Martinrea International Inc
TSX:MRE
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Martinrea International Inc
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Good morning, ladies and gentlemen, and welcome to the Martinrea International First Quarter Results for 2019 Conference Call. [Operator Instructions] Please be advised that this call is being recorded. I would now like to turn the conference over to Mr. Rob Wildeboer, Executive Chairman with Martinrea International. Please proceed, sir.
Good morning, everyone. Thank you for joining us today. We always look forward to talking with our shareholders, and 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 financial results and commentary through our network.With me this morning are Pat D'Eramo, Martinrea's CEO and President; and our Chief Financial Officer, Fred Di Tosto. Today, we will be discussing Martinrea's results for the quarter ended March 31, 2019. Pat, Fred and then I will make some comments, and then we'll open the call for questions and we will endeavor to answer them. Our press release with key financial information discussed on a fairly detailed basis has been released. Our MD&A and full financials have been filed on SEDAR and should be available. These reports provide a detailed overview of our company, our operations and strategy and our industry and the risks we face. We are very open to discussing our remarks, and we hope in the Q&A, some highlights of the quarter, the state of the industry today, how we are addressing the challenges and progress in our operations. As always, we want you to see how we see the world.As for our usual disclaimer, I refer you to the disclaimers in our press release and filed documents. Our public record, which includes an annual information form and MD&A of operating results, is available on SEDAR, and you may look at the full disclosure record of the company there.And now here's Pat.
Thank you, Rob. Good morning all. As noted in our press release, our good story continues with Q1 adjusted net earnings per share coming in at $0.67, at the midrange of our $0.65 to $0.69 guidance range. Q1 performance represents our best quarterly net earnings per share results to date. As a matter of fact, if not for the significant unrealized FX gain from our revaluation of our balance sheet recognized in Q1 of last year, net earnings on an absolute dollar basis would have been up year-over-year as well.Our adjusted operating income margin came in at 8.2% for the first quarter, a good start to our '19 and '20 targets. This is on production sales of $927 million as compared to our guidance range of $910 million to $950 million. As you know, we have committed to a margin increase over the next 2 years of an adjusted operating income margin of 8% or greater for '19 and 9% or greater in 2020. These targets continue to be in our line of sight despite softening sales, primarily in Europe and China.As already noted, Q1 was a good start to the year, and we expect Q2 adjusted EPS to be between $0.64 and $0.68. We expect adjusted operating income margin to be lower year-over-year in Q2 due to a high volume of tooling sales. We should have seen this in Q1, but due to some delays in some key programs, along with engineering changes and others, we will likely see the larger tooling sales fall into Q2 and Q3. As a reminder, we make low to no margin on tooling sales. Therefore, despite continuing good performance, the increased tooling sales volume will dampen the operating margin percentage.We expect Q2 production sales to be between $870 million and $910 million. New business wins for Q1, as noted in our press release, came in at approximately $55 million, representing annualized revenue at peak volume. This includes $40 million in a combination of lightweight structures and propulsion systems work on Ford's new small pickup truck to be assembled in Mexico. Approximately $10 million in additional product wins on the new Jeep Grand Cherokee and some additional work from Toyota and Nissan. Quoting activity continues to be high in our commercial groups, particularly in our lightweight structures, though our propulsion group is seeing healthy activity as well.Overall, we continue to expect sales to remain strong in North America on truck and SUV as well as CUVs of some European programs, namely with JLR, due in part to Brexit is slowing. China sales have also been lower than expected. The volumes for CAF have decreased significantly, and volumes for JLR have not progressed as expected.Based on the volume headwinds with CAF, we are currently contemplating a downsizing of our fluids plant in China. The plant has very high concentration of CAF business, and the volumes are just not there to sustain the current cost structure. We will continue to promote our fluids business with other Chinese and China-based customers.Brazil sales have also dropped. However, at the same time, we have improved the operations and have concluded that based on revenue expectations in the near term, we will restructure the business with a workforce reduction to keep cost in line with sales. The onetime restructuring cost of between $5 million and $10 million will improve our competitiveness in this sometimes difficult market. We still believe Brazil has potential as the market has shown in the past, and we will invest where appropriate, but we will continue to be prudent.We have a substantial amount of launches and new program management activity. 41 of our 47 facilities have launches or new business equipment installations currently. Some facilities have up to 11 or more launches in 2019. Our larger ongoing launches and programs in lightweight structures include the GM Silverado, a very large program, which continues to launch well, now focused on the Mexican volume, which formally launched in January. This will be followed by the heavy-duty in Michigan and large SUVs in 2020. We're also preparing for the launch of the new Ford Escape later this year, another large program for us. With our go-early approach to launches, this is clearly yielding significant benefits to date.Our aluminum plant in China continues to launch knuckles and control arms for JLR, and the final phase of the same project for JLR on the newly built crossover has also ramped up during this first quarter, although overall volumes for this platform have been lower than expected so far in '19.On the propulsion system side, engine launches in both Europe and North America for Volvo, Ford and JLR continue as planned as well as a boatload of fuel brake and filler launches for GM, Ford, FCA and JLR this year, including a significant amount of fluids content on the new GM Silverado.Our work in lean continues to provide both operational improvements as well as a better way of thinking relative to our work at all levels of the organization. We have just added another top executive responsible for lean in our aluminum and fluids operations, one that I have known for many years, who has 14 years of Toyota experience on the global OMCD team.Accelerating 2.0 strategy continues to move faster down the path to assure we meet the commitments we've made to our people, our customers, our investors as well as our communities. We continue to work to grow our technologies in lightweight structures and propulsion systems, including new energy vehicles. We began with the new tech center in Auburn Hills, Michigan where we've now been for over a year. We continue to focus on key R&D leadership to grow that effort.As I've said previously, we're very pleased with some of the new products and product designs, which we have expected to come to market in the next few years. With the new commercial groups, lightweight structures and propulsion systems, I'm confident we can continue to see strong growth past 2020.Last, I want to thank the Martinrea team, again, for their outstanding efforts, allowing us to progress so well the Martinrea way. With that, I'll pass it to Fred.
Thanks, Pat, and good morning. As Pat has already noted, the first quarter was another strong quarter for us, in line with expectations. Overall, the year is off to a good start. We are very happy with the overall progress we're making as an organization. We are delivering solid results in a volatile global volume environment. First quarter total sales came in at just over $1 billion, representing a 6.1% increase over the first quarter of 2018. Production sales for the quarter were $927 million, in the midrange of our previously announced sales guidance range of $910 million to $950 million, up year-over-year from $893 million reported in Q1 of 2018 despite some of the volume headwinds we are facing in the overall market, in particular, in our Rest of World operating segment, as Pat has already noted. The higher year-over-year production sales largely reflects positive foreign exchange translation plus the launch of new programs, partially offset by lower year-over-year production volumes in North America on certain light vehicle platforms, namely the Ford Escape and Jeep Wrangler; in China, largely with Ford but also with GM and Jaguar Land Rover; and in Europe, mainly Jaguar Land Rover. Generally speaking, overall production in North America, where approximately 80% of our business resides, continues to be quite strong with lower passenger car volumes being generally offset by higher volumes in CUVs, SUVs and trucks.Looking forward, we continue to expect total sales to be up year-over-year for the full year 2019. In addition to Q1 results, this positive forward-looking sales trend is also reflected in our Q2 '19 guidance, which caused our production sales to be in the range of $870 million and $910 million, as Pat has already noted, up year-over-year from $857 million of production sales in the same period of 2018. Again, this despite some of the volume headwinds we are facing.Adjusted earnings per share in Q1 on a basic and diluted basis was $0.67 per share, also at the midpoint of our published earnings guidance range. $0.67 of adjusted earnings per share represents a record quarter for us from an EPS perspective, aided by a lower share count from the recent share repurchases. Now our net earnings for the quarter on an absolute dollar basis did decrease slightly year-over-year. However, that is somewhat misleading as Q1 '18 benefited from a large unrealized FX gain from the revaluation of our balance sheet, as highlighted in our release last year. If you take the unrealized FX out of the equation, net earnings for Q1 would have been up year-over-year, as Pat noted. We did have one adjustment to earnings during the quarter related to a loss on the warrants we hold on our NanoXplore investment, which is further explained in our MD&A. We also adopted the new lease accounting standard, IFRS 16, during the quarter. You will see some adjustments to our financial statements as a result. The adjustments, as further explained in our financial statements and MD&A, include the recognition of lease liabilities and right-of-use assets on our balance sheet.From an earnings perspective, generally speaking, the new standard does not have a significant impact on overall operating results with the decrease in operating rent expense being replaced with depreciation expense on right-of-use assets and increased finance expense. However, the new standard does impact adjusted EBITDA due to the recognition of depreciation on right-of-use assets in lieu of operating rent expense. The adoption of IFRS 16 contributed approximately 7% of the year-over-year growth in adjusted EBITDA during the quarter. It's just something to keep in mind when you review our results.Overall operating income margin for Q1 was 8.2%, again, a good start to the year. Upfront costs related to the preparation of upcoming new programs and related new business in the process of being launched weighed on the Q1 margin, as was expected. This is expected to continue to be a factor in Q2 as well. Further, our Rest of the World operating segment had an operating loss of close to $3 million in the quarter due to the customer volume headwinds Pat already outlined compared to operating income of $1.1 million in Q1 last year. As you can see, this segment is weighing on our overall margin progression despite being relatively small in terms of our overall book of business and footprint. Pat has already touched upon our intention to adjust in light of the lower-than-expected sales.Despite some of these challenges and as Pat has already noted, we continue to feel good about our operating income margin targets for 2019 and 2020. As such, there is no change to our margin outlook. We continue to expect an overall adjusted operating income margin of at or better than 8% for 2019 and at or better than 9% for 2020. Rob will spend some time discussing our thinking around capital allocation, so I won't spend much time on the topic other than to reinforce the notion that we are committed to a strong balance sheet, which at the current time, in our eyes, represents a leverage ratio of around 1.5x net debt to EBITDA, excluding the impact of IFRS 16.The recent increases in net debt and our leverage ratio, due to our share repurchase program, increased dividends, investments made in NanoXplore and an increase in tooling-related working capital, is supported by an improving free cash flow profile starting in the back half of 2019 and heading into 2020.With that, I'll now turn it back over to Rob.
Thanks, Fred. Some comments on capital, our industry and a few other things.In the last several calls and releases, we talked about our use of capital, and let me give you a very brief update on that. As you can see from our recent press releases, we've won a lot of new business since the beginning of 2018 with new product awards approaching $1 billion. This includes the awards just won in the past few weeks. That's a lot of new business. Some of it is on new models, some of it is conquest business. Of course, we continue to win repeat business, too. In terms of capital allocation, investments we have been making in our business have been bearing fruit, and further, we will continue to invest in our own business. This will be our priority. There's clearly tremendous value to it. Note that organic growth is over an increasingly broad range of customers, over many geographies, especially outside Canada, and over a broad range of vehicles, ICE, electric, hybrid. Opportunities abound. That is our primary focus as a use of cash.Many people ask us about M&A opportunities. We see a lot of, what I would call, noise. We're clearly not averse to M&A activity. After all, we've done it many times in our past. We applied a build-or-buy scenario, and where it was cheaper and faster to buy than build, we did so, especially given the fact there were cheap assets available, although with a lot of fixing to do. We have been fixing very well as our margin improvement attests. I believe our margins are now at or above many of our competitors. We actually did acquire a plant in Mississippi in the last several weeks from a troubled supplier, Variform. The cost was nominal and the revenue is not large, but we helped out a customer, Nissan, and we are retaining the business with a chance to grow it, the kind of deal we like to do. Today, we are certainly willing to look at our opportunities, but we feel it is very important to be disciplined and to buy prudently as we did here. At the same time, I note that we have invested in and will invest in technologies or products that support our business. We increased our investment in NanoXplore in the first quarter, and we are excited about that as we have stated publicly a few times now.In terms of our debt levels, we like and have a strong balance sheet. This is helpful not just from a funding perspective, but our customers, frankly, like companies with financial strength. They know we are there for the long term. Believe me, this industry has long memories, and customers still don't like overlevered suppliers. So we will maintain a strong balance sheet even as we fund our internal growth and make strategic investments. Having said that, we used some funds in the quarter to make some investments, as Fred noted. In terms of returning capital to shareholders, as you'll recall, we increased our dividend last year, and that has represented some increased return. As well, we filed for a normal course issuer bid at the end of August to purchase up to 5% of our outstanding common shares or just over 4.3 million shares, and we completed that in the first quarter, spending approximately $26 million in the quarter. We promised we would buy back some shares as a good investment of capital while still funding our growth, taking advantage of investment opportunities and maintaining a strong balance sheet. We kept our promise, actually, faster than we planned, motivated in part by the lower share prices we saw a few months ago. Over the next several months, we will focus on making the needed investments to fund our growth. Our intention at this time is that subject to all the points I've just made, we will consider renewing our normal course issuer bid in August. The benefit, of course, to shareholders is less dilution of earnings and increased earnings per share number and, over time, support for higher share prices.In terms of the industry, volumes for the most part were fairly flat or down across our markets, and the times of robust year-over-year growth may be over for now, at least in some areas. It is great to see 2019 off to a great start of what we believe will be another record year for Martinrea. We believe that our story in 2019 and 2020 will be a very good one on both an absolute and relative basis. We are seeing some softness in automotive markets and are doing well overall despite the headwinds Pat went through in the regions in which we operate. With some volume headwinds, we are seeing some supplier stress in the overall market, making some assets available. We will buy assets when the values are compelling.In addition to the usual industry challenges, we continue to deal with some broader issues. For example, in the area of trade, we are pleased with the signing and, hopefully, pending ratification of the USMCA, as the updated form of NAFTA is generally termed. But as for the date of that, who knows. We were very busy with a variety of governments and industry participants in the negotiations, and we believe the signed agreement is a good one with some potential opportunities for North American suppliers, such as ourselves, because of the North American rules of origin provisions.We had to deal with the imposition of steel and aluminum tariffs by the United States and the retaliatory tariffs imposed by Canada. We are advocating further removal in 2019, but we do note that the direct impact to us, either initially or because of relief sought and obtained, is minimal.We believe we have had the opportunity to be part of the conversation, and that in the final analysis, we will end up with a very healthy North American automotive and automotive parts industry, whether and when this deal is ratified or not.In terms of broader tariff and trade discussions involving the United States, China and others, we believe there will eventually be a resolution that works for the industry. Martinrea has a small presence in China, but there is opportunity there if the risks can be addressed.On a positive note, challenges present opportunities to nimble, entrepreneurial, lean and resilient companies with great people. And we believe we have shown an ability to take advantage of opportunities over the years. The recent Variform plant acquisition is a great example. We get stronger through meeting challenge as well. We thank our stakeholders for their support. We will continue to do our best for you in 2019 and beyond. The future is there for us to seize. Now it's time for questions. We see we have shareholders, analysts and competitors on the phone. So we may have to be a little careful with our answers, but we will answer what we can. Thank you all for calling.
[Operator Instructions] The first question is from Mark Neville from Scotiabank.
I just want to clarify a couple of things that Pat said about the Rest of World. So you have made the decision to restructure in Brazil and sort of studying China or sort of just waiting a little bit, is that what you said, sir?
Yes. So in Brazil, based on the operation improvements and what we see or foresee as the sales, we can do a workforce reduction. So we decided to go forward and do that. We expect that to fall between $5 million and $10 million, probably closer to $5 million, overall said and done. So we will start that -- or actually, we have started that very recently. Relative to China, specifically in our fluids business, we are studying what we feel CAF is or isn't going to do relative to volume and whether it makes sense to do something similar there. So we haven't concluded on that yet. We've been in talks with them somewhat. But I would say, by the end of the next quarter, we'll be able to tell you where we're at.
Okay. So by end of quarter, okay, before you make the decision. Okay. That makes sense. Just if you do the restructuring, if it's necessary, I'm just curious how quickly you think the Rest of World could get back to, call it, breakeven results.
Well, I think in the case of our aluminum business still in China that we have a lot of future launches with Chinese in China on key vehicles that -- with Geely, for example, that are electric. Those launch in the next 1.5 years or so. And I think that's when you really start to see the aluminum plant sustain itself better. Now if JLR's volumes come back, that will happen earlier. But currently, their volumes are pretty low. But our focus has been, as we've said in the previous calls, we'll focus more on the Chinese local automotive makers that are focused on electric vehicles, in their case, or some type of new energy vehicle. As far as the fluids plant goes, we are continuing activity. We've got sales with Geely and other local suppliers that -- or excuse me, customers that we're working with. But we're just not real sure where CAF is going to go. So it's really kind of targeted at that specific volume. Whether that means we'll shrink the plant or consolidate with our aluminum plant is unclear.
Okay. And on the 2019 sales guidance, just to be clear, you said up. Is that production sales or the tooling sales?
That would be both production and toolings. We are, as a Pat noted, expecting a higher-than-normal level of toolings, that's going to be up year-over-year, but also production sales as well. We were up about 4% in Q1. Our Q2 guidance suggests a similar level on the back half. Again, we expect to be up year-over-year as well, so.
We had expected those tooling sales to hit this quarter, as we had talked about previously. But there has been a lot of engineering changes and some program delays on some key programs that pushed those out. So more in Q2 and possibly even some in Q3.
So just to anticipate the overall question. The volumes in North America seem to be trending down somewhat, 2% to 5%, maybe that will be for the year. That's still a very good level of overall volume. And in terms of our volumes, because we've won extra work that more than compensates for the industry slowdown, which is a different story than perhaps a number of other people have. And with respect to the Rest of the World, I mean, it's about 2% to 3% of our business. Let's put that in context. We've always said that you've got to be careful in the context of growing in China. Our aluminum operations are -- have a lot of backlog. And I think that a lot of people are finding with the China slowdown overall, there's a problem, but there's also a problem with some particular customers that have seen a bigger tail-off than some others. And so in that sense, I think, you're seeing a lot of suppliers take a look at their China operations, and they're seeing some challenges. And then with respect to Europe. Once again, our year-over-year production revenues are up. But part of that -- and you're seeing a European slowdown or as far as we talked about industry players I've talked about, but because we've won work, we've tempered that overall economic decline.
I guess to that point, there was a tougher Q1 macro. You had a good quarter. The Q2 guidance looks pretty good. The '19 margin guidance, I mean, you're basically there. But when I look to 2020, you're still down 100 basis points, I guess, in the guidance to bridge. If we're talking about a 4% or 5% volume decline in '19 and '20, I'm just curious as to how much risk you see to that margin guide for next year, again, assuming we see similar sort of declines through the next 1.5 years, call it.
Yes. It really boils down to what platforms get affected. As you know, we're heavy in CUV, SUV, truck. We've won some good electric vehicle work recently. And assuming those vehicles will be affected less, and certainly, they have been so far. But if that turns, certainly, that would put pressure on us. But the anticipation right now is those vehicles are selling well, and they're going to continue to for some time.
In the overall level, we've said we'll probably be slightly less than flat. I think that consensus is in the marketplace with a lot of folks. But we're seeing margins steady and improving when a lot of people are seeing margins decline. And I think we're consistent to what we said we were going to do. We've said it in 2014, '15, '16, '17, '18 and now it's '19, and we've got to put the pucks in the net. If there is a precipitous decline in volume because of externalities or everyone talks about the 2008 scenario, of course, it's harder to maintain margin when volumes are off 20% in the industry, but we don't see that. And we're being as open as we can. And obviously, we're spending a lot of time -- we're going to customers, with IHS, Ford, and so forth. And this is where we see the industry. We think we're fairly consistent with what most of our compeers in the industry are seeing.
Yes. No. Okay. Agreed. And maybe just one last one for Fred. On IFRS, a lot of numbers, I just want to make sure I got them. EBITDA, up about $8 million year-over-year from IFRS. And it just wasn't clear, was there any earnings impact, EPS?
No. So generally speaking, in Q1 and in a go-forward basis, IFRS 16 won't have a big impact on our net results -- operating results, given the fact that you're replacing lower rent expense with higher depreciation and finance expense. Where the impact comes into play is EBITDA. And your numbers are about right.
[Operator Instructions] The next question is from Peter Sklar from BMO.
Pat, like you -- when you look at your segmented businesses, the North American operations are just doing particularly well. From a very high level, like what is your sense that's been going on there? Is it the ongoing lean programs that have been implemented over the last number of years? Or is it the favorable platform exposure or smooth launch? Like, what are kind of the key factors that are behind that strong performance?
Well, I would say up through this past year being '18, the majority of it was a combination of the lean activity and a much better launch than we had, had in some previous years.Go forward, starting late '18, '19, there's a good mix of better product with better margins, along with other products with poor or no margin dropping off. So between now and 2020, it's probably half and half mix of lean activity, continuing to launch well, and the other half being better margin product.
I'll put my plug-in for culture. I think that we emphasize culture a lot in this company. I think our people are doing a great job. I think we have -- we treat our people extremely well, and we empower them and we have a lean aspect to our culture and entrepreneurial. We said it would make a difference. It's making a difference, and that's -- and that, we think is part of our sustainable competitive advantage going forward.
Okay. And then my next question is -- just wondering if you have any views. North American sales production are tailing off a little bit. Inventories -- dealership inventories were at record highs. And what's interesting though is that the OEMs are really not incentivizing the vehicles. If you look, your average incentive per vehicle is still in decline. So just wondering if you have any thoughts of how that's going to play out. Are they going to cut production? Or are they going to increase the incentives to clean up some of this imbalance? I'm just wondering, in your discussions with the OEMs, if that kind of issue has ever come up and if you have any views.
What we've seen so far are 2-week shutdowns here and there from different plants to balance their inventory. And there's also, of course, some inventory build-up, especially with truck, in the spring selling season. So I think there's some anticipation of that burning off based on the time of the year. But a lot of other products, so far, were not seeing incentives nearly as much as we're seeing 2 weeks here to balance up their inventory. Now just from my experience, I think, you're going to start to see incentives at some point before you'll see them drop off. But I think they're all tired of the incentives game that they've had to play for so long, so they're trying to avoid it as long as possible.
There are no further questions registered at this time. I will return the meeting back to Mr. Wildeboer.
Wow. That's the shortest Q&A we've ever had. I don't know if we answered all the questions, or it's a slow morning. If any of you have any further questions or would like to discuss any issues concerning our company, please feel free to contact any of us at (416) 749-0314. We're always available. We love talking to our shareholders. Have a fantastic day.
The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.