Q3 2022 Martinrea International Inc Earnings Call

All participants please standby your conference is now ready to begin.

Good evening, ladies and gentlemen, and welcome to the Martin International third quarter results Conference call.

Instructions for submitting questions will be provided to you later on I would know like to turn the call over to Mr. Rob will de Boer.

Please go ahead, Sir good.

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 a pad to Raimo, Martin <unk>, CEO , and president and our CFO Fred di Tosto.

Today, we will be discussing Martin <unk> results for the quarter ended September 32022.

I refer you to our usual disclaimer in our press release and filed documents I will speak Pat will speak then Fred and then we will do some Q&A.

I wanted to touch on three things for you.

And then turn it over to Pat and Fred for their comments many of them more detailed in mind and perhaps more interesting.

First.

I want to thank our people and our leadership team for their hard work. Despite tough times. Our results are the fruits of their hard work and dedication and.

And a lot of great performance.

We say often it's all about your people and eight that the truth.

Our leadership group recently got together for our global leadership conference twice postponed by the pandemic and Lockdown measures 150, or so people it was a fantastic.

<unk> event.

That will get into more detail about a few things, but the culture, we drive at Martin read every day in everything we do is evident in our team.

Our focus on lean thinking taking waste out of every process.

Focus also on entrepreneurial thinking which means taking ownership of what you do in.

And at the core our Golden rule culture, meaning treat people the way you want to be treated.

I talk about these things a lot, but so do all of the other leaders in our team.

We walk the talk and take care of our people.

The theme of the conference was living our vision.

And that's what we do consistently making people's lives better by being the best we can.

Second related to our culture.

Our our results.

I believe as Peter Drucker said culture eats strategy for breakfast here.

Here is an example of good culture breathing good results.

As Pat and Fred will elaborate on in some detail our Q3 was outstanding, especially in the context of the challenging world in which we live.

Record quarterly revenues record Lee quarterly EBITDA, adjusted excellent free cash flow and one of our highest EPS numbers ever.

These results should not come as too much of a surprise to you or to us as they reflect what we've been saying for quite some time.

If you recall very early last year, we said the chip and other supply chain shortages were a real problem.

Some said chip shortages were a blip, we said they were a blip if you recall check the tape we.

We said that we would struggle as customers production schedules or massively disrupted in a year ago, we lost money in Q3 and Q4 as predicted.

At the time, we said the first half of 2022 would be better than it was we show a decent profitability.

We also said that the second half of the year would be better than the first half.

And this is proving out.

By the way we have also said and still say next year will be better than this one as we expect production volumes to improve significantly and we also expect higher revenues free cash flow and operating margin.

The trend line is up to the right as they say is proving out.

Please recall our position in 2019 that was a record year of profitability and profits. We also won over $1 billion in annual sales based on projected volumes of new work, if as and when launched.

Even with the pandemic Lockdowns trade disputes inventory shortages of Russian war effort inflation and higher interest rates. We have continued to invest in our business and launching that record level of new work and so now that much is launched or is launching our revenues are now significantly higher driving higher profits and cash flow.

So not unexpected this is what we planned for.

Frankly, and this is not an Aragon statement, but it is a true one.

We believe we understand the auto parts market the auto market and most of the geopolitical issues, we face as well as anyone in our business, we're looking into the business.

We have now over 18000 employees and 57 plants in 10 countries on five continents and it is our business to know our business as we say at the start of our calls we want you to see how we see the world and we've been pretty accurate on the fundamentals we are happy to share our thoughts.

Long term what should be the time horizon for the investor our future looks bright and we have never been stronger.

The third area I would like to touch on are some of the key challenges we see over the next several months.

Noting that the overall trend line for auto parts suppliers in general and US also is positive over time not negative.

The Russia, Ukraine situation is not going away anytime soon and still impacts energy prices supply chains, including many minerals and so forth. This will be a headwind we believe.

Related to that is the issue of energy prices in Europe , where we do about 20% of our business.

We think it's going to be a cold expensive winter and frankly, we see a strain on energy prices over the winter and probably next also.

This will have an effect on profits and margins and probably volumes.

But as predicted we are seeing moves to provide energy price relief to industry.

Our industry has been involved in many discussions in Germany. The auto industry is the largest in the country is going to ensure the industry does not shut down <unk>.

Programs are being developed to alleviate energy costs. This after Europe has worked hard to build up gas reserves for the winter.

Germany is talking about a subsidy program there is massive and could cost them 200 billion euros.

This should keep production going.

A very very expensive lesson, perhaps and sustainability and renewable energy policy it.

It could cost, Germany half a trillion dollars to remove reliance on Russian gas.

<unk>.

Inflation pressures do exist.

And as front page news, especially as they give rise to higher interest rates as the fed the bank of Canada, and others raise rates to lower inflation.

I'm not a fan of the higher interest rate policy is I think it's somewhat misguided.

In industry, including our own were seeing much inflationary pressure easing off including in many input products materials and shipping costs.

<unk> has been caused to a large extent by the war in the Ukraine, but by government's printing money by supply chain issues caused by lockdown policies and so forth.

We're getting a handle on some of these things at the same time consumers are going to spend on travel leisure entertainment people have been locked up for two years, they are going to spend.

So not sure higher rates are necessary and many in our industry have given that advice to governments.

Maybe our industry input has some influence on the lower than expected rate hike last week.

The time to stop interest rate hikes in North America was yesterday, especially in Canada, I digress, but.

But suffice it to say I do believe rate increases will end sooner rather than later and rates will stabilize at least at a sustainable level.

I also believe people will adjust and continue to buy vehicles as they are financed by rates that still historically are not too high often provided by Oems that have strong balance sheets.

And as I said industry production next year and a number of years after that it should be higher than this year or last and that is good for us auto part suppliers.

We would like to thank all our shareholders lenders suppliers customers governments and employees for your support we cannot grow and thrive without it with that I'd like to turn it over to Pat.

Thanks, Rob Hello, everyone.

As noted in our press release, we generated an adjusted earnings per share of <unk> 56 cents and an adjusted operating income of $70 million in Q3 up from a loss of $16 million in Q3 of last year.

<unk> sales came in at $1 1 billion up 41% year over year adjusted EBITDA of $140 million was a record for the company as Rob mentioned.

Adjusted operating income margin came in at five 8% 170 basis point sequential improvement over Q2 production sales that were 7% higher a solid result, which was mainly driven by higher sales volume and improved mix compared to last quarter.

The reduction in launch costs as volumes on some key programs are smoothing, although others are still sporadic.

And continued improvements in our Martin Ria operating system or lean activity.

We also continue to make good progress on recovering inflationary costs through commercial negotiations with our customers.

I'm proud of the work the team has done on this front. These discussions have a lot of layers and are never simple, but our team has faced the challenge head on and concluded several agreements on favorable terms.

We have made good progress commercially and we expect to see further progress as the year comes to a close commercial negotiations are not completely subside.

But we do see them normalizing ladder in the later part of 2023, depending on inflation.

On our last call, we said that we expected our Q3 results to be better than Q2 as supply chain bottlenecks improved our launch activities news.

And we drive cost recoveries. This is exactly what happened we are right, where we expect it to be during the quarter and we expect a strong finish to the year with good momentum into 2023.

Having said that.

We continue to face a challenging environment on several fronts.

We have seen steady improvement in the production environment since last year, we continue to deal with supply related disruptions from several of our customers.

So while the production environment is stabilizing it's not as stable as we expected it to be at this point.

Margin percentages remain below potential despite the improvement in the past few quarters, we made progress in offsetting significant costs through inflationary pressures are proving to be more persistent and we envisioned.

While inputs such as steel and aluminum have seen some pricing relief we have pass through mechanisms on these commodities or other commodities, where we don't have pricing pass through we have not seen as much relief.

As you know energy prices have been a significant headwind in our European business.

So natural gas prices in Europe had been declining since September they remain a headwind.

Can you just sit well above year ago levels.

The good news is we continue to expect a strong 2023, which I will elaborate on in a moment.

Turning to our global operations in North America, we saw a notable increase in our adjusted operating income margin in Q3 compared to Q2 on an 8% increase in production sales as.

As mentioned earlier.

Lower launch costs and a positive mix along with improvements in operations resulted in better margins during the quarter.

As you are aware, we have been launching a lot of business over the last couple of years on our last call. We indicated that we had not seen much benefit from lower launch costs and that this will become more evident in the back half of the year.

Proved to be the case in Q3 as programs ramped up and we made operational progress and launch costs declined.

As discussed we are making progress on recovering inflationary costs with more to come.

Along with inflationary recovery, we are also making steady progress operationally and we continue to see opportunity here.

There is a lot we can do in the moment and even more that we could achieve in a more stable labor environment labor remains challenging all over but especially in the United States.

Turning to Europe , adjusted operating income declined slightly in the third quarter compared to Q2.

We continue to make progress in our operations. Unfortunately, this has been masked by a significant cost challenge, most notably energy and we are devoting a lot of time on recovering a fair portion of these costs.

In our rest of World segment, adjusted operating income improved over last quarter on better volume and mix as the strict COVID-19 lockdown measures in China that impacted the first half of the year began to ease.

Looking forward, we continue to expect 2023 to be a strong year for us with better production volumes sales margins and free cash flow compared to 2022, and what we expect will be at the beginning of a strong cycle with the majority of our plants running at full capacity.

But that said we are revising our 2023 outlook.

Based on what is in front of us at the moment, we now expect 2023 total sales to be between $4 eight and $5 billion.

Adjusted operating income margin to be between six and 7%.

Free cash flow to be between 150 and $200 million.

Although short of what we originally were expecting still a very solid year in particular, the free cash flow outlook.

The updated margin and free cash flow outlook reflects the slower normalization in the supply chain and production environment.

Labor conditions.

And the fact that we are not recovering 100% of inflationary cost increases, although I would say that we are doing quite well in this area.

The free cash flow outlook.

It's also being impacted by higher interest costs due to overall increased borrowing rates.

Operating margins are also being impacted by material pass through which is largely the reason for our sales outlook range being up.

Along with the expected higher tooling sales.

Excluding these two items our sales outlook for next year would actually be lower than our original outlook generally reflective of the current IHS volume projections.

Material pass through impacts our sales with no corresponding incremental margin benefit.

It says a decremental impact on our margin percentages because it essentially represents sales without profits tooling sales are also essentially pass through to our customers and carry a little to no margin.

So overall, we're expecting 2023 to be a solid year and a nice increase from 2022 levels and we are very focused on free cash flow.

And it is reflected in our outlook for next year.

Of course, there is still a lot of uncertainty as Rob mentioned via from supply chain challenges that impact production or macro economic risks from high inflation and interest rates or the potential for an economic slowdown.

The energy crisis in Europe in particular as a material risk one that we are monitoring closely we don't have a crystal ball, but we are confident that we will navigate our way through these challenges as we have in the past.

Now I'm going to take a moment and talk about our global leadership conference or GLC that we held last month in Blue Mountain a couple of hours north of Toronto.

The GLC brought together 150 of our top leaders across the organization for three days to discuss the companys strategic direction and priorities for the future.

It was a great event we.

We had people in attendance from every region that we have a presence in including Canada U S, Mexico, Brazil, Germany, Spain, Slovakia, China and Japan.

Leaders left the conference energized and excited about our future with a clear direction and priorities for 2023 and 2024.

There are some key takeaways from the conference. The overarching theme is that we are doubling down on our four pillar strategy, which encompasses our high performance culture operational excellence is the.

The planned financial management and customer focus. This is the same basic strategy that enabled us to expand our business both organically and through acquisition.

Double our adjusted operating income margin from 4% to 8% less than five years, and introduce new and innovative products to the market or what we call breakthrough products securing the next leg of our growth.

Simply put strategy has served us well in the past that we are accelerating it.

I want to expand on what disciplined financial management means to us it means prudent profitable global growth.

And our focus on free cash flow.

Sales growth is to be selective targeted and guided by our return on invested capital and free cash flow targets.

<unk> had several presenters speak on the importance of free cash flow and we held an interactive workshop on the topics that all attendees participated in.

We are committed to these objectives and have a high level of buy in across the organization.

I also want to touch on operational excellence, we spent a lot of time talking about program management.

Our Martin Ranch operating system or Mos, what we sometimes referred to as lean.

Through presentations and panel discussions business unit leaders and other executives reflected on our challenges and key learnings for the future.

Of course strong program management.

Is also a key part of the customer focus and it has a big impact on how we are perceived by our customers.

They view our capabilities on time delivery quality and the ability to adjust to demand.

That has had tremendous fluctuation due to supply chain challenges.

Our MLS we held multiple workshops using interactive tools that demonstrated how implementing lean practices and having lean a lean mindset had positively impacted the business and how we must accelerate this thinking it continued to improve efficiency productivity and profits as well as employee.

<unk> and morale.

Another key takeaway is that we've had a lot of opportunities within our core automotive parts of the business, but not limited to it.

We are an innovative company and our R&D capability is strong.

We see a lot of opportunity to develop new innovative products for our customers. These include breakthrough products, some of which I outlined in detail on our last call. We expect to introduce more of these products to the market in the coming months and years ahead.

Our Martin Ranch innovation development ore mined initiative is also central to our innovation focus mind has already delivered tremendous value to us we have a 21% ownership stake and nano explore and together we introduced a brake line product coated with graphene and is unique to the market and has recently been named a 2020.

Two automotive news pace Award winner.

We continue to explore the potential to supply graphene enhanced lithium ion batteries for electric vehicles.

Through our bolt to explore joint venture we.

We see mined as an incubator for new technologies that can augment our product offering and capabilities and there are a number of exciting opportunities that we continue to explore through this initiative.

The covered a lot of ground in three days.

And as I alluded to people left with a clear vision of where we are heading as an organization and what leadership role is to deliver on the plan.

Many thanks to the Martin Ranch team for their hard work and has provided strong results thus far.

I'll pass it to Fred.

Thanks, Pat and good evening everyone.

As Pat noted our third quarter financial results were much improved over last quarter on better margins and higher production sales with a record quarterly adjusted EBITDA.

But we continue to deal with challenges on multiple fronts, including supply related production disruptions inflationary cost headwinds.

Labor market conditions and manage a crisis in Europe , our results continue to trend higher as I said they would.

We're making great progress on recovering inflationary costs through favorable commercial settlements for their customers.

To drive operating improvements across the organization.

We've also started to see the benefits of lower launch costs and our margins.

We expect our results to improve further supply chain disruptions abate and our launch activity continues to normalize.

As Pat outlined we anticipate higher production volumes sales margins and free cash flow in 2023.

Taking a closer look at our performance quarter over quarter production sales were 7% higher on better volume and mix.

The production environment continues.

To improve but we're still dealing with supply related production disruptions with a number of our customers.

Adjusted operating income margin came in at five 8%.

Nice increase from the four 1% we generated last quarter.

Margins benefited from improved volume and mix.

Launch costs as key programs ramp up towards mature volumes and operating improvements from our lean activity.

As such adjusted operating income was up 53% sequentially in Q3, and adjusted EBITDA was a record $142 million up 23% over Q2.

Free cash flow came in at $64 $1 million solid result, reflecting strong EBITDA growth and positive working capital flows.

Free cash flow was $35 4 million for the first nine months of the year.

We expect free cash will be positive for the full year of 2022.

Looking at our performance on a year over year basis third quarter adjusted operating income of $69 $7 million was up sharply from a loss of $16 2 million in Q3 of last year.

And adjusted EBITDA more than tripled on production sales of over 41% higher.

Recall that Q3, 2021 was a quarter that supply related production disruptions are at their worst.

Mark in a low point in our financial performance before results began to improve in subsequent quarters.

While higher year over year operating results are nice to see margins are still below where we know we can achieve it takes time, but ultimately we do expect to get there.

Moving onto our balance sheet net debt was about flat quarter over quarter and $928 million at the end of Q3.

As we announced earlier this year, we have an amendment covenant structure with their lenders, where adjusted EBITDA in Q3, and Q4 of last year is ignored.

In the remaining quarters on a trailing 12 month period, our pro rated when calculating net debt to EBITDA for covenant purposes.

Our leverage ratio is also subject to higher limits through the third quarter of this year.

On this basis, our calculated net debt to EBITDA under the revised terms of two seven times in Q3.

<unk> down from two three times in Q2.

A comfortable level and well below the covenant maximum of 375 times for the quarter.

Based on the standard our unadjusted calculation net debt to EBITDA was 243 times at the end of the quarter.

While below our typical three times covenant threshold.

As such we are below a three times, even without the amended formula.

We expect end year lower than this as we lap Q4 of 2021.

Our leverage ratio should nationally continue to improve in the coming quarters as we generate an increasing amount of EBITDA and free cash flow a portion of which we will use to pay down debt.

We have strong relationships with our lenders and we thank them for their continued support.

And with that I'll now turn it back over to Rob.

Thanks, guys now it's time for questions. We see we have shareholders analysts and competitors on the phone also some employees. So it may have to be a little careful with our answers, but we'll answer what we can thank you all for calling.

Thank you we will now take questions from the telephone lines. So if you have a question using the speaker phone. Please lift your handset before making this.

Do you have a question. Please press star one on your devices Keypad you may cancel your question at any time by pressing star two.

Presto and at this time, if you have a question there will be a brief pause for all participants register and thank you for your patience.

First question is from David Ocampo from Cormack Securities. Please go ahead.

Thank you good evening everyone.

Oh.

Pat I really appreciate the margin commentary on 2023, and it does make a lot of sense.

I'm thinking about the inflation pass through provisions and the revenue basically at zero margins.

Do you believe that the 6% to 7% is the new normal going forward or is that 8% still possible in the current inflationary environment like thinking beyond 2023.

Right.

Until we know what inflation does it would be hard to answer.

Things normalized or go back to what you would call a normal level of at least.

Certainly.

If you get back on board with where we were in the past but.

The energy costs in Europe , and the erratic.

Supply chain situation those things would have to get back to what we would consider normal before I wouldn't commit to that.

Yes, I think the past surged are going to be downward pressure on margin the higher the past certain stock grants.

The downward pressure on that.

What to do with our updated forecast.

But I wouldn't say this if all things being equal.

If you go back to 2019, when we are in the 8% range.

Certainly those things are in our grasp in the future I believe.

So Pat is it better to look at.

Evaluate Martin ramp based on kind of return on invested capital as opposed to margins just because of the way that the revenue portion of the inflationary pressures at zero margin.

I think at the moment, certainly certainly our returns our free cash flow generation.

And just our improved profit could be.

Probably a better thing to look at.

So I think margins again in the future would be something to discuss.

You saw our evaluation would support that.

And is there like a return on invested capital target that we should be thinking for you guys.

Yes.

We have a strict hurdle rates, we have disclosed that in the past.

Typically targeted IRR of 15% just given the entire interest rates have actually increased that slightly so it's somewhat higher than that at the moment.

And it kind of fits in with our strategy of being somewhat more selective in terms of or basically go after going forward with our with our plants for the most part being full.

And gives us the ability to step back and make better decisions you might if you had a bunch of empty facilities.

Yes that makes sense guys. That's it for me.

Thank you.

Thank you. Our next question is from Mark Neville from Scotiabank. Please go ahead.

Hey, good afternoon guys.

Great results.

Maybe just first on the recoveries.

Okay can you just give us sort of a rough.

Sense of how big the impact was in Q3.

And maybe just how it flowed through the P&L I assume it's just come through in our sales of 100% margin et cetera.

I'm not going to get too specific in that area in the past we've talked about the 100 plus million dollar headwind.

We are recovering a fair share of that we're not recovering 100% and with the higher energy customer recently that number is a little bit higher.

But I.

I wanted to kind of stay away from that just given the fact that some of these negotiations and the results are somewhat.

Confidential and I.

Sorry discussed and elaborated.

Yes, Sir.

I would add.

We're happy with our progress.

Okay, Yeah, I guess I had sort of a follow up I was just curious of how far along the way are you in.

I think I'm not sure if it was sort of pattern rather to this might continue these negotiations in the second half of 2023 is that right.

Yes, so it was me and basically Youre doing commercial negotiations all the time, it's just the.

<unk> is a significant increase due to the inflationary costs this past year.

And those will spill over into next year at least the early part of the year and then as that normalizes.

Normal what I would call normal commercial negotiations will continue as they always have.

But the level of intensity and the amount of time spent on it is much higher.

Last year.

Ill just add so as we close out of 'twenty two.

We're closing out some of these final negotiation with some customers and a lot of them all of them are dealing with 22. Some of those deals will set precedent for next year and carrying into next year and others will have to renegotiate essentially so this activity.

We'll continue for a period of time.

Until we get to a new normal of them.

Cost level.

A lot of the higher financial results are higher financial results have been driven obviously by the record revenues.

Some of Thats faster, but some of that is just the fact that we're producing a lot more product as you recall, we won a lot of work in 2019 over the last several years, we've continued to invest lots of capital.

Order to launch those programs to put capital in place to support the <unk>.

Higher revenue level and with that comes higher EBITDA and all that type of stuff.

Okay. That's helpful.

Good numbers.

The shirts.

Maybe on the 2023 guide.

Again, maybe for talking EBIT dollars versus EBIT percent I think if my math is correct.

Midpoint will be down sort of 10% to 15%.

Okay I appreciate all the details.

So the puts and takes but I guess, if you are too.

Okay.

Ranked the top two or three things that are impacting.

What how would you rank those I guess.

Hey, you got to do your job.

As far as far as the improvements I guess is what youre asking what are the top of the reduction.

A reduction here.

I think we hit all the main points I mean, maybe just repeat them I mean, the capacity is having an impact on our margin percentage.

So that's quite substantial in terms of higher sales was essentially in all profitability associated with it.

Ill cover 100% on the inflationary cost increases as I noted.

In addition at the production environment continues to be lumpy and we expect that to continue into next year and then our sales guidance range is up but if you back out the material pass through as well as we are going to be we're expecting higher tooling sales next year are all look actually.

As a result.

Outlook for next year.

So the lower volume some of an impact as well.

Okay.

Understood. Thanks, guys.

Thank you. Our next question is from Brian Morrison TD Securities. Please go ahead.

Yes, good evening.

First question I had maybe just going through them.

The Q3 results the operating margin.

When I look at on a sequential basis.

<unk> sales were up nominally maybe 1%, 2% and realize there is some mixed benefit from being weighted to the U S. But I would just look at the increments, you're probably up 25% to 30 basis points in terms of the operating margin relative to Q2, but were up 170 basis points.

Sequentially, so what are they.

Take a look at launch costs are being activity commercial negotiations, maybe just breakdown that additional 140 basis points or the additional $29.

And so the volume and mix.

It has an impact but also we saw an improved mix in the quarter.

The bigger impact and we talked about this earlier in the year and in the back half of the year, we're expecting our launch activity in launch costs are normalizing and we saw that in Q3, and that's just a byproduct of.

Operational improvements as well as some of the production on some of these programs smoothing out.

So we saw some of that in Q3, and we continue to expect the back half of the year in terms of launches to normalize compared to the front half of last year.

So essentially everything in a falling into place.

Excellent and where those launch costs is that the biggest contributor to that delta of them.

I'd say one of the problems with the launch cost was the was the increased ramp of the customers in some cases I mentioned this before.

If you are supposed to launch to full volume in a month and Thats, taking 12 14 months in some cases.

Not generating the revenue or the smoothness in your in your operations in order to run like you would normally plan to run.

So the volumes and a lot of the cases not all on the size of that and a lot of the cases has improved and those improved volumes translate into our plants into smoother run running.

And that's had quite an impact.

So the better the customer runs the better we can improve our operation and run with them and we're starting to see that.

This quarter.

But again.

I don't want I don't want to celebrate yet because there's still a lot of disruption they don't tend to be a week at a time anymore, but.

There'll be a day here a day there are a couple of days and it's very disruptive.

To the workforce because you can't you can't adjust or flex your workforce for two or three days.

So you end up with inherent inefficiencies in people because you can't run.

Pat just.

I'm not sure I was clear on the call, but are you still in simulating that Q4 is going to be better than Q3 in terms of financial performance.

Okay.

We said the second half of 'twenty three 'twenty, two would be better than the first half. So we got to go and look at some of the releases and so forth and see how people adjust their inventories at Christmas time.

We get a lot we get a lot of erratic and this isn't even in normal times a lot of erratic.

Releases that get canceled a couple of weeks out from Christmas depends on how the products running they look at their supply chain issues and a lot of times unexpectedly.

The customer ended up shutting down a week or two before they say they are and so sales tend to drop a lot of times in December .

Okay construct.

I expect our performance given whatever sales we have to be good.

Okay and then last question if I can just in terms of the guidance I understand the inputs, while youre taken the.

Forecast operating margin down it makes complete sense. The question I have though is what is factored in for European risk, whether it be elevated energy costs or potential for production curtailments do you have anything factored into that.

Okay understood.

In terms of energy.

So essentially there is into our commercial discussions and grocery to their customers. So we have managed to offset some of the increased cost with with these recoveries.

Assuming.

We'll be able to do that next year as well.

As it relates to our 'twenty guidance.

And in terms of production volumes.

But we essentially budget and forecast.

So their current projections would be pretty close to what we are expecting next year and baked into our outlook.

Alright, great results, thanks very much.

Thank you our next question from Michael Glen from Raymond James. Please go ahead.

Hey, Thanks for getting me in can you just talk about what's coming up in 2023 for Martin Ryan in terms of new launch activity.

And we don't have.

Nearly the launch schedule, we had the previous couple of years, but we still have a number of launches like we would any other year in our aluminum group.

There is a couple of good sized ones, there's some volume ups throughout our organization, where customers have come and asked us to increase the level of capacity because they perceive their sales going up in the near future.

So we wouldn't consider that a full launch, but you are easily adding equipment in changing your lines and things like that we do see a lot of that right now.

I'm trying to think yeah, we don't have any.

Big Big launches starting next year, we have either to Mercedes program. That's just launching now and will ramp up next year. In addition to that there'll be some preparation for some upcoming launches in 'twenty four.

And particularly with GM their best III EV platform as well as <unk>, which is there.

<unk> in their electric pickup truck.

And then.

No.

Go ahead please.

Mark.

Uh huh.

I'll, let you take that.

No no go ahead please.

So the margin for North America this quarter like when we're thinking of the program.

That factored into that margin.

Many of those programs that are still.

Operating below what the target margins or is there is there a wide delta there.

There are a few programs that are not meeting the ramp schedule as planned a couple of good sized ones they've improved one of the two in particular has improved but the other is still struggling but even the one that has improved as off off schedule.

So I foresee those programs getting better next year, especially and I think we'll see better performance from ourselves because again.

The more you can smooth production.

The more we can stabilize our operation.

We've done a lot. Despite the fact, we get a lot of this ceramic production schedule, but.

But.

Nothing is better than than even flow through through the system and.

I expect that will continue to improve but we still get surprises just today, we had one of our customers shut down an operation for the next week totally unexpectedly.

Things happen still more often than we'd like.

And more often than they like to I'm sure.

That's not necessarily even chip related it could be other components. For example was extra stair yeah. It wasn't it wasn't chips, there, but I think some of those other supply chain issues that have been hiding behind chips, we're going to see more of.

Once we haven't known about that that will start to appear.

Okay.

And just to try to understand this European energy dynamic so we saw.

Just a huge run in energy prices through the period.

Through the quarter.

And when you when you reported though it looked like it was.

Overall, it was a pretty.

It wasn't it wasn't.

Notable impact in the period, especially when you look to Q2.

Q3 versus Q2 over in Europe . So.

When we see those big run.

And if we see those big runs take place.

Energy prices over in Europe through the winter.

That happens.

Should we anticipate that you are passing that through then to customers do you have that negotiated now.

While we are still negotiating so that would be the <unk>.

Pension.

We've had some success, but we still have some work to do there.

The other thing to note is as this year in 'twenty. Two we did have some hedges in place to kind of temper the impact now.

100%, but we had some.

And those are going to start expiring as well and the premises will be able to offset it with customer recoveries and so forth.

A lot of that work should be done by the end of the year and we should be going into next year with those frameworks in place.

Yes, I don't think that energy prices haven't had a significant impact they have had an impact on our costs and also on production schedules from customers and so forth you can see.

Our European results aren't nearly as good as our North American results. There is a lot of stress in the system there we're dealing with it.

Well, but.

As we said in our remarks, it's going to be a tough winter in Europe as they deal with what happens when the weather turns cold.

So a large percentage of our energy spend was on spot this year.

And would you be would you be okay, indicating just how much of an overhang of excess energy cost was in the quarter.

No.

Okay.

And then for 2023 guidance it looks like Youre forecasting somewhere over $300 million in Capex is that is that sort of the assumption embedded into the free cash flow guide.

Our guidance on that hasn't changed we're expecting our capex next year to be in and around depreciation and amortization the amortization as a percentage of sales and that should be just under $300 million in that range.

Okay and is there any sort of working capital assumption in there as well to think about.

I mean, our production really working capital will flow with sales.

Typical rates.

The one that continues to be volatile and we'll always be volatile as tooling related working capital and I think last couple of years, we've proven that we can manage that quite well so.

And do the same next year.

Okay. Okay. Thank you for taking the questions.

Thank you.

Thank you next question is from Peter Sklar from BMO capital markets. Please go ahead.

Evening so.

This very elevated level of earnings you have particularly in North America.

Some of it would be attributed to the outcome of your commercial negotiations and that you had some retroactive recoveries during the.

Quarter or is this kind of.

The earnings.

Level of the company now.

In the context of all the pluses and minuses that you've talked about.

And commercial activity definitely helps I mean, those deals are quite complex a lot of puts and takes.

I think if you look at our historical North America margin, we've been higher than that so I still think there is upside to that outlook.

If you think about our outlook for next year, our margin expectation, we're expecting each of our segments to contribute to that.

So it's not like you've got a big whack of recovery that inflated the margin just for this quarter is that what you say the bulk the bulk of the improvement when we're at 5% in Q2, 7%.

Volume mix as well as the launch activity that I referred to earlier.

We've had a lot of good improvements in our operations or I should say leveling.

From improved volumes.

I would attribute a big piece of it to that.

I think as we said.

Second half of last year, we lost in part because customer schedules for gone haywire.

First half of the year, we said it would be better.

The second half better than the first half and they are in next year should be better so that shows a progression in margin overall, so the fact that.

This quarter was higher than last quarter or the first half is as what we were predicting before before the before we were doing the commercial negotiations quite Frank Okay. And then this I listen to management talk on the call.

I just want to make sure.

Interpreting this right, but I'm getting the impression that the biggest item for this big jump in operating earnings that you've experienced as is launched the fact that launch costs are going down and new programs.

Grams or ramping up so youre getting contribution so thats the biggest item on the list in terms of contribution do you agree with that.

It's a big part big part of it and also sales mix, obviously in any given quarter, depending on what products are selling in this volatile environment. We see these large mixed swings.

We ended up coming on the right end of that in Q3.

That's a really good question, but one of the things and Fred as a wonderful chart that just shows the downtime from different customers and so in the second half of last year. There was a lot of Red and then in the first quarter. There was less red second quarter less of our third quarter less rep that really.

Has a huge impact on the profitability of any operation. When you go stop and start and you can't plan, it's very very difficult and third quarter was was a lot better than previous quarter. So certainly a lot better than it was.

Nine months ago, I'll say general motors, our largest customer and I am saying this year in particular and they've actually done quite well in managing their production schedules.

<unk> up and down to some extent, but they have been the best of the bunch.

It would stabilize.

How do I say this because I said it last year.

When we're when we're shutting down for weeks at a time.

We're laying off people and they're not coming back and that creates instability.

And then as it is just a day here in a day they are holding on to the people.

And you are paying for them and they're not doing any work no fault of theirs has nothing to do but you can't let them go because they won't come back.

And so the less of those.

Random down days the more efficiency, we are gaining in what we're paying our people to do the work that they do.

So it really does have a pretty significant impact when the customers run.

And some customers have lowered lowered their volumes on a daily basis in order to continue to run smoothly and that makes a huge impact as well because we can lower the level workers, we need but.

But keep them all working all the time, so the efficiency gains there as well.

Out of that hidden.

As we've gone through this the last year or so and that's.

Certainly helping a lot.

Okay I understand.

Rob I wanted to ask you said something on a different topic, you said something very interesting that.

Yes.

Well, you said a lot of interesting things, but there was one and get them started.

Things I wanted to ask about.

In terms of the situation in Germany, if we have a cold winter and there is energy rationing.

You felt confident that the German government would not.

Ration energy to the automotive industry and the industry would not go down is that just.

Kind of you thinking through common sense or are there are people in government Youre talking two I'm just wondering.

You know how you come to that viewpoint.

Okay.

I always appreciate when government sack with common sense, its not always the case, but but.

But in this particular thing.

There have.

Been several sources first of all part of a pretty big automotive industry, and we know that the Oems have been having discussions and our people in Germany have been having some discussions as well but.

If you recall.

Six weeks ago, the German Chancellor was in town in Toronto.

And meeting with our Prime Minister a number of other folks an.

Invite to that but we actually spent a lot of time talking about what do you do about energy and so there were two aspects to that the first one was.

Yes.

Ensuring that they've had so that basically means securing supply.

And they were making good progress then and since then they still have so basically if you look at some headlines we say we're going to have enough gas. The second thing, though is once you have the gas you say well, what's the pricing right and in France at that time had already pledged suddenly 20 billion euros to help out their industry and there were discussions.

<unk> at that time about what Germany is going to do with respect to their industry and you can talk about rationing and so forth, but the German Oems are quite clear that they're not going to be making vehicles, if they're going to lose thousands of euros per vehicle because of the energy costs were right behind them as a supplier, saying the same thing so the.

A number that I've heard at that time was perhaps as high as $200 million $6 billion billion, sorry, $200 million and do much but $200 billion and and those discussions are still moving forward and we've heard that as recent as the last 48 hours that they're working on a package at the same time.

And we'll see how this goes but.

What happens with gas prices they've been all over the place and we will see what happens there. So I think theres going to be a solution in that context, but.

We'll have to see how it how it plays out the reality is that it's been made very clear in.

In Germany, and some other jurisdictions that while it may be a tough winter. The checkbooks are going to be opened in order to ensure that you don't shut down the economy and in Germany of course auto is the largest largest part of that economy very big players and it makes the economic cost of Germany is actually higher if theyre industry goes down.

And then if they subsidize energy prices yes.

And Rob I didn't understand that these meetings with the Chancellor did you attend some of these meetings as industry represented up are you hearing from people.

I was there face to face and they said don't worry we got it covered.

I was the Guy who said or I was one of the guys said, it's great that you've got the gas, but whats the price okay.

Okay got it.

And then Fred just one last question I don't know if you have it at your fingertips or not.

It's okay, but I think your total tooling revenues were $67 million can you give it.

Can you break that down by the three geographies.

Yes.

Yes.

Yes, I don't have that in front of me I can get that to maybe Neil and I can circle.

Okay. Thank you.

Okay.

Thank you.

The next question is from Christopher <unk> from CIBC. Please go ahead.

Alright, Thanks for taking my question here.

Just a follow up on that.

Hurricane interchange itself for your 2023 guidance.

Are you assuming that there will be some subsidies that kick in.

Assuming that that <unk>.

Will be compensated from from the Oems kind of at the same level that you're seeing.

Being compensated at the moment, how are you thinking about the energy price for next year.

We are assuming essentially that we'll be able to offset.

Particular percentage consistent what we're kind of seeing this year either in the form of cost from the customer recoveries or it could be in the form of government relief as well. So it depends on what this package that's being proposed looked like and how we can get access to it.

And our customers.

This is November one we have to see a lot of things play out with the water and the gas price that type of stuff. So.

In that sense will play at the same as other folks but.

There is a resolve amongst the government and the industry and other industries to try in.

Minimize the impact to industry. So the industry can stay open and employment.

Okay, Perfect and then just looking at.

Looking at production or a month into Q4 here.

Is that if you were to compare it to let's say the first month of Q3 is there.

Is there a notable difference.

Smoothness of production schedules or is it.

Relatively similar to what you thought at the beginning of Q3.

I would call it similar.

Would you agree yes, I would agree with that I think we alluded to it earlier as you kind of enter into the holiday season, that's really where the question marks on what the volume will look like as we go.

And to the end of the year.

And our customers often adjust.

And those adjustments might be a little more erratic due to the supply chain issues. They are having they may have.

One of our customers last year ended up taking a lot of their lines down so they could come out of the chute in January and run smooth and in that particular case, it worked really well and they've run probably one of the best.

This year.

They've done very well comparatively.

So we don't know what we're going to see until we see it. Unfortunately.

Okay, Okay, great and just one last one can you remind us what leverage ratio you're targeting here.

And how much free cash flow, you're generating and we will be generating what youre kind of looking to get to.

So.

Strategy Hasnt changed longer term.

We target to be in and around one five turns of EBITDA.

Be something we'd be targeting.

Not necessarily looking to change that at this point.

Making great progress.

Okay perfect. Thank you and congrats on a good quarter.

Okay.

Thank you once again, please press star one if you have a question next.

The next question is from Ben <unk> from Pi financial Please go ahead.

Great quarter, guys and all my question. Thank you.

It had been answered thank you.

Thanks.

Thank you.

So there are no further questions registered at this time so Mr with the board.

Moving back to you.

Okay. Thanks, Thanks, very much everyone for calling in this evening if you have any.

Any further questions just contact us either Neil or Fred or powder Iron will try and take you call them and help you have a great evening.

Thank you.

Conference has now ended please disconnect your lines at this time and we thank you for your participation.

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