Q1 2022 Martinrea International Inc Earnings Call
All participants.
She is now ready to begin.
Good afternoon, ladies and gentlemen, and welcome to the Martin International first 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. Rod.
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 and our remarks are addressed to them as well as we disseminate our results and commentary through our network.
With me are pad to Raimo, Martin <unk>, CEO , and president and our CFO Fred the tosto.
Today, we will be discussing <unk> results for the quarter ended March 31 2022.
I refer you to our usual disclaimer in our press release and filed documents.
Before we get to Pat and Fred for a focused discussion of the quarter, what's behind the results from what we think the rest of the year and next looks like.
And where the analysts can focus on their models et cetera, Let me make some general comments directed to not just our shareholders and the investor community, but to our people many of whom are on the call and all of which will have access to this transcript.
I'm going to touch on two themes today resiliency.
The resiliency and entrepreneurship in the context of our business in the World We live in.
Our world and our industry grows with the challenges we face.
As I'm prone to say, we live in a broken world.
Sometimes we have really good times and sometimes many daunting challenges faces.
Briefly what's cast our minds back to the end of 2019 beginning of 2020.
Margaret I was coming off our best year ever many would say.
Hi revenues record earnings record EBITDA or cash flow solid positive free cash flow operating income margins at an effective 8% rate, but for a GM strike, which temporarily hurt earnings and a <unk>.
Stock price roughly double what we have now.
As well recall that we had announced in the months previous over $1 billion in annual incremental business launching in 2000, 22021, and 2022, a record of wins for Martin ran guaranteeing that our plants would be full when all these programs, we're locked which is happening now.
And then lots of challenges and I'm not going to get into all of them you know them, but to summarize some of them the pandemic and related shutdowns to varying degrees all over the world still occurring in some places like China.
Supply chain issues, especially semiconductor chips.
Erratic production schedules from customers, resulting in much unplanned downtime labor shortages wage inflation in some areas of input costs going up in materials energy and other inputs border issues now interest rate increases impacts from a major war in the Ukraine with international implications.
But look at the resiliency of our company in the midst of all of these challenges.
We've been leaders in fighting the challenges of the pandemic, we didn't run away and hide we developed safety protocols improved our safety record to among the industry's best we became a leading manufacturer of personal protective equipment, such as ventilators parts and level III masks, we've built our revenues and worked on our launches so that today the first quarter of 2020.
Two we are announcing record quarterly revenues.
Our financial performance is really saw it as we head into 2022 as Pat and Fred will talk about with solid EPS higher adjusted EBITDA this quarter than for the same period last year higher North American adjusted operating income than we had a year ago and.
And we are still launching and growing our people our team just gets it done.
There was early and see of our people from our CEO to the people that touch the parts is simply fantastic.
The culture, we talk about it in our vision statement and operating principles comes through the four in challenging times.
One of our guiding principles is challenges make us better.
That is true of this company and our people you are resilient and we're so proud to be on this call today, representing over 16000, great people.
So that's the resiliency.
The second theme is entrepreneurship.
As you know entrepreneurship is one of the cornerstones of our culture, along with lean thinking and a golden rule philosophy of treating people like you want to be treated.
It's an overused term by many and misunderstood by many.
Some say entrepreneurship means risk taking this implies a shoot from the hip approach. It doesn't mean that this is what it means to us simply this we.
We want all our people from executives to general managers to our people on the floor to act and think like an owner with a stake in the enterprise supporting a can do attitude promoting an ability and willingness to urgently get things done.
Acting to avoid unnecessary bureaucracy and developing an ability to learn from challenges openly and constructively with the trust of working in a team.
That's a direct lift from our sustainability report.
So.
How can we see entrepreneurship this ownership mentality and what we do.
We act like owners because we are.
I look at this business the same as if I owned 100% of it. That's what you want me to do I think I also think always about the people who also own this business and that also includes our employees they.
They need this business to provide them what they need a job still one of the greatest social policies in our society.
Job that is secure and safe when it gives opportunity for fulfillment.
One commentators written that what drives people to work and perform well is essentially three things a job a person can master a job that provides some autonomy input self respect and a job with purpose. We seek to provide that and I think we were pretty successful our employee survey show that in a relatively low turnover rates do.
<unk> also a lot of people love working here.
So what does that mean in practice.
It means we make big and small decisions with a view to being around a very long time.
True sustainability.
Just over 20 years old now, but we have grown from nothing to a $4 billion plus advanced manufacturing technology company not too bad.
It means we try and avoid major risks they can turn around and bite us in the <expletive>.
On a geopolitical basis for example, we never set up shop in Russia. Despite intense pressure from some customers to do so our reason brushy as corrupt bribes are the norm there last I checked that's against our laws. We also don't trust dictators.
Another example is China.
Despite intense pressure, including from some investor folks we've maintained a light touch in China, we set up a small fluids facility outside Shanghai in order.
Service worldwide customers and win worldwide programs.
It just worked out well and our Chinese workforce by the way is fantastic and the past months. They have volunteered to stay at the plant to make product a wonderful commitment.
We have a start up aluminum plant serving customers in China that has done well, but future projects in China will likely be done through and working with a Chinese partner we liked.
We have not built any metallic plants in China as we've partnered with local players we did inherit two small plants, where they're gonna Tulsa acquisition.
But looking at China. We also we always saw geopolitical risk.
If China did not move towards full W. T. O membership for example, if there is a trade war if there are tariffs and sanctions.
We're looking pretty wise today with limited exposure in both areas companies with too much exposure there are well exposed we take a long term ownership view.
At the same time, we've been bold in growing our business and many other areas. We've gone full bore into Mexico with great success, we remain advocates for investment in the U S. The south middle and North because it is the economic center of the auto business we believe.
And we have invested heavily in Canada, because we believe in Canada, There's a lot of positive auto investment in Canada as recent announcements illustrate.
We have grown our footprint carefully in Europe through acquisitions and building on what we've bought it's a limited footprint and even today in the midst of a war that can be viewed as European and our growth in Europe is largely tied to growing our relationships with European manufacturers not just in Europe , but in North America.
Our new plant in Tuscaloosa full of Daimler work is testimony to that.
This is what an entrepreneur it does take a long term ownership view.
We believe the future and have always believed this is regional and then a great place for US is North America. Our greatest footprint. This too is a wise move be very very strong in your home market first.
As entrepreneurs, we also seek out opportunity.
Even in the midst of a pandemic and crisis as we said in 2009, while let a good crisis go to waste we bought a company in the spring of 2009 with two of our customers were going bankrupt.
We bought an aluminum company in 2011 from bankruptcy and turned it into one of the industry leaders and built this north American presence from zero to $300 million annually. When the current launch cycle is completed.
As entrepreneurs, we have seized opportunities in materials investing in graphene and becoming the largest shareholder of the world leader in graphene manufacturing and introducing new product into our industry by the way are graphene enhanced brake lines have just been nominated for an automotive news pace Award, which is really cool.
We've been co ventures, and a company that can now make and is making graphene enhanced lithium ion batteries.
We are investigating aluminum are battery technology, and additive manufacturing using the latest and greatest in aluminum powder.
We set up a new innovation division to help promote innovation in our company called mind like good entrepreneurs do.
And as you know our whole system with each plant being a center of excellence encourages entrepreneurship.
So as you look at our Q1 results and as you listen to our thoughts on what is coming for the rest of the year and next year remember these two words resilience and entrepreneurship, we see lots of opportunity.
One final brief thought on the macro demand for vehicles remains strong we have a shortage of supply.
Underlying economy in North America is still pretty strong North America is in a good position.
And and you can check this if the war in Ukraine continues much like the Korean conflict of 70 years ago, Sadly, perhaps that may be good for the North American economy, now your history and something I don't observe those who forget the past are condemned to repeat at the.
The future is going to be good for us and it's going to be fun and with that let me turn it over to Pat.
Thanks, Rob and Hello, everyone as noted in our press release, we generated an adjusted earnings per share of 31, and adjusted operating income of 44 million in Q1.
Production sales came in at $1 1 billion up 19% year over year.
Adjusted EBITDA was up year over year and up almost 80% from Q4.
This was a big improvement over the two most recent quarters and in line with our expectations for Q1.
And notably better than Q4, as we indicated on our last call.
Volume and mix were much improved to start the year.
We witnessed a lower level of chip related production shutdowns in call offs. Although we were still experiencing short term disruptions from some of our customers. Some key Martin rare programs, including the Chevy Equinox, Silverado and Sierra as well as others. So I'm much better production number during the first quarter.
Adjusted operating income margin came in at three 8% a good improvement over what was essentially a breakeven result in Q4, but still below what we foresee in the coming year.
As margins continued to be held back by cost inflation and program launches and production disruptions.
Rising energy costs continued to be a drag on our business in Europe natural gas prices are up roughly 50% since Russia invaded Ukraine in late February and Theyre now about seven times higher compared to this time last year.
The expectation is that energy and other inflationary cost increases.
Either normalize at some point or are largely recovered through commercial negotiations as discussed on previous calls. These negotiations take time, but we are making headway as expected.
Overall, while the current environment remains challenging it is improving as you can tell by our first quarter performance results in the back half of the year should demonstrate steady improvement over the first half had supply chain bottlenecks get worked out and launch activity receipts to normal levels. We expect that this will set the stage for a multiyear.
Period of strong production volumes margin and free cash flow with our plants basically running at full capacity as industry demand is unwavering.
As such we remain confident in our ability to meet our 2023 outlook, which includes over $200 million in free cash flow Fred will have more to say about this outlook in a few minutes.
Turning to our North American operations as mentioned volume and mix improved sequentially in Q1 as production as the production environment was more stable with a lower level of customer call offs, though we still saw short term disruptions. This quarter overall, the worst is likely behind us from a volume perspective, although.
Sales mix is always a variable.
Of note impacts on the supply chain from the war in Ukraine is strict COVID-19 control measures in China appear to be mostly isolated to those regions in our case. So far we have seen only limited spillover effect in our core North American market. However, some north American customers could still get affected by these near term.
Supply disruptions and of course, the inflationary costs continue to impact our business.
In addition, we continue to launch on the largest book of business, we have had in the company's history.
With traditional customers with both core products in all electric vehicles as well as E D programs with customers such as Daimler Tesla and lucid.
This has resulted in higher than normal launch costs, which is compounded by the volatile production environment. We have seen in recent quarters. These costs will continue to improve in the latter part of the year, which when combined with a more stable production environment from our customers will result in better margin performance.
Turning to Europe , our performance was consistent quarter over quarter energy and material costs continued to be a significant headwind as mentioned earlier overall, we continue to make good progress operationally in Europe . However, this progress is being masked by these inflationary cost pressures.
In our rest of World segment operating performance was impacted by lower volumes and mix launch activity and the disruption caused by the Covid lockdown measures in China, making it difficult for our people to come to work in both our facilities and our customer plans.
We don't have any new business awards to announce today is it's only been two months since our last earnings call, where we announced there's some substantial awards totaling $100 million in annualized sales.
However, we have been awarded some meaningful replacement work on a number of high volume programs and we expect more new awards in the near future. We're also quoting on increased volume opportunities on a number of current platforms with our customers.
Let's take a look at how we are trending towards our 2023 outlook I'm on slide eight.
This is the same chart, we provided on the last call showing the drivers that are expected to take us from what is essentially a breakeven adjusted operating income margin in Q4, two and 8%.
In 2023.
The first bucket is volume and mix here, we are tracking according to plan if not somewhat better than Q1 in particular with current customers. We expect continued improvement on this front looking at our industry production volumes IHS took their north American forecast down slightly for this year, but 2023 was <unk>.
Acyclic unchanged net net there's not a change in our expectations regarding overall market volume.
Next we have expected recovery in materials labor and energy costs achieved through successful outcomes on commercial negotiations as mentioned we have seen some additional cost pressures since last quarter on a positive note. We've recovered some of these costs through discussions with our customers. These negotiations continue and we expect to recover more.
As we progress through the year, our assumption is that the incremental cost pressures will be recovered or otherwise offset.
And or normalized next our assumptions regarding operations and customer production inefficiency are unchanged. We saw the benefit from a more stable production environment on our financial performance in Q1, and we expect further improvement in the coming quarters as discussed on previous calls this erratic production environment over the last year.
Year, or so has made it difficult to adjust or flex our labor in real time, resulting in poor absorption of overhead cost with some recent improvement in production environment. We are seeing some relief on this front and as always we continue to execute on our Martin Ria operating system or M. O S initiatives and we continue to.
See a lot of opportunity here as I've said before we are still in the early innings of what we can achieve on this front.
Finally, we are making great progress on new program launches, we expect our launch activity and in turn launch cost to continue to reduce as the year progresses with that will come improved margins. The key is a continued reduction in short term disruptions from our customers.
To sum it all up we are making good progress toward our 2023 outlook and they're right, where we expect to be at this point and.
And we are anticipating an even greater improvement in the coming quarters.
Quickly I want to say a few words about bolt to explore our 50 50, JV with nano explorer aimed to commercializing the production of graphene enhanced lithium ion batteries. Both the explorer held its battery day on April 5th at our demonstration facility in Montreal. The event was well attended by analysts investors and government Representatives.
<unk>, which speaks to the level of interest in the project. The day consisted of a tour of the demonstration facility as well as presentations and technical discussions by management. The presentation is available on our Investor Relations section of our website for those that are interested to summarize where we're at the.
The demonstration facility is up and running and producing batteries. Our technology has been validated internally and by third parties and confirms the advantages of graphene enhanced lithium ion batteries over existing technologies, which include greater capacity longer life and faster charging speed with enhanced safety.
We remain on track with our expected milestones and anticipate that we will proceed with building a two gigawatt hour facility to start production in 2020 for conditional on validating the project economics, obtaining financing on favorable terms and completing site selection, we expect to make this final decision over the next several months.
<unk>.
With that I'd like to thank the entire Martin Ray a team for their continued dedication and commitment in these challenging times and with that I'll pass it to Fred.
Thanks, Pat and good evening everyone.
As Pat noted our first quarter results are much improved sequentially as.
As it benefited from a more stable production environment with a lower level of trip related production shutdowns and customer call offs during the quarter.
While we continue to face headwinds from supply shortages cost inflation and higher than normal launch activity.
Our expectation for results are better than the first half of this year followed by a further recovery in the back half of the year appears to be on track thus far.
And supply chain bottlenecks improve and our launch activity normalizes, we believe 2022 will be a transition year, it's a strong multi year period of strong volumes.
<unk> margins and free cash flow in our Q1 results are a positive data point that gives us confidence that this will be the case.
Taking a closer look at our performance quarter over quarter production sales were up 30% on industry production volumes that were up 6% in our core North American market.
Our sales growth outpaced overall market growth materially given a positive mix.
As programs that are most impacted by the production shutdowns of previous quarters also saw a more pronounced recoveries as production began to normalize these.
These include programs, such as <unk>, such as the Chevy Equinox, and Sierra and Silverado large pickup truck platforms that we have discussed at length on previous calls.
Adjusted operating income margin came in at three 8% a marked improvement from the loss of generated in the previous two quarters and representing an incremental margin on production sales of 19%.
Some are lower than normal for us through the continued inflationary cockpit cost pressures, we are facing in energy and material, including freight costs.
Tooling sales declined during the quarter after an unusually high level in Q4.
And as such total sales were up just under 10%.
Adjusted EBITDA of $112 $4 million was up almost 80% quarter over quarter. A notable achievement given the persistent industry challenges that we continue to work through.
Free cash flow was negative in Q1, reflecting the timing of working capital flows for both production and tooling related capital as noted in the past tooling related working capital in particular can be lumpy and unpredictable between quarters.
And now he is also a factor as we turned the harvest working capital in Q4, where we tend to deploy it in Q1.
Looking at our performance on a year over year basis first quarter adjusted operating income and EBITDA results were generally consistent with year ago levels.
Recall that Q1 2021 was the first quarter that we began to feel the impact of chip and other supply charges on our operations.
Of course, we expect our results to surpass these levels getting back to our pre COVID-19 performance and expectations.
Turning to our 2023 outlook, we continue to expect to achieve total sales, including tooling sales of four $6 billion to $4.8 billion and.
And adjusted operating margin exceeding 8% and more than $200 million in free cash flow.
We're off to a good start in 'twenty to 'twenty. Two is our Q1 results demonstrate and we expect further improvement as we progress through the year as supply conditions in launch activity normalize.
Can I get some relief on the cost side through some combination of input cost normalization and our cost recoveries through commercial negotiations.
As Pat mentioned demand for vehicles remains robust and inventories continue to trend near an all time, low which should support strong industry production volumes for several years.
We also expect their own sales growth outpaced industry volume growth given the substantial amount of business that we won in the recent years and we continue to launch on.
Yes.
Finally, our capital spending is expected to decline to a range of approximate depreciation as a percentage of sales in 2023.
Two main drivers continue to be second generation programs, and our flexible airlines, which require less capital than their first iteration and getting pass their heavy investment cycle in aluminum.
This is one of the key drivers underpinning for our outlook for over $20 million in free cash flow in 2023.
Our track record of delivering on our financial targets speaks for itself and we're confident that this will continue to be the case as we deliver on our 2023 outlook.
Turning to our balance sheet net debt increased quarter over quarter to $922 million in Q1.
Our net debt to adjusted EBITDA was three three times at the end of the quarter an increase from approximately three one times last quarter.
An increase in noncash working capital both production and tooling related reflecting the timing of working capital flows as previously discussed contributed to the increased debt levels.
Overall, we are comfortable with our balance sheet position and expect to remain well within the covenants stipulated in our amended credit agreement with our lenders that we announced last quarter.
And with that I'll now turn it back over to Rob.
Thanks, Fred and pack just one further note from me our AGM will occur on June seven and proxy materials will be posted shortly.
We'll have a live in person meeting and hope to see some of you. There we will give some presentations on the status of our industry and company.
And as the AGM will be close to our all field facility. We are open to providing tours to those who can make it subject to overall numbers. There are some really exciting and innovative things happening there.
And with that we conclude our formal remarks. Thank you for your attention. This evening.
Now it is time for questions. We see we have shareholders analysts and competitors on the phone also some employees. So we may have to be a little careful with our answers, but we'll answer what we can thank you for calling.
Thank you.
We will now take questions from the telephone lines.
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Our first question is from David Ocampo from Cormack Securities.
Securities. Please go ahead.
Thanks, Steve.
I was wondering if you guys can give us an update on how we should be thinking about that.
Uses of free cash flow, especially as we head into 2023 with that big $200 million plus guidance I was just wondering if a bulk of this can be reinvested into bolt explore.
Given the rollout of their facility or should we be thinking about this there's 200 million as more potential for further paying down debt or or even shareholder distributions.
Yeah. It's a good question, we're looking forward to getting to that position I think probably initial.
Focus will be on a on paying down debt.
We have revolving lines and any free cash flow would do that initially.
It's not clear in the context of Volta is too.
Whether we would invest or the extent to which we would if we do.
We're in the midst of looking at financing financing alternatives, there and working.
Working with our partners at <unk>.
Now I'll explore are very excited about the future for that but we're certainly not necessarily going to.
But our free cash flow there and I think there's other potential uses of that as well, but we're looking forward to positive free cash flow and strengthen our balance sheet first of all.
That's helpful commentary and then my second one here is just falling up on the inflationary pressures.
I guess, maybe for Pat when you guys are negotiating new contracts with customers are you changing the way that you you have pass through provisions within the contract. So if costs move up or down both you and the customer well protected or or should we think about the old automotive contract is kind of status quo.
Well, we've for new quotes we're certainly using the newer numbers that are out there today, but a lot more focus on indexing components and those types of things that can be indexed.
Some of these some of these costs may be more short term like energy costs may not go on for years and years. So you know, there's there's options such as quarterly reviews and those types of things that had been discussed so there's a method for every one of the inflationary items out there currently and we've been tapping into all.
Yeah, and I guess for your current contracts do you expect the negotiations to be wrapped up prior to 2023 or could that potentially be at risk for your 8% margin target base.
Based on our rate I would expect we'll be pretty much wrapped up this year.
Uh huh.
Okay. That's it for me thanks, guys.
Thank you.
Thank you next question is from Mark Neville.
<unk> Bank. Please go ahead.
Hey, Hey, good evening guys.
Yeah.
Yeah pretty pretty impressive quarter.
I guess I, just I can understand how sales were up sequentially.
Year over year was I think was pretty surprising.
Is it really just mix.
Instead of regional Lady.
Yes.
Did that at the end of the day, that's really what it comes down to.
General Motors for example is our largest customer and we have some.
And quite a bit of content on some some large platforms there and if you look at their production volumes in the back half of last year. They were impacted more so than most.
And then we saw a fairly rapid recovery as we embarked on 2022 and we ended up.
And a very I'll say in a perfect situation because all the customers who are still experiencing production shutdowns, but as it relates to certain of our key platforms are the ones are actually quite strong and stable.
Okay.
And.
In terms of.
Trying to think of when you talk about further improvement to margin in the second half.
Some of it is predicated on supply chain.
This is also the launch cost I guess I'm just trying to.
Understand how material the tailwind from lower launch costs would be.
Just because supply chains are still quite uncertain, maybe just try to isolate.
What's in your control.
Yeah.
So as far as launch costs goes as I've said the last two calls we've had a significant amount of launch activity more than we've ever had before.
And in a very difficult time, especially when it comes to resources. So the costs have been higher than normal because of those two things.
But they are receding as as the customers smooth out their launch curves one of the problems has been that as a customer launches. They have a specific launch curve than in normal times, we can follow that curve with our head count and our costs and as the volumes go up.
Then then our our margins go up as well.
But it's been very erratic for some of our biggest launches because as I said last time that they'll run two or three days and then suddenly stopped.
In the past you did lay off people you could send people home.
Even for a few weeks you could manage those types of things and they weren't nearly as frequent but today given the employment situation, especially in United States and if you do that then they don't return to work and a lot of cases, because there's so many jobs out there.
So it had to manage it much different but again there they are improving we're seeing steadier polls from our customers on the new launches and as that happens our costs become more in line you know we get more stability.
It's still going to take some time for some of them. Some of them are still really struggling and certain platforms as.
As far as immaterial and those types of things you know our logic here is is that when we negotiate with our customer X cost for a component or apart.
Material is spelled out our overhead is spelled out labor rates are spelled out.
And so forth so.
The intent from the customer is is that a lot of this stuff becomes pass through especially material.
So the materials have changed a lot and so our discussions with our customers are you know that's still got to be pass through and and so far we've had a lot of cooperation.
With a lot of the customers and we're making some good headway.
One of the one of the issues I would say two of the issues that a little bit more difficult to wrestle through one would be logistics because a lot of this inflationary cost is transportation.
And that's a little tougher because its erratic to some extent and energy, especially in Europe as I said energy costs in Europe is seven times higher than they were a year ago and they're affecting everybody. So so those are a little harder to wrestle through but we are making good progress.
So when you're talking with your customers.
Well recoveries and material costs.
Is that a retroactive or just sort of on a go forward basis.
That's just what's reset.
We can earn that normal Martin you at all trying to recover.
The last few quarters.
I would say, it's a it's not a standard approach it's dependent on the platform dependent on the customer depending on the situation.
Things that customer needs things that we need and it's all negotiation. There is no. There is no single path are all customers or platforms.
Every deal.
Every deal has been a little different that's right yeah. Yeah. Okay. That's understood. One last question I guess just energy prices in Europe .
Their way up and just how material is that.
I don't know how as part of your cost structure, what percentage is energy.
More specific here.
Yeah, and I'll provide a little bit of guidance.
On the overall impact of the inflationary cost increases because I did comment on it when we saw our third quarter.
We had quantified at that point of about $40 million annualized.
When we filed Q4 I'd noted at that point that it had increased further and since then it has increased even further largely related to energy which has jumped.
Jumped even more substantially since the conflict in Europe started in February .
And at this point in time that magnitude is sitting at somewhere north of $100 million annualized and as we noted.
We are actively.
I'm trying to recover some of that from our customers and we have some success there so.
There is some positive momentum.
The momentum in that.
And then there's also an expectation that at some point some of these costs will normalize later this year.
That's super helpful. Fred I guess just to sorry, just to follow up on David's last question.
I got the I'm talking about going into 2023 with sort of the negotiations Doug.
<unk>.
I mean, the way to think about it that sort of.
Big chunk of that $100 million.
There's not there next year I guess, you might not recover it but its not there next year.
That would be the assumption yes.
Alright, alright, thanks, guys again, good job on the quarter.
Thank you.
Thank you next.
Next question is from Michael Glen from Raymond James. Please go ahead.
Hey.
Thanks for taking the question.
Just to go back on to the sales volume in North America.
Like when we look at it on a P.
Platform by platform basis.
Like on the Equinox platform is there notable.
Content per vehicle change between.
Q1, this year in Q1 last year.
Oh no no that's been that's a fairly mature programs. So it would be the same.
Okay, and then and same on silver.
Silverado it would be similar type C. P V.
So our auto would've launched before 'twenty, one, but silverado is is adding capacity remember they they've launched.
And Aqua.
So they are building silverado's set a higher volume.
And then previous that our content on that increased content.
Okay for vehicles right.
And when you think about.
The production sales in North America for the quarter at $824 million.
All else being equal.
It's kind of bounce around a bit quarter to quarter, but if you.
You would generally expect it should stay in and around that type of level through the balance of the year.
Well I guess time will tell I mean are.
Theres still some instability in the volumes of play with certain customers. So we're keeping a close eye on it.
But I don't see it at this point are dropping drastically from those levels. So I think there's more there's actually more opportunity because.
You look at the the percent of the launches that we're having the majority of them are in North America.
So the benefits, we should see some benefit as the sum of those launches that are struggling with our customers start to smooth out.
The general trend line is up.
Okay.
And then just in terms of Oh are you able to give some updates for capex guidance for.
This year 2022.
Yes at this point in time no change based on my comments on the last call essentially consistent year over year as we head into 'twenty three.
As we noted in our guidance, we expect our capex to decrease year over year.
And.
Where we sit right now and nothing has changed.
Yes.
Okay, and then any any thoughts on working capital through the balance of the year.
Well, obviously in Q1, we saw an increase as I noted in my opening remarks, we generally see that happening in Q1 based on seasonality of course, we also had a surge in volume in Q1 as all contribute to working capital.
But I'm expecting by the end of the year based on seasonality as well to essentially to normalize back again, so its typical trend and what we see on an annual basis, So working capital so nothing unusual.
From where I sit.
So do you.
Would you would you think that you can.
Have a flat working capital year.
It really will depend on where we land on tooling and Thats, the one element where.
It's not as predictable kind of jumps up and down right now, we're actually sitting at actually around flat working capital and as waste the tooling. So that's going to be the one fire but.
I don't see it increasing too much year over year.
But we'll obviously keep an eye on and managing.
Okay and then.
Can you give a comment as to where you stand with Mattel can you update us.
I can't remember exactly the last guidance that you gave with respect to what the contribution from analysis should be but can you can you give an update us to how we should think about that.
Yeah. We're we're generally on track there. So think we sat for 'twenty two would be flattish.
Then we'd be positive in 'twenty three.
So the one headwind that we're dealing with right now.
Is the inflationary cost pressures and then the Tulsa plant in Germany in particular has been hit hard by our energy.
So we're working through that that's kind of masking some of the progress there. If you're you know if you you should take that out of the equation, where we are on track if not maybe slightly ahead I'd say, if we didn't have the inflationary costs, we'd be slightly ahead of plan post pandemic remember, we've kind of pushed off some of our activity due to the inability to get resources there but.
Once we got back into our cadence.
I'd say, we're slightly ahead actually visited there last month and it's pretty pleased with what I saw.
And there is a tailwind with our Mexican operations to sell the higher North American volumes are helping us there and of course, our Tuscaloosa.
That's a big launch for us and that's on track.
And your customer base over in Europe .
Like when you have conversations with them.
How do they how do they think about or how.
How do they feel about the the rest of the year in Europe .
Yeah from a volume point of view, they still seem pretty positive at least the ones that are able to build and arent dependent on parts from Ukraine, Let's say <unk>.
BW has been affected a lot by that we don't have a lot of VW work we have some.
But you know we were in some higher end vehicles.
Some of their evs.
For both BMW Daimler there, they're pretty they're still pretty positive in the case of some of the others.
It's not quite as clear but.
We haven't seen a drastic drastic volume impact at this point just costs have been.
Effect that again energy being by far the greatest.
At the same time, we were talking about Regionalization North America is pretty strong.
The markets the markets go up and down a fair bit, but we think the underlying economy is pretty strong, especially in the United States and some north Americas is I think pretty bullish.
From a auto industry perspective.
No question in Europe , there's a lot of uncertainty.
And so.
Yeah.
<unk>.
We're pretty happy to be flattish in the context of where it is but we think the European situations more likely to get better than worse.
Yeah, you know I.
I visited again, our German plants last week, they're really banging it out right now they've.
And for the first time in at least one of the plants the need for people.
<unk> has come up this last year, so or this last few months. So it's it's.
I haven't seen a from a volume point of view a big change.
Okay. Thanks for taking my question.
No problem.
Thank you. Our next question is from Christopher <unk> from CIBC. Please go ahead.
Thanks for taking my question.
I can appreciate that.
Given the improvement in the back half of the year.
Hoping you could kind.
I'll speak to some of the puts and takes.
Q2.
And if you think that could end up being worse than Q1, just based on the fact that.
There is a real possibility in Q2, we could see.
The full quarter could see that we're in Ukraine.
Well that would be awesome.
<unk> been able to renegotiate.
Uh huh.
Yeah, I would say, let's neutralize the war for a moment and just say it stays as is.
I would expect.
Can't say sales wise, whether it be as high or not.
But.
But the improvement activity.
From an operational point of view the launch continuing issues in cost receding. Some again, it's somewhat dependent on the customer's ability to meet their curves.
But we start we're seeing improvement there.
And then our our.
Work with the customers on inflationary costs and that progress is continuing and I would expect all those to be positives for us.
I'm not understanding exactly where sales is coming in now there is other.
Headwinds such as aluminum costs as you know have gone up.
That's on an index and that corrects itself over time, but those kind of things, we're not sure where they're going to land.
But but.
That's my two cents and I'll, Fred if you have a different view.
Got it.
Perfect. Thanks.
How are you.
Thinking about mix it sounds like Youre on.
Very successful programs right now but.
Yes.
Oh, yes, we have been prioritizing there.
No merchant vehicles, which tend to be.
A larger pickup trucks.
Eventually, we'll see that mix shift back to something more normalized do you see that impacting your earnings.
We've seen we've seen in the case of G. M. For example, they've been pretty much running across the board. They I won't say their chip issue was corrected but.
Noticeable improvement over the previous two quarters some of the other customers are still struggling and there was a little bit more hit and Miss.
But I don't see it getting worse, I think youre going to see that situation get better.
Now they're impacted negatively by you know the China.
Locked down which may have some.
Post effect, if there are parts that arent coming when they should be or something.
We don't see that.
But but.
I think it's I think it's going to get better not worse for the other customers and more Gms at right now as an example is our largest customers is frankly are as good as I've seen it in two years.
Great. Thank you congrats on a good quarter and ill jump back in the queue.
Thank you. Thank you.
Thank you next question is from Peter Sklar.
BMO capital markets. Please go ahead.
Pat.
<unk> answered my question, which was on aluminum so.
As you know use a lot of aluminum because of console in your other testing operations and.
Like I understand.
Like you get chewed up by the customer and there is all these formulas and things in that but I find sometimes there can be leads and lags and I'm. Just wondering if there are any distortions in Q1 or like where are they any leads and lags or anything to note about the Q1 adjustments.
As it relates to Q1 nothing significant so there was really no positive or negative there.
But based on the current trend on price alone as last couple of weeks come back down all of this will depending on where it lands impact could be bigger in the second quarter.
And likely negative.
But it's hard to tell how significant that is at this point.
And what kind of buying ahead, so where the prices today is it's two or three months out for our utilization.
Like oil or whatever the price of the barrel is today isn't necessarily affecting gas right away. So there is a lag internally as well as externally.
Right and.
Like are you protected in all your aluminum or is there some.
Yeah I mean.
The far majority of our materials protected it's just that when it comes to steel, which is what we use the most of it is protected in a much shorter timeframe than aluminum there are some some materials aluminum materials a few in some steel products that we take care of ourselves, but the far majority of our covered.
Okay, and then just lastly, Pat I just wanted to ask you. So.
You had this really strong recovery of operating earnings in North America during the quarter and like.
What do you think was the larger factor was it like the revenues you generated from the favorable mix like the revenues came in very strong or was it you know the more stable operating environment, where you just didn't have.
Customers stop go kind of production schedules are whereas it really hard to.
It's hard to they both they both contributed the mix contributed the volume contributed and we certainly have seen some improvement on.
On the operations, but we're still getting we're still getting poked a bit on operations with some of these launches again, because the unsteady poll.
But I expect that's going to get better like I said earlier and it has definitely gotten better.
Since last year. So it's just moving but it's moving slow and then and then lastly, you know the commercial negotiations we've been working very hard with our customers in correcting some of the cost picture and that is helping as well.
So that you felt that in Q1.
There is certainly.
Certainly a little bit of it.
Okay.
And like in past.
I understand when you talk about this more stable operating environment, you keep referring to like how that is helping your launches but that should help all your production not just you're not just for wells that are in launch, but mature as well.
So if you take a look at our programs that had been stable sales were very good on those days. This month with most of those are this quarter that most of those are a lot of those are GM programs a lot of our launches our big program. Some of the big programs that we've been talking about.
But the pull from the customer has been unsteady so again.
We are running two or three days and then stopped and run the next week and then stop and Youre carrying all this overhead and all these people you're not getting that that smoothness in the operation.
And when you don't have that there's excess cost built in and you have extra people.
You tried to cut some of those costs down by taking some of the people out but then they don't come back as I said and it really is difficult in the operation to get.
The cadence going when you don't have steady poll.
And some of these launches our customers are struggling to have a steady pull whether it'd be chips or something else in their supply chain.
But it's better now than it was last quarter and I expect it will continue to get better. So we will continue to see improvement in that.
Okay and.
You haven't called out any particular launch issues, which as you know often arise so I assume youre happy with the launches there is nothing significant to report there.
The launches themselves again, and you know we had our struggles in the front end of it with with lack of resources like I said, but now it's more.
The steady state that we're that we're lacking and.
You know again, I'm expecting that to get better, but yeah, I'm a lot more happy with where we're at today than we were a year ago on some of this in a lot of it frankly was resources, we just couldn't get enough people.
Alright, and I don't want to paint I don't want to paint the wrong picture.
Or is there still really tough, especially in the United States.
It's still really tough and people are working very hard to.
To manage the day to day, but that's that's not unique to us that's across the board for the to the supply base.
Like when you say resources Youre talking about engineering or are you talking about like.
People on the plant floor, making this in our in our case, it's more plant people.
Sure.
For sure, but some of those plant people are technical people to write you know whether you have machine repair controls people die makers those types of things.
And.
Again, it's getting better but it's been it's been very very.
At times, but better today than it was a year ago by far.
Okay. Thanks for your comments.
Thank you next question is from Brian Morrison TD Securities. Please go ahead.
Thank you Fredrik and I just want to make sure I understand the path to 2023 outlook slide so when you're talking about a $40 million in lives going to $100 million annualized that's all three buckets of material labor and energy correct with the recent increase just simply do the energy.
Yeah, that's correct and are the two largest piece that are material in energy.
So with some recovery at that point in time $100 million annualized inclusive of Q1, that's where we currently stand correct.
Correct Okay.
Okay. So from a recovery standpoint, improving we're sort of past the peak of that.
Cost pressure.
<unk> seen some of them are still seeing some bit of a moving target.
So we really work hard to try to get things on indexes. So so we can pass them through a lot easier, but not all components are work that way.
It's not as erratic as it was but there is still movement.
Okay.
Look at the next bucket then you get to the operations customer collection inefficiencies.
The flex.
Next in the labor at this point in time, it would seem that we're sort of past the peak in that bucket is that correct.
It's more stable than it was a year ago as I said it is not optimal yet.
It's still it's still a struggle some states more than others frankly.
But improving.
We're finding all kinds of <unk>.
Very unique ways to get people to work and stay at work and very creative and been pretty proud of some of what the team has come up with to help ourselves out so.
Okay and in terms of heavy launch cycles.
Still not profitable.
Should see normalization in the second half of 2022 or is that more of an industry.
Let's say the later the latter part of 2022 I would expect most of these launch curves to be pretty steady.
When we say we get back to normal we're always launching something someplace.
So there'll still be launches, but this very high volume of launches will be reduced for sure.
So when do you see that normalizing is that second half versus second half I would say mostly second half.
It'd be at normal levels by the end of the year, Yes, yes, okay. Okay.
Okay. Thank you that's helpful. And then just the last question somewhat housekeeping what was the program about the cancellation of the restructuring charge.
I didn't hear the question scam Academy, So general Motors.
Announced a number of months ago that they were going to cease production of the equinox and their chemical facility in Ontario.
And we.
We had some work on that platform and resulted in a <unk>.
<unk>, one facility and actually a closure of another yeah that we're in the process now.
Now GM makes that vehicle in three plants. So they are consolidating.
And so we still have the business, we just have it in a different location.
We're going to continue making that vehicle in Mexico.
Out of two facilities.
Okay. That's all I have thank you very much.
Thanks.
Thank you once again, please press star one if you have a question.
Next question is from Binnie Hickey from Ti financial Please go ahead.
Hi, I actually wanted to ask a question for Peter.
Identical question. So so I'll go back in the queue. Okay.
Okay. Thank you.
I guess, we answered.
Yes.
We have no further questions at this time Mr. <unk>.
I'll return the meeting back over to you.
Well thanks, everyone.
Thanks for spending part of your evening with Us and.
And we hope that so we've informed you well if there's any follow up questions feel free to give us a call or Neil Forster call.
At the.
Numbers in the press release and have a great evening.
Thank you.
Yes.
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Okay.