Q4 2022 Martinrea International Inc Earnings Call
Speaker 1: You
Speaker 2: All participants, your conference is now ready to begin. Good afternoon ladies and gentlemen. Welcome to the Martin Rhea International First Quarter Results Conference Call. Instructions for submitting questions will be provided to you later on. I would now like to turn the call over to Mr. Rob Wildeboura.
Speaker 3: Please go ahead. Good evening, everyone.
Speaker 3: We always look forward to talking with our shareholders and we hope to inform you well and answer questions.
Speaker 3: 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.
Speaker 3: with me here at Pat Duremo, Margarita CEO and President, and our CFO for Ed Dutosto.
Speaker 3: Today, we will be discussing Martin Rayn's results for the year and quarter and December 31, 2022.
Speaker 3: I refer you to our usual disclaimer in our press release and file documents.
Speaker 3: I will speak power, speak them for it, and then we will do some Q&A.
Speaker 3: Welcome to 2023.
Speaker 3: A year of promise and anticipation.
Speaker 3: Building on a very solid 2022 it turns out.
Speaker 3: want to start with a word about our people and our culture.
Speaker 3: We believe our people are the most valuable assets of our company.
Speaker 3: It's been three years or so since the World Health Organization declared a pandemic, and we, as a company and as an industry, faced a series of monumental challenges that, in many respects, were new, unprecedented for us.
Speaker 3: Our people face the challenge with courage and tenacity.
Speaker 3: And we have never been more proud to work with such a great group from the receptionist to the shippers and our plants to our executive team and our support functions.
Speaker 3: But many felt, for the worst of times, may have turned out for us to be the best of times.
Speaker 3: Although it certainly was not always a fun time.
Speaker 3: We talk about our culture a lot at Martin Ram, as all our stakeholders have come to know. Our vision is making lives better by being the best supplier we can be in the products we make, and the services we provide.
Speaker 3: Our mission is basically to take care of our people, our customers, our communities, and our stakeholders, lenders, and shareholders.
Speaker 3: Our 10 guiding principles represent the way we approach our business.
Speaker 3: Our sustainability and success, we believe, comes down to culture.
Speaker 3: As leaders, we are the chief culture officers of the company.
Speaker 3: Living our vision is at the core of the future.
Speaker 3: Our culture, especially as we have cultivated it more and more over the past few years, is a sustainable competitive advantage.
Speaker 3: To us, the Golden Rule means treating people the way you want to be treated. It covers so much. It covers dignity and respect. It covers teamwork. It covers integrity and truth. It covers diversity and inclusion. It covers ESG. It covers good leadership.
Speaker 3: Cold and rural means treating people the way you want to be treated. It covers so much. It covers dignity and respect. It covers teamwork. It covers integrity and truth. It covers diversity and inclusion. It covers ESG. It covers good leadership. It makes us a great company.
Speaker 3: We don't want to say we're a great company because we have diversity.
Speaker 3: We want to say we're a diverse company because we're great.
Speaker 3: Think about it. There's a meaningful distinction.
Speaker 3: Your people have to trust you to lead them this way.
Speaker 3: People have to trust you to lead them this way. To trust that you care for them.
Speaker 3: Leadership is stewardship.
Speaker 3: And think about this. Progress travels at the speed of trust. Some people may be skeptical. They may ask, but what do your people say?
Speaker 3: progress travels at the speed of trust. Some people may be skeptical, they may ask, but what do your people say? Let's talk about that.
Speaker 3: Every year we do detailed employee surveys.
Speaker 3: administered by third party experts.
Speaker 3: who perform similar functions for many companies, including some of our competitors and customers.
Speaker 3: We are told we have not just industry leading stats.
Speaker 3: but we are one of the best performing companies anywhere.
Speaker 3: Our employee surveys are voluntary.
Speaker 3: But we had almost 15,000 surveys submitted. That's a pretty good sample.
Speaker 3: We have 58 locations now in 9 countries on 5 continents in different product groups.
Speaker 3: nine countries on five continents in different product groups. That's also a good sample.
Speaker 3: We scored very well in the general categories.
Speaker 3: The way we work, covering health and safety, work environment, team work and collaboration, supporting our people, addressing communication, fair treatment, diversity and inclusion.
Speaker 3: covering health and safety, work environment, teamwork and collaboration, supporting our people, addressing communication, fair treatment, diversity and inclusion. Value and recognition.
Speaker 3: covering compensation and incentives to rear advancements, appreciation, and shaping the future, addressing personal goals, performance feedback, growth, and development.
Speaker 3: Well, the scores are not perfect, and we can always improve and we'll strive to do so. Here are some answers to some critical questions.
Speaker 3: I fully understand my job role and responsibilities.
Speaker 3: 95% agree.
Speaker 3: Our location works to improve health and safety.
Speaker 3: 89% agree.
Speaker 3: I feel a sense of personal accomplishment at the end of the workday.
Speaker 3: 82% agree. How many plants can beat this? This is a huge number.
Speaker 3: agree. How many plants can beat this? This is a huge number. I respect my general manager.
Speaker 3: 95% agree.
Speaker 3: Martin Raya prioritizes and encourages diversity.
Speaker 3: 89% agree.
Speaker 3: My direct supervisor treats me with dignity and respect. 88% agree.
Speaker 4: Not perfect.
Speaker 3: but outstanding results overall.
Speaker 3: In order to get this feedback from your people, you have to walk to talk.
Speaker 3: You have to feed back from your people. You have to walk to talk. You have to care for your people.
Speaker 3: Analysts and investors look at numbers.
Speaker 3: I believe these numbers and our safety numbers are even more important than a quarterly margin or EVTA number.
Speaker 3: It would be great to see these referenced in some analyst reports.
Speaker 3: I believe our shareholders care about them too.
Speaker 3: We believe that a happy, motivated, empowered, purpose-oriented workforce is the foundation of company success in the short, medium, and long term.
Speaker 3: that are happy, motivated, and powered, purpose-oriented workforce is the foundation of company success in the short, medium, and long term. A strong thank you to our people.
Speaker 3: Let's turn to the other highlights of 2022.
Speaker 3: Last year at this time we indicated that we believe 2022 would be a good year and our results would improve throughout the year as supply chain conditions became, quote, more normal.
Speaker 3: As industry volumes would recover somewhat, and production schedules became more stable, and as we dealt with cost inflation through negotiations with customers and suppliers.
Speaker 3: We knew we would have many challenges with a war in the Ukraine energy sources and shortages and so on and on.
Speaker 3: But we did say that the first half of the year would show profitability, and that the second half of the year would be better than the first. In general, that's how the year 2022 played out for us.
Speaker 3: Here's some of the key highlights of 2022.
Speaker 3: The full range are found in our annual information form and our year-end releases.
Speaker 3: Our industry-leading safety metrics continue to improve again. We take safety seriously. Our total recordable injury frequency, or TRF, was 1.21. An improvement of 12% over last year, but more impressively, an 86% improvement over 2014 when we made safety our priority.
Speaker 3: Note that a trip at 1.21 is less than half the industry standard of 3.1.
Speaker 3: As many of you know, over the past two decades we have bought a number of trouble plants, where safety culture often had to be emphasized as part of the plant culture.
Speaker 3: We are very proud of this improvement. A safe plant is generally a good and profitable plant also.
Speaker 3: We recorded record revenues of 4.75 billion.
Speaker 3: an increase of over 25% from 2021. We saw increased revenues from some of our key programs, but we also have launched many new products in 2021 and 2022 that are driving some of the revenue growth all during the pandemic.
Speaker 3: We generated a record level of EBTA during the year. Each of the third and fourth quarters showed record quarterly EBTA.
Speaker 3: Disoperating cash flow also translated into free cash flow in the second half of the year of approximately $80 million dollars.
Speaker 3: Our 2022 fully diluted net earnings per share of $1.76 adjusted.
Speaker 3: or $1.65 underjusted was significantly higher than a 41-cent adjusted and 45-cent unadjusted in 2021. Our balance sheet improves throughout the year, any year with a net debt-to-eva DA ratio, excluding high FRF 16 of under 2-to-1. The best it has been since before the pandemic.
Speaker 3: We maintained our dividends to our shareholders in 2022. During the pandemic, we have not reduced dividend payments.
Speaker 3: Quality is important to us and our customers. Many of our products are safety parts and we won a number of quality awards in many of our plants.
Speaker 3: We continue to invest heavily in the business, given the significant amount of new business we have won. We know that in the past three years we have spent close to a billion dollars on CAPEX.
Speaker 3: the highest for a three-year period in our history.
Speaker 3: But the majority of this spend was to launch work we had won.
Speaker 3: We did not slow down our investment activity during the pandemic.
Speaker 3: And that is a primary reason we are coming out of it with significantly higher revenues.
Speaker 3: Not many auto motor parts suppliers have a similar experience.
Speaker 3: If you do not believe in perfect launches, we believe in better ones each time. We have many good ones.
Speaker 3: Not only have we grown our business, we have significant content on the vehicle's park customers are making.
Speaker 3: Electric, hybrid, or ice.
Speaker 3: our portfolio is matching what the industry is making. Our light-weighting technologies are precisely what our industry needs.
Speaker 3: We continue to both utilize and invest in leading-edge technologies in our regular operations and through Martin Ray Innovation Development or MIND.
Speaker 3: We have investments in graphene and graphene-enhanced batteries through our nano-explore relationship. aluminum-air battery technology through Alumafower.
Speaker 3: and several other new technologies such as a FANCO using supercapacitor technology.
Speaker 3: Our innovation efforts will recognize in 2022 with Martin Rand being awarded a PACE award for a graphene guard enhanced brake lines.
Speaker 3: This is generally regarded as the most prestigious technology award in the automotive industry. A big congratulations to our team.
Speaker 3: We continue to drive sustainability initiatives at Mark Grant and we encourage you to read our 2022 Sustainability Report.
Speaker 3: a few highlights.
Speaker 3: On carbon reductions, carbon intensity, as carbon emissions relative to sales, has reduced by 19 percent since our 2019 baseline.
Speaker 3: Energy reductions. Energy intensity, which is energy consumption relative to sales, has reduced by 16 percent since our 2019 baseline.
Speaker 3: Renewable energy, approximately 42% of our electricity consumed comes from renewable sources today. Our CDP score, we increased our score to B for management of climate issues up from a C in 2021.
Speaker 3: Long-term targets. In 2022, we set a target to reduce our carbon emissions by 35% by 2035 without the use of carbon credits.
Speaker 3: In diversity, our CEO led diversity committee formed additional subcommittees to focus on mental health, minds matter, women at Martin Raya, young professionals at Yopro and women in manufacturing.
Speaker 3: As we look to 2023 and beyond, we do so with renewed confidence. We have been through a tough three-year period.
Speaker 3: We believe we will see better industry sales and production growth, especially in North America, where most of our operations are located. There is pent-up demand, vehicle inventories remain low, while interest rates have risen and may remain elevated this year and maybe beyond.
Speaker 3: Automotive financing is available often at competitive rates.
Speaker 3: And consumers, especially in the United States, have generally strong household balance sheets and good jobs.
Speaker 3: Our 2023 outlook shows growth in revenues, adjusted operating income margin, and free cash low. Very solid outlook. And, as noted, we believe sustainable companies with a great culture will be around for a long time.
Speaker 3: Our future is great. We look forward to sharing it with you. And now here's Pat.
Speaker 3: Thanks Rob. Good evening everyone. As noted in our press release we generate an adjusted net earnings for share of 58 cents and an adjusted operating income with 71 million dollars in Q4. Up significantly from a loss of 3 million dollars in Q4 last year.
Speaker 3: Production sales came in at just under $1.2 billion, up 38% year over year, and Q4 adjusted EBITDA with $149 million.
Speaker 3: which is a new quarterly record for the company.
Speaker 3: Adjusted operating income margin came in at 5.5%, which is slightly lower than the 5.8% we generated in Q3 due to a quarter over quarter increase in tooling sales, which typically earned lower margins for the company, and some previously recognized favorable commercial settlement that were reclassified into sales in Q4.
Speaker 3: It costs offset accounting treatment with no corresponding volume or bottom line impact to the quarter.
Speaker 3: Adjusting for these impacts, fourth quarter production sales and over operating income margin were similar to Q3.
Speaker 3: Another strong quarter, especially when you consider the ongoing volatility in the environment. During the quarter, we continued offsetting inflationary costs commercially and continued to improve our operations despite continued supply chain disruptions, impacting a level of stability, of customer production schedules, albeit at a lower level.
Speaker 3: I'm happy with the work the team is doing on all these fronts. It's been a challenging time to be in the automotive parts business, in many respects, and still is.
Speaker 3: Our team has faced these challenges head on, negotiating fair agreements with our customers and suppliers.
Speaker 3: The business continues to drive operational improvements across the organization. I can't thank our people enough for their hard work and tenacity during this time.
Speaker 3: As I mentioned in our last call, commercial negotiations will continue.
Speaker 3: So we do see them normalizing as the year progresses, assuming it continued easing in inflationary pressures.
Speaker 3: On that front, a warmer than expected winter and improved supply conditions in Europe have resulted in a drop in natural gas prices in the region.
Speaker 3: And the worst case scenarios that were contemplated as a result of the energy shortage, including production shutdowns, have not come to pass.
Speaker 3: This is good news. Notwithstanding, inflationary headwinds persist in other areas and labor conditions continue to be tight, particularly in the United States.
Speaker 3: And while production environment is gradually improving, we continue to be impacted by supply-related production disruptions with several of our customers, as I already noted.
Speaker 3: Looking forward, we continue to expect 2023 to be a good year, with better production volumes, margins and pre-cash flow compared to 2022.
Speaker 3: and what we expect will be the beginning of a strong cycle with most of our plans running at capacity. We updated our 2023 outlook on our Q3 call back in November . As a reminder, this outlook calls for a total sales between $4.8 billion and $5 billion. Adjusted operating income margin to be between 6 and 7%.
Speaker 3: and pre-cash flow to be between $150 to $200 million.
Speaker 3: We're maintaining this guidance and continue to see it as reasonable and achievable. Of course, volumes are difficult to predict and mix is always a factor.
Speaker 3: Looking at our global operations in North America, our adjusted operating income margin contracted somewhat quarter over quarter in Q4 compared to Q3.
Speaker 3: The quarter of a quarter increase in tooling sales and reclassification of commercial settlements mentioned earlier took place primarily in North America.
Speaker 3: This had the impact of increasing sales without any blow-through to earnings. In addition, our mix in North America was less favorable, and we had a lower level of commercial settlements during the quarter.
Speaker 3: On a full year basis, a North American operating income margin for 2022 came in at 5.7% up nicely year-to-year from 2.4% in 2021.
Speaker 3: We expect further a year over year margin gains in 2023. Abstent quarterly fluctuations we see from time to time as our outlook calls for.
Speaker 3: Further margin gains are expected to come from planned volume and mix normalization of input costs, continued lower launch costs, and continued operational improvements.
Speaker 3: What I now call our pandemic launch activity was among the busiest launch cycles we've ever had. I'm happy to report the products have stabilized and we are in a great position to enhance our margins as our customers ramp up.
Speaker 3: Turning to Europe , we saw notable sequential improvement in adjusted operating income during the fourth quarter, mainly driven from our favorable commercial settlements.
Speaker 3: As I mentioned earlier, we put a lot of time to recover our fair portion of the elevated energy cost that have been weighing on our European business.
Speaker 3: We concluded several agreements on favorable terms which have had a positive impact on our margins in this segment in Q4.
Speaker 3: Our operating income margin in Europe for the full year 2022 came in at 1.7% up from the loss in 2021.
Speaker 3: We made some good progress in this region as well. In our restaurant operations representing 3 to 4% of our business, adjusted operating income to climb slightly quarter over quarter, given it weaker sales mix. Resultant is segment tend to vary more than others because it's relatively small in size.
Speaker 3: But overall, we're happy with the performance in Q4. I'm pleased to announce that we've been awarded approximately $90 million in new business over the past number of months. This consists of $60 million in our lightweight structures commercial group, including additional ED content on GM's new ED pickup truck, Lucid Air and the Jeep Gladiator Hybrid Electric.
Speaker 3: as well as additional business with Audi, JLR and Toyota.
Speaker 3: $15 million in our propulsion systems group with Stellantis, Scania, and NISN, and $15 million in additional content on the Lucidair and our Flexible Manufacturing Group.
Speaker 3: As you can see, we continue to win meaningful work on our EV platforms with key customers.
Speaker 3: It's also worth pointing out that over the last four quarters we've also secured roughly 250 million in replacement business, including the next generation GM equinox crossover.
Speaker 3: Of note, we are now constructing a new metallic facility in Mexico that will accommodate work on GM's new BED3 electric vehicle program.
Speaker 3: This on the heels of expanding our FMG plant and a new fluid to plant in that country. We have a lot of great activity happening in North America, particularly in Mexico.
Speaker 3: Let's turn the page and discuss a great new investment. Monday we announced the acquisition of the assets of Montreal-based FENCO development, which was actually completed last year.
Speaker 3: The FENCO designs, manufacturers, and markets-innovated technologies for the electrification and connectivity of heavy-duty vocational trucks. The FENCO Hybrid Electric Solution augments the vehicle's powertrain and electrifies onboard equipment utilizing a unique ultra-papacitor-based technology, which reduces greenhouse gas emissions.
Speaker 3: by 30 to 40 percent, while also reducing engine usage hours, fuel consumption, noise pollution, and related maintenance costs.
Speaker 3: The FENCO is a global police act 100 company.
Speaker 3: and a global technology leader in the innovative use of ultra-capacity.
Speaker 3: We're very pleased with this acquisition and look forward to building on a then goes leading edge technology with the company's existing customers as well as new customers.
Speaker 3: We welcome the Asenko team to our Martin Rea family.
Speaker 3: Again, many thanks to the Martin Rea team for their great work leading to another solid quarter. With that, I'll pass it to Fred.
Speaker 3: many things to the Martin Raya team for their great work leading to another solid order. With that, I'll pass it to Fred. Thanks, Pat, and good evening, everyone.
Speaker 4: It's pat-indicated, our fourth quarter financial results were sentient consistent with the third quarter.
Speaker 4: Notably, Q4 just said EBITDA said a new Corley record for the company. As you said, the back half of 2022 would be better than the front half, and that is essentially how the year unfolded for us.
Speaker 4: Notwithstanding, our company and the auto parts industry in general continue to deal with headwinds on multiple fronts as many of you are well aware of.
Speaker 4: These include ongoing supply-related production disruptions, inflationary cost-headwinds, and play labor market conditions.
Speaker 4: Despite these challenges, we have made great progress in recent quarters towards getting our margins back to levels that we are accustomed to.
Speaker 4: The strong performance continued in the fourth quarter. We expect that results improve further as supply chain disruptions abate. Production of bombs continued to recover.
Speaker 4: Now launch activity continues to normalize.
Speaker 4: As Pat noted, we have maintained our outlook, which calls for higher production volumes, sales, margins, and most importantly, free cash flow in 2023.
Speaker 4: Take it across the look at our performance chord of the chord.
Speaker 4: Production sales were 4% higher, large due to the reclassification and previously recognized commercial settlements into sales, as Pat mentioned, in general timing of commercial settlements.
Speaker 4: Excluding these items, production sounds were essentially flat quarter-by-quarter.
Speaker 4: Generally, the production environment will simmer at the last quarter, but is expected to gradually improve as the year unfolds.
Speaker 4: Adjusted operating income margin came in at 5.5%. A bit below the 5.8% we generated last quarter. Due as pattern ordered to a quarter of a quarter increase in tooling sales.
Speaker 4: and the recratication and timing of commercial sediments previously discussed.
Speaker 4: Overall, excluding these items, adjusted operating commargin was a senti flat quarter of a quarter.
Free cash flow came in at $15 million, another positive quarter, but below Q3 levels reflecting the timing of capital expenditures. On a four-year basis, free cash flow was $50 million, positive, a strong result considering the ongoing challenging environment.
Free cash flow is expected to improve significantly this year as our 2023 outlook complies.
reflecting a higher level of EBITDA and lower CAPEX. Looking at our performance on our year-to-year basis, fourth quarter adjusted operating income of $71 million was up sharply from a loss of $3 million in Q4 last year.
An adjusted EBIT of $149 million more than doubled on production sales that were 38% higher.
Recall that the back half of 2021 was when supply-related production disruptions were at their worst.
Marking a load point in our financial performance before results began to improve materially in self-conquers.
While a stronger rear rear performance is nice to see.
Results are still below what we know we can achieve. We expect to go a long way towards bridging this gap in 2023, as our outlook implies.
Moving on to our balance sheet, net debt was about $20 million lower quarter by quarter, closing out the year at $909 million.
Renewed that to EBITDA ratio was 1.95 times in line with our expectations to be below two times at your end.
This represents a comparable level for us in his well-beloved or covenant maximum of three times.
A leverage ratio should naturally improve in the common quarters of the generate an increased amount of EBITDA and free cash flow.
A leverage ratio should naturally improve in the coming quarters of the generate an increased amount of EBITDA and free cash flow, a portion in which we will use to pay down debt.
We have strong relationships with our lenders and we thank them for their continued support. I'm not going to spend a bit of time on capro location and capro spending.
I should note that we have had for some time an investor newsletter on our approach to capital location posted on our website.
Now force there, my directive invests the relations of corporate development.
but has been both an auto analyst and invested with Franklin Teppleton. I've said all those are thinking very nicely for you.
In any business, how the company allocates its capital is among the most important decisions management has to make.
Capital location is equally as important as operational decision-making and execution.
We have to be effective at both to ensure organization prosperous or even survive the long room. Prophile businesses with strong operating track records can be derailed by a poor capital allocation strategy. Therefore, it is critical that they get this part of the corporate strategy right.
Tomorrow we spend a lot of time thinking about capital allocation.
my rear we spend a lot of time thinking about cap allocation. Our overarching priority is quite simple.
to generate long-term positive returns for our shareholders. Generating returns is part of our mission.
In that sense, we are no different than Invest Manager running a mutual fund, pension plan or endowment fund, or an individual investing, invest their managing his or her own portfolio.
We are committed to the long-term sustainability of our company in line with our vision, mission, and principles.
We're all owners, increasing our holdings of shares and equity-based investments over each of the past seven years.
with minimum shareholding requirements and a robust equity share ownership program.
In the last three years we have met the challenge of the pandemic, chip shortages, and inflation and so on, head on and say where a stronger company has ever been because there are owners and behave like owners.
Taking a closer look, our capillacation framework is shown on this slide.
While maintaining a strong balance sheet, we seek to invest in growth and manage the opportunities that have the potential to generate strong returns for our shareholders.
This can take the form of organic capital investments and research and development initiatives.
as all his acquisitions that make strategic and financial sense. These priorities are driven by a discipline and turn or rate of return and return investment capital framework.
That is, we choose the options that have the highest expected returns over the long term. In late 2014, Pat joined us as President and CEO and we embarked on our lean transformation journey.
A period we referred to as Mar and Ray a 2.0. For the next five years, adjusted operating income margin nearly doubled to 7.5% in 2019.
Over 8% of fuel in the impact of the 2019 GM Strike Committee recall.
8% excluding the impact of the 2019 GM strike, you may recall, putting us among the top in our peer group.
We achieve this through a combination of plan-level operating improvements and our lean manufacturing practices and a more disciplined, go-to-market approach, adhering to a strict IR hurdle rate in quoting new business.
which is generated Royce that are among the best in our peer group.
We have had margin challenge over the past three years, but as noted, margins are improving and are expected to continue to do so in 2023.
So let's talk about free cash flow playing the long game. Free cash flow is an important metric in assessing the merits of any investment.
There's a key element for many investors, for many of you, and ultimately a key driver evaluation.
The value of an investment is equal to the present value of its future cash flows discount at the appropriate cost of capital.
Importantly, the cast January a potential of business must be looked at to read long-term lens.
The company may have options to invest capital in high return organic growth opportunities that will provide a steady stream of free cash flow in future years.
However, those investments reduce free cash flow initially.
Working capra foes can also be unpredictable over short-term periods, skewing the true cashflow picture.
When allocating capital is incumbent on us to play a long game and not be distracted by near-term ebbs and flows.
A minor 8 2.0 journey, especially in the last three years, has also included substantial capital investment.
Mostly on program launches are reflecting all the work we have won. This year we are expecting CAPEX to decrease from 2022 levels, helping to lead to an expected strong free cash flow profile in 2023.
Mostly on program launches are reflecting all the work we have won. This year we are expecting CAPEX to decrease from 2022 levels, helping to lead to an expected, strong, free, casual profile in 2023. What about acquisitions?
Our acquisition strategy has been and is disciplined and has served us all over time. Historically, our acquisition and strategic investment strategy has revolved around acquiring businesses that broaden our product offering, technology, fruitpent, or customer base.
They helped us grow rapidly from a startup to accompany with over 4.5 billion revenues a true growth story.
Primarily, these were distressed assets requiring investment and resource to turn around.
We were able to acquire these companies cheaply and structure the operations, thereby putting them on a more sustainable path.
We have proven our effectiveness at turning around struggling businesses.
We are prudent and disciplined buyers, and this is a big part of how we built our organization. Our acquisition strategies have all over the years. The valuation remains a key component. Great companies can end up being back acquisitions if you pay too much. So we are selective and prudent in our approach.
Basically, we look for companies that can help us achieve some combination of advancing our lightweight strategy, enhancing our product and technical capabilities, and diversifying our customer base.
And we look to acquire these companies that are reasonable to attract evaluations.
While I won't go into further here, our investments in metallosis assets in the NanoExplorer are proving to be great investments to maintain and grow our business.
Strong balance sheet is also paramount as it gives us the confidence and ability to withstand downturns if and when they arise, like during both the Great Recession of 2008-2009 and the recent COVID-19 shutdowns. Our customers also prefer to deal with suppliers who are financially sound that they know will be around to serve them in the long run.
So strong balance is fundamental to maintaining and growing our business. We believe our target and net debt adjusted even to ratio of approximately 1.5 times is appropriate for our business. As it represents a level that allows us to manage downside risk, we'll maintain the flexibility and best for growth.
And we are approaching that target.
Proven 19 pandemic highlighted the importance of a strong balance sheet and strong lending relationships.
It also showcased our ability to manage through a crisis and appeared full of uncertainty.
A strong financial position leading into the COVID-19 downturn, as all of the actions we took in the form of cross-reductions from temporary layoffs, solid reductions and CAPEX reductions, as all of the liquidity actions to increase credit availability allowed us to navigate through the crisis and position of strength.
The final component of our capital allocation strategy is returning capital to shareholders in the former share repurchases and dividend growth over time.
While our dividend rate is higher than many in our industry, we pay approximately 16 million dividends annually for presenting a modest cash outlay given the scope of our business.
Raise their dividend just before the pandemic and maintain its system.
While we seek to reward our investors with a steady stream of dividend income, our view is that shared by back servers and a more compelling opportunity, as we believe our stock is undervalued.
As such, return of capital is more likely to be focused on buybacks at this juncture as they offer better return potential.
We have been active with our share-reproject program in the past between 2018 and 2020.
We were purchased 8% of the company's outstanding shares for $83.4 million.
In the pandemic kit 2020, we spend that our formal normal course issue a bit.
a prudent move to preserve cash. However, we did maintain our dividend in full.
move to preserve cash. However, we did maintain our dividend in full. It is now March 23.
We continue to invest in our business, maintain our dividend, and keep our balance sheet strong. We're also filing for a normal course issue bid, which will be in a position to commence our after-releaster first court results in May.
So, philosophically, we like buybacks as we think our shares are trackably valid and represent a great investment opportunity.
At the same time, we're going to be prudent with our cash and we'll continue to strengthen our balance sheet while still investing in the future of our company. In conclusion, we believe our capital allocation strategy provides the right mix between investing in the future of our company.
while putting it in a strong financial position through prudent balance sheet management. It also seeks to reward our shoulders for their continued support in the form of returning capital to them through dividends and share buybacks. In summary, our capital allocation framework is core to our overall corporate strategy, and should enable us to drive meaningful and substantial growth in revenues.
earnings and free cash in the medium in a long term. And with that, I turn you back over to Rob.
Thanks guys, now it's time for questions. We see we have shareholders, analysts, and competitors on the phone, but also employees. So we may have to be a little careful with our answers, but we will answer what we can.
Thank you all for calling. We will now take questions from the telephone line. So if you have a question and using a speaker phone, please lift your hands up before making your selection. Do you have a question, please press star one on your device, please keep that. You may cancel your question at any time by pressing star two.
So please press that one at this time if you have a question and there will be a brief pause while participants register. We thank you for your patience.
The first question is from Michael Glenn from Raymond James. Please go ahead. Hey, good evening. So maybe just to start, Rob, during your opening remarks you talked about the fact that we
the investment of close to $1 billion in CapEx over the past three years, which is a large number. I mean, and then Fred, you're talking about CapEx being lower in 23 versus 22, which is great, but can we look out over three years? Can you give some sort of...
So it was like the one billion that you spent, was that an anomaly for three years or is that a potential we could see something of that magnitude?
like was the one billion that you spent was that an anomaly for three years or is that a potential we could see something of that magnitude come around?
Good question, I'll start and turn it over to Fred. Recall in 2019, which is a long time ago, a lot of things have happened since that time, we won a ton of work. We announced new business wins in the range of $800 million to $1 billion in annual business.
which was the best year of quoting and winning in our history. And of course, in our business when we win work, it takes a couple of years and with some slowdowns over the pandemic, maybe three years to launch that. And so a lot of our cat-bex was focused on.
on launching programs that we'd want. And, you know, effectively our focus was to fill our plants. The pandemic didn't diverter from that. And as we come out of the pandemic, as you can see, from our higher revenue rates and so forth, we think our plants are pretty full. I think we've said that our plants are fuller now than they have ever been.
And basically the last time we had plants this fall was when we had two plants back in 1998 I'll turn over a Fred person color maybe on the future. Yeah, I mean, I think we're not gonna shy away from investing in our business as long as you know Returns are there and the projects meet our hurdles However, we are coming out of a pretty heavy investment cycle from our perspective and that included some you know fairly long-term assets
So, you know, we're focused right now on 23. We've provided guidance on that year, and then going forward, we'll continue to kind of apply the same logic. And then you're also talking about the production schedule, volatility, and I'm just curious. I mean, others seem to be...
impacted more by this. I'm just wondering how you're managing through this because it seems to be impacting you last. What changes have you made, or is this the flexible line that you transitioned to a few years ago or a number of years ago now? How are you being more effective in terms of managing through this production volume?
We're not in too bad. You know, pretty much again looked like the previous quarter overall. Okay. And then just in terms of cadence for the year, you know, Pat, maybe I don't know if you're talking about Ford having some challenges during Q1 in that comment, but there's also some
news about GM and some silver auto production.
Stopages to control inventory. Like should we think about Q1 being...
perhaps a bit softer and then building through it and then it builds through the balance of the year. Yeah, I think there was some, you know, there's certainly some customers that had some issues coming out of the shoot, but.
You know, I expect that throughout the year, we're actually going to have a pretty decent year. Similar to what we said earlier, I think our sales will still be around 4.8 for the 5 billion. And I do think it'll pick up. I think the second quarter will probably be the best test. You know, in the past, prior to COVID, second quarter was always the big quarter.
And since that time, it has been out of sorts. You know, if you look back at 2020, it was the end of the year before all the supply shortages this year. You know, it was the third and fourth quarter that were the better quarters. It'll be interesting to see, but we somewhat expect the second quarter to kind of start to return to where it had been in the past.
Okay, thanks. All right, thank you. Thank you. The next question is from Brian Morrison from TD Securities. Please go ahead. Okay, thank you. So when I look at the four drivers in your prior operating margin chart, the volumes and increments, the launch, the cost efficiencies, and pass-through, I'm curious, do you expect, Pat or Fred, do you expect to see the volume increase in the cost efficiency in the oil market?
all of these positive margin contenders this year. And the reason I ask is if you just look at the volume and comments, you should be able to get to the low end of that range alone. And then the second question to that is, you mentioned launch being a benefit after the heavy cycle. You've gone through it in great detail. Can you maybe just ballpark how we should think about that in terms of basis points in 2023?
Well, we had a lot of launches, as you know, during the pandemic, about $600 million worth, if I remember right. And a lot of those products are in different stages of ramps. So our ability to produce steadily is improved significantly. The poll from the customers is still pretty erratic in some cases. So...
As we see them start to smooth out their ramp cycles, I think we'll benefit more. We don't control that, of course, but I would say our part of the game has been played and now it's a matter of waiting on the launch cycles. Some are moving along pretty well, there's a struggling.
But certainly as this year progresses we expect it to get better. And as really the first part of your question I would say simple answer to your question is yes those are going to be contributors year-to-year. We're expecting production volumes to be out year-to-year. We're expecting supply chain disruptions to continue to improve, although you may see some quarterly ebbs and flows there.
and then some normalization of input costs as well as inflation. I mean general comment, there's a lot of stress in the industry at any particular time and it's not just semiconductorships but you know we're really good at what we do and there's a shout out to our people and they've done really good job on launches, they've done a lot of launches and at the end of the day some people just operate better than others. We think we're really good operators.
And if you look at the inventories on some of the best selling products, they're still pretty low. And, you know, there have been some quality issues from other suppliers other than chip shortages that have affected some of our customers.
If you recall last year, some customers built ahead a lot of vehicles without chips, so they had to distribute some of those chips into those products based on what year it was and what year they want to sell those vehicles in. So some of that probably took priority away from some of the production, but I think you'll see that level out pretty easily.
Okay. I appreciate the clarity. Maybe just if I can go down that, that, the pass-through.
Correct me for long, but I think the disclosure was about $100 million. It was the last one that I can recall. Maybe just update us where you came in at year end and what's baked in your 2023 guide. It sounds like you expected to be a little bit of a tailwind. And then I guess some of your peers are talking about Q1 as inflation-pasturing negotiations could be soft.
You know, the negotiations are extending beyond the quarter. I realize it's fluid, but are you seeing any change in the progress as in early 2023? I think the $100 million number has been kind of talking the last couple of quarters. I think the last thing I said is probably north of that. Again, we're starting to see some relief in that area. So it's better than moving.
the location was cast and that will help.
However, the commercial activity will also continue. So that has not stopped and I agree with some of our peers that are saying that those discussions are continuing to 23 and we're seeing that as well.
Okay, sorry, last question, Fred. I didn't really, I didn't quite understand the NCIB in terms of, you're going to restart it in May. I appreciate that you're, you're, you're, you're, you want to get active with your NCIB, but why are we going to move till May?
Well, because we got approval to apply today. So, in that context, we talked about it with our board. It's our year in board meeting. We talked about capital allocation strategy. And so, the TSEX to approve it. So, we tend to purchase when we're not in a blackout period. We'll be in a blackout period. It will first be...
Thanks for your viewing, everyone.
Just a couple quick hitters for Fred maybe. Just curious on your commercial negotiations, how you guys reclawed five minutes sales for the quarter. How were you guys recording in the path?
Just a couple quick quick hitters for Fred maybe just curious on your commercial negotiations how you guys reclassified that as sales for the for the quarter. How are you guys recording in the path that just trying to get a better sense on how to model and how many kind of power's necessarily should be toleratingoused from a
Yeah, earlier in the year when we closed out some of these negotiations, and again, it got really complicated because some of it was in piece price, some of it was spot BOs, and so these deals were structured very differently depending on the customer in the program. And there was a certain piece of that that we accounted for as...
but it kind of skew the sales number in the fourth quarter a little bit. Got it.
Then just on your capital allocation comments there, is it necessary for you guys to hit that 1.5 target or as soon as the NCID kicks in, we could expect by-back if you're share price kind of hangs around at these levels? It's a directional target in that context. I think you've seen our net debt to EVTA come down really quickly. We just think.
in terms of long-term capital, or strategy in terms of where we're comfortable with our debt to even the A levels, subject to some of the macro things that we see in the world from time to time, that's a pretty good guideline. That makes a lot of sense. It sounds like there's still some commercial renegotiations that happen here in 23.
So, those are the thought process that margins continue to improve throughout the year, absent of your typical seasonality. That's a good question. There is still commercial negotiations. There's always commercial negotiations. We expect them to normalize as the year goes on. There's still some out there that we're dealing with.
goes on, but our target is...
A little bit of up 6%, below 7% is our target for the year and I'm pretty comfortable. We're going to achieve that. Again, volume and mix can really have an impact on that. And I think second quarter, if second quarter is like the second quarter's prior to COVID, we'll be a real test of that. It's really hard for us to...
just do it on a quarter by quarter basis because of timing and the negotiations are ongoing all the time. That's why last year we kind of said, you know, after the second half of 2021 being negative, we said, you know, we're going to be profitable in the first half of 2022. We think the second half of 2022 will be better than the first half, which is turned out to be the case. In 2023, we'll be better than 2022. Excellent. We're pretty.
We're gonna get confident on that. But what happens in a particular quarter may depend if you're negotiating in March and it carries over to April or you're in May and it carries over to July , you just gotta get the right result. And that's the focus of our people. But the problem is is the volatility still. I mean, there are...
Positive size is that if we could produce more vehicles than the US could sell more.
That's a pretty good story because you know what is the demand? And so I'm at a dealer in Detroit in December and to purchase a vehicle. I won't say which customer because...
I wanted to make sure they know I love them all. And so I go to purchase this vehicle and the lady who's selling the vehicle to me. You know, I noticed a lot was very sparse. And I said, how many cars do you have? She says, trucks and cars we have, 29. And I said, how many did you have pre-COVID?
She used, she said we used to carry between six and 800 vehicles on that lot. Okay, now I said, you'll never go back that again, because I don't know, I'd probably not. But if you think about 29 versus 6-800.
And they had 145 coming on trucks when we were talking, she said that 127 of them were already sold. So there is a pipeline there that is very empty still that will keep us busy this year regardless, assuming the supply chain can support it.
That's where we believe we're at. Yeah, and the publicly traded franchise dealership say the same thing. Well, they should because we're right and I'm glad they agree. Well, that's it for me guys. Thanks so much. I'll hop back in the queue.
Thank you. Next question is from Peter Scholar from the Ketter markets. Please go ahead. Good afternoon, our good evening. Could you talk a little bit about how you see labor inflation in 2023 in North America and Europe , I believe, in Europe it's a little bit different because you have workers councils and...
like the wage rate is set at the beginning of the year, so you'd have a view into that already, and I believe in North America, you're largely non-unized. Yeah, that's correct. So in Europe , we've already settled, I don't remember the number, you're three or four years out with our unions there, at least the ones in Germany. So, I think that's it.
Mexico is an annual event. There might be a little bit higher percentage than there's been in the past. We've seen a pretty wide range of settlements so far, a little higher than normal, but not crazy.
And in the US, we have some union negotiations, so it's TBD. The ones that we had in Canada that we've already settled have all been very reasonable. So the big bump in some of the plants that we had to pay for the plant was the
Back when we couldn't get any people at all, certainly we won't see that type of inflation again, I don't think. There's still some struggles, especially in the United States still on getting people, but it's substantially better than it was last year.
Okay. And then the other question I had is, like when you look at your segmented operating income, you had this very dramatic improvement in your Europe operating income, which you, it sounded like from your commentary. There was a big chunk. The philosophy
commercial settlements that fell into the quarter that won't be repeated. So you know of the 10.9 million of operating income.
Can you give us some kind of guidance as to how much of that is unusual due to this one-time bump in commercial settlements? I assume it was largely related to energy costs in Europe . The timing of commercial settlements definitely skewed from the segment margins this quarter. The way I would look at it...
6 to 7 and obviously the biggest driver to ask me in North America is our biggest business. We see upside there and we also see some upside in Europe to contribute to that as well. So that's the way I would probably look at it. Okay, thank you. That's all I have. Thanks very much.
Thank you. Next question is from Krista Friesen from CIBC. Please go ahead. Hi, thanks for taking my question. A lot of my questions have been touched on at this point. So I was wondering if you could just give us an update on the Vault Explorer JB and where things sit.
at such time as things line into place they'll make an announcement. I will say in a general sense and we've made no secret of this we are very bullish on Nano Explorer and graphene whether it's in batteries whether it's in brake lines where one
the PACE award last year that our people should be congratulated for, whether it's in things like cement or plastics or some of the other things. And so there's a lot of discussions in the context of that. From my perspective and maybe a little personal perspective, we think graphene enhanced batteries are potentially great for a lot of different reasons and there's a lot of battery makers out there looking for ways to make better batteries and so we're supportive of it.
not just the Volta initiative, but overall graphene and battery initiative and graphene and everything else. So that's kind of where our thought pattern is. Thanks. Congrats on a great quarter and I will jump back in the queue. Thank you. Thank you. Please press star 1 at this time if you have a question. Next question is from Ben Zekick from TI Financial. Please go ahead. Hi, good afternoon. Most of my questions have been touched by the audience.
I think where we thought we were going to be, we've been pretty good predictors of where we're going to be in a general sense. We don't want to get too specific on things, but we think that we're going to get there sooner rather than later. The other thing is, in terms of the 1.5, there's no necessary magic in a number.
But it has been a good guide for us. We're very comfortable, say, between one and one and a half. We're a little less comfortable as we get close to two. We think if we're under one, we aren't utilizing our capital structure appropriately. And quite frankly, if you're closer to three, where we were for a while.
then you're looking to pay down debt. The other things that factor into our considerations for capital allocation are things like where the stock price is at, where interest rates are at. Paying down debt actually saves more cash than it did three years ago. And so it's a titter of a process as we kick it around. And I think that's the right way to do it. There's no...
one single fixed rule where you say this is where you want to go, you have to be prudent. At the same time, you're always looking at different opportunities, right? So there could be a big program to win and look at. I would say, and this goes back to what Fred said earlier, we spend a lot of time filling our plants. We want a lot of work. We put a lot of money into it. We're at the stage now where to win big programs means we have to build plants.
Those are going to require more capital than they did in the past when we had plants with capacity. And we're going to look at that. We're going to basically say how do we cover our capital and so forth. So I think we're going to be prudent. We're very open in our discussions. We consider all the factors, but we'll try and make the right decision when it's going
What we've said is we think capex in 23 will be in and around depreciation amortization as a percentage of sales. Got you. Okay, thank you. Thank you so much. Congrats.
Thank you. Thank you. So there are no questions registered at this time, so Mr. Will DeBoer, I will return a meeting back over to you. That's it. Everyone is gearing up for dinner, so we wish everyone a great evening. Thank you so much for joining our call, for all the employees listening. There's quite a few of you. Thank you.
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Your conference has now ended. Please disconnect your lines at this time and we thank you for your participation. Is that Marvin already?
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