Martinrea International Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 9 speakers on the call.

Operator

Good evening, ladies and gentlemen. Welcome to the Martinrea International Third Quarter Results Conference Call. Instructions for submitting questions will be provided to you later in the call. I would now like to turn the meeting over to Mr. Rob Wildeboer.

Operator

Please go ahead, sir.

Speaker 1

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 Thank you, ladies and gentlemen.

Speaker 1

Thank you, and good morning everyone. And our remarks are addressed to them as well as we disseminate our results and commentary through our network. With me are Pat Deremo, Martinrea's CEO and President and our CFO, Fred Di Tosto. Today, we will I will speak then Pat, then Fred, then me again briefly, and then we'll do some Q and A. Before Pat and Fred focus more particularly on the company, our progress and our results, a few overview comments The UAW strikes were disruptive, messy and more acrimonious than they should have been.

Speaker 1

Not a material impact on our great Q3, but it impacts our Q4 year end, Just as the GM strike in 2019 impacted our Q4 then, but it could have been a lot worse. We Now have labor peace at our largest customers for years, a 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 volume set to expand in the coming years, particularly in North America. We went into the reasons for this in some detail But I want to make just a few quick points given recent developments to bring it to the present.

Speaker 1

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.

Speaker 1

The U. S. Consumer who drives 70% or so of the U. S. Economy Is in decent shape.

Speaker 1

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.

Speaker 1

As much as in Canada. 2nd, there remains a shortage of vehicles and 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, We continue to see production and sales of vehicles going up in 2024 from 2023 and up in 2025 from 2024, a good background for our business.

Speaker 1

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 are back where we started.

Speaker 1

Noted in 2000 and 1, USR was higher than it has been in 2023. When U. S. Population was 285,000,000 Today, it is $340,000,000 Think about that. I do believe that today, some people are holding off 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 And the market adjusts.

Speaker 1

When you're used to 0% financing, a rate of 2.9% or 3.9% looks punitive. When rates are generally over 5% for a while, 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.

Speaker 1

Note that we have seen reduced prices or 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 at the UAW, for example, a lot of the increase was the catch up To broader wage hikes seen in the economy in recent years. Geopolitically, we share the concerns of everyone about conflict In the Ukraine, in 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 or surplus energy supplies. Overall then, Our industry is in pretty good shape as is our company.

Speaker 1

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. EV sales projections may be way too optimistic. OEMs must learn to make money on EVs, etcetera.

Speaker 1

But I think there is a tendency to be overly negative when looking at things through a short term lens. 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

Speaker 2

Thanks, Rob. Good evening, everyone. Our Q3 financial results were strong and generally consistent with the prior quarter From a production sales and operating margin perspective, adjusted EBITDA continued at record levels coming in at $163,000,000 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.

Speaker 2

As Rob spoke earlier, We saw the UAW workers at the Detroit 3 OEMs go on strike in multiple locations, which began on September 15. As many of you are aware, UAW has reached agreements with Ford, Stellantis and General Motors, which is great news. In Canada, Uniphore quickly reached settlements with the Detroit 3 Canadian operations. The U. S.

Speaker 2

OEM plants affected by the strike action are coming back online. As such, The restart and ramp back up has begun, but it will take some time to get back up to full volume and it could be a bit bumpy Depending on the readiness and performance of the supply base, our plans are in place and we are executing with no problems. 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 plants for the final 2 weeks of the quarter. With that said, we'll have more impact on Q4 production volumes and results. While we have made great strides in diversifying our Our customer base in recent years, the Detroit 3 OEMs still account for close to 2 thirds of our sales.

Speaker 2

The plants that were impacted by The strike action cover a number of different platforms, including some significant and profitable programs for the Detroit 3. We do have content on the affected 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 flex cost effectively. The labor reductions in some situations are a bit tricky in the tight labor environment because we want to make sure we have the workforce as the volumes come back.

Speaker 2

As

Speaker 3

such, we have

Speaker 2

been careful adjusting prudently knowing full well that we would be called upon To turn things back on in short order, what production volumes will look like in the Q4 is a little unclear at this point given the strike action, as well as the pace of the restart and ramp up of customer plans. With that said, we are providing you with an update on our 2023 outlook. Notwithstanding the strike, we are confident that we will meet, if not exceed, the high end of our previous sales outlook of $4,800,000,000 to $5,000,000,000 As we were tracking well ahead of this pace as of Q3, in part due to higher than expected tooling sales, 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, 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 could also end up below the low end of our $200,000,000 target range.

Speaker 2

Again, we should be close. Overall, a really strong year. I would like to emphasize we were on track to meet our outlook heading into the Q4 before the strike and we expect any lost volumes as a result of the strike to We made up over the coming quarters. History has demonstrated that this is typically what happens. For example, Following GM's strike in 2019, the company worked overtime to rebuild lost volumes in order to meet demand and prevent sales losses.

Speaker 2

There continues to be a lot of upside in our industry. Automotive sales in our core North American market remain resilient. Production is expected to grow in the coming years and there is 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 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%.

Speaker 2

As we indicated on the last call, The timing of commercial settlements results in some peaks and some valleys in our financial results and margin profile between quarters. 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 We were performing prior to the pandemic. This reflects the continued progress we have made in our Martinrea operating system initiatives. Given that our operations are performing at a high level, future progress will primarily be a function of volumes.

Speaker 2

On that note, volumes have been relatively consistent, setting aside near term distortions as a result of the strike. Supply Chain pressures are easing, though 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 EV sales will likely translate to more ICE vehicle sales.

Speaker 2

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 3rd And expect more in the future. Commercial activity will continue in 2024, but we expect it at a more moderate pace. Turning to Europe, adjusted operating income margin improved quarter over quarter.

Speaker 2

As we alluded to on the last call, the 3rd quarter benefited from favorable commercial settlements in Europe. Besides the commercial activity, which has yielded positive results, the region continues to deal with weaker than expected production volumes and inflationary pressures. While these headwinds did not worsen in the Q3, they have yet to improve in any meaningful way. In our Rest of World segment, A small portion of our overall business representing about 3% of the 3rd quarter production sales, Adjusted operating income margin was higher quarter over quarter similar to Europe, commercial settlements and our Rest of World segment drove a strong performance in the quarter. Production volumes in China overall have also been weaker than expected.

Speaker 2

I'm pleased to announce that we have been awarded $80,000,000 of new business since our last All consisting of $70,000,000 in our Lightweight Structures Commercial Group and $10,000,000 in our Propulsion Systems Group with multiple customers. Year to date, new business awards have totaled $300,000,000 Overall, we are pleased with the 3rd quarter performance, Continue to manage our operations well despite the headwinds. I want to thank the Martinrea team for their hard work in delivering these results as well as their dedication and perseverance. With that, I'll pass it to Fred.

Speaker 4

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 maintained adjusted operating income margin at a healthy level. Taking a closer look at the results quarter over quarter, we generated an adjusted operating income of $83,000,000 in the 3rd quarter, Which was essentially flat over Q2 and production sales that were also flat at $1,250,000,000 Note that in our industry, the 3rd and 4th quarters are typically the weakest because of holidays and scheduled downtime.

Speaker 4

So these are really good results. Adjusted operating income margin came in at 6%, consistent with the 6.1% we generated in Q2, Despite a 17% increase in tooling sales, which typically earn low or no margins for the company. This is 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 $400,000,000 for the year. In addition to some timing effects, this is also reflective of upfront capital payments we are receiving from some OEMs on certain EV programs Another volume up request, which gets treated as tooling sales as per IFRS standards.

Speaker 4

To elaborate 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 Pat and Rob Earlier, we are in some cases, but not all, cutting deals for capital payments upfront from the OEM Ahead of program launch, in those situations where we see volume risk as elevated. Moving on, adjusted net earnings per share came in at $0.68 in the Higher than the $0.62 we generated in Q1, a great result. This included a $7,000,000 net foreign exchange gain in the quarter. Free cash flow came in at $79,200,000 a really good result and a notable improvement over the $25,400,000 generated in Q2 As expected, on the last call, we spoke about the drivers that we expected would enable us to generate free cash flow in the back half of the year, including positive working capital flows and significantly lower cash taxes.

Speaker 4

I'm happy to see that this is playing out as anticipated. Looking forward, working capital and cash taxes should remain tailwinds 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, 3rd quarter adjusted operating income of $83,000,000 was up 19.1% over Q3 of 2022 On production sales, they were 10.9% higher and adjusted operating income margin of 6% was up from the 5.8% generated in Q3 of last year. Recall that Q3 of 2022 was a quarter where we started to see some better results, fall on a low point in our industry Supply related production disruptions were at their worst.

Speaker 4

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 IFRS 16 lease liabilities declined by $48,000,000 quarter over quarter to $889,000,000 in Q3. We continue to make good progress on deleveraging and this includes spending roughly $11,000,000 buying back approximately 800,000 shares during the quarter Our net debt to adjusted EBITDA ratio continued its downward trend ending the quarter 1.56 times, Down from 1.71 times at the end of Q2 2023. Our leverage ratio was basically at our long term target range of 1.5 times or better.

Speaker 4

Overall, we are pleased with our 3rd quarter performance. We continue to perform at a high level despite industry headwinds. Our balance sheet is in great shape and we're executing on our capital allocation priorities. To our shareholders and all of our other stakeholders, Thank you for your continued support. And with that, I now turn it back over to Rob.

Speaker 1

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 it each call. In Q3, we generated approximately $153,000,000 in cash from operations, and here is how we allocated it. First, capital expenditures were about $62,000,000 As we have always stated, we invest in the business first.

Speaker 1

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 debt, as Fred noted, with net debt about $48,000,000 lower quarter over quarter And so we strengthened our balance sheet. A 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 creditworthiness of their supply chain as a financially distressed supplier becomes a problem for the customer.

Speaker 1

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 the supply base substantially. We paid our usual dividend to our shareholders approximately $4,000,000 or $16,000,000 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 800,000 shares, total cash spent was approximately $11,000,000 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. Noted in the last 5 years, since the beginning of 2018, we have bought back over 8 point Half 1000000 shares, 10% or so of the company.

Speaker 1

We all recall there 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 We'll likely be lower in Q4 as we work through the disruptions related to the strike and uncertainty surrounding the restart and ramp Back up to more normal volume levels. We are 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.

Speaker 1

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 best interest of the company. Finally, as Pat and Fred also mentioned, a big thank you to our people. This is a challenging business in a challenging world, And you continue to deliver. Thank you for your dedication every day.

Speaker 1

So now it's time for questions. We see we have shareholders, analysts and even some 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.

Operator

Thank you all for calling. Thank you, Mr. Wildebrand. We will now take questions from the telephone lines. First question is from Michael Glen, Raymond James.

Operator

Please go ahead.

Speaker 3

Hey, good evening. Maybe just to start, sorry, and I apologize for this, but we're missing a few of the numbers, I think, right now For the segments, but can you just clarify like for the expectation for The operating margin heading into Q4, like what we should be thinking about there within North America and Europe?

Speaker 5

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 Q4 looked like. We're obviously seeing some volume headwinds related to the strike and so forth in the Q4. So that's a little unclear in terms of where all that It's up, just given how the restart and the ramp up happens. And I should add, it's unclear on whether or not the OEMs make up lost volume this Overall, we do expect them to make up the lost volume over time, but how much of that is in the Q4 is a little unclear.

Speaker 5

So I think at the end of the day, we said Margin free cash flow wise, we're probably going to fall short of our low end of the range, but we will be close. And that's for the year. Thanks for the

Speaker 3

year. Okay. And Pat, thinking about or Fred, maybe even thinking about CapEx spending in 2024, can you give an updated view on where that should hit?

Speaker 4

Yes. So this year, we the guidance we provided were we'd be essentially

Speaker 5

in line with depreciation and amortization as a percentage of sales and that's essentially materializing. So Our CapEx spend has dropped year over year considerably. And we're not ready to give specific guidance for next year. Overall, I'm expecting next year to be in line with depreciation and amortization as a percentage of sales as well, just generally speaking.

Speaker 3

Okay. And then Rob, when you talked about looking at some investments, I guess you're probably talking about M and A, is there is can you just maybe dig a little more into that what you might be thinking about or size or timing or anything like that?

Speaker 5

Well, if I told you what I was really thinking about, I think that was probably inappropriate. But right now, I'm thinking about dinner actually. But we see lots of opportunities from time to time. It's not necessarily M and A and it's not necessarily Elephant hunting or anything like that, there are opportunities. We've made some strategic investments that you've seen, NanoXplorer being For example, and we continue to see opportunities there.

Speaker 5

So we assess a lot of those at any particular time. And we got to see what we're going to do. It's premature to talk about anything other than that. I will say, and I think This is probably true for anyone in the auto business. There's a fair bit of stress out there in some areas.

Speaker 5

And so The merchant bankers and the investment dealers are pretty busy. But I think you can assume we're not elephant We're looking at investments that allow us to basically show our ability to invest in technology and build it up.

Speaker 3

Okay. Thanks for taking my questions.

Speaker 5

No questions. All right. Thank you.

Operator

Thank you. Our next question is from Tammy Chan from BMO Capital Markets. Please go ahead.

Speaker 6

Hi. Thanks for the question. On Europe, I think a quarter or 2 ago, Some of the headwinds have been, I think you were going through some launches, some negative production mix. I mean, you kind of alluded to that a bit on the call today. So aside from if we were to pull out the recovery, is the segment like how is that segment performing?

Speaker 6

Has it been improving? Is it profitable or still a bit uneven at this point?

Speaker 2

Yes. As far as the performance goes, the plants that we have over there, I would say most of them are performing better Then pre pandemic, there are few that have launched on top of volume increases. So Obviously, when there's a launch, there's always a little bit more distress. But in a couple of the plants, one in particular, They increased ICE volume products at the same time they were launching EV products, and it was a lot of work. I would say we're over the hump.

Speaker 2

So operationally, I'm feeling pretty decent as we go into 2024. As far as the market itself, it's Been very flat. So 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.

Speaker 5

Yes. I think ultimately, financially, the biggest challenge here right now is the volume. The volumes aren't hitting planned levels. That's Putting some pressure on the business overall. We are offsetting some of that as well as inflationary pressures Commercial activity and so forth, we saw some of that concern in the Q3.

Speaker 5

But the expectation or I should say the hope is that the volume We'll end up coming back to the plant levels. Yes. And as we indicated in our remarks, The rate of uptake for EVs is something That we're all monitoring. I think we've seen some cutbacks from some OEMs. And to a certain extent, As we fill our plants with EV products, they tend to be either delayed or ramp up more slowly.

Speaker 5

And as Pat said in his remarks, The reality is that the ICE production may increase or may not necessarily offset what we're having for EVs. I think that's true for basically everyone.

Speaker 2

Yes, it's just interesting because it's Europe. In Europe, the expectation was The adaptation rate would be much higher even in North America, but all the EV launches and we've done a number of them Our disc is going slow so far. And interestingly enough, there are ice products that we expected to go down that have actually gone up. So it's kind of a strange situation that I'm sure will level out in the next year or so.

Speaker 5

Yes, just a policy thought. When EVs are coming, I think a lot of people want them. They're coming naturally at a lower rate than government's mandate. Best thing for the industry would be reduce government EV mandates and allow the industry to evolve the way it should. And I think you'll have a lot of smoke.

Speaker 6

I see. Okay. And so to confirm, when you say the biggest This challenge is involved in not hitting plant levels. I'm sorry, is that because of the whole EV discussion in Europe in those plants? Or is it Something else that negative customer mix or just the industry has been flat?

Speaker 2

I think it's just flat as a whole Compared to what you would expect post pandemic, I think there's probably some concerns with people as to what do I buy, But we're seeing ICE volumes up a little higher and the EV volumes lower than expected, but the market as a whole is lower than expected. In Europe. This is Europe specific. We absolutely think something different in North America.

Speaker 6

Right. Okay. My second question is a bit more further out in time line. I'm just wondering just with all the puts and takes Between the Detroit 3 now have some higher costs in their structure from The new contracts with the UAW, there's the whole EV component to consider. In terms of how you think about the business' Margin trajectory, you're kind of at around 6% now.

Speaker 6

Do you think over the more medium term, you can get to 7% or higher? Or do you think there's some puts and takes there, some structural factors that might offset that? Thanks.

Speaker 2

That's a really good question because the transition is taking longer than everybody expected. We've launched ICE programs, a number of them, all going slower than expected. But as Fred said, We cut some pretty good deals from a capital point of view, but it's still capacity that's not Hit its numbers yet, but it will. And then ice volumes that are a bit higher than expected. So in that environment, we're going to that inflection point.

Speaker 2

I wouldn't expect margins to jump up significantly In the next year or 2, but I think once the market does its shift into EVs, given the investments that are out there, I think you'll To see a more normalized market as we did before the pandemic.

Speaker 5

Yes, I think Tammy, you're probably the expert on this looking at What's happening with a lot of suppliers are on a relative basis, our operating margins are better than most. And I think some other people are seeing some challenges as well. But I think with respect to the OEMs also recognize that even though the cost of labor has gone up Significantly with the UAW contracts and I think they've said this, that might result in $800 per It's not pricing the cars out of reach of different folks and all that type of stuff. And our customers in America, we're making pretty good money as the UAW so often pointed out. So in that sense, I think there's 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 you're going to see the ability for our customers to make good

Speaker 2

margin Yes. I think one more key point in all 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 a relief because newer products have the inflation Adjustments in them for the most part, and of course, we expect inflation will continue to drop on a relative basis. So I think you'll see that normalize as well. The good news from where I'm sitting is operationally, we're running as well or better than we were Before the pandemic, and so really it's a matter of volume

Speaker 3

and the EV

Speaker 2

is taking off as expected

Operator

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

Speaker 7

Thanks very much. A couple of questions, please. So Fred, just starting with that increase in tooling costs, it looks to me like it's about $100,000,000 higher than what you thought, obviously, margin Decrimental. Will this reverse in 2024 or is this going to remain a headwind with respect to tooling costs?

Speaker 5

Now at the current time, this I would characterize as a bit of an anomaly for 2023. Again, it's 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 situation. So we weren't willing to make those investments. So we got customers to I'll front some of that upfront. So it's being treated as tooling.

Speaker 5

I don't expect a lot of that going forward beyond 'twenty three. So I'm expecting Here for the tooling sales line to normalize back to what we typically see in any given year, let's call it 200 to 2

Speaker 7

Okay. So if my math is correct, that should be positive to the operating margin to the tune of maybe 20 basis points.

Speaker 5

Percentage wise, correct, we're in ballpark.

Speaker 7

Great. 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 the message?

Speaker 4

Not sure exactly you mean.

Speaker 5

We haven't really And specific about next year, we're talking more broadly. I was referring to the tooling, I mean, that won't necessarily be a headwind heading Next year. And from a macro perspective, we do see the market volume in North America specifically improving. So that should support a pretty good year from a margin perspective, but at this point in time, we're not ready to give specific guidance.

Speaker 7

That's fair. Can you say high level, will launches be a tailwind? Will

Speaker 5

We're always launching work. We're coming out of a very heavy launch cycle. I was actually looking at some numbers. I mean, We've added close to $2,000,000,000 of sales if you compare our sales line to 2020. I know there was a bit of a dip related to COVID and so forth, but that's a lot of business we So a lot of that is behind us and I'm expecting the next 12 to 18 months to be a more normal level of Launch activity.

Speaker 7

Okay. So just high level then, you should have positive impact from incremental margins, positive impact from launch costs, I assume some efficiency, but we do have tailwinds is the message.

Speaker 5

Yes. Yes. Some would agree. Having said that, we also mentioned a number of potential headwinds in this industry. Every time we turn around, There's a war somewhere.

Speaker 5

There's something else somewhere else, so or a strike.

Speaker 2

So So if there's another black swan

Speaker 5

event, The only thing is we get a black swan of every 6 months. So EBIT transition is one item that we highlighted here that is a bit of An unknown, I think, for the entire industry at this point. Okay. Okay. If you wanted to summarize,

Speaker 2

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.

Speaker 8

Okay. Okay. And then I guess this

Speaker 7

is probably My key focus here is I really appreciate and I think investors do as well, this focus on free cash 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 and A that this remains your focal point, it's your priority. We're not going to be taking a step back and looking at distressed assets again, are we?

Speaker 5

I think that's right, unless there's something we can't refuse. So if you go take a look at the Matalas acquisition that we did And the price we paid for that and what we have in there in assets. We have we've got a challenging asset in Europe, but we've got a couple of gold ones in North So when you can get something like that, it's really good. And in the context of capital allocation, we look at all that stuff. We look at On a consistent basis, I'm very happy that our balance sheet is strengthening.

Speaker 5

We all are very happy That the financial numbers are getting better. 1.5 or better was our target. But back in 2017 2018, We 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 Now normalizing now increase our business organically by a substantial amount and we've been working very hard to Get back to that range, 1.5 times or better is a good place to be.

Speaker 5

I think it's So important for a company like ours to keep our powder dry, but we are not actively searching big M and A as There

Speaker 2

are no elephants in our crosshairs right now, that's right.

Speaker 7

Okay. That's what I'd like to hear. Thank you.

Speaker 5

Thank you.

Speaker 6

Thank you.

Operator

Our next question is from Krista Fritzen from CIBC. Please go ahead.

Speaker 8

Hi. Thanks for taking my question.

Speaker 5

I was

Operator

wondering, can you kind of

Speaker 8

provide us with an update on just the state of the supply chain and What level of call offs you're seeing from the OEMs, if you're able to kind of separate that from the impact of the strike over the past little while here.

Speaker 2

Yes. So first off, with our internal supply chain, Meaning the Tier 2s that we purchased from, as the strike started to At least the contracts looked like they were going to get negotiated and we're going to get a settlement. We immediately started putting our dealers out to our supply base to try to get a feel for Are there any potential problems or distress? And in the moment, our internal supply chain, we don't see or foresee any problems. Now our supply chain is a lot smaller than our customers and we have seen some customer disruption over the last week.

Speaker 2

It's not clear how impactful it will be, but you'll see a shift or shifts Coming out of some of the customer plans based on something going wrong in the supply base as 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 anybody's legs out from under them. So we're keeping our eye on it.

Speaker 2

I know the OEMs are all over it. And I think they expected some pain As they started back up again.

Speaker 8

Great. That makes sense. And can you just Provide us with an update on how you're finding the labor environment right now. Are you able to hire as many people As you need and at a reasonable price.

Speaker 2

Yes. The toughest place we've had since the pandemic by far and away has been the United States. And I would say it's better. In fact, we visited a couple of our plants this week And both of them talked about the fact that the labor situation has improved. That said, it is not what it was prior to the pandemic.

Speaker 2

Obviously, we worked on labor rates and so forth during the pandemic like everybody else. And it certainly helps stabilize it, but we're keeping our eye on it. Frankly, we have moved work Out of the U. S. Into Mexico and into Canada to help the situation and are currently still doing that until we see what we consider a Completely stable workforce.

Speaker 2

The good news is we've got capacity or places we can add some capacity in Canada and Mexico. And so we've been able to shift

Speaker 8

Perfect. Thank you. I'll jump back in the queue.

Speaker 5

Thank you.

Operator

There are no further questions registered at this time. Mr. Will DeBoer, so I'll return the meeting back over to you.

Speaker 5

Thanks very much everyone for taking time this evening to listen to us. If any of you have further questions, we I'd like to discuss any issues concerning Martinrea. Feel free to contact any of us or Neil Forrester At the number in the press release and have a great evening.

Operator

Thank you.

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Earnings Conference Call
Martinrea International Q3 2023
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