given the circumstances.
While the semiconductor shortage will continue to weigh on results in the near term we are confident in the longer term outlook for our business given.
Given strong customer demand for vehicles low vehicle inventories and our solid backlog of book business.
Given our confidence we are rolling out longer term guidance, which I'll discuss later on the call.
Taking a closer look at the Q1 results.
Total sales are up approximately 14% year over year or approximately 5%, excluding $78 million of sales growth contribution from of Martin Rheumatol subgroup.
Production sales were up 12%, while tooling sales were up 45 per cent.
Sales benefited from new business launches during the quarter as one of those higher volumes of certain programs.
As mentioned the man for vehicles has been robust and vehicle inventories of main loan North America, particularly on truck SUV and see of your platforms wary of the majority of our platform exposure.
This bodes well for future production.
However, sales for the quarter were tempered by the global semiconductor shortage, which will continue to negatively impact results of at least through the second quarter.
Q1, adjusted operating income was $48.5 million of pretty good result in the circumstances and roughly the same as last year.
This represented a 4.9% margin.
Lower than the 5.8% margin, we generated in the year ago quarter, which was largely pre pandemic.
As expected and it was and as we told you on the last call we experienced a temporary lag on offsetting higher aluminum raw material costs through contractual price increases, which impacted operating margin by about 85 basis points.
We expect this impact of mostly reverse in the second quarter as pricing on customer contracts adjust to reflect the higher aluminum costs.
Showed aluminum prices normalize to a lower level at some point in the future would actually benefit from a margin tailwind, albeit of temporary one.
The reversal, it's true of prices were to increase.
Margins were impacted in Q1 and will be in Q2 by of heavy launch cycle, which of course is very good news for future sales margins and profits.
We also saw higher tooling sales, which typically earn of low margins.
COVID-19 related government subsidies totaling $5.4 million benefited margins during the quarter.
Our sales mix hurts, our margins somewhat in the context of the customer shutdowns because of the chip shortages.
When Ford suspense production of the escape, which it has for seven weeks to date, this largest shuts down or Shelbyville, Kentucky plant one of our largest operating facilities.
When Jim Schutz non production of the Equinox, which has happened we have five plants supporting that program.
When a plant is largest shut down that hurts margins, which will rebound very positively and quickly when customer production resumes.
In North America, we achieved an operating margin of six 3% down from seven 3% in the first quarter of 'twenty 'twenty due to the impacts just discussed.
Our European operations were essentially at breakeven in the quarter, reflecting the temporary lag in aluminum pricing pass through and current lower margin profile of our new modern rheumatology of German facility.
As Pat mentioned earlier, we are making progress on the restructuring and integration of our newly acquired operations in Germany and are trending towards breakeven in our Marin room of Tulsa group overall.
We continue to feel very good about the acquisition and its prospects for the future.
Our rest of the World segment continues to generate strong results with a 10.2% operating margin in the quarter.
The level of indicative of the long term potential of the business.
Moving on to earnings adjusted net earnings per share was 41 cents in Q1, an increase from the 30th since we delivered in the year ago quarter.
In addition to the sales and margin impacts discussed previously E.
EPS benefited from a force and net foreign exchange gain.
Of note adjusted net earnings per share excludes of gain on the dilution of our investment in nano explorer and the amount of $7.8 million or eight cents per share after tax.
To explain how this works non unexplored recently completed an equity offering of 11.5 million shares for $46 million.
And of separate transaction, we acquired 1 million shares at $4 per share NAV.
Net net our ownership interest decreased from 23.3% to 22.2%.
I of fresh requires of dilution and equity interest of be treated as a deemed disposition.
Resulting in a significant gain during the quarter, demonstrating how well we've done with the investment of nano.
As you all know we are very excited of bonanno explore and its prospects for the future.
Free cash flow as defined in our MD&A for Q1, 2021 was negative $38.7 million inclusive of of $35 3 million dollar increase in working capital and 90.8 million in cash Capex.
The increase in working capital was largely production related.
Seasonally production related working capital typically increases during the first quarter of any given year of.
As the industry comes out of the December holiday shutdowns.
Capital additions were in support of new business wins customer driven engineering changes.
Passing investments in support of higher than expected volumes.
And some of the fro of spending from 'twenty into 'twenty one.
When evaluating our capital program. It is important to note that the majority of our capital program related.
We only deploy capital when we win the business and our capital investments are subject to strict hurdle rates.
As Rob mentioned, our return on invested capital is among the best in our peer group, which demonstrates that we are investing well and generating good value for our shareholders.
Turning to our balance sheet net debt increased slightly compared to Q4 levels.
On the face of of financials net debt to adjusted EBITDA was 2.24 times at the end of the quarter, but approximately 1.6 times of a bank covenant purposes reflect in our amended credit agreement, allowing us to exclude Q2, 'twenty 'twenty EBITDA from the calculation.
Overall, our balance sheet is strong and our leverage ratio remains within our comfort range and well below our bank covenant maximum of three times.
Subsequent to the quarter, we amended our credit agreement with our lending syndicate, providing us with additional credit availability of pre COVID-19 pricing and extending our maturities out to 2025.
We have an excellent relationship with our lenders and we sincerely thank them for their ongoing support.
Turning to guidance our business continues to face some short term challenges from the industry wide semiconductor shortage.
Heavy launch cycle and lingering disruptions due to the COVID-19 pandemic.
While the ultimate impact of semiconductor shortage will have on our operations is difficult if not impossible to predict and visibility is low on.
Current expectation is that the impact on Q2 will be fairly similar to what we experienced in Q1.
We still expect production to recover in the back half of the year. The loss bombs are unlikely to be fully recovered until 'twenty 'twenty two.
Given these current headwinds, we expect second quarter production sales to be in the range of $850 million to $950 million now.
On adjusted net earnings per share to be in the range of 36 to 46 cents.
In the circumstance of decent money, but not close to where we expect to be once we get through the supply issues.
On a full year basis, we continue to expect 2021 adjusted EPS to approach 2019 levels and free cash flow to be approximately breakeven.
These targets are dependent on a recovery in production of bonds from an improving supplier of semiconductors in the back half of this year.
Despite some near term challenges that we have described at length. We are very optimistic on the long term prospects and outlook for our business.
As discussed demand for vehicles as of robust driven by a strong macroeconomic outlook, especially in North America low interest rates and for many an increase in savings and worth of wealth of accumulated during the pandemic.
Vehicle inventories remain low and are likely to remain low for some time, given pent up demand.
We believe this sets the stage for a multiyear period of strong production growth once supply side pressures ease.
Given our high conviction in the long term outlook for our business. We are rolling out our 'twenty 'twenty three outlook, which calls for total sales, including tooling sales of $4.6 billion to $4.8 billion in adjusted operating income margin exceeding 8% and free cash flow in excess of $200 million.
Of note approximately 90% of expected 20 of 23 sales reflects business that is already booked.
While the sales of dependent on volumes, we believe our volume projections, which are based on IHS assumptions are realistic if not somewhat conservative.
Also worth mentioning is that our 2023 sales targets or inc. Imply substantial market outgrowth for the next few years.
The investments, we're making on our business today in the form of organic capital expenditures will allow us to grow at a faster pace than the industry we operate in.
As Rob mentioned, we generate high returns on our invested capital and companies that generate high returns then that generates strong free cash flow over time.
When we rolled out our mind weighted coupon on strategy back in 2015, we said that we would double margins over a five year period and that is exactly what we did to a level of among the best in our industry.
Simply put we did what we said we would do.
And we are very confident we will do so again in delivering on our 'twenty 'twenty three outlook.
And with that we conclude our formal remarks.
Thank you for your attention. This evening now it's time for questions.
We see we have shareholders analysts and competitors on the phones to NAV to be a little careful here, but we will answer what we can thank.
Thank you for calling.
Thank you.
We'll now take questions from the telephone lines. If you have a question.
Speaker phone please lift.
Lift your handset.
Thank you.
All of a question. Please press star one on.
Pat.
You may cancel your question of anytime by pressing star two.
Please press star one at this time, if you have a question there will be a brief pause while the participants register we thank you for your patience.
Our first question is from Chris Jeff Friesen with CIBC. Please go ahead.
Alright, thanks for thanks for taking my call.
Wondering if you could provide a little bit more color around the net Tulsa integration in Germany. So I think you mentioned that you expect to be.
Moving towards breakeven by the end of the year so is that.
You think fourth quarter will be breakeven for my telephone.
So we are we touched upon this on the last call and if anything we've solidified that outlook of.
With the progress of the last few months or we're quite happy with with where we've been able to achieve over the last two or three months sequentially quarter over quarter. The group improved so in Q1, we were approaching a breakeven and we expect a similar improvement in Q2, and then in the back half of the year of the expectation is as debt.
You know depending on volume and so forth that are we will turned positive on a run rate basis and a longer term, we still feel very good about the business and our expectations are still there no change in longer term outlook.
And I just got to get this through this next phase, but we feel pretty good about the progress we've been making on the last few months I answer that question is yes.
Perfect. Thank you.
Just on on your guidance here, where you said Q2, 2021 of impact from the semiconductor shortage should be similar to Q1 I was wondering.
What you might be seeing that some of your competitors arent some of your Canadian and U S.
Peers have noted that they expect Q2 to be worse and thank you one of ours. Just wondering if you have any suggestions as to what you might see that's different.
I think broadly speaking are there is a possibility it could be somewhat worse are we had a pretty big impact on us in Q1 think others, maybe are less of an impact and they're seeing more on Q2. So just the way we see the releases in the moment were seen it to be somewhat similar if not maybe just slightly worse.
So that's kind of our view of at the moment.
Qualitatively, if I, if I might try what happens when.
And Fred mentioned, the escape and the equinox.
Are big programs for Us we have a lot of plants working into that and we've had a lot of shutdowns in Q1 from those programs and.
Certainly with the equinox.
The shutdown I think Mike pretty level of all quarter right in terms of in terms of Tami and so on a portion of the Canadian portion so when that happens.
You have you still have all the costs of of plant for the most of our and you don't have revenues coming in so it sort of talks down.
And and I think we experienced some of that in Q1, we think Q2 will be similar on that so in that sense. We may not see the deterioration of some some may have had a lot of it depends on mix as Fred said.
And also with respect to the escape it heard of seven weeks in Q1, that's a million square foot facility. That's a big facility. That's about 10 per cent of our manufacturing space or so overall and it's just kind of the way it kind of way it works out.
Great that makes sense I'll jump back in queue. Thank you. Thank you.
Thank you.
Next question is from Michael Glen with Raymond James. Please go ahead.
Hey, good evening, Thanks for taking the question. So maybe just to circle back on the on the chip question.
What what portions of your business actually use the chips are they integrated into much of what you guys are making.
No we actually don't.
Make any products that use chips directly but if another supplier of back most of the chips go to suppliers.
Some may go directly to the Oems, but they're usually to the supply base, but it's one supplier of short on chips then they they don't build vehicles.
The Oems are targeting the most profit profitable vehicles, which tend to be trucks and larger Suvs.
Based on the chips that they can get.
And so what with respect to the equinox, what you talked about like do you see.
A uplift take place like D C evidenced that the any of the content you have on on on the pickup truck is improving.
Or well of the offsetting.
Some customers pickup trucks had been running others had had some spotty issues even go into the each of the Oems and kind of get a feel for what that is we do see the large trucks stabilizing a little bit more as we go into the second quarter, but.
The midsize SUV smaller Suvs or few of these like equinox escape, although they're popular.
We believe that they will they'll take a backseat he of the to the trucks and so forth.
And and our line of sight of line of sight is not very good and I don't think the Oem's line of sight is either I mean, the way that they're having to manage it.
They have to decide where the chips are going in.
A lot of times, we don't know, they're going to shut down for a week before.
Other times, we get a better projection so now they're managing it the best they can but it's a it's a real struggle for them right now.
And just on.
On the Canada. So during their conference call G M talked about.
Pulling forward the deal the Oshawa plant the timeline for the asphalt plant to Q4 with the Silverado and then they also talked about the bright drop EV.
Getting done and Inc. Yourself. So are those are those platforms at year that Martin rats, the neighbor to love.
Get some content on.
We are we are we've got some heavy content on the the silverado.
So and associated programs.
The new product in the electric product or Cannae, where we're in the bid cycle, but.
It's an unknown at this point.
I would note debt T. One next step which is the pickup truck on large SUV is our largest platform in North America. So it's a you know a big platform for us and we've got a lot of content on the on those.
And you don't see any.
Oh I'm sorry go ahead sorry.
When it goes to to full electric from.
Legacy internal combustion you don't see any any change at all on the the context that you provided.
In the case of in case of the Silverado I think burst of.
All electric Silverado's there'll be some but they'll continue to have a lot of ice, but all of our product on the silverado well not all of it but all of our metallic product, which is the biggest portion of our.
Of our content is all body in white, so it's it's not dependent on the propulsion system at all.
Okay. Thanks, Thanks for taking the questions and.
No problem I have a good evening.
Thank you once again, please press star one on your device per pad.
Of a question.
Our next question is from Peter Sklar with BMO capital markets.
Please go ahead.
Okay. Thank you I missed something during a Pat I think it was your commentary you talked about I believe an eight cent drag is that your estimate of the lost earnings as a result of the chip shortage.
No that is the lag in aluminum so.
And as Fred said as well.
That lag, which should correct itself this quarter.
Cost in the short term of about eight cents, a little bit more than that.
So had we not had the lag.
Actually this quarter from an EPS point of view would have been stronger than last quarter, but again, that's of contractual thing and it corrects itself over time.
And why did the timing change from for the Oems.
What do you mean on the lag yes.
Yes.
Oh, no we've always had.
A lagging aluminum in either direction.
<unk> been a more extreme lag because of the price of aluminum jumped up quite a bit right. Okay that makes sense.
And then the last thing I wanted to ask you about Pat.
Like are you finding that.
Huntsville is less affected by the chip shortage, because you're selling into engine plants as opposed to vehicle Assembly plants.
No well it depends on the plant. So some harmful plants are are pretty full on.
On a mexico's pretty busy because the products that its on for the most part.
Had been selling though there has been from stoppages short term.
But in Europe, especially.
In some locations, where we have other customers like jail or has a lot of downtime of it affected us So I would say in China, not so much in Mexico, not so much been in Europe.
We probably lost more production did of chips than anywhere else relative to aluminum.
Okay and you don't you don't do the engine block business in Europe right. It's just in Mexico.
Engine blocks, there as well we had engine blocks there.
Along with a lot of suspension work in St of Mexico, eight engine blocks of transmission housings and lot of suspension work as well.
Right. Okay. Okay. Thanks, very much thanks.
Thanks, a lot.
Thank you there are no further questions registered at this time I would now like to turn the meeting back over to Mr will deploy.
Thank you very much thanks to all of you for giving up.
You're hearing it was a busy day for the analysts for auto parts company obviously.
Have a have a great evening, if any of you have further questions or would like to discuss any issues.
Please call us at the contact information that you have on your press release, where all of US are available for you and have a great evening.
Okay.
Thank you. The conference has now ended please disconnect your lines at this time, we thank you for your participation.