Q2 2021 Martinrea International Inc Earnings Call
All participants thank you for standing by your conference is about to begin good afternoon, ladies and gentlemen, and welcome to the Martin and be out International 2021 second quarter conference call and instructions for so many questions will be provided to you later in the conference and all.
I'd like to turn the call over to Mr. Rob of Baltimore. Please go ahead Sir.
Good afternoon or evening, everyone. Thank you for joining US today, we always look forward to talking with our shareholders and we hope to inform you well and the answer questions. We also note that we have many other stakeholders, including many employees on the call and our remarks are addressed for them as well as we disseminate our results and commentary through our net.
Work.
With me of pad to Raimo, Martin Reidy, the CEO and president and our CFO Fred di Tosto.
Today, we will be discussing Martin ranges of results for the quarter ended June 30.
I refer you to our usual disclaimer and our press release and filed documents.
And that will speak first and then Fred and then I'll finish up and we'll do some Q&A here's Pat.
Thanks, Rob and Hello, everyone and as noted in our press release, our Q2 adjusted net earnings per share came in at 34 cents just below the low end of our guidance range that we discussed on our Q1 call of 36 cents the 46 cents per.
The sales came in at $839 million also below our guidance range of 850 to 950 million.
Our adjusted operating income margin for Q1 was for playing for percent of.
The big improvement compared to a negative 14, 9% and the.
And then it impacted us in Q2 of last year for rehab you sales for close to 2 months.
Margins remain below pre COVID-19 levels, given the short term headwinds, we continue to face most notably from.
From the industry wide and shortage of semiconductors.
This is having a more dampening effect on production than many expected just a few months ago.
We also continued to progress through our heavy new business launch cycle with programs on the Nissan Pathfinder and road, the new Jeep Grand Cherokee and Grand Wagoneer for.
Ford Mustang Mach E.
And the Mercedes C class as well as the recent launch the new lucid air among others.
Well of launch costs are a normal part of business they are having and over weighted impact on our margins this year compared to a typical year because.
As we have many programs ramping up at the same time, Inc.
The combination of the delayed 2020 and the plan 2021 programs all launching simultaneously.
The good news is these programs will generate sales growth and strong margins once the supply chain bottlenecks are removed and production gets back to normal and.
In fact, our current plant capacity will essentially be full across the globe once normal production returns from our customers.
And the future looks great for our industry as well as our company vehicle demand remains very strong and vehicle inventories are at record lows.
The industry challenges of poor chip visibility that we are dealing with and the short term, we foresee a multiyear period of strong production growth once the supply chain pressures ease.
1 of the largest customers recently commented that the supplier update the inventories so low that once supply chains are stable and will take more than 2 years with substantial overtime to rebuild normal inventory levels.
This gives us even more confidence and our longer term outlooks.
Our 2020.3 guidance of margins above, 8% and free cash flow of over 200 million implies.
Fred will have more to say on this momentarily.
Turning to our operations, we continue to experience short term disruptions and customer releases continue to fluctuate due to the shortage of semiconductors and other supply constraints.
Sales mix has also been an issue and some of our higher volume programs such as the Chevy Equinox and Ford escape had been dirt extended production shutdowns as highlighted on our last call.
Give me an update general Motors Kimi plant, which produces the equinox has been mostly shut down since February and.
We remain shut down for the latter part of August and.
And there's also taking downtime at a number of north American plants, which is even affecting some pickup truck production.
Similarly for its facility that produces the escape and Kentucky was down 7 weeks and Q2.
These are just a couple of examples and a long list of production shutdowns announced by the Oems.
In addition to supply chain issues labor availability continues to be challenging and certain regions.
And we've had to adjust the wages and select locations as a result.
But these increases in specific locations and Covid related government relief easing some next month.
We expect labor availability to continue to improve and the hourly ranks on the salary side of the business labor demand is very competitive.
This is the consequence of the high post pandemic demand for all types of products auto and non automotive included.
But the high demand from our customers and all of the launch activity. Many facilities remain busy despite the supplier disruptions that cause released fluctuation.
As travel restrictions have eased and many parts of the world our ability to move resources and needed areas to support launches and the operational enhancements is improving the stability leaves us well positioned for the eventual recovery of volumes.
No I never completely stopped visiting plants during the pandemic I'm happy to report that I'm visiting more facilities with the ability to cross borders with fewer issues.
I'm impressed with what our plans for the accomplished despite the difficulties and brought on by Covid and the result, the resource and supply chain challenges I'm also very proud of the work of our S. C. O team has done both inside and outside of our plans to keep our lines bad, but the necessary of materials to meet our production needs.
I'm pleased to announce that we have been awarded $40 million of new business. Since our last call. This includes approximately $30 million and lightweight structures with various customers, including general Motors Ford and Toyota and approximately $10 million and our propulsion systems group with Volkswagen and Ford.
New business awards in 2020 once a day now total approximately $170 million.
The pace of New business awards in recent quarters, and our schedule of the launch activity gives us tremendous confidence and the outlook over the next few years.
And I want to take a minute and provide a quick update on both the explorer R. E D battery joint bad share with nano explore.
As a reminder, also explore will build of 1 megawatt hour demonstration facility in Montreal, Canada with the purpose of proving our new technology with grabbing enhanced lithium ion batteries.
Once were satisfied with the results of the JV will determine next steps and how best to take advantage of the technology, including the possibility of commissioning of 10 gigawatt hour of manufacturing facility.
We've now secured the Denver and demonstration facility in Montreal, and the equipment is being delivered over the next number of months, which puts us on track to the up and running by early next year.
We expect we all demonstrate the enhancements the graphene brings by mid 2022.
We're excited about both the explorer and its prospects as we believe graphene enhanced batteries can provide some significant advantages over the current products and the marketplace.
Simply put scrapping should enable faster charging speeds and longer battery life, which extends driving range wrapping.
Graphene enables the use of silicon anodes, which is more efficient and graphite the current standard.
The challenge the Silicon anodes is that they have a limited life as the silicone expands and eventually fractures when charged wrapping.
Wrapping can be used the coat, the silicon spheres, which reduces the swelling and prevents fracturing reis.
The result is greater energy density and capacity of retention, which extends battery life and driving range.
Graphene enhanced batteries.
The safer the as graphene has high thermal conductivity provides.
Provides bet greater temperature control and reduce the the rest of thermal runaway, which.
Which has caused buyers on some the current batteries and the market.
This makes our graphene battery technology unique.
All of the explore also has the potential to fill and missing piece of the Canadian E. The supply chain. The domestic production of EV batteries. This is noteworthy given the government's E D ambitions and the recent OEM announcements regarding the production of electric vehicles and Canada.
There are currently of number of concerns with the current EV battery technologies fire risk charging time and its impact on capacity driving range and battery life.
And our work to date shows grabbing enhanced batteries.
Should improve all of these current challenges some significantly.
On that note I'd like to thank the entire Martin Red team for their continued dedication and commitment and the face of the industry supply shortages and other near term challenges, but that all pass at the Fred.
Thanks, Pat and good evening everyone.
Overall second quarter results showed some strong year over year of growth from the Covid shutdown laws of 2020, but were still below of pre pandemic levels.
As Pat noted, we continued to face headwinds from the global semiconductor shortage tight labor market conditions, and heavy launch cycle, which impacted the results in Q2.
Production volume visibility remains low with customer shutdowns being announced or extended on short notice.
This has impacted volumes and key programs as previously discussed.
Our team has done a remarkable job and the face of these challenges and we thank them for their efforts.
Or commentary from automakers semiconductor manufacturers and industry analysts has been somewhat conflicting.
Our expectation is of supply driven challenges will persist and some form threat.
Through at least the third quarter and quite possibly the fourth.
Given the heightened uncertainty and volatility of company and our industry is facing and the short term we have opted not to provide quarterly guidance for Q3 at this time.
Current challenges notwithstanding we remain confident and the longer term outlook for our business.
And the strong customer demand for vehicles.
Rock bottom vehicle inventory levels, and a healthy order book.
We believe this will set the stage for strong growth and industry belongs for at least the next 2 to 3 years. Once you get past the near term supply challenges and our growth is expected to outpace the overall industry.
I'll have more to sandro of shortly.
Taking a closer look at the Q2 results total sales almost doubled off the pandemic induced slows the experienced in Q2 of last year.
Production and sales doubled while tooling sales were up 10%.
In addition to the sharp volume recovery sales also benefited from new programs launched in recent quarters, including the Jeep Grand Cherokee and Grand Wagoneer, and the Nissan Rogue the Ford Mustang Mach E and others.
Despite the strong year over year of growth sales of remained below of potential given the volume disruption caused by the global semiconductor shortage.
This will likely continue to win and near term sales as previously mentioned.
Adjusted operating income margin came in at 4 point and 4% in Q2, a vast improvement over the loss generated in Q2 of last year as Pat mentioned.
On a year of air basis margins benefited from higher volumes and productivity and efficiency improvements.
Despite the improvement margins remained below potential due to the volume impact of the semiconductor shortage of previously discussed and negative sales mix as.
And as well as higher labor costs and costs related to of heavy new business launch cycle.
The good news is these launches are and will benefit future sales margins and profits.
Importantly, our Q2 adjusted operating margin fell by 50 basis points over the Q1 level on a 9% drop in production and sales for a decremental margin of production and sales of 11% or approximately 20%. If you exclude the aluminum pricing temporary lag effect discussed last quarter of <unk>.
Solid result that is reflective of our continuous improvement lean and cost disciplined mindset.
Regionally, our North American operations achieved an adjusted operating income margin of 6%.
Up from a 12.7 per cent loss and the second quarter of 2020 due to the impacts just discussed.
The European margins also demonstrated a sharp improvement over Q2 last year, the remain and the loss position given the volume challenges already discussed and our ongoing restructuring efforts and the region, which are progressing.
The rest of the World segment continues to operate at a high level with an 11.4% adjusted operating income margin and the quarter.
The level of indicative of long term potential of the business.
Moving onto earnings briefly adjusted earnings per share was 34 cents and Q1 of sharp increase over the 91 cent loss of genuine and year ago quarter.
In addition to the sales and margin impacts discussed previously E.
The P. S benefited from a 5 and net foreign exchange gain and a lower than normal effective tax rate of 24.5 per cent.
Free cash flow as defined in our MD&A for Q2, 2021 was negative $62.4 million.
Inclusive of of $67.9 million increase of noncash working capital.
And 75 million and cash Capex.
The increase and noncash working capital was both production and tooling related.
And the disruption caused by the global semiconductor shortage and specifically the short notice our low lead times, we are getting on production releases from our customers and other material shortages is forcing us to carry a higher than normal of of inventory.
This dynamic should reverse over time as production volumes normalize.
As we discussed on our last call capital spending of somewhat elevated this year given the amount of work we have been winning.
As all of those customer driven engineering changes and some of the fro of spending from 'twenty into 'twenty 1.
The majority of our capital is program related.
And the only deploy capital and when we win business.
We earned strong returns and our invested capital among the best of our industry and fact.
Which demonstrates the we're investing well and generating a good value for our shareholders.
Turning to our balance sheet net debt did increase compared to Q1 levels largely to fund the working capital increase previously discussed.
Our net debt to adjusted EBITDA was 1.84 times at the end of the quarter.
Which is modestly above our target of 1.5 times, but within our comfort range and well below our bank covenant maximum of 3 times.
We remain committed to maintaining a strong balance sheet.
As I.
And at the start of my remarks, we're not providing the customer and next quarter guidance, given the uncertainty and lack of visibility we and indeed, our industry are currently facing.
However to be clear, our conviction and the longer term prospects for our business and our company has never been better.
The fact that we are dealing with the supply issue as opposed to a demand issue gives us a great deal of comfort.
And the demand picture is as good as it has been and years.
We see evidence of this at the dealership level for customers are having the wait months to take delivery of popular models and in some cases paying thousands of dollars over MSRP.
We also see it and used vehicle prices, which are currently at near all time highs.
Anecdotally, we also hear stories of people putting out vehicle purchase decisions given limited motto options, which suggests the pent up demand exists.
We're also executing well and our lean journey and as such the potential to rebound to historical margin levels.
Urban exceed them remains once production bottlenecks are worked out.
We continue to expect our capital spending to normalize to a range of park's main depreciation as a percentage of sales.
2 main drivers continues to be second generation programs, and our flexible wireline, so which will require less capital and their first iteration.
And getting pass through heavy investment cycle and the aluminum business.
Keep in mind that we've been winning a lot of business as of late which requires investment results and the good news story, given our return profile.
We don't know exactly when the semiconductor shortage will work itself out quite frankly, no 1 does.
However, few if any expect the situation drag on beyond 'twenty 'twenty 2.
And as we look beyond into 2020, 3 our outlook, which calls for total sales, including tooling sales of.
And for 0.6 to 4.8 billion and.
And adjusted operating income margin exceeding 8%.
And free cash flow and excess of 200 million seems is achievable as ever from where we sit today.
Our track record of delivering on our financial targets speaks for itself and.
And we are confident this will continue to be the case as we deliver on our 2020.3 outlook.
And with that and now turn you back over to Robyn.
Thanks, Fred and Pat with the comprehensive overview and outlook of patent Fred I just wanted to add a few brief observations before questions.
First our recent quarterly calls of feature detailed aspects of our business and we provided and investor letter of getting into more detail. These remain relevant for.
Previously, we've outlined our approach to innovation and more recently our approach to capital allocation.
And our recent H M. I gave an overview of culture and sustainability, which many of you on this call of herd and hopefully enjoy it.
Given the fact that we just did this for you I'm going to forego that presentation of summary, there of this evening.
Neil Forrester has done a great summary of letter of our approach to sustainability and the context of our company culture and you will find the presentation posted on our website.
We believe we have a unique and special approach to sustainability and ESG issues and will undoubtedly discuss these more in future.
Second from a safety health and operational perspective, our company remains at the forefront of best practices and relation of COVID-19 protocols.
Our people continue to be safe and feel safe and our facilities.
1 of the biggest issues in terms of operations has been our ability to cross borders, including the Canadian and U S borders for key people.
Orders are still of mass, but we're going to get through this and supply chain normalcy will be good for everyone.
Third both Pat and Fred of provided a view of our operations and performance and our long term context as well as addressing the quarter both are relevant and their way of course, our quarterly financial results don't reflect some really positive news about the increasing value of our investments and new technologies such as gray.
Fine and graphene enhanced products.
Our nano explore investment of appreciated considerably and value and the second quarter and since not reflected in our earnings per share numbers, but theres a lot of value there and we believe long term there's much more to come.
And we of other exciting technologies and products and the pipeline to a key to our long term success and sustainability will be our ability to capitalize on our technology.
And with that we conclude our formal remarks. Thank you for your attention. This evening and now it's time for questions, we see way of shareholders analysts and competitors on the phone. So we may have to be a little careful with our answers, but we will answer of what we can thank you for calling.
Thank you and we'll now take questions from the telephone lines. If you have a question and you're using a speaker phone. Please lift your handset before making your selection. If you have a question. Please press star 1 on your devices keypad and you may cancel your question at any time by pressing Star 2 please press star 1 at this time.
The other question we.
And we will take the first question from Michael Glen from Raymond James. Please go ahead.
Yeah.
Hey, good evening, Pat Thanks for the update and Baltics for now I just want to ask a few.
A few more detailed questions about that because clearly the market is giving some pretty significant valuations to different battery companies. Some of which are a pretty early stage. So I mean, you talked about faster charging speeds longer lifecycle for the battery.
Increased driving range are you able at this time to give any quantification.
And to what those might look like.
Well the work so far has been done on for lack of the better term many batteries the.
Quarter size type that are going to camera so it's pretty early.
The equipment that we've ordered and is coming it will produce cells that are essentially the same type of sales you would use and of Tesla or what have you.
And and and a battery.
Our car battery for instance, there's thousands of cells. So there may be 6 or 7000 of these cells inside of 1 car battery and if you haven't seen them. There is kind of like looking at a double a batteries and it's a little bigger.
And that ability to produce those cells, which are pretty much identical to what's in the market, we will be able to prove the technology out and so you know we're not quoting specific percentages of improvement we have confidence we're going to see these improvements, but until we can put it and 1 of these are typical cells.
We're going to we're going to hold back on and I'm guessing.
Our of predicting what that might be.
And as I said, we think and some cases it could be substantial.
And [noise].
In terms of the decision to establish vault to explore and I believe there was some lab level type testing taking place before the establishment of vault to explore.
Our U C.
Seeing the like can you characterize the results you saw in that lab testing game for you.
Significant confidence that you that you will see something favorable once you scale this up.
Well I am not going to go into that detail for the reasons I said before but I will tell you we wouldn't be making the investment if we didn't have the competence.
And and at what point I mean, it is it isn't a long time away and you talked of demonstrating the enhancements by mid 'twenty 'twenty, 2 but at what point.
Like are you going to be the vortex floor plan on releasing results publicly when and when they are available.
Yes.
And really discuss the method and which we're going to share. The information you know there are companies that talk to us about it it.
And it can be all kinds of methods based on interest that might support this activity I don't know if you want to add to that.
Michael as you know, we are and joint venture with another public company and to explore and we're working together on that and we're being careful of our information and consistent with the with what they're saying. So you know I think let's develop and where we're positive about this development we think debt.
From a number of perspectives, it's a positive for us and them and.
In respect of our investment and our explorer is going to be positive for graphene and we think the graphene zone enhancer, but let's let's be specific about the results for and you can be specific about the results.
Okay.
And then just a question on the Cannae plant and Ingersoll so.
Cause I read articles about it and I'm just trying to figure out exactly.
And what's happening there. So did you make an indication that you will be you'll.
And you'll be providing product there by the end of August and then S. S. G M transitions that plant to the new bright dropped platform is that a platform that you're that you are involved in.
So they were supposed to start of this month the can be back with the equinox and it was delayed again until all of that I don't remember, what David and September but I think the sixth is what comes to mind I could be off a little bit.
And then they've announced the closure date Hum.
And it's already been reported so.
How much debt will run between here and there we really don't know I mean, as we've talked about the Oh the chip shortages.
We don't have great line of sight, but the bra.
Drop product is pretty low volume.
By itself at least initially.
Paired to.
What they have there now and.
And so.
I think as he of substantial loss of volume or maybe it'll be some other products added down the road as electrification takes off and we don't have anything significant I don't believe on on that at this point, we have we haven't been of content on the vamp and nothing substantial at this point.
And the other thing to bear in mind is that products being made in Mexico, So and so far not the breaks out the bright spot, but the existing equinox, so and so far as the equinox remains of good seller.
You know the volume all of part part of the volume certainly that's lost and in Canada, We'll see increased volumes for us and Mexico and 1 issue for US is to make sure that we fill plants that are supplying.
Flying a tami and that's mainly our oilfield plant and we're working on on filling that plant. So that's the type of thing that we do when the customer Macy's the terminations.
Okay.
Go ahead, sorry, and.
And so that was sort of my my and my next question on what you do with the.
Incremental capacity of it becomes available and Canada, you see enough work available like what that have to sell into Canada from all fields are or that could sell into the U S.
And it is.
And he asked the question again I'm not sure I understand what you mean by selling to Canada or sell into the U S. Like for for the excess capacity that will be in all fields that will become available and all felt the kit does that have to sell into Canada or that can go across the border. It can go across the border and.
As we said we make product for the current equinox and its sister of the train and both plants and some of those are exchanged we actually shipped there now.
So some of that work will remain we've won and some other business that we've previously announced that we'll go into all field and.
And are working on some other things as well at this time and and at the end of the day that plant can stay fall our anticipation is it will be the.
General comment that might be useful for you and for the others on the line is this.
Spite the intermittent.
The plant shutdowns that we're seeing with the chips and everything else and by the time the work that we're doing.
Doing in terms of preparing for new launches and all of that type of stuff by the time all of that's in process, we're gonna be full across the world and every plant.
And as I said and my initial comments.
Basically if we win anything significant.
He may have to actually just add at a plant or a significant addition, I mean, we are literally.
And I think for the first time ever.
Okay. Thanks for taking my questions.
No from a good evening.
Thank you. The next question is from Peter Sklar from BMO capital markets. Please go ahead.
Hi, This is James filling in for Peter.
First question is in terms of the labor shortage of Martin Currie of doing anything to kind of alleviate the pressure I think like any initiatives specifically that the company is doing and tell me.
Labor pressure.
Yeah, I mean in specific locations and as I mentioned and my.
The first comment that we have made wage adjustments.
And.
Similar to other companies bonus payments for staying for 6 months of those types of things, it's not a it's not all over and all regions of weighted.
Weighted more in the U S and any.
Where else.
And it has made a difference and our ability to to man up appropriately.
Okay and.
I understand that obviously, all most of the Oems there.
And then from content victory workouts and in terms of the semiconductor shortage.
Especially for the coming quarter, but like what are you hearing directly from the Oems that you guys speak to kind of how much visibility are they giving you and what are they saying what the commentary like.
Visibility.
Yeah.
The leak out and a lot of cases, I mean, I got a text today from 1 of my operators It said.
This customer just decided or just said, they're going to shut down for the next 2 weeks starting Friday.
And so that's what 3 days 2 days notice.
Up until that point, we expect them to go and I'll go pull out for the at least the next month.
And we see this happen quite frequently and I will tell you it's not as frequent as it was and.
And the beginning but it's still happening quite of bit you know some products you can inc.
And of bank on a lot of the trucks and the larger Suvs are pretty steady there has been some disruption but.
But the medium size Suvs and so forth, there's a lot more disruption I mean do you think about it.
Tammy hasn't run out again, like Rob said that we run and Mexico, but the equinox has not run really up here since February.
And Canada.
And that's the big plant with a lot of volume and and specifically because of the chips, but a lot of products are hidden Mrs and <unk>.
1.2 weeks top of week, 1 for weeks stop of wheat.
And I think it is going to be like that into the fourth quarter, and maybe even a little bit and almost likely for share into next year.
Yes, I think as you're as you're finding there are some contradictory stuff, but it isn't.
And it isn't a vicious or anything but I, just don't think that they know.
Yeah, it's absolutely no malice and all of this they really they have a hard time understanding and 2 it's very complex. It's not so much of the chips go right into the Oems.
The majority of chips go into the supply base and they're put into products and then they go into the Oems.
So it's a very complicated system theyre trying to manage through right now.
Okay understood and can you give us a update on the top of the acquisition.
Yeah actually it's gone quite well.
Plants in China, all of the 1 place we're not seeing much disruption.
The ones and Mexico are the 1 in Mexico, I should say.
We've had some very good success, if you remember during COVID-19.
We made some significant.
Changes to the the number of people and the organization and it's paid off and we're very happy with it plant.
Clinton Tuscaloosa was mostly empty and now is very full and that doesn't launch for another year or so its the eve of 2 and <unk>.
But a lot of activity going on there, Germany is continuing to improve we're pretty pleased with the with the activity now that we have people there to support it.
So overall I think we feel like we should have felt about a year and a half ago, but but it's starting to come into play so.
And still feel very good about the acquisition as a whole.
Okay, great. Thank you.
Thank you. The next question is from Mark Neville from Scotiabank. Please go ahead.
Hey, good evening guys.
Good evening.
And I appreciate not wanting to get the Q3 guide, but I guess, just just to be clear when you do get the physical and the expectation would be.
For the well give me back to providing the normally normal cologuard.
Yeah, well, we'll make that assessment as we go here and what.
And what we'll see how things play out, but and the moments and the next few months, it's going to be challenging to yes because.
And I have some good visibility on what's going on and stuff.
Okay and the other thing.
The example, I gave a minute ago on literally a few hours ago being notified we're going to be down for 2 weeks and 1 of our big plants.
Is the reason, it's very difficult to do right now.
Yeah no understood.
And Fred and you need to call and earlier just on the Decrementals and so I understand it's.
The 20% that's sort of with the the aluminum issue from Q1 could you point of recovery Q2 that was that the comment yes.
So it's lower if the fact that up if you a fact that in and most of it balanced out and the quarter. So we don't highlight of big impact this quarter. So when you factor and it's roughly around 20% slightly lower and North America and slightly higher in Europe.
Okay.
And.
And I guess, there's the expectation that the there will not be sort of the capex or lower capex and just given all of the issues you yourselves plant planned to spend at the law.
Level, you were spending for is that correct.
At this point of time, the customers are not the scaled back and their launch activity. So that's the question is yes. So we're following our customer on that front.
And from that perspective, they have and not slow down.
And then.
And I was saying earlier.
We are going to impact of the brands.
And when the supply shortages.
All of themselves the.
The next 2 or 3 years, just sheer volume is going to be quite incredible.
Very anxious about it.
Yes.
And <unk>.
And it's about Capex eventually sort of equal equal the DNA.
I mean, roughly like what year are we talking.
23, so in line with our of longer term outlook.
Okay.
And I guess just on the heels of extending the obvious but the the prior commentary of the neutral free cash flow, just given you're still spending and given all of the volatility and the impact of production.
And free cash flow assurance, and it's probably that.
And you're right.
It's probably no longer the expectation.
You cut out there for of circa of you're referring to 'twenty 1 yeah yeah.
Yes, I mean, I think at this point off to see how the volume plays out and the way we're starting the back half of the year not looking really good from that perspective. So I think there is the risk at this point.
Yeah, and I completely understand.
Yeah, maybe just 1 last question just down the hall from some of the Michaels question of the Opel and explore I guess I'm just curious.
And yesterday and the initial testing.
And I appreciate the comments about being small scheduled Inc.
The customers have seen net servicing results or is just too early for that.
Just curious.
And not so far.
We're pretty early though we are starting to talk to customers.
Just based on what we expect.
But the publicly we're just not going to talk about.
And much better we think it'll be until we get more data.
The other sister, there's a strategy there and you can go to the customer too early too right.
Yeah.
Hi, guys.
Appreciate that thanks for the question.
Thanks.
Thank you. Our next question is from David Ocampo from core Mark Securities. Please go ahead.
Good evening everyone.
Good day.
And my first question is on on the elevated operating costs that you guys are seeing particularly as it relates to labor are these being factored into the future contracts that you guys are winning and then as it pertains to your older contracts are you able to find efficiencies and your business. So when the volumes do normalize and you can you can still.
Get the operating margins that you guys thought you would kind of initially and when you sign those contracts.
Yeah.
I would say I'll start this and let Fred and finish it but you know a lot of the labor.
Driven as the launch related yeah, we've had a lot of launches that got delayed if you recall from 'twenty on top of one's from 'twenty, 1 of which has created some excess costs and the short term until the launch of smoothed out which will happen this year.
At least the majority of and there's some more launches that are obviously forthcoming at the end of this year and on into next.
There is some labor areas, where labor costs have gone up just hourly point of view.
Our ability or.
No plans as far as negotiating to improve our contracts.
Certainly are in play and some cases.
They're not the unilateral across the company, we're not seeing wage increases everywhere by any means I'm more and specific plants and again, mostly in the U S.
I don't know if and when I add to that at all for it.
No not not really accident.
Okay.
And I will tell you this debt at the end of the day with the volumes and where we expect the land with labor as a whole are our target for margin has not changed.
Okay. That's helpful.
And when I take a look at your rest of World segment, you know margins continue to be at a pretty elevated level and that's despite all of the.
And the inflation that we're seeing and and we've discussed on this call I was wondering if you could sort of just talk about the fundamentals that are leading to the strong performance relative to North America and Europe.
Well I think.
And we've it's a relatively small segment for us So you know.
China has been thus far a pretty good experience for us we've got some and some good contracts there and some good platforms.
And the semiconductor your share is not necessarily the hit US there. So we've been seeing some and some decent volume.
And despite all of the restrictions are and as it relates to the Covid and all of the issues that have come with that.
The team over there has actually done quite well so we're quite pleased with the performance and.
The that continuing into the future.
And for D C. The sort of normalizing and mine with with the historical North America margins or can they continue at the double digit level.
While we were a pre COVID-19 I think 1 of the quarters are close to the 10%. So I don't I don't think that's too far off and I think you're almost there at this point, but.
And I can see these current levels being sustainable for a period of time and again keep in mind.
Quarter over quarter, you got some launch activity in certain quarters whenever that happens.
Given the size of the segment that can go up and down from that perspective, but longer term.
I think where we are of something that we can achieve going forward.
Okay. That's great that's all the questions of that.
Thanks.
Thank you and your next question is from Christopher Freeze, Inc. From CIBC. Please go ahead.
Thanks for taking my questions.
And just to follow up on the the margins there. So if we hypothetically of rare to see the chip shortage kind of rectify itself or bottom out anyway by the end of the year do you think we could.
C of returned to pre Covid margins in 2022, and then progress onto their debt 8 plus percent in 2023 or or would that still be a little bit ambitious.
Well I think of it as possible of course, depending on how quickly the the volume recovers, but are you now and it will likely end up being a bit bumpy along the way and we are continuing to launch work. So as we roll this new work online.
There's going be some cost associated with that sort of envision more of a gradual progression for the 8% and.
The 23 as of close to next year sort of certain.
The the back half of 'twenty 2.
Most of the law of big launches are done and get it out and be looking pretty good and the chip issue certainly should be behind us by then.
Okay, Perfect and then just a follow up on the call. So I think you mentioned on your last call that you were hoping it would contribute positively to EBITDA in the back half of this year is that still what is expected or is it also kind of impacted by the chip shortage or just how you're thinking about that.
And we're starting to see a more of an impact and volumes in Europe as it relates to the chip shortage for Q2 was worse in Q1 and 2.
Q3's, continuing at that pace.
So I think some of that may be a risk and depending on the volume plays out but it is improving.
And we noted earlier so that's that's positive and we're.
And we're pretty we feel pretty good about heading into next year, assuming the volume is there that the it'll contribute as expected.
So okay perfect.
Okay.
Good day.
And I just I just wanted to also ask I know debt.
And we're seeing kind of Brian and Covid cases, and various different areas are you is that impacting anything or are you having to share.
<unk> do anything different because of the COVID-19.
Covid cases are not an issue non.
And so far I mean are you know.
And there are plans for instance, and the U S that.
And it started the remove masks and so forth and haven't put them back on but as far as the surging cases anywhere and certainly there's parts of the world that are tougher Mexico and Brazil.
But I haven't seen any significant rise in any of our locations so far.
Okay perfect. Thanks, Thanks for taking my question.
Thank you.
Thank you as a reminder, please press star 1 at this time if you have a question. Our next question is from Brian Morrison from TD Securities. Please go ahead.
Thanks, very much I, just want to follow up and.
And some of the margin questions here, so to be clear matassa EBITDA profitable in 2022 is that the message yes, Okay, and then I understand the consolidation of the launch activity for 2020 and 2021. This year I just want to clarify so you're going through a combination of heavy launch activity and plant inefficiencies for.
Labor inefficiencies and costs et cetera. So it's fair to say that we expect both of these issues in terms of the margin impact to ease and 2022, it should be a clear tailwind.
Yeah, I mean, I wouldn't go as far as the say labor inefficiencies beyond launch the areas, where we're having labor and efficiencies are due to the launch and of course, we've had some some wages that have.
The increase because of the current condition of resources.
So certainly and.
Certainly after these launches of these launches.
Moving onto their normal curve I expect there to be a significant tailwind.
And because these programs that we're launching our current this typical launch of these are very large launches some really big programs that are and as you recall.
And our newer work as it has a better margin profile. So I expect the.
And I expect to do very well and were pretty good and we're pretty good and launching and we're pretty good 1 of our plants are running the big issue that hit margins right. Now is the fact that we've got plants close if you take a look at you know the number of of customer plants that were closed and the second quarter, which was more than the first.
Quarter.
And it's almost like rotating strikes.
And in our in the labor situation and when you have a plant like Shelbyville, which is our biggest manufacturing plant in North America, which makes the escape for 7 weeks, you've got costs and you don't have revenue and and so that that will sort itself out as volumes come back and the chips come back.
And by far our biggest hit on more and that's a really good that's a really good point and the other pieces too which is very unusual but the noteworthy sort of shed.
You kind of set it when you talked about labor and efficiency, where labor inefficiency is coming into play and at certain locations.
And chips take the plants down and the past, it's very easy to lay everybody off pick them back up again, you got to be a lot more selective now because everybody off today and coming back.
So you've got to be much more strategic and Youre short term layoffs and those types of things. We can typically cut costs or today you are taking some risk that you won't get trained people back. So so we have to be smart about the way we manage that.
Okay. Thank you both of that makes a lot of sense of Fred just in terms of to the level.
And I'm very high level and 2019, you've got this ambitious forecast for 2023, and maybe just some color with respect of where we think 2 and should be in 2022 and 2023.
Yeah, generally speaking and again, it's somewhat volatile.
Some sunk and roll into future periods, and so forth, but somewhere in the range of $2 million to $300 million over the next couple of years are.
And we'll likely end up being where we land.
Give or take.
Okay. Thank you and the last question, maybe Rob I assume this one's for you, but when you think about your holding the nano.
You did refer to.
And that you've had here is now 30% since the last quarter. When I asked you about it and now makes up 20% of your market cap and just maybe walk through what your midterm of options are for.
And for holding this position.
Ah well.
The couple of things. The first thing is that our investment there and it's not just the passive investment we've.
<unk> brought value to us we brought value to them and so we've got a good working relationship as well and also I think you know we've helped support on the operational side and I think debt. So that's so that's 1 thought we think thats actually of growing value business for us.
In the sense debt.
We believe and graphene, we believe that they're the best producer of graphene and the world are.
We can almost say we are part of that like you know so we take this personally as well we think there's tremendous opportunities. There. We've obviously open the doors to some extent on the automotive market with our graphene enhanced spray clients, which we think of of the best brake lines and the world and we think every customer should have them.
And so you know there's a there's a a good there is a relationship more than just the passive.
Shareholding, there and we can help work with them in order to grow the business along with the other investors that we partner with and nano which include you know the cash and fidelity and some pretty good some pretty good.
You know our long term long term players.
We also think that working together with them on the Volta will create value for us.
And if nothing else and and the sale of graphene and we think graph here and its batteries or something for every battery manufacturer and the world to look at so we think theres an opportunity there and yet at the same time. We also recognize that are of strategic investment at some point if someone wants to buy part of the position.
We would.
And we would consider and I think we've put.
And so that's the same with anything else right and in the context of we also sell of plant of someone make us and offer we couldn't refuse or something like that.
So where we are right now we're comfortable that we're seeing the accretion and value are we really like our solution is team we.
And we really like the opportunities, there and and and.
And we think it's got a lot of growth and in terms of you know the value of that being 20% of our market cap I'm not sure it's being reflected in our market cap I think that I think investors that are missing out on what we're doing there which is not just the passage of investment just don't understand the picture.
I agree and that's why I ask thank you.
I'll add to that.
At the end of the day, there is a perspective on the auto parts to a certain extent the unless you do and electrification or autonomous that you're not and the technology game or something like that and that's insane.
The reality is that you know this of very technology, driven industry. We have a lot of content on electric platforms. We have of locked offer of light weighting and which is what we do is absolutely core to every environmental green initiatives and it's out there involving automotive were heavily involved.
And looking at the increased electrification of the market, including making products like battery trays, including bringing light weighting technologies and were investing a lot of time effort innovative capital and money into leading edge technologies graphene being 1 of them and some other things that we haven't disclosed yet, but we're right at where raw.
At the cutting edge of technology and quite frankly, you know it's a it's a different it's a different market that people should basically take a look at.
Okay.
Thank you.
Thank you there are no further questions registered at this time I would now like to turn the call back to Mr. Rob well the black.
Well. Thank you very much thanks for giving some timeless this evening and thank you very much for your questions and incisive.
The commentary if anyone has further questions feel free to call us the contact information is and the in the press release and he can talk the Neal Fred Powder me at any time, Thank you very much.
Yeah.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.