Q2 2023 Martinrea International Inc Earnings Call
All participants your conference is now ready to begin.
Good evening, ladies and gentlemen, and welcome to the 2023 second quarter results conference call instructions for submitting questions will be provided to you later in the call I would now like to turn it over to Mr. Rob Willett.
Please go ahead.
Good evening everyone.
Thank you for joining us today, we always look forward to talking with our shareholders. We hope to inform you well and answer questions.
We also note that we have many other stakeholders, including many employees on the call and our remarks are addressed to them as well as we disseminate our results and commentary through our network.
With me are pad to Raimo, Martin <unk>, CEO and president.
And our CFO Fred di Tosto.
Today, we will be discussing <unk> results for the quarter ended June 32023.
I refer you to our usual disclaimer in our press release and filed documents.
I will speak then Pat and Fred EMEA again briefly and then we will do some Q&A.
Before Pat and Fred focus more particularly on the company our progress and our results.
A few overview comments on how we see the automotive world in mid 2023.
We believe the industry is in the early innings of a strong period of stability and overall growth in volumes, especially in North America.
We went into the reasons for this in some detail in our past two annual shareholder meetings, including our last one in June and on some of our recent calls.
But I'm going to make just a few quick points given recent developments to bring it to the present.
The North American economy is in pretty good shape as we've been saying for many months and now most agree with us.
The underlying U S economy is solid.
Unemployment is at low levels.
And there is strong underlying demand for housing and autos.
People's confidence is increasing.
And people know they can find work.
And the balance sheet of the typical U S family is actually pretty strong.
Given a decade of higher savings rates.
Asset price increases.
And in recent years lots of free government cash.
All of this is good for the U S consumer who drives 70% or so of the U S economy.
Second there remains a shortage of vehicles in inventory, while being rebuilt has some ways to go.
U S R and production levels are rebounding, but are still not at historical levels, but I wish I mean average levels over the past 20 years.
Roughly the lifetime of our company.
We see production and sales of vehicles going up in 2024 from 2023 and up in 2025 from 2024.
Good background for our business.
Third.
Let me address interest rates.
Governor Powell and the fed just raised rates to their highest level in 22 years.
Interestingly, our company started 2020 or 22 years ago. So at least in terms of interest rates, we're back where we started.
Note that in 2001 U S. Saar was higher than it is today.
When U S population was 285 million people today, there's $340 million think about that.
I do believe that today, some people are holding off on auto purchases because of higher interest rates not to mention high auto prices, but the reality is that people get used to paying interest in the market adjusts.
When you were used to zero percent financing.
Our rate of 2.9% or three 9% looks periods.
When rates are generally over 5% for awhile, such an interest rate it looks like a bargain.
And I imagine, we will see some competitive auto financing in the next few years.
I also believe the trend line of rates will be lower over time.
We are at or near the peak.
Having said that I don't have a ton of faith in the fed.
They've made a number of mistakes over the past few years.
Fourth inflation is coming down by whatever measure.
Note that we have seen reduced prices or a reduced rate of increase in prices in many areas recently.
We also believe the rate of wage inflation to help workers deal with inflation in the economy will moderate.
Speaking of workers and inflation, we know there will be UAW and uniform contract negotiations in the next several weeks or months.
Theres always the possibility of a strike which of course is a short term disruption, but the impacts tend to be transitory in nature car.
Car makers tend to make up any production loss. So a loss car sales today, there's a future sale.
Overall, then our industry is in pretty good shape as is our company.
It's not to say of course, they're not or will not be some headwinds supply chains have challenges, albeit reduced.
There are geopolitical issues EV sales projections, maybe too optimistic Oems must learn to make money on evs etcetera.
But I think there is a tendency to be overly negative when looking at things through a short term lengths.
And so sometimes it helps to take a step back look further out and put things in perspective.
With that said here's Pat.
Thanks, Rob Good evening, everyone. Our second quarter financial results were strong and an improvement over the prior quarter adjusted EBITDA of $161 million was yet another quarterly record.
And adjusted operating income margin came in at six 1% in the range of our 2023 outlook between six and 7%.
As we said previously we expect results to continue to improve that supply chain disruptions subside and production normalizes.
Challenges from ongoing erratic production supply chain bottlenecks cost inflation and tight labor market conditions, while continuing Ed.
And improved compared to last year, and we expect we will continue to lessen in the months and quarters ahead.
At the same time, we continued to make progress on our commercial activity offsetting the inflationary costs and volume instability. We have been facing these commercial settlements had been one of the key drivers of margin improvement that we've seen over the last year or so.
And I will elaborate on this more in a few minutes.
Looking forward, we continue to expect 2023 to be better year over year with higher production volumes margins and free cash flow compared to 2022.
See the early stages of a strong cycle and automotives.
With the majority of our plants running near capacity.
As such we are confirming our 2023 outlook, which calls for total sales to be between $4 85 billion.
Adjusted operating income margin to be between six and 7%.
Free cash flow to be in between 150 $200 million.
We continue to see this guidance is reasonable and achievable automotive sales are proving to be more resilient than many expected seasonally adjusted annual rate of sales or SAR in the U S coming in at $15 6 million units for the second quarter.
The healthy level as demand continues to Trump the impact of rising interest rates and inflation on consumer buying patterns.
Operationally, we are performing at a level that has become consistent with or better than where we were in 2019, just prior to the pandemic.
As expected free cash flow was positive in the second quarter, Fred will elaborate on the various puts and takes on in his remarks, but the key point is we continue to expect that 2023 will mark a turning point in the evolution of our company establishing ourselves as a consistent generator of free cash flow.
Yeah.
Turning to our global operations in North America, our adjusted operating income margin remained strong in Q2 aided by higher production sales.
You can see improvements in commercial settlements, partially offset by the dilutive impact of higher tooling sales.
Volumes improved quarter over quarter as certain programs that were disproportionately impacted by supply related disruptions in Q1 rebounded in Q2.
We continue to operate with a healthy margin level in North America production is generally improving and we are benefiting from the reduction in some launch activity of new programs.
Supply chain pressures continue to ease the Oems are still facing parts shortages in some areas some driven by constraints in the tier two and tier three supply base.
We've been fortunate during this period that we had not inhibited our customers.
With our own supply chain of course bottlenecks at any point, along the supply chain can impact the overall level of production and more importantly, the stability of production.
Additionally, labor remains tight in certain locations. So the situation is improving.
On the cost side inflationary headwinds are generally better though persist in some areas of the business compared to last year.
Our efforts to offset these costs through our commercial activity are ongoing and will continue through the rest of the year.
Turning to Europe adjusted operating income was positive in the second quarter up from the loss in Q1 on lower quarter over quarter production sales all favorable commercial settlements allow us to turn a profit in the quarter margins remain below what we think they ultimately will achieve this segment largely because OEM production volumes in Europe are.
Currently falling short of planned levels.
European results are expected to continue to be positively impacted by favorable commercial settlements during the back half of the year offsetting some of the production volume headwinds and inflation.
We have and are currently experiencing and our.
Our rest of World operations, a small portion of our overall business representing about 3% of our second quarter production sales adjusted operating income was lower quarter over quarter, given the continuation of lower than expected production volumes in China and the absence of some indirect cost recoveries in Brazil that benefited us.
Q1.
And I want to take a moment and talk about our commercial activity in more detail. It's a key issue as commercial settlements have been an important contributor to our financial performance over the last couple of years.
So let me provide some insight on how these agreements work and how they vary and structure.
First commercial negotiations are typically complex and multifaceted.
There's a lot of data exchange between ourselves and the customer.
When you're asking customers for money you need to present, a detailed account of your cost and make a compelling case to show your request is reasonable.
You must establish credibility in these discussions.
And you do that by knowing your business and knowing your cost structure inside and out.
Second agreements can take a variety of different forms for example, they can result in an increase in piece price.
The price that's paid for each part over the life of the contract.
These agreements are ideal as they essentially lock in pricing over the life of the contract.
Pending on the situation Oems may be reluctant to do this particularly in an inflationary environment, where costs are ultimately expected to come down.
Energy in Europe is a good example, in many cases Oems will pay to cover a portion of the inflationary burden over a specified time period. This.
This can be retroactive or it can be in the future or both.
Then you renegotiate with the customer for subsequent time periods. These efforts are ongoing and can result in short term spikes in income and some quarters.
The third point is commercial activity as a normal part of doing business.
It's something that we're always working on in one form or another the key issue at hand is in the last few years the activity in the settlements have been more pronounced given the unprecedented increase in input costs and lower production volumes.
This activity will certainly continue beyond this year, but we expected a lower level.
Once contracts roll off in normal course, we will reprice agreements based on prevailing market costs for both replacement works and new projects.
Finally, I want to emphasize this point the timing of commercial settlements can be somewhat erratic, which can result in some variability in our quarterly results.
This is particularly true in our European segment.
Margins are lower for the rest of the world operations, which are smaller.
We continue to negotiate commercial settlements in all regions.
Margins will benefit from those settlements when they occur and.
Our motivation in these negotiations is always get the best deal, while maintaining a positive relationship with our customer as opposed to managing to the quarterly expectation.
Our business is best looked at over longer periods of time.
Something to keep in mind as we move forward.
I'm pleased to announce that we have been awarded a $150 million of new business since our last call consisting of 90 million in our propulsion systems commercial group, including $65 million with General Motors as.
As well as other work with Daimler Volvo and $60 million in our lightweight structures group for various products with Mercedes Benz and General Motors.
Year to date, New business awards now totaled $220 million.
Already exceeds the total amount of work that we won in 2022.
Overall, a good quarter and a good first half of the year.
Both in terms of financial results in new business wins I want to thank the Martin Ray a team for their dedication and hard work in delivering these results.
I'll pass it to Fred.
Thanks, Pat and good evening everyone.
As Pat mentioned, our Q2 performance was solid with adjusted EBITDA setting another quarterly record for the company.
Overall, our Q2 financial results showed continued progress in our operating margins free cash flow and balance sheet, which we expect.
<unk> will continue in the back half of the year.
Taking a closer look at the results quarter over quarter.
We generated adjusted operating income of $82.4 million in the second quarter.
Up approximately 10% over Q1.
On production sales are roughly flat at one point to $5 billion.
As higher North American sales were offset by lower sales in Europe .
Adjusted operating income margin came in at six 1%.
And then the 5.8% generated in Q1, despite a 71% increase in tooling sales, which typically are in low or no margins for the company.
Adjusted net earnings per share came in at six two cents in the quarter higher than the 54 sensor generated in Q1, largely reflecting the higher operating income.
Free cash flow was positive at $25 million, an improvement over the negative 32 million generated in Q1, reflecting higher EBITDA lower capex and a Q1 seasonal increase in working capital.
Working capital levels remain relatively flat quarter over quarter in Q2 as expected.
We remain committed to our free cash flow outlook for 2023.
Extrapolating Q2 free cash flow being the most recent run rate over the remainder of the year. The additional drivers in the back half of the year that will help us get there include.
Higher EBITDA in the back half of the year, assuming a continued improvement in the overall production environment and benefits from ongoing commercial activity.
Positive working capital flows in large part driven by the expected seasonal unwinding of working capital during the back half of any given year.
And significantly lower cash taxes in the back half of the year.
Which is essentially a timing issue with cash taxes were higher than normal in the first half.
Well free cash flow is partly dependent on macro factors that are outside our control.
We have a good line of sight on capital spending which is expected to come in around $300 million for the year.
This is a significant reduction from where we spent in 2022.
Looking at our performance on a year over year basis, and I won't spend too much time on this.
Second quarter adjusted operating income of $82.4 million was up 81% over Q2 of 'twenty two on production sales there were 19% higher.
And adjusted operating income margin of six 1% was 200 basis points higher year over year.
Recall that at this point last year, we were still in the early stages of digging ourselves out of a low point in our industry when supply related production disruptions are at their worst.
While the strong year over year performance was nice to see it's really the sequential improvement that tells the story of how we're performing operationally.
Turning to our balance sheet net debt, excluding <unk> 16 lease liabilities declined by $18 million quarter over quarter to $937 million in Q2.
Some good progress.
This includes the funding of approximately $10 million spent on share buybacks during the quarter through our normal course, issuer bid, which Rob will discuss further in a moment.
Our net debt to adjusted EBITDA ratio continued its downward trend ending the quarter at 1.71 times down from one nine times at the end of Q1 'twenty three.
And within striking distance of our long term target range of 1.5 times or better.
Our leverage ratio should naturally improve in the coming quarters as a generating an increasing amount of free cash flow.
Overall, we are pleased with our performance in the second quarter.
The environment continues to improve we're making great progress operationally.
Our balance sheet is in great shape, and we're executing on our capital allocation priorities things.
Things are coming together.
Our shareholders and all our other stakeholders. Thank you for continuing your continued support.
And with that I'll now turn you back over to Robert.
Thanks Fred.
One final brief discussion about capital allocation now that you have heard our operational and financial position.
Our views on capital allocation are provided in an investor note on our website for reference.
In Q2, we generated approximately $110 million in cash from operations and here is how we allocated.
First <unk>.
Capital expenditures were about $76 million.
As we have always stated we invest in the business first we need a strong core.
As we have discussed our investments have to meet hurdle rates on new or replacement business.
We also look to invest strategically in R&D acquisitions, and new technologies and so we did that in the quarter also to the tune of about a million dollars.
Note that in the past year, we have invested in aluminum are battery technology graphene enhanced batteries additive manufacturing technology, leading edge software programs unique giving programs and many other product and process improvement technologies.
We also realized on a revolt explore investment by exchanging our Volta shares for nano explore shares basically doubling the value of our investment.
As you know automotive is a leading technology and innovative industry and we believe we are leading edge in many areas.
We also paid down some debt as Fred noted with net debt of about $18 million lower quarter over quarter, and so we strengthen our balance sheet.
Our strong balance sheet is an advantage in our industry, where we have seen a lot of supplier distress over the years customers do not want to worry about the credit worthiness of their supply chain is a financially distressed supplier becomes a problem for the customer.
We paid our usual dividend to our shareholders approximately $4 million or $16 million on an annualized basis, providing our shareholders with a positive return on their investment.
Finally, we purchased approximately 1% of our shares for cancellation under our normal course issuer bid or just over 815000 shares.
Our average price was approximately $12.30 per share. So we believe it was good value.
Total cash spent was just over $10 million.
At our enterprise Iot EBITDA, multiple which is at or near our historic low we believe an investment in our own company is a good investment.
It also rewards our supportive shareholders with a greater piece of the company without having to write a check.
Note that our N CIB is suspended during our blackout periods, we intend to be back in the market again this quarter.
We anticipate with our increasing free cash flow profile, we will continue to have greater flexibility to deploy cash in the best interests of the company.
So now it's time for questions. We see we have shareholders analysts even some competitors on the phone, but also employees. We may have to be a little careful with our answers, but we'll answer what we can thank you all for calling.
Thank you Mr. William.
We will now take questions from the telephone lines.
We have a question. Please press star one on your devices Keypad you may cancel your question at any time by pressing star to Keith Presto and at this time. If you have a question that would be a brief pause for all participants register and we thank you for your patience.
Our first question is from Christopher <unk> from C. B I D. C capital. Please go ahead.
Hi, Thanks for taking my question.
Congrats on the quarter I was just wondering.
In Europe .
The weakness that you're seeing there is that.
<unk> based or is it some of that specifically related to the metals.
You acquired a few years ago now.
I Wouldnt say its specific from a policy I think it's broader in terms of our product portfolio, there and volumes on certain platforms as one customer in particular that we saw a decline in volumes.
Keeping a close eye on that hopefully I saw the trend going forward, but we were down quarter over quarter and it wasn't necessarily one specific location that was across the region.
Okay, Great and then.
Maybe just on a different point.
How are you.
Caring for.
Potential strike at one of the.
More than one of the Detroit three.
Just what Martin for answering.
Sorry for that.
Yes, we're really.
More focused on the response.
If one of them goes on strike or multiple.
How we stopped production.
Shipping those types of things, mostly operational is not much we can do in the big picture, but.
As far as cost cutting in the short term those types of things that will put our plans in action over the next couple of weeks and then wait to see what happens.
We had a similar.
Situation back in 18.
19, Glenn.
When GM went on strike, we had prepared how we were going to respond.
<unk> been a temporarily cut costs.
For a little bit they made up all of the production afterward actually into the following year.
So as Rob referred to earlier from a overall volume point of view they will tend to make up all of their production on overtime or whatever they got to do to get the numbers, but.
I think that will prepare like you did last time essentially.
And of course keep an eye on it as negotiations go.
We'll find out in the next couple of weeks there is a specific target or if theres multiple targets.
What would you expect.
If there were to be a strike it would be kind of similar repercussions.
2019, GM strike or are things a little bit different this time around.
The supply chain is quite a bit more fragile than it was four years ago.
There's a lot of noise.
It's been four years a lot has happened in the last four years.
So the Union has has things that wants to accomplish.
But.
I think the Oems are also have learned that they can make a lot of money when they don't have too much product. So.
How they're going to approach it in the past would have been to build inventory ahead of an anticipated strike.
And we haven't seen that which means they will build thereafter.
So.
I have not seen the normal preparation that we would typically see not sure. If we understand why that is just yet but my belief is.
Selling a one car for a lot more than they used to versus selling two cars at cost.
The big difference in how they react.
You make a good point to some of the potential for agility.
Suppliers.
As opposed to 2019 I think there is some fragility in the tier two and tier three we're in a strong position. We've always use those opportunities to take advantage of those opportunities customers need strong suppliers I think that's one of the comments that we made in our comments.
But ultimately.
This is an industry that is used to shutdowns.
Some of them are different than others cohort is different than a strike the strike is different than the usual shutdowns in July .
Christmas time in order to manage inventory.
So we'll see we'll see how it goes it could be that you know you have a two week strike and then people run through Christmas.
And make it up so and with respect to what's exactly going to happen I think we're.
We're listening to the conversations I'm, having conversations similar similar to what all the analysts on the phone or two I think.
I've been in this industry.
Remember now 33% to 40 years old place to law never too long, but every time I've seen a strike and I work for an OEM for 24 years as well so.
Every time I've seen a strike in my memory the volumes are made up.
After the fact so.
I was just going to be a matter of how much makeup there has to be in my view.
Thanks, I appreciate the color and I'll jump back in the queue.
Thank you.
Thank you next question is from Michael Glen from Raymond James. Please go ahead.
Hey, good good evening, so just to.
Think about that.
Whats being talked about in terms of a strike clearly the unions are.
Asking first though.
Starting point, some fairly large wage increases.
If we think about where you're positioned where your plants are positioned in proximity to the OEM plants. This.
Does that sort of labor inflation does that necessarily spread do you have to reflect that as well across your facilities.
But in this case, we're actually ahead of them. Okay. So keep in mind that the wage inflation that took place during COVID-19.
Unionized plants have not renewed contracts is essentially the Detroit three haven't.
The adjustment that everyone else is already made.
So, though the wage increases the union are asking for seeing very high.
The industry, probably adjusted to a good portion of that.
Two years ago back when we were having employee travel, especially in the United States. When we were having trouble keeping people.
So unlike the past where the union mindset precedent of future wage increases in some ways. It has happened in the opposite because of the pandemic.
And the there is already a measure that the union and management can use in any industry that shows that you know wages have increased across the board.
So I'm not concerned about the residual wave.
That I might have been concerned about years ago, because again it started with the supply base more so.
Okay, and can you remind or can you give an indication what your union penetration rates are throughout North America, yeah, pretty pretty low and a few plants in the U S, which we've already resolved.
Four years away from from another negotiation and in Canada, it's about too as well with uniform.
So we've pretty much already settled with our unions and then other countries there.
Countrywide in Mexico, all plants have unions, Germany, Spain same thing.
All our union clients.
Canada, United States are under contract for multiple years.
Yeah, we settled over the last year or so.
Okay.
And so I understand the commentary surrounding the commercial recoveries well I understand some of it.
But are you can.
Can you just help us.
Like for.
Like how.
If we're thinking of North America is there a way to frame for us. Thank you put up a decent operating margin in the second quarter in North America. It sounds like there was some pressure recoveries in there. So they like that may or may not happen in Q3 that.
Yes, so so think about it this way, let's say you pay $10 for a part or we get $10 for a part.
And inflation goes up 20% or $2 and we negotiate with the OE to recover as much of that is possible. If we're really lucky.
You get $2 and you get it in the peace cost.
But everyone recognizes there's a portion of that inflation that will go back down again, it's not going to continue at the same rate energy is probably one of the best examples.
So you negotiate with the with the OE.
That new price.
And in the best case, and where you always try to focus is getting it into the peace costs are into an index, which adjusts to the pes costs, which we've done a lot of <unk>.
What will happen, sometimes when you're negotiating that this retroactive you say okay. It's started in January 1st started started in 2022 or whatever and it's different for all the parts and the different products.
You might see a portion of that will spike.
And then level out and then you haven't had a new premium on top.
A lot of times, that's not going to reach where you were before so your margins are compressed a little bit because getting 100% recovery is difficult because there is some some variance in there as I said.
But we've done a pretty good job of recovery I would say I'm very happy and proud of the efforts everybody's put in and we have a very good view.
Do you have what our costs are which helps us with our customers.
And I would say that will continue throughout the rest of this year. It will again vary youll see it into next year, but as I think especially the latter part of next year, you'll start to see it.
Normalized and when I say normalize.
I just mean, it always something thats going on its just at a much lower level.
But we're constantly in commercial negotiations Mr.
It's just that because of the inflation rate went so high so fast the activity level is significantly higher the last few years than it normally would be.
A lot of people like to focus on the quarterly results. That's why we're out of the discussion. That's why are the IV annual guidance. So I think within that that's what you got to look at.
That's a really good point you can settle faster to hit a number in a quarter or you can work. It work at work it and get the right price, which is better for you in the long term and our tendency has been to do the latter.
Okay.
And if we're thinking about.
Like.
See I don't I know, we don't have a perfect view on it because we don't know the amount of commercial recoveries, but within North America E. As you look to the back half of the year you see.
Margin improvement continuing excluding commercial recoveries.
We're running pretty well right now that's why we're giving you the annual guidance. So that's a leading question you just follow the discussion that we've had.
I had made the comment in the.
Earlier that our production levels are getting in our better than in some cases, where we were at 19, So I'm feeling pretty good about our operations our operational run well.
Okay. Thanks for taking the questions.
Yes.
Thank you. Our next question is from David Ocampo from Cormack Securities. Please go ahead.
Yeah.
Mr. Ocampo Your line is opened.
Sorry about that I had it on mute.
I just wanted to follow up on Christine's question.
As it relates to Europe , I mean, it does seem like there's a pretty clear line of sight of improving those operations.
Hum.
It is the expectation I mean, if I, if I kind of do some back of the envelope math. It suggests that you guys are going to get into that low to mid single digit EBIT range for Europe is that the right way of thinking about it where we should see a quick snapback in Q3 and Q4.
I think there's and I'm honored that I mean, I think our view is that there is upside in Europe .
Right now we're dealing with some some volume headwinds or wrapping their heads around that and see how the next couple of quarters calls from that perspective.
I've got some specific platforms and customers that are impacting that so obviously the next couple of quarters will be dependent on that.
And that just to kind of go off the discussion on the commercial activity.
There's quite a bit of commercial activity still ongoing some of its earmarked for Europe . So we're expecting that in the back half of the year, you'll get a bit of a lift from that.
From some of that activity as well.
But obviously the overall performance longer term will be dependent on the volume environment.
Got it.
And Fred maybe the last one for you if I kind of take a look at the working capital space into 2021, it's been a pretty big drain on the company.
As we kind of go into 2024 with increased volumes or are you still expecting working capital build or is there going to be some sort of release in the coming quarters or coming years, well I think we've seen a big increase in our sales too right. So there's a bit of a connection there obviously you weren't covering involved with that.
I think for this year you were expecting.
Typical seasonal pattern at the end of the you're going to expect some unwinding.
Just based on seasonality and we.
So the reverse of that in Q1.
And then heading into next year, depending on the sales level should probably hover around similar levels going forward.
Dependent on volume and so forth.
Expect any huge reduction over the medium term.
Okay. That's it for me Thanks, a lot guys.
Thanks.
Thank you. Our next question is from Tami Chen from BMO capital markets. Please go ahead.
Good afternoon, and thanks for the question I just had two quick clarifying one.
On Europe . So if we if you try to back out the the recoveries I'm just trying to understand the underlying business right now is that generating positive EBIT at this point.
We're not going to get specifics on the commercial magnitude and items, obviously, there's some sensitivity around that.
Obviously, we were faced with some volume headwinds of quarter over quarter. There was a decline just based on that so I think I'll leave it at that but.
Again going forward, we have some commercial activity is still ongoing we got to close those out before the end of the year and some of that will go back to beginning of the year right. So again, there's a timing effect, which were trying to explain but it's really hard to put your finger on and for you guys to model well and I appreciate the complexity here, but.
You got to look at it in totality for La.
Longer period, the underlying business includes the commercial relationship we.
We make parts, where you get revenues we of course.
We get depends on the commercial relationship was kind of a contract amendment there too so.
At the end of the day, if you if your revenues exceed your cost sharing their margin and Thats, where it will be.
Right, Okay and in terms of improvement in the second half.
This is in reference to an earlier question just wanted to make sure I understand what you're saying it sounds like the improvement in the second half is more so due to just the timing of the recovery is because in the second half it tends to be a seasonally lower period or are you specifically anticipating.
For example in Europe that one particular customer production will also improve in the back half there since that first half for you.
I think it's early to tell whether you go back to normal seasonal patterns from volume perspective, I think were you know the industry is digging themselves out of a whole inventory levels remain low.
So, it's really hard to see whether or not the back half we ended up going back to the typical patterns now we did see a bit of a low point in Europe . So the whole business of some bonds recover in Europe .
But on top of that as I noted the commercial activities should help us all in the back half.
Got it okay.
So I still stick volume and put it aside and just even it out for the moment operationally.
We continue to get back to the normal levels.
The plant we.
We have got from our culture continues to improve as we've said in the past so pretty happy overall with the operational performance. So.
I see upside.
As we go forward again.
Volume has to be there.
Got it thank you.
Thank you.
Thank you once again, please press star one if you have a question.
Our next question is from Brian Morrison from TD Securities. Please go ahead.
Hi, good evening.
When I look at sort of investor focus on the knee.
Operating margin you tick the box leverage you check the box Europe , you're back to positive operating margin.
Free cash flow I want to talk about first off so you're flattish year to date and you're still targeting 150 to 250 I get the drivers, but the one question I had you made a comment on cash taxes paid so I just quickly looked it up it looks like cash taxes have been about 50, 657% of your edp to date.
I mean, your cash taxes in the back half a year it could be a big swing I'm just wondering how should we think about that.
In terms of a percentage or.
Yeah, absolutely and just to clarify the guidance is $1 50 to 200, <unk> you said $2 50, but just so I guess, what I'm, saying so one.
150 to $201 50 to 800.
Yeah.
Anyway.
You're spot on I mean.
If you look at our last number of years in terms of patterns in the back half of the year from a free cash perspective has always been it's going to be better than the front half and cash taxes is usually an element of that a lot of these installments cash installment tax installments are driven off of prior year. So a lot of them end up being front end loaded on the front half so I'm expecting cash.
<unk> in the back half to dropped significantly compared to the front of house. So that's one of the leavers unwinding of the working capital is another big one.
That should happen as well as just seasonally.
And then the potential upside in EBITDA as well depending on the ball on this course and then some of the commercial elements, but.
I mean, the roadmap is there.
And that's the reason why we confirmed our guidance for the unregulated EBITDA sorry process. Okay.
Yes, sorry, so obviously EBITDA grows reversal of working capital.
Capex goes down and then these cash taxes are significantly lower than the first half yes.
Gotcha, Okay and then the other question I have is your leverage you've done a great job since the pandemic, reducing your leverage share one seven times with the cash flow you're forecasting in the back half of the year, you're going to be well below your target I'm, assuming normal course operations of course, I guess M&A is sort of sounds like its not in the picture here.
Should we forecast sort of leverage of one five times and that is how active you should be in your in CIB.
We'll have the discussion with our board every quarter the.
The discussion.
This time, we have a normal course issuer bid out there we were I think fairly active.
Q2, 1% a year.
I'd say ishares are there. So so so we will be buying in this quarter I don't want to.
Handcuff the board on the next one but I think.
We indicated when we get our NCI visa by up to 5 million shares.
We're well into that.
Anticipate buying a significant chunk of it we'll see how the market is and all that type of stuff, but we've got a lot of cash flow to generate.
Is that is being generated and that's a good deployment of cash we think an investment at the EV to EBITDA levels that we're at is a pretty good investment I think a number of our shareholders agree with that at the same time, we'd like to strengthen our balance sheet too.
In terms of M&A and strategic investments, we've made some strategic investments as you know.
But you don't have to spend a lot to make an investment in technology very often some of the stuff that you are seeing so we're balancing that pretty well I think.
It's nice to be in a position where you are.
Your discussion is how are we going to allocate my cash for sure.
Sorry, one last question and I'll squeeze in Fred what's your effective tax rate for the year.
So first half we were around 20% I'm expecting the back half to be.
Something similar maybe a little bit higher but not much and that's obviously dependent.
Dependent on mix as well as some tax planning strategies that we have in front of us.
It makes a lot of sense, thanks, very much alright. Thank you.
Thank you.
There are no further questions registered at this time so Mr will the boral returned to the meeting back over to you.
Thank you very much everybody I know you have had two earnings call from US two hours in here get ready for dinner. So thank you very much for.
Listening to our presentation.
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