Q4 2021 Martinrea International Inc Earnings Call
All participants.
She is ready to begin <unk>.
Evening, ladies and gentlemen, and welcome to the Martin We are international fourth quarter results Conference call.
Instructions for submitting questions would be provided to you later in the call I would now like to turn the call over to Mr. Rob will the board. Please go ahead Sir.
Good 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 answer questions.
We also note that we have many other stakeholders, including many employees on the call.
In our remarks are addressed to them as well as we disseminate our results and commentary through our network.
With me are Pat to Raimo, Martin <unk>, CEO , and President and our Chief Financial Officer, Fred di Tosto.
Today, we will be discussing Martin ranch results for the year and quarter ended December 31 2021.
I refer you to our usual disclaimer in our press release and filed documents.
Yes.
A few general comments from me at the outset to set the context pack.
Pat and Fred will Echo some similar thoughts and provide more context, and then we will finish up with some Q&A.
Welcome to 2022 a.
Our Europe renewed optimism and we hope the year, we finally put lingering pandemic related headwinds in the rearview mirror.
Our company and industry continued to navigate our way through some significant challenges in 2020 , one most of which were related to the ongoing fallout from the COVID-19 pandemic.
Including supply chain issues labor shortages cost inflation in materials energy and other inputs.
And substantial new business launch activity. We're currently launching the largest volume of new programs in the company's history.
And as such launch related costs are currently elevated.
Pat and Fred will provide more detail on these.
Arguably the challenges we faced in 2021 were greater than the challenges we faced in the early days of the COVID-19 pandemic.
When the automotive industry shut down for over two months beginning in March 2020.
Our revenues dropped precipitously close to zero and many in our industry question their ability to survive.
However, we knew what we had to do to secure our own survival.
Acted quickly to reduce costs and protect our balance sheet, thereby ensuring the sustainability of our business well into the future.
We quickly bounce back from those dark days posting record results in the third and fourth quarters of 2020.
The overall environment has been more erratic and unpredictable.
Production volumes declined year over year and remains suppressed, but the impact has been uneven across programs and platforms in our sales mix has been negative.
Cost inflation has been more pervasive than most in our industry expected.
Labor shortages have impacted the company visibility has been extremely limited.
These factors have made it difficult to pivot in real time in response to these changing industry dynamics.
As we head into 2022 we know there will be challenges some continuing in some new already this year, we dealt with border closures, resulting for protests against the COVID-19, pandemic restrictions, which affected our industry.
You seem to have been resolved there's conflict.
New Crane casting a cloud over Europe global financial markets in the automotive market.
Especially in Europe .
The events are terrible I believe the impact on the automotive industry are likely transitory.
Undoubtedly there will be more challenges, we live in a troubled world.
However, as we look forward.
We believe there are reasons to be positive our fourth quarter results were better than our third quarter results were off to a good start in the early part of 2022.
We believe our results will continue to improve throughout the year and supply chain conditions normalize in industry volumes stabilize and recover.
Our launch activity is also expected to normalize later this year.
Faulting and higher sales and better margins as volumes on these programs ramp up.
We are also addressing cost inflation through commercial negotiations with our customers and other offsets.
We believe that we're at the beginning of what is likely to be a multi year cycle of strong sales and production growth, especially in North America, where most of our operations are located.
Demand for vehicles is robust and likely to remain strong given pent up demand interest rates that although appear likely to move higher are still low in a historical context high savings rates and strong household balance sheets.
Additionally, vehicle inventories remain near an all time low and it will likely take several years to build back up to normal levels.
Pat and Fred will talk towards 'twenty, 'twenty, two and 'twenty 'twenty three outlook.
As always we continue to live our vision of making lives better by being the best we can be in the products, we make and the services, we provide as well as our unique culture based on our central Golden rule philosophy.
At the same time, we remain true to our lean thinking philosophy and to our entrepreneurial character.
We are a technology company focused on innovation and we had some notable developments on that front during the year.
Here's some of the key highlights of 2021 and the full range are found in our annual information form and year end releases.
We celebrated our 20th anniversary as an auto parts manufacturer a significant milestone for our company and that time, a relatively short time in the industry. We have been one of the fastest growing companies in the world.
We continued to deliver industry, leading safety metrics with a total recordable injury frequency or trip of 1.37.
Representing a 46% improvement over last year, and a 91% improvement since 2014.
This is a wild statement Wow. This is significantly better than the industry average of three point O and is an accomplishment to be proud of our goal is to be the industry leader.
In light of the ongoing semiconductor shortage and other headwinds were currently facing and as a proactive measure we reached an agreement with our banking syndicate to provide enhanced covenant flexibility Fred will talk to that we have excellent relationships with our lenders and we thank them for their ongoing support.
We increased our investment in nano explore ink by purchasing 1 million shares in February 2021 to hold an approximate 22% interest in nano explore at yearend nano explore is a world leader in graphene production and we are very excited about its future.
Also in 2021 we have been producing the world's first graphene enhanced brake lines for customers at technological first.
We entered a 50 50 joint venture with nano explore called Volta explore aimed at commercializing the development of graphene enhanced lithium ion batteries for electric vehicles we.
We are excited about this potential game changing technology.
We formally established our Martin Ranch innovation development ore mined initiative with the purpose of incubating developing and funding innovative technologies that can be directly applied to Martin raise operations or grow independently.
Martin Ranch currently holds three equity investments, including its 22% stake in nano explore as Voltaire explore a 50 50 joint venture with nano explore in a minority equity position in alumina power and private company developing aluminum are battery technology for a variety of end markets, including automotive.
Martin Ray is also evaluating a number of other initiatives within mind, including additive manufacturing robotics and software.
As the industry increasingly moves towards electric vehicles, our program mix and product portfolio is evolving in lock step with this trend.
We estimate that by 2026, approximately 40% of our book of business will be an electrified vehicle platforms, which is in line with the industry projections from IHS market in the regions we operate in.
Our business is largely agnostic to propulsion type and for the small portion of our business that is exposed we have a broad range of products that are either in production or underdevelopment to address the transition.
In fact, we believe that we have an opportunity to augment our content per vehicle as the world goes electric.
We believe that our culture is and will be a sustainable competitive advantage for the company over the long term and we believe it has driven the improving financial safety and quality performance in the past.
In order to be sustainable for the long term a company has to be profitable safe build 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 a company poised to excel in 2022 'twenty 'twenty, three and beyond and we are committed to deliver for our shareholders and all our stakeholders.
We thank you for your ongoing support and we have a great future together.
With that I will turn it over to Pat.
Thanks, Rob Hello, everyone as noted in our press release, we generated an adjusted net loss per share of <unk> 12 cents and an adjusted operating loss of $2.9 million in the fourth quarter. This is on production sales of $850 million, which is down 13% year over year as a result of that.
Lower volumes due to chip and other supply shortages.
Operating income was further impacted by mix cost inflation inefficiencies due to customer fluctuation and launch activity.
EBITDA was positive at $63 million better than Q3 at 44.9, though still down from Q4 of last year at $132 million. We note that Q4, 'twenty 'twenty was a record for the company.
Results did improve sequentially over Q3, as we saw a slightly lower level of chip related OEM production shutdowns and customer call offs during the quarter. It was encouraging to see but we're not out of the woods yet we continue to face volume cost supply challenges that have hampered our progress over the last.
Last year.
We are seeing signs of these challenges easing in the early part of 2022 we expect Q1 to be notably better than Q4 with the results expected to continue to improve over the course of the year as the supply chain issues gradually sort out and our launch activity normalizes.
From an industry and macroeconomic standpoint demand for vehicles is very high we continue to expect our plans to be operating at full capacity once production smooth.
And the recent program launches reached mature volumes over the coming quarters. We therefore remain confident in our 'twenty 'twenty three outlook, which includes over 200 million in expected free cash flow generation for the year.
In the meantime, and as always we continued to manage costs and protect the balance sheet and ensure sustainability of our business over the long haul.
During the quarter, we reached an agreement with our banking syndicate, providing us with covenant flexibility as we navigate our way through the remaining pandemic induced challenges.
Our relationship with our lenders as strong.
I'll have more to say on the outlook in a few moments and Fred will address our balance sheet later on the call.
Looking at our North American operations volumes continued to be held back by chip and other supply shortages as I mentioned, but were a bit better in Q4.
And we have a good start 2022 .
Cost inflation and labor shortages continue to impact our operation at a time when we're working through a period of heavy new business launch activity much of the current launch cost is driven by the fluctuation in customer poll due to the supply of chips and other components. Hence one day, we have a plant that is running full in the next day we had.
People standing waiting on the customer.
The good news is these headwinds are not getting any worse at this point.
So there has been some stabilization in that sense, while labor shortages persist they had improved in some locations and we do not anticipate having to implement any further wage increases at this time.
Mercil negotiations aimed at recovering a portion of the inflationary costs that have weighed on our margins in recent quarters continue with the customers.
We've had a number of positive outcomes on this front and expect that we will have more success as we move forward.
As I discussed on the last call. This process will take time.
As I alluded to earlier, we continued to progress through the largest period of new business launch activity in the company's history.
Our launch activity has been especially high during the pandemic due to the compression of 'twenty 'twenty and 2021 launches, but also because we've won a lot of new business. In recent years programs. We are currently launching represent approximately 800 million and annual sales touching both traditional customers like G.
M Ford instead of Lantus with both core products in all electric vehicles as well as E D programs from newer customers such as Daimler and lucid.
In the moment these programs are resulting in higher than normal launch costs with the issue further compounded by the volatile production environment. This is in part driven by the abnormal customer poll due to the supply of chips and other components. This makes it difficult to flex our cost structure and match the level of volume.
The good news is these programs will ultimately drive above market sales growth and improved margins in the years ahead.
Notably as we progress in the back half of this year and into 'twenty twenty-three our plant launch activity is expected to drop by half.
So launch costs over the timeframe will dropped to a lower level as well.
This combined with the expected normalization in production volumes as supply conditions in our industry improve should set the stage for a meaningful recovery in our operating results.
In Europe , we are facing the same cost pressures as in North America with energy costs being the significant and unique headwind we continue to make good progress with our operational improvements in the region. However, this progress is currently being masked by energy supply headwinds and cost inflation the bottomline in.
Pact that these efforts will be more visible once production returns to normal.
Our rest of World segment continues to be impacted by the same volume and cost issues as other regions, although to a lesser extent as margins in this segment were quite healthy.
Overall, our operations appear to have hit an inflection point back in the third quarter with a modest improvement in the fourth quarter and a much more meaningful improvement in Q1 to be expected.
The positive momentum will continue as the year unfolds as we have noted in the last few quarters.
I am pleased to announce that we've been awarded a $100 million in new business. Since our last call. This includes approximately $50 million in our lightweight structures group on the general Motors, New Bev three electric vehicle platform $35 million on various propulsion systems work for G M for Daimler and Tesla.
And $15 million in our F. M. G group with lucid G M, John Deere and Thermo King New business awards since the beginning of 2021 have now totaled approximately $300 million.
I wanted to take some time and explain the drivers of the expected margin improvement that is underpinning our 'twenty 'twenty three outlook.
What this slide shows is a visual description of the drivers that will take us from what is essentially a breakeven adjusted operating income margin in Q4, two and adjusted operating income margin of 8% as implied in our outlook.
The items are in order of significance. The first bucket comes from the expected recovery in our industry volumes as projected by IHS and the normalization in our sales mix recall that mix has been a challenge for us in recent quarters with programs such as the G M Equinox, Sierra and Silverado and the board of SK.
Chip, which have been discussed at length in previous calls.
Next a recovery in materials labor and energy costs achieved through successful outcomes on commercial negotiations with our customers will be a source of margin improvement.
We have had some success here and we anticipate that we will have more in the coming quarters. The reality is our industry has witnessed inflationary costs that would have been hard to fathom at the time of the existing contracts were put in place at.
At the same time, our OEM customers have protected and even enhance their margins through higher prices of vehicle buying customers.
So it should be expected that they share the inflationary burden with their suppliers. Most of the customers are generally accepting of this reality given the cost breakdowns customers use to build the final pricing with suppliers.
And so it becomes a matter of negotiating a fair settlement as I said this takes time, but we continue to drive this board and we're making good progress.
Of course, there's also the possibility that material cost normalizes as supply conditions improve which would relieve some of the pressure on the other hand labor costs are likely to be higher permanently.
Moving on the next bucket consists of operational improvements across our network as we continue to execute our lean initiatives as discussed at length today and on previous calls our operations had been impacted by the volatile OEM customer production schedules and short notice of call offs that have created a lot of the.
[noise] cincy.
This category also assumes that operations improve as a result of normalization and production schedules and volumes.
So at minimum we achieve our pre COVID-19 performance levels, though we expect more from ourselves of course.
Next the reduction in launch activity I mentioned earlier dropping by almost half later this year and into 2023 will result in better margins.
Finally, there's a small other category that contains various puts and takes while we don't have perfect visibility we have a clear view of what we need to do to improve operations to drive margins higher.
Next.
I wanted to briefly mentioned Volta explore R E D battery joint venture with nano explore as we get many inquiries.
Bolt to explore is making great progress and is on track towards meeting its expected milestones. We remain excited about this potential game changing technology.
Our demonstration facility in Montreal is being commissioned the equipment is in and we're ramping up.
On schedule.
The feasibility study will be completed by mid 2022 with a go no go decision on a larger gigawatt factory expected. Shortly thereafter volt explore envisions building a 10 gigawatt hour facility likely in two phases first the initial two gigawatt hour pits factory.
To start production in mid 'twenty 'twenty four followed by an expansion to a 10 gigawatt factory.
In 2026.
Yeah.
As a reminder, the key advantages, we expect from graphene enhanced lithium ion batteries compared to competing technologies. Currently in the market include increased battery capacity, therefore longer battery life faster charging speeds improve safety is graphing tie thermal conductivity allows for greater temperature control.
At lower costs.
In the near future, we will hold a battery day at the company's demonstration facility in Montreal. The advent will consist of a plant tour as well as technical discussions and presentations with senior management of Volta explore I would encourage all interested investors and analysts to attend.
With that I'd like to thank the entire Martin Red team for their continued dedication and commitment in these challenging times.
Our future is bright and with that I'll pass it to Fred.
Thanks, Pat and good evening everyone.
As Pat noted our business continues to face challenges from lower volumes due to semiconductor and other supply shortages as well as mix cost inflation operational inefficiencies and heavy launch activity.
As such our Q4 results remain well below year ago levels, and below where they need to be quite frankly.
The good news is it looks like we hit the bottom in Q3.
And are now in the early days of what we believe will be a strong multi year recovering volumes sales margins and free cash flow.
Taking a look at our sequential performance or.
Our fourth quarter results did improve over Q3.
As chip related OEM production shutdowns and customer call offs declined slightly.
We had an adjusted operating loss of approximately $3 million close to breakeven on.
On production sales of $850 million, which was up by about 7% for.
For an incremental margin on production sales of approximately 25%.
We had a higher than normal level of tooling sales in the quarter and as such our total sales were up 24% compared to Q3.
Adjusted EBITDA was up by 41% quarter over quarter.
We generated $21 million of positive free cash flow in the quarter, which was largely driven by a reduction in tooling related working capital.
While we wouldn't extrapolate this amount going forward as tooling related working capital flows can be lumpy and unpredictable, we do expect to generate positive free cash flow on a full year basis in 2022.
As Pat noted we're off to a good start so far in Q1, as they're seeing higher volumes and greater production stability with fewer customer call offs compared to Q4.
We believe our results will continue to improve throughout the year, our supply chain conditions normalize and industry volumes recover.
Our launch asked you to expect it to normalize later this year, resulting in higher sales of better margins. Once these programs ramp up.
We're also addressing cost inflation through commercial negotiations with our customers.
Overall, while its still early days the outlook, we provided in our last call that is for Q4 to be slightly better than Q3, followed by a steady improvement in the first half of 2020 , two and an accelerated pace of recovery in the back half of the year is on track at this point.
More importantly.
We continue to have a high degree of confidence in our ability to achieve the targets set out in our 'twenty 'twenty three outlook.
Which calls for total sales, including tooling sales of $4.6 billion to $4.8 billion.
And adjusted operating margin exceeding 8% and more than $20 million in free cash flow.
Demand for vehicles remains robust and inventories continue to trend near an all time low.
We believe this sets the stage for multi year period of strong industry production volume growth once supply chain bottlenecks are worked out.
We also expect our sales growth to outpace industry production volume growth given the substantial amount of business that we've won in recent years that will continue to launch on.
Pat walked us through the bridge to a greater than 8% margin target earlier.
Drivers include volume and mix recovered material labor and energy costs operational improvements and a normalized normalization in new business launch activity.
We already cover these in detail so I won't elaborate on them again here.
The other key assumptions underpinning our twenty-three free cash flow outlook is an expected normalization in capital spending to a range of approximately depreciation as a percentage of sales.
The two main drivers continue to be a second generation programs and our flexible airlines, which require less capital in the first iteration getting pass through heavy investment cycle in aluminum.
We are bidding a lot we've been winning a lot of business in recent years and this has required investment.
But ultimately this is really good news given our strong return profile.
Our track record of delivering on our financial targets speaks for itself and.
And we are confident that this will continue to be the case as we deliver on our 'twenty three outlook.
Turning to our balance sheet net debt was essentially flat quarter to quarter at $857 million at the end of Q4.
Our net debt to adjusted EBITDA was 3.11 times at the end of the quarter, an increase from approximately 2.5 times last quarter.
As we foreshadowed on our last call in light of the semiconductor shortage other challenges, we proactively amended our lending agreements with our banking syndicate during the fourth quarter.
Write us with increased financial covenant flexibility.
Similar to what we did in 2020, the company's calculation of its net debt to EBITDA ratio for covenant purposes, now excludes EBITDA from Q3 and Q4 of 21.
And is based on the annualized total of the remaining quarters in the relevant trailing 12 month period.
In addition, the maximum net debt to EBITDA Covenant has been increased to four times for Q1 of this year 4.5 times for Q2, and 3.75 times for Q3 before returning to three times in Q4 of 2022 .
We have a strong relationship with our lenders and we thank them for their continued support.
And with that and I'll turn it back over to Rob.
Thanks, Fred and Pat.
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 phone. So we may have to be a little careful here, but we'll answer what we can we.
We will give answers to the questions. We would like you to ask thank you for calling.
Thank you we will now take questions from the telephone lines.
And you're using a speaker phone please lift your handset before making your selection.
Question. Please press star one on your devices Keypad you may cancel your question at any time by pressing star two.
Please press star one at this time, if you have a question there would be a brief pause while the participants register and we thank you for your patience.
My first question is from David Ocampo from Cormack Securities. Please go ahead.
Thank you good afternoon, everyone.
Good afternoon or good evening.
Uh huh.
I really appreciate the discussion on the bridge to 8% margins, but maybe if I can dig a little bit more into the cost inflation piece.
You know that recovery that youre, showing there does that assume that all your customers re price I'm, just trying to get a sense on what margins could be a fair your customers don't play ball here.
Well, it's it's not assuming that we get 100% of everything that's out there. There's also the request on the other side. So you.
You've got you've got the inflationary or deflationary.
Number is coming from our supply base, the tier twos and tier threes and raw material.
G, which is a big one right now.
And then of course.
Well, we would like to recover from the customer, but you're also still negotiating with the side that's driving the inflation. So between those two hills, we certainly expect to make that type of progress.
And we've had we've had some good progress so far.
And.
So is it closer to 50%, 75% that needs to get repriced in China, we're not we're not going to get into that detail. We're in negotiations. We're just telling you. We're in negotiations and we gave you an estimate.
You can appreciate that I think.
No that's definitely can.
Then I guess for your New business Awards is there more flexibility on pricing there, especially as you know.
The higher than normal inflationary pressures per.
Sitting here like are you guys gonna have to renegotiate some of these new contracts that you guys have just recently signed.
I would say that a lot of these things come into play later you know these are things that are a couple of years out and certainly if there was some inflationary effect, we would be negotiating that but our expectation is on a lot of the material cost increases like you look at aluminum is just.
Shot through the rough recently.
A lot of that stuff's going to going to recover and normalize some things such as labor. We knew was going to go up it went up we would bury that that would be a part of your pricing that's normal.
So you know.
We would expect that those things that need to be adjusted because it's out of line at the time of launch or as you approach. We would certainly negotiate but we also made some assumptions based on where we're sitting in what we were seeing in the environment.
Anything new that's coming our way, obviously, a recording and with our updated costs, reflecting our current realities.
Okay that makes a lot of sense I'll hop back in the queue. Thanks, a lot everyone.
Thank you.
Thank you next question is from Michael Glen from Raymond James. Please go ahead.
Hey, good.
Good evening.
I'm just wondering can you provide.
Provides some insight into.
How you are impacted by these European energy prices I mean, I know that there's a lot happening right there.
But.
Like what does this represent and like our thinking up input cost into your plants.
How important is energy and said to the overall cost structure.
Yeah.
It's a significant in our aluminum business in particular, just given the nature of the equipment and the processes are so it's a pretty major input there and it's at this point, obviously concentrated in what's going on in Europe . So on the last call I articulated this has been in November .
Cost inflation at that point was hovering around $40 million annually and that included material labor and energy on energy at that point was let's say a smaller component of that since.
Since then beginning of this year and more recently with the situation in Ukraine.
That has skyrocket, even more so the energy piece of it continues to grow and at 40 million now is larger I'm not going to get too specific but again were negotiate with customers and so forth I don't want to throw any specific numbers out there, but energy is a fairly significant piece to the the head of the cost headwinds are currently facing it is.
Pretty localized to Europe , though we're not seeing it in North America at this point at all.
And are there.
Are there any concerns coming about.
Outright shortages or having to curtail to check.
Ted.
The supply is just not there is there are there any discussions along that line.
No I mean, not at this point I think the supply is there I think is anxiety.
But a lot of it so far that what could happen and so prices go up which is pretty typical but we haven't had any signs of shortages yet.
Just to just say in a broad perspective of course are the customers shutting their plant because they can't get parts from whatever wherever it is that'll affect our production as well, even though we've got supply of what we need we think that.
Europe is obviously a critical area in all of this is <unk>.
Under 20, just under 20% of our revenue. So obviously it could could impact what's what's happening in Europe , probably more than in North America, North America supply chain seem.
Pretty solid and demand exceeds supply and you know a lot of people are going to still trying to ramp up supply and in North America, but we're quite aware of what's happening in Europe , and I think you've seen some of the uncertainty from Volkswagen and asthma and a little bit from BMW and we're monitoring that as a as we go where you're being <unk>.
Specific to energy are being are talking really.
No it really specific to it.
The energy situation I know that it.
It's a.
Very volatile right now.
I mean, I mean, the reality on energy as Europe has got to come up with a solution really quickly to get gas from someone other than Russia.
And I think that certainly.
Canada, the United States in some other places.
Including put in place in the mid East a got to have got to be able to provide alternative supply as quickly as possible.
At the same time the issue is going to be how long the Russian Ukrainian situation occurs I know that people are talking there many different scenarios out there, whether it's going to be a longer drawn out affair or or shorter we're watching that as much as anyone else, but we do think that.
On a long term basis, the very interesting thing here is europe's going to have to pivot from relying on Russian energy.
And the long term will be good for energy costs.
And.
Just on Capex are you able to give an indication for capex in 2022 and also at the same time, maybe some thoughts on working capital in 2022.
Sure. So 21 was a pretty heavy year for various reasons indicated earlier a lot of new program Capex some compression from 'twenty a.
A bunch of engineering changes customer driven as well as some iron inspected volumes that are coming down the pipeline.
And looking into 'twenty two.
No levels will continue to be somewhat elevated I would say somewhat similar to what they were in 'twenty, one maybe slightly lower.
As Ann into 'twenty three the expectation is is.
That you, you'll see a nodal noticeable drop in our Capex program.
Cute on two things number one we've invested significantly in the number of flexible while lines across a number of programs as those programs come into next generation your investments will be lower on the replacement work.
And on top of that our aluminum group has gone through but have a growth spurt. Some heavy investment cycle and that is very capital intensive business and over the next 12 months, we're going to be the tail end of that and then as we enter 'twenty three we should start seeing that normalize.
So that's kind of built on our 'twenty three outlook and by 'twenty. Two you expect to start generating some significant free cash flow.
As it relates to the working capital I mean in the fourth quarter. It was a nice tailwind most.
Most of it came from a tooling related working capital and it tends to be quite volatile are we may end up giving some of that back in the early part of the year, but I don't.
See that as a huge headwind for the year necessarily.
And production line working capital, you'll just see typical seasonal trends as we kind of progress.
Through through 'twenty, two probably a bit of an increase in our Q1, some stabilization and dropped later in the year just based on volumes.
Okay I'll get back in queue. Thanks.
Thank you.
Our next question is from Ben <unk> from Ti.
Hi, good afternoon.
Hi, Ben.
I have one question.
It's sort of similar to two micro glands.
But my question was.
More aluminum and if you could jog my memory.
What is your exposure to <unk> is there any exposure in Europe to Russia in aluminum because they understand they're one of the top two or three export or so aluminum.
We have not seen any.
Let's put it this way we're not anticipating any shortage at this point.
Prices have gone up quite a bit of course, we're protected over time, because we're on an index.
And of course, there's a lag to the index, but.
But we haven't seen anything months out that say, we're gonna be shorted.
At this point okay.
That's all for me thank you.
Thank you. Thank you.
Next question Peter.
Peter.
From BMO capital markets. Please go ahead.
Okay. Thank you operator.
Pat you talked.
Talked about this might be elevated.
You talked about this.
Yeah.
Do you hear me Pat Yes I.
Can now go ahead.
Okay.
You talked about the elevated level of launches can you disclose what are the major programs that you're in launch phase with now.
While we are still in the W. L, which is the Grand Cherokee that's a big one the Ws, which is the Grand Wagoneer, that's another big one.
We've got a number of aluminum launches, we're still you know in in Marquis.
As volumes continue to climb because their plants now are starting to smooth it out a little bit.
<unk> 35, which is then the Ford engine block for the F 150.
We've got the Honda launch continuing to ramp up on the Nissan Rogue Rogue Rogue Pathfinder got delayed a lot between the ship shortage in a number of other items and that's really just now ramping up that said, it's a big program being China Dalian, China. That's right lucid lucid is just getting started that affects a number of our plants. So.
And Alex about $800 million worth of launch with what's complicated this is.
Is because if you think of the launch curve and I'll keep it simple lets say we were going to go up from zero. When you launched 10% per month till you get to a 100% and 10 months or 10 weeks, let's say 10 weeks.
Well, because theres not smooth supply that 10% per week isn't happening, it's 5%. It's two percentage, 4%. So that launch curve is getting spread way out.
And you're carrying all the costs of those people without the volume and that's kind of what we're experiencing in a number of the launches that we see more light at the end of the tunnel this quarter, but certainly in fourth quarter and third quarter. There was a lot of that which created a lot of.
The heavy lifting if you will and costs.
Yeah.
Okay.
Pat a question for you on Europe with the.
You know parts interruption as a result of the.
Conflict in Ukraine.
Are you seeing downtime now from your customers when like are you seeing the downtime is it. This week next week or what we haven't had any indication yet of any downtime that affect our plants. So far relative to the Ukraine, we still have residual downtime from chip shortage and other supply.
Things that were in place prior to last week when the war started.
But nothing that we're directly seeing as an impact at least not so far but do not sell to Volkswagen for example, they've announced downtime yeah, but Volkswagen has.
The plants are something over in Europe , maybe more I mean, and they're talking about one or two plants.
And volkswagen's not one of our bigger customers believe it or not I mean, we do sell to them, but they're not one of our bigger customers.
Alright, Okay, and Fred I, just wanted to ask you like.
And can you just summarize how much is Martin reinvested.
And nano explore and Volta explore.
Can you just kind of review your investment.
Yeah, so going back a few years ago since we've been incremented our investment out of explorer, we got about a $40 million give or take and then investment.
Analytics, that's worth a lot more today.
And then as it relates to Volta explore both us and analyst or have committed to $10 million each as needed as we ramp up the demo facility.
And at this point in time, we've put in a $6 million.
Five 5 million each.
And I don't really pay attention that closely genetics, Florida I noticed the stock has gone to $4 has there been any fundamental change at the company.
No I think I think.
A lot of a lot of.
If you take a look at of shareholders of Danaher was probably four or five people.
People together about 65%. So I think it probably took a bit of a run with the retail side, but the long term perspective of Ano remains.
It's quite solid so.
<unk> is built graphene plant is focus in the next in the next year or two is on graphene sales.
We've been out there.
Some and I think.
That's a market that as.
A tremendous future then the other aspect I guess is that a nano holds 50% of Volta and I think we'll see.
You know the stock fluctuate from that too.
No.
Not it's not particularly unusual I don't want to I don't want to.
Footwear, it's in anyone's mouth, but I think.
I think it might have risen and value faster than we thought it was going to but ultimately there is a really solid business there.
Okay. Thank you for your comments.
Alright, thank you.
Thank you <unk>.
Next question from Brian Morrison TD Securities. Please go ahead.
Thank you if I can just follow up on the launches.
It sounds like the headwind becomes a tailwind in the back half of this year just baked into 2023 can you just quantify what the operating margin or basis points that is like it sounds it sounds like 100 to 200 basis points of margin improvement.
We try to avoid getting that specific but you're probably in the ballpark generally speaking.
Okay, and then just macro question here.
For Pat I guess, but.
Yeah, you have better visibility than most what's going on in the industry and your knowledge the geopolitical conflict, it's obviously evaluate evolving.
Pretty rapidly so.
Just in terms of the supply chain, you know discussions you're having with people in the industry is there is there a risk to the semi issue becoming much greater I understand that there's inputs from the region that go into this.
You know theres been some articles on certain things that come out of the Ukraine that are critical to chip supply, but when you talk throughout people in the industry there doesn't seem to be any any alarm us within the industry about them at this point.
If that's what you were talking about <unk> specifically.
Thank you.
We will say that's what they said last time too.
Well you got to say one thing that they definitely have better visibility and better than we've ever had before you have better visibility on this but I do recall a year ago I think.
Some people were saying I think it was on this call. Some people were saying it was a blip.
And we said it was a blip on our call I think we were right, but on this one we've talked to.
Several Oems in a couple of steel companies about their ability to make me on and Neon Ukraine is actually produced by some of the older older running steelmaking processes. So so people here know how to make it I'm not an expert in the arm, but we've asked the question a couple of times.
You know I've heard the same things Pat.
Okay I appreciate that and then last question for Fred the balance sheet I realize you have support from your lenders and you've got Covenant relief just if if if the industry volumes don't uptick for various reasons any update on potentially or any plans to potentially slow your main strategy or the dividend or you're comfortable just.
Progressing on that front.
I think at this point, where we're comfortable.
And as I noted in my opening remarks, just based on where we see things playing out we do expect to be positive free cash flow for the year. So.
And in the Covenant relief from our banks are there is there is ample room. There it was structured that way to us and flexibility to get through the next number of months as these are headwinds start are.
Getting behind Us So I think overall, we're comfortable in the you know and like.
Always when we're faced with challenges, we'll pivot and adjust as required.
Yeah, we didnt reduce our dividend and our 2020 either.
But we know the orders that we have on our book we know their plants are full.
When volumes return for whatever reason and we know that we're gonna make good money on it. So we're pretty we're pretty we're pretty bullish and.
The interesting thing is that there is challenge after challenge we live in a troubled world in that sense, but we've had wars before 50 668 80. This isn't the first time, Russia invaded some something in the market and the market.
Deals with it but the market doesn't like uncertainty either and that's what we have right now but.
The reality, particularly in North America demand is robust supply is low people figure these things out and our plants are full.
Thanks, Matt.
Thanks.
Thank you next.
Our next question is from Christopher <unk> from CIBC. Please go ahead.
Hi, Thanks for taking my question.
Maybe just a follow on.
Covenant topic, there are there any stipulations around around the covenants.
Being able to increase your dividend or not.
Two of them.
Any sort of acquisition.
Buyback.
Well I think he worked for one of our banks.
But I won't get too detailed.
I don't think we intend to increase our.
Let's tell you what we wanted to I don't think we intend to increase our dividend in the context of <unk>.
Where we are here. So we wouldn't ask I don't think we have to address it.
We get asked from time to time would you buy back stock I don't think and I think we've said, we're not thinking about buying back stock right now for a similar reason I'm in the context of our acquisitions and so forth. If we saw something that made sense, we'd do it.
Quite frankly, we're also cognizant of focusing on.
Launching our product successfully in profit so that's where we're at.
Okay, Great and then just one eight.
8%.
Martin.
2023 to confirm that.
Full year, that's not like a.
Run rate.
It.
That's full year correct.
Okay perfect. That's it for me thank.
Thank you.
You. Please press star one at this time, if you have a question.
Question is from Mark Neville from Scotiabank. Please go ahead.
Hey, good evening guys.
Hi, guys.
Fred.
I think early you quoted the $40 million number in terms of inflation.
Just recap what that wasn't necessary.
On the last call in November .
I would articulate at that point that the cost inflation headwinds, we're dealing with quantifying to approximately $40 million on an annualized basis and that included.
Material labor cost increase as well as energy.
Since then I would say that that number has grown.
And particularly this year energy has been another fairly large headwind.
Some materials as well as Pat noted in his opening remarks, we haven't had to make any further adjustments on the labor front. So it's it's really energy and material. So that $40 million is somewhat larger than when we were sitting here on the on the last call.
Okay. Okay.
In terms of energy gases I'm. Just curious is there anything I mean could you implement that can energy surcharge or something in Europe , and just thinking of how you can manage that.
With or without customer that's part of the ongoing negotiations with them at this point. So we're working through that and through the mechanisms on how we can come and be compensated for some of that stuff.
Okay. Okay.
Just just to be clear do you guys have any sales at all to Russia.
Great.
No.
I also want to go we don't we don't sell their we don't produce there.
We don't we don't pay any bribes to lease any equipment there.
Yeah.
Got it.
We.
We stayed out of Russia.
Yes.
Got it.
Uh huh.
B the blockages from the ambassador is there anything that's sort of to be honest would that be a material impact. Thank you Juan.
No I don't have any really didn't have much impact at all.
There was a lot of a lot more noise than it was a reality when it came to production I mean, some of our customers had to slow down a little bit.
We didn't lay off a single person we might have sent a few people home early on a Friday and then it was pretty much back.
Went on for longer than definitely if it had continued for a couple of weeks at a bit of a problem I will do a shout out for for Fred as chair of the a PMA and Flavia wallpaper is presently a PMA the auto part suppliers went to court to get a contempt motion.
Contempt, a judgment and an injunction against the truckers, which got them, which got to police to move.
Uh huh.
Why we had to do that I'm, not quite sure, but but we did that and I think.
Some really good work to deal with the issue and quite frankly once people saw that you can move people from the bridge and became a matter of time to move people out of Ottawa. So auto parts supplier. So you get some real kudos for that that.
It happened late in the week, which helped as well.
Because at the weekend coming in yes.
Maybe just in terms of guidance I. Appreciate why you haven't sort of provided quarterly guidance recently, but is there an expectation at some point you might start doing that.
There are no.
That's and open discussion, Iran. I mean, a lot of uncertainty and volatility right now so we're not comfortable doing it and we'll reassess as we kind of go through the next few months.
Got it.
Right right right when it looked like things were starting to clear up a bit you know Russia went to war.
[laughter] that's against it makes a lot of what happens.
After the vote.
[laughter] alright.
Though.
Thank you.
Thank you next question is from Ben Jackson Financial Please go ahead.
Yes, hi.
This question is for Fred and I apologize, if I missed the detail, but when you say.
14 million cost inflation I'm, assuming that is meant from the gross profit.
Annualized basis right.
That would be material labor and energy and that was the number we threw out again in November on our last call right.
Right. Okay. Thank you.
Thank you.
There are no further questions registered at this time, so I'll return the meeting back over to Mr. William Blair.
Well. Thank you very much from all of us for listing and feel free to ask any of US questions at your leisure I have a great evening.
Okay.
Thank you the conference is now.
Sure.
Please disconnect your lines at this time and we thank you for your participation.