Q1 2024 Martinrea International Inc Earnings Call
Fred Di Tosto: There are still a lot of operational opportunities. It's funny, as you start to get better, you find more opportunities to get even better. So our plant's ability to identify opportunities just continues to improve. So that's an internal lever that we're definitely pulling. And I'd say lastly, there are certain materials we have exposure to that aren't directly covered by our customers, like, you know, a lot of our material is not on resale for certain products.
Fred Di Tosto: And we're starting to see some opportunities to go to other suppliers and reduce our material costs. So, I think over the course of this year, we'll start to see some improvement in that. And as we go into next year, we'll have a better base, I believe.
Krista Friesen: Okay, perfect. Thanks. I'll jump back in the queue.
Operator: Thank you. The next question is from Brian Morrison from 2D Securities. Please go ahead.
Brian Morrison: Good quarter, sales, margins, capital allocation. I want to follow up on a couple of questions. Commercial recoveries, when you talk about that, I understand it's getting more difficult, but are you going after labor or commodities or both at this point in time? What's at the forefront?
Fred Di Tosto: Most of it in the past, a lot of it was inflation, labor, those types of things. On the go-forward basis, it's more volume-related, I would say. Yeah, some volume and still some inflationary material. Yeah, some inflation. With a little bit of a combination.
Brian Morrison: Okay, and then I guess I want to ask you on that, in terms of volumes, do you have any risk-sharing or minimum guarantees within your EV contract? Conversely, on the new ice contracts that you take in, are there sunset provisions like volume guarantees within those as well? Volume guarantees, just straight up, are very rare, but there are, especially on EVs. As I said earlier, there are contracts that we have that have some protection in them, a lot of protection, and others not as much, but we negotiated a lot of that as we went into the EV space.
Fred Di Tosto: I wouldn't say there's anything unusual in the space currently that's different than before, but volume guarantees are very rare in our world. If you don't get some type of recovery for a program that goes south, And the OEs know that there are, you know, fewer suppliers that are willing to come to the party on new programs. So it's, you know, they work. Okay.
Brian Morrison: And then I guess just a bit of housekeeping, Fred, maybe in terms of the cadence of margins on a going forward basis, should we think that they should be pretty consistent as we proceed through the rest of the year, or do you expect some sort of volatility? And maybe can you address that specifically with respect to the second quarter? I mean, I alluded to it a bit earlier.
Fred Di Tosto: So, obviously, a good start to the year. Q1 met our expectations. We're expecting a good second quarter as well.
Fred Di Tosto: Backup here should be strong as well, but you may see some more volumes based on seasonality. Again, I'm basing that on what some of the forecasters are showing, and then we kind of model after that. So, whether that happens or not is to be determined. Again, it's a great start job, and that could be a bit of a tailwind on Vaughan and so forth.
Fred Di Tosto: That can help. But overall, that's kind of how I currently see the year playing out, all kind of reflected in our outlook. At this point, we feel pretty comfortable with our margin outlook for the year. And do you still have good visibility, like 13, 14 weeks on releases? Yes and no. I mean, you know, the old days where you get, you know, you know, releases, you know, and they tend to happen, doesn't always happen these days, right? So, sometimes you can't rely on them.
Fred Di Tosto: So, there's still some volatility from that perspective. I wish it could be more definitive, but it's gotten a lot better. But, you know, complete visibility is probably not there yet. What will happen?
Fred Di Tosto: There's still supply issues out there with DOEs. And you'll see a release for a week, and you'll get to Friday, and the release will drop out because they've had a part problem during the week. So that's the volatility we still see quite a bit of. Much better? Much better. Much better than it was. Okay, and the last question, Fred, any kind of color, and maybe it's in here already. I haven't seen it yet.
Brian Morrison: A couple of us had a prior call about tooling sales for the year. Can you give us a ballpark? I have about $250 in there.
Fred Di Tosto: Yeah, we were at 65 for the quarter. So I think my last call mentioned 250 to 300. So in and around that range, I think we're still trending toward that.
Brian Morrison: All right. Well done. Thank you. Thank you.
Operator: Thank you. Thank you. Please press star 1 at this time if you have a question. Our next question is from David Ocampo from Cormac Securities. Please go ahead.
David Ocampo: I just have a two-part question for me, and it's no surprise about EV, but have you guys ever disclosed how much capital that you guys have deployed into those programs that are specific mainly to EV where you can't switch it over to ICE? And then the second part of that is when we think about the compensation that you guys are seeking, is that compensation required in order to kind of hit your return on capital threshold? And if you guys don't get any compensation, you guys would be essentially below that return on capital and destroying value? I kind of missed the first question. It came across as a little bit muffled.
David Ocampo: Is it dividing how much capital we spent on EVs versus ICE? Yeah, we don't disclose it that way. We kind of just kind of outline our capital program in the poll, but if you go back to similar releases, there's been quite a nice mix between EVs and ICE. Thank you. Thank you.
Fred Di Tosto: So I think, you know, if I were to just, off the top of my head, generalize the mix, I would say it's fairly balanced over the last two, three years in terms of what we've won. And that would kind of align itself with the capital we've deployed in the organization. Yeah, sorry, just on the compensation. Is it required to hit your return on capital threshold, or is it not necessary at all?
Fred Di Tosto: To some extent, yes, because when you're short on volume, obviously, your original modeling, it'd be challenging to get those returns. So to some extent, yes. And that's where it gets tricky, right? Because a lot of the OAMs don't want to pay for profits and all that kind of stuff.
Fred Di Tosto: So that's where the ARC forum and negotiating come in. But, you know, when you're dealing with a volume expectation, yeah, I mean, it's safe to say that, you know, we're trying to target those returns that we signed up for initially. Yeah, it is fair to say that the volume shortfalls have been in EV programs rather than ICE programs. And can you refresh us on what your IR targets are or return on investment capital targets are? Yes, we started off in our 15, and we have disclosed this in the past, and as rates have gone up, we've increased to some extent from that level. We're a bit higher than 50.
David Ocampo: Got it. That's it for me. Thanks, everyone.
Operator: There are no further questions registered at this time, so I'll return the meeting to you, Mr. Wildeboer.
Robert P. Wildeboer: Well, thank you. It's amazing how quick a call can happen during a playoff game, and we hope everyone has a chance to watch a leaflet if it happens.
Robert P. Wildeboer: Thank you for the questions and discussions. At the end of the call, let me summarize. I'm going to have the Group 3 takeaways.
Robert P. Wildeboer: Propulsion agnosticism supports solid results in a volatile EV environment, which I think we talked about. In the quarter, we produced good results with solid margins and free cash flow, and we will have free cash flow this year. The first quarter was a very good start to that, much better than last year, and we think there's value in the stock and more buyers. So if any of you have further questions, want to talk to any of us or Neil Forrester, please feel free to contact any of us. The information is in the press release. Thank you, and have a great night.
Operator: Thank you. Your conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.