Martinrea International Inc
TSX:MRE
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
9.65
14.45
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Martinrea International Inc
You don't have any saved screeners yet
Good afternoon, ladies and gentlemen. Welcome to the 2020 first quarter conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Wildeboer. Please go ahead, sir.
Good afternoon, 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 first quarter results and commentary through our network. With me this afternoon 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, 2020. But before we talk about results, the past is not where our minds are focused these days but on the present and the future. While 2019 was a challenging yet very successful year, we recognize that the COVID-19 pandemic has created unique challenges for all of us. We have seen an unprecedented shutdown of our industry and most of our customers in North America, Brazil and Europe are either not operating or just restarting some of their plants. We've been extremely focused as a management team and as a Board of Directors on the crisis and how we best deal with the shutdown of our business is restart and our return to full production in the future. Our management team led by Pat has daily meetings to deal with the closure and now is focused on the best restart possible and we've had weekly update meetings with our Board members. Our focus throughout has been firstly on the well-being of our employees and those of others in our industry and our loved ones. We've been very proactive on safety measures and have developed a very robust set of safety protocols for our plants and offices. Our people have to be safe and feel safe. Furthermore, the well-being of our employees extends beyond just the COVID-19 threat, of course. Our people need to have meaningful work and an ability to sustain themselves economically by coming to work. In that regard, we have been very involved in preparing ourselves and our industry for an expeditious, successful and safe restart. After my opening remarks, Pat will take you through some highlights and give you his perspective. Fred will review the financial results. I will finish with some general closing 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 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. Given the detail in our press release and filed documents, our formal remarks on the call today will be generally overview in nature. We're very open to discussing in 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, anything about COVID-19 and shutdowns and related issues 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.
Thanks, Rob. Good afternoon all. As you saw in our press release, our Q1 adjusted net earnings per share came in at $0.38, impacted by customer shutdowns due to the COVID-19 pandemic. The quarter also included 1-month results from our acquired operations from Metalsa, representing a $0.02 share net loss for the quarter. Q1 production sales came in at $822 million, down year-over-year from $927 million again due to March shutdown. $27 million of that came from our new Metalsa operations. With tooling, total sales number was $873 million for Q1. Our adjusted operating income margin for the quarter came in at 5.8%, lower year-over-year due to the effect of the COVID virus on our customer base and volumes. Excluding the acquired Metalsa plants, we actually achieved 6.2% operating margin. Prior to the COVID-19 customer shutdowns, we were well on our way to achieve our previously announced Q1 EPS guidance of between $0.60 and $0.65, which we withdrew for obvious reasons. Our net debt to adjusted EBITDA ratio ended the quarter at 1.62x, slightly up quarter-over-quarter due largely to the financing of the acquisition of Metalsa and foreign exchange translation related to our debt levels. Despite the shutdown of our customers, we're happy to announce new business wins since our last call in March, totaling $35 million in annualized sales and mature volumes, including $28 million for our propulsion systems group from Ford, GM and Audi; and $7 million in our lightweight structures group from Audi. Due to the current environment, we are not giving guidance for Q2 but expect to get clarity on 2020 over the next number of months. Related to the current condition, let me highlight what we are seeing. First, our customers have begun to restart their facilities. This will accelerate over the next number of weeks and throughout June. Production is now relatively normal in China and we expect to see North America and the rest of the world recover in similar fashion. Customer truck and CUV, SUV plants have the most aggressive schedules in North America, which bodes well for Martinrea given our platform portfolio. We've had some facilities in production throughout this situation, namely our industrial business, though at a lower level. One of the products that continues to ramp up are the ventilator stands we are making for General Motors. We foresee that product running for the next number of quarters. It has been a nice supplement to our Canadian industrial plant. I'm proud of the industrial team for their ability to fast-track, develop and produce this at a record pace, gold-star performance during a very difficult storm. Automotive plants have started their ramp-ups on key lines over the past week or so. We will continue to call people back to our facilities as demand rises. The teams have done an exceptional job with COVID safety processes throughout the company. I expect safety overall to continue to improve as it has for the last number of years at Martinrea. Safety is the #1 priority and I expect to maintain our world-class activities at an even greater pace. In one unique example, based on internal demand, we have constructed a clean room at our Alfield plant and have ordered equipment to make masks for our entire company globally. Over the past few months, we have not sat idle. We have strategically kept key resources in a number of our facilities to make operational improvements during the downtime, allowing us to be even leaner than we were prior to the shutdown at multiple locations. With these improvements, we expect that at full volume, possibly as early as Q4, we, as an organization, will run a full operation with less resources than we did prior to the COVID-19 outbreak. This will support our strong bottom line commitments in the future. So we didn't let the crisis go to waste. In fact, we capitalized wherever possible to assure our long-term success and goals stay in our sight despite this disruption. Though some new programs have been delayed anywhere from 1 to 6 months, no major programs from any of our customers has been eliminated. This is great news because as we have said in the past, new programs meet or exceed our hurdle rates and are a key to our planned strong margin over the next few years. You're all aware of the COVID-19 impact on our industry as well as many industries. Like every downturn in the past, we expect the auto industry will lead the pack to recovery, almost certainly assuring a great 2021. Lastly, I want to thank the Martinrea leadership and their teams for their response to this overnight industrial shutdown. It was nothing short of light speed, just incredible leadership and dedication from our Martinrea people, simply outstanding performance. And with that, I'll pass it to Fred.
Thanks, Pat, and good afternoon, everyone. I sincerely hope everyone is staying safe and healthy during these very difficult times. In my opening remarks, I'll provide you with a quick summary of our quarterly results. I will also discuss some additional relevant topics given the current environment, including what we have done and are doing to respond to the COVID-19 pandemic and related shutdowns. I point to our MD&A for more detail around these topics. I'm also happy to answer any questions you may have on the quarter or otherwise. Consolidated sales for Q1 2020 were $872.7 million, a decline of $150.5 million or 14.7% from Q1 2019. The operations acquired from Metalsa, results for which were consolidated with those of the company effective March 2, contributed $28.7 million of year-over-year total sales. Excluding the acquired operations, first quarter sales decreased year-over-year by $179.2 million or 17.5%, approximately $46 million of this decrease related to tooling sales with the remainder largely due to overall lower industry volumes driven by the COVID-19 shutdowns and pre-COVID volume declines in some areas of our book of business in particular in Europe. We estimate that COVID-19-related shutdowns impacted first quarter sales by approximately $80 million, excluding the impact it had on our new Metalsa plants. As Pat noted, adjusted operating income margin was 5.8% for Q1 2020 compared to 8.2% in Q1 '19. Year-over-year decrease was generally due to the overall lower industry volumes driven largely by the COVID-19 shutdowns and a negative impact on overall margin from the operations acquired from Metalsa. Our operating margin in Europe was especially negatively impacted by the addition of a new German Metalsa plant. As a result, operating margin in Europe decreased to a breakeven level during the quarter.I also want to touch upon cash flow on our balance sheet. During Q1 2020, we generated $103.2 million in cash from operations after changes in noncash working capital compared to $99.2 million in Q1 '19. Excluding tooling, which tends to be volatile in nature, we generally experienced an increase in production-related working capital in the first quarter of any given year, given seasonality. That did not happen this year as a result of the COVID-19-related shutdowns and corresponding sales decline. Production-related working capital actually decreased during the quarter. The cash benefit from this was essentially offset by an increase in tooling-related working capital, which increased approximately $100 million from approximately $60 million at end of '19. The cash benefit we have received from the unwinding of production-related working capital continued into April but will also reverse as we restart production and build it back up. Free cash flow as defined in our MD&A for Q1 2020 was $9.9 million compared to negative $21.7 million in Q1 '19, inclusive of $74 million in cash additions to property, plant and equipment. Net debt, excluding the impact of IFRS 16, increased during the quarter by $52 million to just under $715 million due largely to the financing and the acquisition from Metalsa and foreign exchange translation. As Pat noted, net debt to adjusted EBITDA, again excluding IFRS 16, increased during the quarter to 1.62x from 1.41x at the end of '19 but still very much within our targeted range of around 1.5x. We believe we entered the COVID-19-driven downturn with a strong balance sheet, which will ultimately allow us to keep long-term focus as we work our way through the current state. In terms of the COVID-19 pandemic, our response has been measured, prudent and decisive with an emphasis on safety, cash conservation and enhancing liquidity. The health and safety of our employees, their families, our customers and our communities is and will continue to be our top priority. Pat and Rob have touched upon what we are doing in this area. The company has also taken actions to conserve cash by aggressively flexing and reducing its cost base and eliminating discretionary spending across its global footprint. These actions have included employee layoffs, temporary reductions of salaried employee base wages of up to 50%, a curtailment of nonproduction spending, and the delay of capital and tooling spending where and when appropriate. We have spent a lot of time on the last 2 items in particular and continue to do so. In light of some customer program delays, as Pat noted, we are working towards decreasing our cash CapEx spend for 2020 by up to 20% from pre-COVID levels, which are projected to be relatively flat year-over-year. The company has also temporarily suspended the repurchase of common stock under its normal-course issuer bid, the continuation of which is to be reassessed at a later date. As at March 31, 2020, the company had total liquidity of $300 million, including cash and cash equivalents and availability under the company's revolving credit lines. On April 17, 2020, the company further enhanced its liquidity position by exercising the accordion feature incorporated in its banking facility, which increased the volume credit lines available to the company by another $280 million. The company's banking facility also includes a $300 million allowance for asset-based financing that the company can use for additional financing if required, of which $236 million was available as at March 31. We believe we have ample liquidity to withstand the COVID-19-related downturn and corresponding restart. The company also completed a forecast of cash flows and covenant compliance using available internal and external information. Needless to say, as a result of the production shutdowns, the corresponding decline in EBITDA we are experiencing now, our net debt-to-EBITDA ratio will increase from current levels and exceed our target range in the short term. The company has and will continue to work with all our stakeholders to address the challenges of the day. We are working with our supply base to deal with their challenges, including the restart of production and safety protocols; our customers to prepare for the resumption of full production at some point as well as the development of new programs and products; our governmental and regulatory authorities to ensure safety and economic well-being of our industry; our capital providers to ensure liquidity; and our employees to minimize the risks associated with the shutdowns and layoffs in the industry, including, in many cases, engaging in emergency government wage protection programs where applicable as well as a safe and healthy return to work. As the COVID-19 pandemic and its economic impact continue to evolve, we will continue to respond in a measured, prudent and decisive manner with continued emphasis on health and safety, cash conservation and maintenance of our liquidity position. Overall, considering the magnitude of the volume declines and the consequent challenges we faced, we are pleased with our first quarter results and our response to the COVID-19 shutdowns. I too would like to thank the Martinrea leadership and their teams for the work they have done throughout this very difficult time. It's not been easy but the team has really come through strong and united. Thank you for all your efforts. It's been nothing short of remarkable. Thank you for your attention this afternoon. With that, I'll now turn it back over to Rob.
Thanks, Fred. Some brief comments. First, a general industry comment. We're all observers of COVID-19, the health issues, the economic hardships, the need to restart our economy and so forth. I will not talk here about the macro economy although we are happy to discuss these things in our Q&A if you like. These are challenging times, just as we saw and experienced with 9/11 and with the 2008-'09 recession. What I will say is that from an auto industry perspective, there's really 3 phases here: First, the shutdown phase, which we're past in China and just about past elsewhere. Second is the restart phase, which we have seen in China and are now seeing here. This is very challenging, and the industry has been working very hard to be able to launch as smoothly as possible by working on and developing protocols to keep our people safe and ensuring the whole supply chain can start together, whether plants are in Ontario, Michigan or Mexico. This isn't easy. The third phase is and will be rebuilding demand. This requires a return to work and restarting our economy. This has got to happen, and I believe the sooner, the better, not just from an economic perspective but from a social and health perspective. Specific to automotive, we need to open dealerships and get people moving again. This is coming. We may also see some demand stimulus measures like a "cash for clunkers type" program or government incentives. Overall, the auto industry is coming back. How fast and how far remains to be seen, but our people will be there. Second, a comment to our people and our shareholders. At Martinrea, we believe that our culture is and will be a sustainable competitive advantage for the company over the long term, and we believe it has driven the improving financial, safety and quality performance over the past several years. Sustainable companies with great cultures will be around a long time. We believe we have a company poised to excel over the next decade and beyond, and we and our people are committed to that. Our culture comes to the fore in the context of the COVID-19 challenge. We are working very hard to make people's lives better. We are focused on safety. We are working hard to restart our business and bring back as many people to work as we can, when we can. We have worked with governments in the places in which we have plants on relief for employees we have had to lay off, and many of our people are benefiting from programs available to them. Over the last few weeks, our team members have been working to help fight the spread of COVID-19. Our industrial and metallics groups are collaborating with General Motors on the production of ventilators. We have many team members making facemasks and hand sanitizer for our global frontline workers. We're making masks. Employees have volunteered for meals on wheels to help deliver meals to those in need during this time. Our team in Spain are using their own 3D printers to make face shields for hospitals and local police. They are also producing devices and shields to protect health care workers during the intubation process. Of course, we are also taking measures to ensure that we maintain a strong financial and competitive position through the crisis and beyond, as Pat and Fred noted. As to the dividend, we paid our dividend on April 15, and we'll likely pay our next dividend in July once we're back to work in this industry. It will be dealt with at our next Board meeting in June at our AGM, which will be held virtually given the distancing guidelines. Our proxy material, including a message to shareholders, is now on our public record. Finally, we are very focused on serving all our stakeholders. It's in our DNA. We thank all our stakeholders for their support. We will continue to do our best for you throughout the year, the next decade and beyond. We will have a great future together. Now it's time for questions. We see we have shareholders, analysts and competitors on the phone. So we maybe have to be a little careful with our answers but we'll answer what we can. Thank you all for calling.
[Operator Instructions] And the first question is from Mark Neville at Scotiabank.
I actually missed most of the prepared remarks, so I apologize if this is repetitive. But maybe just curious -- I know that visibility is tough right now but can you guys think about sort of incremental or decremental margins in your business? Is there any sort of numbers you can maybe help us with just in terms of our -- for our sort of modeling purposes?
Yes. Not a problem. So I mean if you look at our release for the quarter, year-over-year decremental EBIT margin was about 21%, 22%. I think that's a good, reasonable estimate going forward. The reality is when bonds kind of fall off a cliff overnight, there's a bit of a lag there in terms of flexing our costs, but that normalizes in short order. But it's generally a good guideline to follow.
Okay. No, no. That's very helpful. And just -- I believe previously, you're sort of contemplating about $300 million CapEx. Has that number been revised -- a revision at this point?
Yes. We addressed that in our opening remarks. So generally speaking, we've been spending a lot of time on our CapEx and tooling programs and obviously doing whatever we can to curtail, defer, delay as much as possible. So it's still a bit of a moving target, still in process. Obviously, customer time lines and milestones are an important part of that. So we're working through it, but we're aiming right now to be reducing that guidance to up to 20%. And just -- since I think there are some further opportunities there depending on the next little while goes, there may be some further delays and so forth, we're going to keep a close eye on that and continue working that, but it will come down from pre-COVID levels.
Okay. And just on the balance sheet, obviously, in the 1.6x, I think liquidity looks pretty good and the amount. I'm just curious -- I don't know if you can share these numbers, but just any financial covenants or -- I mean we're, again, like obviously, in good shape right now, but just so we can be aware of that.
Yes. So I mean obviously, one of the first things we did once this thing kicked in was shore up our liquidity. So we achieved that. And as we know, we feel very comfortable there. We've obviously been in downturn mode in executing on those action plans for the last little while. So we've been focused on that. And along the way, we've been forecasting modeling. There's obviously a lot of uncertainty still out there in terms of a restart and what the recovery looks like, timing and so forth. We generally benchmark and forecast based on IHS. So that's kind of the frame of reference. Based on the current view, based on the current restart dates and what it looks like coming out based on kind of that baseline projection, we feel pretty good about our leverage ratio and our covenants. So our bank covenant is net debt to adjusted EBITDA of 3x. So that's kind of the threshold at this point. So we feel comfortable with that. Of course, if the shutdowns are prolonged, then -- if there's another surge of cases in society and we go back in lockdown, under those circumstances, I think it's safe to say we'll be having some discussion with our banks. We, quite frankly, won't be the only ones. I think others will be a tailwind for us. But we have, as you know, strong banking relationships and we feel comfortable with that. And it's not a hurdle that we don't -- we believe it's a hurdle we can overcome.
Yes. I will say in general terms, we -- as Fred said, we have very good relations with our banks. We're very open and transparent. One of the things that we've seen in this situation as opposed to, say 2008, 2009, is there's lots of liquidity in the system. That's certainly been an emphasis of governments dealing with the banks, and we're very close to our banks as far as that goes. And I think as you can see, when we put out our release in March, I guess basically pulling back on the guidance, we said we were in discussions with our banks. With respect to our lines, as you can see, the results of that were very good and we know that we'll keep having discussions with them. But if things go as planned, we should be fine and actually be in a position to utilize the strength of our balance sheet in good ways, like we're winning new work and stuff like that.
Okay. That helps. And maybe just one last thing. Just on the restart of your facilities, and you may have touched on this already but just sort of the schedule. I assume China is fully running, Europe is in the process and North America basically end of the month, everything should be up and running obviously at reduced rates. So is that sort of how to think about it?
China has been up and running for a bit. I'd say they're 80% to 90% level depending on the plant. Europe, for a shorter time, are probably between 20% and 30% there someplace -- probably closer to 20% at the moment. And then this week, some of the North American plants started up, Toyota, Honda. A few other plants from the Detroit 3 are warming up. Next week, you'll start to see them kick in; in the week after, more so. So throughout May, they're all ramping up in -- at least by schedule, the expectation is in June. I'm sure they would love to normalize as much as possible. But the supply chain, employment, all those types of things obviously will probably play a role. So we expect it to be bumpy, the first 2 or 3 weeks, for sure. And we'll pull all that. So as they rise, we'll pull people back in.
[Operator Instructions] And the next question is from Michael Glen at Raymond James.
Pat, in your opening remarks, you talked about some of the work that you've been able to step in at the plant level and get some of the operational improvements in place. Can you just maybe dig a little deeper? Can you identify some of the specific plants that you're able to get into maybe a bit earlier and accomplish some of these improvements?
Yes. So about a year out, we'll plan for the following year improvements. And a lot of those improvements, you need line time to do it and it's difficult when you're in full production to get to the lines and do some of that activity. So with everybody down in a lot of our plants, we kept our lean people in place and worked through a lot of those improvement activities that had been previously planned. So in some sense, you could say you pulled some of those ahead. So that, in combination with plans for the Metalsa improvements which we talked about previously, we were able to pull those ahead as well in a lot of cases. So it's really a combination of those 2 things will allow us to reduce our overall resource base as we go forward. And the fact that we're starting slower will give us a little bit more time. By the time things are back in full production, my expectation is we could be, I don't know, 5%-plus, maybe 10% better across the board. 5% is probably a better bet, but I'll push for 10% certainly.
And then on Metalsa, you had given some indications when you acquired that business. So do you think that you could -- you should be able to do better than what you had initially indicated? I guess the volume might be an offset there.
Well, I would tell you in the case of North America, we were able to pull ahead. In the case of Germany, we couldn't get resources there except for a few that decided to stay. So we have not been able to get our resources when we expected to get them. So I would say Germany will be a bit behind, but U.S. and Mexico will be a bit ahead. And in China, we're back up and running. Those are relatively small plants and actually have been running at 100% or more based on volumes.
The one headwind we do face, obviously, in that business from expectations when we closed it is obviously the volume, as you know. So volumes have come down from what those initial expectations were. So there has been some deterioration there. But longer term, our view of the business is still intact and we're going to continue to improve it and continue to integrate it and get to the -- eventually once volumes start coming back and so forth, get to those expected levels when we acquired and closed the deal.
A lot of our integration team are in Mexico or the U.S. and Canada, and we were able to get access to the plant in the U.S. and the ones in Mexico. But the one in Germany, unfortunately, with all the inability to cross borders and fly, we've had to postpone some of that activity.
Okay. That's helpful. And then maybe just working capital. Fred, you have some comments regarding what was going on with working capital. Can you maybe just -- can you give some -- like what should we -- what we should expect maybe through the next couple of quarters.
Yes. I'll address the 2 aspects. I mean production-related working capital is pretty predictable. So as I noted in my opening remarks, when the shutdowns kicked in, we started benefiting from that unwinding in the receivables and payables and so forth. So we saw a bit of a tailwind in March and that continued in April. And that's obviously going to reverse itself as we restart production, build it back up. That rebuilding of working cap will happen in the tail end of Q2 and in Q3. And then depending on where volumes are seasonally in the fourth quarter, that tends to come down again. So it's a bit of a source of cash by the end of the year. So that's -- I'm pretty comfortable and it's visible to me. What's less predictable is the tooling-related working cap. And in particular, in this environment, it's volatile by nature but -- in particular now. So we actually saw an increase in Q1. And I'm expecting at this point probably not to decrease by the end of the year. If anything, it may actually increase to some extent. So we're still working through that, as I noted on the CapEx and tooling, understanding program time line and so forth and PPAP dates. And it's a bit of a moving target right now, but that is an area that I'm focused in on and could be a negative as it relates to cash for the rest of the year.
And any idea of what that magnitude of negative might be?
It's not going to be too big. I mean $100 million is pretty high to begin with. So I couldn't tell you exactly, but it's not like we're doubling or anything like that. So it would be marginally higher than where we are now.
Thank you. As there are no further questions, Mr. Wildeboer, I would like to turn the conference back over to you.
Okay. Well, that's good because I think we only have an hour anyway. That's probably good. To all of you who called in, we appreciate that. We're obviously remote as well. We're working well together as a team but we're not all together physically. So glad that the call went off and I thank the technical people for that. If anyone has further questions, would like to discuss any of our issues, please feel free to call us at the contact number in the press release. Thanks, and have a great evening.
Thank you. Ladies and gentlemen, your conference has now ended. All callers are asked to hang up their lines at this time, and thank you for joining today's call.