Q3 2023 Martinrea International Inc Earnings Call
All participants your conference is now ready to begin.
Good evening, ladies and gentlemen, welcome to the Martin We are international third quarter results conference call instructions for submitting questions would be provided to you later in the call I would now like to turn the meeting over to Mr. Rob will the board. Please.
Please go ahead Sir.
Okay.
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 reign, as CEO, and President and our CFO Fred di Tosto.
Today, we will be discussing Martin raises the results for the quarter ended September 32023.
I refer you to our usual disclaimer in our press release and filed documents I will speak then Pat and Fred and me again briefly and then we'll 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 world.
The UAW strikes were disruptive messy and more acrimonious than they should have been.
Not a material impact on our great Q3, but it impacts our fourth quarter and year end just as the GM strike in 2019 impacted our fourth quarter then.
But it could've been a lot worse.
We now have labor piece at our largest customers for years.
Good thing and customers have to make up production after the strike, which bodes well for the first half of 'twenty 'twenty four.
We continue to believe the industry is stable with volumes set to expand in the coming years, particularly in North America.
We went into the reasons for this in some detail in her 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 remains 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.
The U S consumer who drive 70% or so of the U S economy is in decent shape.
Note that U S consumers often have long term mortgages at fixed rates. So increases in interest rates do not hurt homeowners in the U S as much as in Canada.
Second there remains a shortage of vehicles in inventory, while being rebuilt has some ways to go.
U S Saar and production levels are rebounding, but are still not at historical levels.
By which I mean average levels over the past 20 years, roughly the lifetime of our company.
We continue to see production and sales of vehicles going up in 'twenty 'twenty four from 2023 and up in 2025 from 2020 for a good background for our business.
Let me address interest rates interest rates I think have peaked in Canada and are close to peaking in the U S.
As I've said before our company started 22 years ago. So at least in terms of interest rates, we were back where we started.
Note that in 2001 U S. Saar was higher than it has been in 2020 three.
When U S population was 285 million people today, it is $340 million think about that I.
I do believe that today, some people are holding off on.
On auto purchases because of higher interest rates not to mention higher auto prices, but the reality is that people get used to paying interest in the market adjust when.
When you're used to zero percent financing.
Our rate of 2.9% or 3.9% looks punitive.
When rates are generally over five per cent for awhile, such an interest rate looks like a bargain.
And I imagine we will see some competitive auto financing in the next few years, we are seeing some of it now.
Core inflation is coming down by whatever measure.
Note that we have seen reduced prices or a reduced rate of price increases in many areas recently.
We also believe the rate of wage increases to help workers deal with inflation in the economy will moderate looking.
Looking at the UAW for example, a lot of the increase was a catch up to broader wage hikes seen in the economy in recent years.
Geo politically we share the concerns of everyone about conflict.
In the Ukraine, and the Middle East.
And potentially elsewhere.
We don't want to see another energy crisis, which is why I personally believe we should be ensuring adequate our surplus energy supplies.
Overall, then our industry is in pretty good shape as is our company is.
It's not to say of course that there are not or will not be some headwinds supply chains have challenges, albeit reduced.
There will be geopolitical issues.
V sales projections may be way too optimistic Oems must learn to make money on evs et cetera.
But I think there is a tendency to be overly negative when looking at things through a short term lands and so sometimes it helps to take a step back look further out and put things in perspective.
And we just had a record quarter with solid free cash flow, we are positive and pumped.
With that said here's Pat.
Thanks, Rob Good evening, everyone. Our third quarter financial results were strong and generally consistent with the prior quarter from a production and sales and operating margin perspective.
Adjusted EBITDA continued at record levels coming in at $163 million and adjusted operating income margin was 6% free cash flow was up nicely quarter over quarter as expected solid performance overall, Fred will provide some more color on this.
As Rob spoke earlier.
The UAW workers at the Detroit three Oems go on strike in multiple locations, which began on September 15.
Many of you are aware UAW has reached agreements with boards to lenders in general Motors, which is great news in Canada uniform quickly reached settlements with the Detroit three Canadian operations.
U S OEM plants affected by the strike action are coming back online as such the restart and ramp back up.
That's begun but it will take some time to get back up to full volume is it could be a bit bumpy, depending on their readiness and performance of the supply base. Our plans are in place and we are executing with no problems.
The strike did not have a significant impact on our Q3 results given the limited scope and the fact that it was only in effect for a few plans for the final two weeks of the quarter, but that said, we will have more impact on Q4 production volumes and results.
Well, we have made great strides in diversifying our customer base in recent years, the Detroit three Oems still account for close to two thirds of our sales.
The plants that were impacted by the strike action cover a number of different platforms, including some significant and profitable programs for the Detroit three.
We do have content on the effected platforms. So we were directly impacted.
There have also been some spillover effects, most notably lower engine block production in some cases.
We have managed the situation and likes cost effectively a labor reductions in some situations are a bit tricky.
Tight labor environment, because we want to make sure we had the workforce as the volumes come back as such.
We have been careful adjusting prudently knowing full well that we would be called upon to turn things back on in short order.
While production volumes will look like in the fourth quarter is a little unclear at this point given the strike action as well as the pace of the restart and ramp up of customer plants.
But that said we are providing you with an update on our 2023 outlook.
Withstanding the strike we are confident that we will meet if not exceed the high end of our previous sales outlook of $4.8 billion to $5 billion.
As we were tracking well I hinted this pace.
As of Q3 in part due to higher than expected tooling sales, which Fred will provide more color on in a moment.
Given the lower volume projection in Q4, including the strike impact and some potential unevenness around the restart and ramp up we may fall short of the low end of our 6% to 7% target margin range.
But we should still be close.
The higher tooling sales, which tend to be at low or no margin is also a factor in this likewise, we continue to expect record free cash flow for the full year of 2023, but can also end up below the low end of our $150 million to $200 million target range again, we should be close.
Overall, a really strong year.
I would like to emphasize we are on track to meet our outlook heading into the fourth quarter before the strike.
We expect any loss volumes as a result of the strike to be made up over the coming quarters history has demonstrated that this is typically what happens for example.
Following GM strike in 2019, the company worked overtime to rebuild loss volumes in order to meet demand and prevent sales losses.
There continues to be a lot of upside in our industry automotive sales in our core North American market remained resilient production is expected to grow in the coming years and Theres still a lot of pent up demand and not enough vehicle inventory of course, we are mindful of macro risks such as higher interest rates and inflation, but <unk>.
Overall, we remain upbeat about the long term prospects of our business.
Turning to our global operations in North America, our adjusted operating income margin declined quarter over quarter on production sales that were down by about 2%.
As we indicated on the last call the timing of commercial settlements resulted in some peaks and some valleys in our financial results and margin profile between orders.
We had a lower amount of settlement money in Q3, which explains part of the margin decline the lower production sales and higher tooling sales quarter over quarter were also factors again tooling sales tend to earn low to no margins.
We're performing well operationally and North America at least as good if not better than we were performing prior to the pandemic.
This reflects the continued progress we have made in our Martin Raya operating system initiatives given that our operations are performing at a high level future progress will primarily be a function of volumes.
On that note volumes have been relatively consistent setting aside near term distortions as a result of the strike supply chain pressures are easing that we do continue to deal with some issues that are impacting production such as labor availability in the United States.
As Rob mentioned earlier volumes on a number of electric vehicle programs have been slower to ramp up.
This doesn't come as any surprise to us.
While this impacts us to some extent on EV volumes. It stands to reason that fewer E. These sales will likely translate to more ice vehicle sales.
On the cost side inflationary headwinds are generally better compared to the last few years, though persist in some areas of the business our efforts to offset these costs as well as program volume shortfalls through commercial activity are ongoing we saw some settlements in the third quarter and expect more in the future commercial activity will continue in 'twenty.
24, so we expect it at a more moderate pace.
Turning to Europe, adjusted operating income margin improved quarter over quarter as we alluded to on our last call. The third quarter benefited from favorable commercial settlements in Europe.
The size of the commercial activity, which has yielded positive results. The region continues to deal with weaker than expected production volumes and inflationary pressures.
These headwinds did not worsen in the third quarter, they have yet to improve in any meaningful way.
In our rest of World segment small portion of our overall business representing about 3%.
The third quarter production sales.
Adjusted operating income margin was higher quarter over quarter similar to Europe commercial settlements in our rest of World segment drove a strong performance in the quarter production volumes in China overall have also been weaker than expected.
I am pleased to announce that we had been awarded $80 million of new business since our last call consisting of $70 million in our lightweight structures commercial group and $10 million and our propulsion systems group with multiple customers year to date, New business awards have totaled $300 million.
Overall, we are pleased with the third quarter performance continued to manage our operations well despite the headwinds.
I want to thank the Martin Red team for their hard work in delivering these results.
As well as their dedication and perseverance.
I'll pass it to Brett.
Thanks, Pat and good evening everyone.
As Pat mentioned, our Q3 performance was solid.
EBITDA continued at record levels, we generated strong free cash flow reduced our net debt and leverage ratio and maintain adjusted operating income margin at a healthy level.
Taking a closer look at the results quarter over quarter generated an adjusted operating income of $83 million in the third quarter, which was essentially flat over Q2 on production sales were also flat at 1.25 billion.
Note that in our industry, the third and fourth quarters are typically the weakest because of holidays and scheduled downtime. So these are really good results.
Adjusted operating income margin came in at 6% consistent with a six 1% we generated in Q2 despite.
Despite a 17% increasing tooling sales, which typically earn low or normal or no margins for the company.
This on top of a 71% increase in tooling sales in Q2 compared to Q1.
Tooling sales are coming in much higher this year than our original expectation potentially exceeding 400 million for the year.
In addition to some timing effects.
This is also reflective of upfront capital payments, we are receiving from some Oems on soon EV programs and other volume up requests, which gets treated as tooling sales as per I FRS standards.
Collaborate on this a bit on most programs capital paid by suppliers is typically recovered in the piece price of the part over the life of the contract.
However, given the uncertainty surrounding EV adoption rates and the ramp up of EV sales that patent Rob spoke to earlier, we are in some cases, but not all cutting deals for capital payments upfront from the OEM had a program launch in those situations, where we see volume risk is elevated.
Moving on adjusted net earnings per share came in at 68 cents in the quarter higher than the 62 cents. We generated in Q1, a great result, this included a $7 million net foreign exchange gain in the quarter.
Free cash flow came in at $79 $2 million, a really good result, and a notable improvement over the $25 4 million generated in Q2 as expected.
On the last call we spoke about the drivers that we expect it will enable us to generate free cash flow in the back half of the year.
Including positive working capital flows and significantly lower cash taxes.
I'm happy to see that this is playing out as anticipated.
Looking forward working capital and cash taxes should remain tailwind in Q4.
Obviously Q4 volumes are impacted by the strike as Pat noted, but regardless, we continue to expect record free cash flow on a full year basis in 2023.
Looking at our performance on a year over year basis third quarter adjusted operating income of $83 million was up 19, 1% over Q3 of 2022.
Production sales there were 10, 9% higher.
And adjusted operating income margin of 6% was up from the five 8% generated in Q3 of last year.
Recall that Q3 of 22 was a quarter, where we started to see some better results for in a low point in our industry when supply related production disruptions were at their worst.
As such the year over year comparisons are becoming less pronounced.
The sequential comparison continues to tell a better story of how we are performing operationally.
Turning to our balance sheet net debt, excluding <unk> 16 lease liabilities declined by $48 million quarter over quarter to $889 million in Q3.
We continued to make good progress in deleveraging in.
And this includes spending roughly $11 million buying back approximately 800000 shares during the quarter through our normal course issuer bid.
Our net debt to adjusted EBITDA ratio continued its downward trend ending the quarter at 1.56 times down from $1 seven one times at the end of Q2 2023.
Our leverage ratio was basically at our long term target range of one and a half times or better.
Overall, we are pleased with our third quarter performance.
We continue to perform at a high level despite industry headwinds our balance sheet is in great shape.
We're executing on our capital allocation priorities.
To our shareholders and all of our other stakeholders.
You for your continued support.
And with that I'll now turn it back over to Rob.
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, but we intend to specifically talk to at each call.
In Q3, we generated approximately $153 million in cash from operations.
And here's how we allocated it.
First capital expenditures were about $62 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 paid down a good chunk of that as Fred noted with net debt of about $48 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.
As a financially distressed supplier becomes a problem for the customer.
This is especially important these days as we see the combination of geopolitical events UAW strikes interest rate pressures and so on having increased the stress on our supply base substantially.
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 800000 shares.
Total cash spent was approximately $11 million.
At our enterprise value to 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 in the last five years since the beginning of 2018.
We have bought back over eight and a half million shares 10% ourselves the company.
We all recall or was a pandemic and a few other negative things that occurred during that time.
We paused repurchases when the UAW strike hit, which we felt was prudent.
Repurchases under our normal course issuer bid will likely be lower in Q4, as we worked through the disruptions related to the strike and uncertainly uncertainty surrounding the restart and ramp back up to more normal volume levels.
We're also looking at some investment opportunities that would benefit us having said that we continue to believe that buybacks are a good use of capital given where our stock is trading at and we anticipate with our positive free cash flow profile, which will occur. We believe on a regular basis, we will continue to have greater flexibility to deploy cash in the back.
Interest of the company.
Finally as.
As Pat and Fred also mentioned a big Thank you to our people. This is a challenging business in a challenging world.
And you continued to deliver thank you for your dedication every day.
So now it's time for questions, we see we have shareholders analysts and even some competitors on the phone, but also employees. So he 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 <unk>.
We will now take questions from the telephone lines. If you have a question. Please press star one on your devices keypad.
So your question at any time by pressing Star two please press star one at this time, if you have a question that would be a brief pause while.
Thank you Sir.
A question we thank you for your patience.
Okay.
First question is from Michael Glen Raymond James. Please go ahead.
Hey, good evening, maybe just to start sorry, and I apologize for this but we were missing a few of the numbers I think right now.
Wait for the segments, but can you just clarify like left for the expectation for the operating margin heading into Q4 like what we should be thinking about there are within North America and Europe.
I think our opening remarks pretty much provided the guidance for the year. So I think you can probably do some math and back into what the fourth quarter look like.
We're obviously seeing some volume headwinds related to the strike and software in the fourth quarter. So.
Little unclear in terms of where all that ends up just given how the restart and the ramp up happens as soon as it's fanfare on whether or not the Oems make up lost volume. This quarter. Overall, we do expect them to makeup of us one more time.
But how much of that is in the fourth quarter, it's a little unfair.
So I think at the end of the day, we said operating margin free cash flow wise, we're probably going to fall short of our low end of the range, but we will be close.
That's for the year.
For the year.
Okay and.
So thinking about or Fred maybe even thinking about capex spending in 24 can you give an updated view on where that should should hit.
Yes. So this year, we are the guys who provide area we'd be essentially in line with depreciation and amortization as a percentage of sales and that is essentially.
Realizing so our capex spend.
Drop year over year considerably.
And we're not ready to give specific guidance next year, but overall I'm expecting next year to be in line with depreciation and amortization as a percentage of sales as well as generally speaking.
Okay, and then Rob when you you talked about looking at some investments.
I guess, you're probably talking about M&A is there can you just maybe dig a little more into that what you might be thinking about or size or timing or anything like that.
Well, if I told you what I was really taken up our epic that would probably be inappropriate.
[laughter] right not thinking about that are actually.
Right.
Right.
Yes.
We see lots of opportunities from time to time, it's not necessarily.
M&A and it's not necessarily the elephant hunting or anything like that others are.
There are opportunities we've made some strategic investments that you've seen now explore being one of them for example, and we continue to see opportunities. There. So we assess a lot of those.
Any particular time and.
We got to see we obviously, we're going to undo it is premature to talk about anything other than that I will say I think this.
This is probably true for anyone in the auto business. If there is a fair bit of stress out there.
In some areas so.
The merchant bankers in the investment dealers are pretty busy but I think.
I think you can assume we're not we're not elephant hunting.
Looking at investments.
Allow us to basically show or our ability to invest in technology and build it up.
Okay. Thanks for taking my questions.
No question.
Thank you.
Thank you. Our next question is from Tami Chen from BMO capital markets. Please go ahead.
Hi, Thanks for the question.
On Europe.
I think our core.
She will go some of the headwinds have been thank.
Thank you were going through some launches.
Hmm.
<unk> production that you kind of alluded to that a bit.
On the call today so.
I think Florida pull out the recovery is.
Like how is that segment performing who put that improving.
Possible.
Bill.
Great.
Yeah as far as the performance goes the plants that we have over there.
I would say most of them are performing better than.
Then pre pandemic.
There are either have launched on top.
Volume increases so.
Obviously, when there's a launch it's always a little bit of more distress, but in a couple of the plants one in particular they eat.
Increased ice volume products at the same time, they were launching EV products.
There's a lot of work I would say we're over the hump.
So operationally I'm feeling pretty decent as we go into 'twenty four.
As far as the market itself.
It's been very flat.
Oh, I don't know sales wise, where it's headed but my we anticipate it will be pretty flat as we go into next year.
Yes, I think ultimately financially.
The biggest challenge right now is the volume declines are hitting plan levels.
That's.
Putting some pressure on the business overall, we are offsetting some of that as well as some inflationary pressures on commercial activity and so forth you saw some of that comes in the third quarter.
But the expectation or I should say the hope is that the volume.
I ended up coming back to planned levels.
Yes.
We indicated in our remarks.
Right.
Uptake for Evs.
It's something that we're all monitoring I think we've seen some cutbacks from some Oems.
And to a certain extent as.
As we fill our plants with EV EV products.
Tend to be either delayed or ramp up more slowly.
That said in his remarks.
Reality is that the ice production may increase, but it may not necessarily offset where we're at I think that's true for basically everyone. Yes, it's interesting because it's Europe in Europe, the expectation was that yet.
The Appalachian adaptation rate would be much higher even in North America, but.
All the EV launches and we've done a number of them are just going to slow so far.
And then interestingly enough there are ice products that we expect it to go down that have actually gone up so it's kind of a strange situation that im sure will will level out in the next year or so.
Yes.
Policy not like Evs, I mean, I think a lot of people want them coming actually at a lower rate.
Governments mandate, that's thanks for the industry would be reduced government EV mandates allow the industry to evolve the way it should and I think you'll have a lot of scope.
I see okay.
When you say the biggest challenge was from volume not hitting plan level I'm, sorry is that because of the whole discussion.
Or is it something else negative customer mix.
Understood.
I think it's just flat as a whole.
Compared to what you would expect post pandemic I think theres, probably some some concerns with people as to what do I buy.
But we're seeing nice volumes up a little higher than EV volumes lower than expected, but the market as a whole is lower than expected.
In Europe in Europe. This is Europe's specific we absolutely think something different in North America.
Okay.
My second question.
More further out timeline.
I'm just wondering just with all the puts and takes between.
Detroit three now have some higher costs in there.
Structure from that.
The new contract with the UAW Theres the whole.
Poland to consider it.
In terms of how you think about the margin trajectory and you're kind of at around 6% now.
Thank you.
The more medium term.
And get to 7% or higher or do you think there's some puts and takes there are some some structural factors that right John.
Thanks.
Yeah. That's a really good question because the transition is taking longer than everybody expected, we'd launched ice programs a number of them.
All going slower than expected, but as Fred said we.
We had some pretty good deals from a capital point of view, but it's still a capacity that's not hit its numbers, yet, but it will and then ice volumes that are a bit higher.
The unexpected.
So in that environment, we're going through that inflection point I wouldn't expect margins to jump up significantly in the next year or two.
But I think once the market does it shifts into evs given the investments that are out there I think you'll start to see a more normalized market as we did before the pandemic.
I think.
Tammy you are probably the expert on this looking at what's happening with a lot of suppliers are on a relative basis, our operating margins.
Our better than most.
And I think some other other people are seeing some challenges as well.
But I think with respect to the Oems also.
Recognize that even though the.
The cost of labor has gone up.
Significantly with the UAW contracts and I think they've said this.
A result of an $800 per car, it's not pricing the cars out of out of reach of different folks and all that type of stuff and our customers in North America, we're making pretty good money as the UAW. So.
So often pointed out.
So in that sense I think there are certainly money to be made if you look at the if you look at the underlying pent up demand and desire for new vehicles and the fact that the vehicle age average vehicle age now approaching 13 years, I think youre going to see the ability for our customers.
To make good margin on vehicles for a long time.
And I think one more key point in all of this relative to margins is.
We recovered a lot of our inflation as did a lot of the industry, but you didn't recover 100%.
So over the course of the next few years as the new products launch and the inflationary pressure is it relief because newer products have.
And then the inflation adjustments in them.
The most part and of course, we expect inflation will continue to drop on a relative basis. So I think youll see that normalize as well the good news from where I'm sitting as operationally, we're running as well or better than we were before the pandemic.
And so really it's a matter of volume and the.
E D is taking off as expected over time.
Okay.
Got it thank you.
Thank you Brian.
Your next question is from Brian Morrison from TD Securities. Please go ahead.
Thanks, very much couple of questions. Please so just starting with that increase in tooling costs.
It looks to me like it's about $100 million higher than what you thought obviously margin deca.
Decremental will this reverse in 2024 or is this going to remain a headwind with respect to tooling costs.
No at the current time.
So I would characterize as a bit of an anomaly for 'twenty three again.
A lot of it's based on some of these commercial deals we cut on some of these more let's call them riskier volume situations. So we arent.
Willing to make those investments so they got customers too.
Some of that upfront.
Being treated as tooling I don't expect a lot of that going forward beyond 'twenty three so unexpected next year for the tooling sales volume to normalize.
Back to what we typically see in any given year, let's call. It 200 to 250.
Okay. So if my math is correct that should be positive to the operating margin to the tune of maybe 20 basis points.
Percentage wise correct ballpark.
Okay. So when you talk about guidance for 2024, I think if I heard you correctly, you said that it will revert back to margin performance, specifically it will revert back to just incremental margins as opposed to launch costs and cost recovery and some efficiencies is that is that the message.
I'm not sure exactly you mean or you haven't really been specific on next year, we're talking more broadly.
I was referring to the tooling.
On that therapy, a headwind heading into next year.
And from a macro perspective, we do see.
The market volume in North America, specifically, improving so that should support.
Pretty good year from a margin perspective, but at this point in time, we're not ready to give specific guidance.
That's fair can you say a high level with launches be a tailwind will cost recovery be a tailwind next year.
I would say.
Heading into the back half of this year I would say our launch activity.
How does it fairly normalized.
These launching work, we're coming out of a very heavy lifecycle.
I was actually looking at some numbers.
We've added close to $2 billion of sales if you compare our sales by 2020 I know there was a bit of a dip related to coal and so forth, but that's a lot of business. We brought online right. So that's behind us and I'm expecting the next.
<unk> talked to 18 months to be a more normal level of launch activity.
Okay. So just high level, then you should have positive impact from incremental margins positive impact from launch costs.
I assume some efficiency because you do have tailwind just based on message.
Yeah.
And to add to them.
Said that we also mentioned.
A number of potential headwind.
Alright.
How much longer out.
Or somewhere there is that there is no.
Something else somewhere else so our strike so if theres another black Swan event, we're gonna have yeah, I think we are.
Good thing is we've got a black Swan event every six months.
The transition is one item that we highlighted here.
It's a bit of.
An unknown I think the entire industry at this point.
Okay. I mean, if you wanted to summarize I'd say volumes are going to be good we really believe that what the EV volume is versus the ice volume is very unclear and then when the Oems layer back in some of the strike losses, probably be in the front end of next year, if not the remainder of this year.
Okay.
And then I guess this is probably one of my key focus here is I really appreciate it and I think investors do as well just focus on free cash flow, which was very strong this quarter and also your balance sheet improvement you're operating at near full capacity. So you're optimizing your assets and your free cash flow I just wanted to make sure.
When you talk about M&A that this remains your focal point at your priority, we're not going to be taking a step back and looking at distressed assets again are we.
I think thats right unless there is something we can't review. So if you go if you go take a look at the <unk> acquisition that we did and the price we pay for that.
And their assets.
We've got a challenging asset Eric had a couple of old ones in North America, and so when you can get something like that it since it's really good.
And that's in the context of capital allocation, we look at all of that stuff, we've looked at that on a consistent basis.
I'm very happy that our balance sheet is strengthening we all are.
Very happy that.
Financial numbers are getting better.
One five or better was our target.
2017, and 18, you got there and then we went up we continue to just recall how much work. We won in 2019, we continue to invest in that throughout the pandemic now normalizing now increase our our business organically by a substantial amount and we've been working very hard.
Hard to.
Get back to that range, one five times or better is a good place to be I think it's also important for a company like ours to keep our powder dry, but we are not actively searching big.
Kevin.
There are no elephants in our crosshairs right.
That's what I'd like to thank you all.
Alright, thank you.
Thank you. Please press star one at this time, if you have a question.
Our next question is from Matt Christa Fritzen from CIBC. Please go ahead.
Hi, Thanks for taking my question.
Alright, I'm wondering can you kind of provide us with an update on <unk>.
Yeah.
Date of the supply chain and it.
What did you call.
Carlos you're seeing.
From the Oems, if you're able to kind of separate that from from the impact of the strike over over the past little while here.
Yeah, So first off with our internal supply chain, meaning the tier twos that we purchase from.
As the strike started to or at least the contracts look like they were going to get negotiated and we're going to get a settlement. We immediately started putting our feelers out to our supply base to try to get a feel for are there any potential problems or distress and in the moment.
Internal supply chain, we don't see or foresee any problems.
Our supply chain is a lot smaller than our customers and we have seen some customer disruption.
Over the last week.
Not clear how impactful it will be but you know, you'll see a shift or shifts coming out of some of the customer plans based on something going wrong in the supply base.
They have started back up from the strike we anticipated this we talked a little bit about it in our speeches.
But I haven't seen anything Super critical at this point, that's going to take anybody's legs out from under them. So we're keeping our eye on it I know the Oems are all over it.
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I think they expected some pain as they started back up again.
Sure.
Alright that makes sense.
Can you just provide us with an update on how you're how you're finding the labor environment right. Now are you able to to hire as many people as you need them.
Is that a reasonable yes.
The toughest place we've had since the pandemic, but far and away it's been the United States.
I would say it's better.
Visited we visited.
A couple of our plants this week.
And both of them talked about the fact that the that the labor situation has improved but that said it is not what it was prior to the pandemic.
Obviously, we worked on labor rates and so forth.
During the pandemic like everybody else.
And it certainly helps stabilize at but we're keeping our eye on it frankly.
Frankly, we have moved work out of the U S into Mexico and into Canada.
Help this situation and are currently still doing that until we see what we consider completely stable workforce. The good news is we've got capacity.
Our places we can add some capacity in Canada, and Mexico, and so we've been able to shift some production to help ourselves.
Okay. Thank you I'll jump back in the queue.
Thank you.
Well there are no further questions registered at this time, Mr. Boyce I'll turn it back over to you.
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