Martinrea International Inc
TSX:MRE
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Martinrea International Inc
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Good afternoon, ladies and gentlemen, and welcome to the Martinrea International First Quarter Results Conference Call. Instructions for submitting questions will be provided to you later in the call.
I would now like to turn the call over to Mr. Rob Wildeboer. Please go ahead, sir.
Good evening, 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 results and commentary through our network.
With me are Pat D'Eramo, Martinrea's CEO and President; and our CFO, Fred Di Tosto. Today, we will be discussing Martinrea's results for the quarter ended March 31, 2022.
I refer you to our usual disclaimer in our press release and filed documents. Before we get to Pat and Fred for a focused discussion of the quarter, what's behind the results and what we think the rest of the year and next looks like, and where the analysts can focus on their models, et cetera, let me make some general comments, directed to not just our shareholders and the investor community but to our people, many of whom are on the call and all of which will have access to this transcript.
I'm going to touch on 2 themes today: resiliency and entrepreneurship in the context of our business and the world we live in. Our world and our industry grows with the challenges we face. As I'm prone to say, we live in a broken world. Sometimes, we have really good times and sometimes many daunting challenges face us. Briefly, let's cast our minds back to the end of 2019, beginning of 2020. Martinrea was coming off our best year ever, many would say, high revenues, record earnings, record EBITDA or cash flow, solid positive free cash flow, operating income margins at an effective 8% rate, but for a GM strike, which temporarily hurt earnings and a stock price roughly double what we have now. As well, recall that we had announced in the months previous over CAD 1 billion in annual incremental business launching in 2020, 2021 and 2022, a record of wins for Martinrea, guaranteeing that our plants would be full when all these programs were launched, which is happening now.
And then lots of challenges, and I'm not going to get into all of them. You know them. But to summarize some of them, the pandemic and related shutdowns to varying degrees all over the world, still occurring in some places like China. Supply chain issues, especially semiconductor chips, erratic production schedules from customers, resulting in much unplanned downtime, labor shortages, wage inflation in some areas, input costs going up in materials, energy and other inputs, border issues, now interest rate increases, impacts from a major war in the Ukraine with international implications. But look at the resiliency of our company in the midst of all these challenges. We have been leaders in fighting the challenges of the pandemic. We didn't run away and hide. We developed safety protocols, improved our safety record to among the industry's best. We became a leading manufacturer of personal protective equipment, such as ventilators parts and Level 3 masks. We've built our revenues and worked on our launches, so that today, the first quarter of 2022, we are announcing record quarterly revenues.
Our financial performance is really solid as we head into 2022, as Pat and Fred will talk about with solid EPS, higher adjusted EBITDA this quarter than for the same period last year, higher North American adjusted operating income than we had a year ago, and we are still launching and growing. Our people, our team, just gets it done. The resiliency of our people from our CEO to the people who touch the parts is simply fantastic. The culture we talk about in our vision statement and operating principles comes to the 4 in challenging times. One of our guiding principles' challenges make us better. That is true of this company and our people. You are resilient, and we are so proud to be on this call today representing over 16,000 great people. So that's resiliency.
The second theme is entrepreneurship. As you know, entrepreneurship is one of the cornerstones of our culture, along with lean thinking and a golden rule philosophy of treating people like you want to be treated. It's an overuse term by many and misunderstood by many. Some say, entrepreneurship means risk-taking. This implies a shoot-from-the-hip approach. It doesn't mean that. This is what it means to us, simply this. We want all our people from executives to general managers to our people on the floor to act and think like an owner with a stake in the enterprise, supporting a can-do attitude, promoting an ability and willingness to urgently get things done, acting to avoid unnecessary bureaucracy and developing an ability to learn from challenges openly and constructively with the trust of working in a team. That's a direct lift from our sustainability report.
So how can we see entrepreneurship, this ownership mentality in what we do. We act like owners because we are. I look at this business the same as if I own 100% of it. That's what you want me to do, I think. I also think always about the people who also own this business, and that also includes our employees. They need this business to provide them what they need a job, still one of the greatest social policies in our society, a job that is secure and safe, one that gives opportunity for fulfillment. One commentator is written that what drives people to work and perform well is essentially 3 things: a job a person can master, a job that provides some autonomy, input, self-respect and a job with purpose. We seek to provide that. And I think we are pretty successful. Our employee survey show that and our relatively low turnover rates do also. A lot of people love working here.
So what does that mean in practice? It means we make big and small decisions with a view to being around a very long time, true sustainability. We're just over 20 years old now, but we have grown from nothing into a CAD 4 billion plus advanced manufacture and technology company, not to bet. It means we try and avoid major risks that can turn around and bite us in the ass.
On a geopolitical basis, for example, we never set up shop in Russia, despite intense pressure from some customers to do so. Reason, Russia is corrupt. Bribes is a norm there. Last I checked, that's against our laws. We also don't trust dictators. Another example is China. Despite intense pressure, including from some investor folks, we have maintained a light touch in China. We set up a small fluids facility outside Shanghai in order to service worldwide customers and win worldwide programs. It has worked out well. And our Chinese workforce by the way, is fantastic. In the past month, they have volunteered to stay at the plant to make product, a wonderful commitment. We have a start-up aluminum plant, serving customers in China that has done well, but future projects in China will likely be done through and working with the Chinese partner we like. We've not built any metallic plants in China as we have partnered with local players. We did inherit 2 small plants with our Metalsa acquisition. But looking at China, we also -- we always saw geopolitical risk. If China did not move towards full WTO membership, for example, if there is a trade war, if there are tariffs and sanctions. We are looking pretty wise today with limited exposure in both areas. Companies with too much exposure there are well exposed. We take a long-term ownership view.
At the same time, we have been bold in growing our business in many other areas. We've gone full bore into Mexico with great success. We remain advocates for investment in the U.S., the South, Middle and North because it is the economic center of the auto business, we believe. And we have invested heavily in Canada because we believe in Canada. There's a lot of positive auto investment in Canada as recent announcements illustrate. We have grown our footprint carefully in Europe through acquisitions and building on what we have bought. It's a limited footprint and even today in the midst of a war that can be good as European. And our growth in Europe is largely tied to growing our relationships with European manufacturers, not just in Europe, but in North America. Our new plant in Tuscaloosa full of Daimler work is testimony to that. This is what an entrepreneur does, take a long-term ownership view. We believe the future and have always believed this is regional and at a great place for us is North America, our greatest footprint. This too is a wise move, be very, very strong in your home market first.
As entrepreneurs, we also seek out opportunity, even in the midst of a pandemic and crisis. As we said in 2009, while at a good growth crisis go waste. We bought a company in the spring of 2009 when 2 of our customers were going bankrupt. We bought an aluminum company in 2011 from bankruptcy and turned it into one of the industry leaders and built its North American presence from CAD 0 to CAD 300 million annually when the current launch cycle was completed. As entrepreneurs, we have seized opportunities in materials, investing in graphene and becoming the largest shareholder of the world leader in graphene manufacturing and introducing new product into our industry. By the way, our graphene enhanced brake lines have just been nominated for an Automotive News PACE Award, which is really cool.
We've been co-ventures in a company that can now make and is making graphene enhanced lithium-ion batteries. We're investigating aluminum-air battery technology, an additive manufacturing using the latest and greatest in aluminum powder. We set up a new innovation division to help promote innovation in our company called MiND, like good entrepreneurs do. And as you know, our whole system with each plant being a center of excellence, encourages entrepreneurship. So as you look at our Q1 results and as you listen to our thoughts on what is coming for the rest of the year and next year, remember these 2 words, resilience and entrepreneurship. We see lots of opportunity.
One final brief thought on the macro. Demand for vehicles remains strong. We have a shortage of supply. The underlying economy in North America is still pretty strong. North America is in a good position. And you can check this, if the war in Ukraine continues much like the Korean conflict of 7 years ago, sadly, perhaps, that may be good for the North American economy, know your history. That's something unobserved, those who forget the past are condemned to repeat it. The future is going to be good for us, and it's going to be fun.
And with that, let me turn it over to Pat.
Thanks, Rob. Hello, everyone. As noted in our press release, we generated an adjusted earnings per share of CAD 0.31 and adjusted operating income of CAD 44 million in Q1. Production sales came in at CAD 1.1 billion, up 19% year-over-year. Adjusted EBITDA was up year-over-year and up almost 80% from Q4. This is a big improvement over the 2 most recent quarters and in line with our expectations for Q1 and notably better than Q4, as we indicated on our last call.
Volume and mix were much improved to start the year. As we witnessed a lower level of chip-related production shutdowns and call-offs, although we are still experiencing short-term disruptions from some of our customers, some key Martinrea programs, including the Chevy Equinox, Silverado and Sierra as well as others saw a much better production number during the first quarter. Adjusted operating income margin came in at 3.8%, a good improvement over what was essentially a breakeven result in Q4, but still below what we foresee in the coming year as margins continue to be held back by cost inflation and program launches and production disruptions. Rising energy costs continue to be a drag in our business in Europe. Natural gas prices are up roughly 50% since Russia invaded Ukraine in late February and are now about 7x higher compared to this time last year. The expectation is that energy and other inflationary cost increases, either normalized at some point or are largely recovered through commercial negotiations. As discussed on previous calls, these negotiations take time, but we are making headway as expected.
Overall, while the current environment remains challenging, it is improving, as you can tell by our first quarter performance. Results in the back half of the year should demonstrate steady improvement over the first half as supply chain bottlenecks get worked out and launch activity recedes to normal levels. We expect that this will set the stage for a multiyear period of strong production volumes, margin and free cash flow, with our plants basically running at full capacity as industry demand is unwavering. As such, we remain confident in our ability to meet our 2023 outlook, which includes over CAD 200 million in free cash flow. Fred will have more to say about this outlook in a few minutes.
Turning to our North American operations. As mentioned, volume and mix improved sequentially in Q1 as the production environment was more stable with a lower level of customer call-offs, though we still saw short-term disruptions this quarter. Overall, the worst is likely behind us from a volume perspective, although sales mix is always a variable. Of note, impacts on the supply chain from the war in Ukraine and strict COVID control measures in China appear to be mostly isolated to those regions. In our case, so far, we have seen only limited spillover effect in our core North American market. However, some North American customers could still get affected by these near-term supply disruptions. And of course, the inflationary costs continue to impact our business.
In addition, we continue to launch on the largest book of business we have had in the company's history. With traditional customers with both core products and all electric vehicles as well as EV programs with customers such as Daimler, Tesla and Lucid. This has resulted in higher-than-normal launch costs, which is compounded by the volatile production environment we have seen in recent quarters. These costs will continue to improve in the latter part of the year, which when combined with a more stable production environment from our customers will result in better margin performance.
Turning to Europe. Our performance was consistent quarter-over-quarter. Energy and material costs continue to be a significant headwind, as mentioned earlier. Overall, we continue to make good progress operationally in Europe. However, this progress is being masked by these inflationary cost pressures.
In our Rest of World segment, operating performance was impacted by lower volumes and mix, launch activity and the disruption caused by the COVID lockdown measures in China, making it difficult for our people to come to work in both our facilities and our customer plans. We don't have any new business awards to announce today as it's only been 2 months since our last earnings call where we announced some substantial awards totaling CAD 100 million in annualized sales. However, we have been awarded some meaningful replacement work on a number of high-volume programs, and we expect more new awards in the near future. We are also quoting on increased volume opportunities on a number of current platforms with our customers.
Let's take a look at how we are trending towards our 2023 outlook. I'm on Slide 8. This is the same chart we provided on the last call, showing the drivers that are expected to take us from what is essentially a breakeven adjusted operating income margin in Q4 to an 8% in 2023. The first bucket is volume and mix. Here, we are tracking according to plan, if not somewhat better in Q1, in particular, with current customers. We expect continued improvement on this front. Looking at our industry production volumes, IHS took their North American forecast down slightly for this year, but 2023 was basically unchanged. Net-net, there is not a change in our expectations regarding overall market volume.
Next, we have expected recovery in materials, labor and energy costs achieved some successful outcomes on commercial negotiations. As mentioned, we have seen some additional cost pressure since last quarter. On a positive note, we've recovered some of these costs through discussions with our customers. These negotiations continue, and we expect to recover more as we progress through the year. Our assumption is that the incremental cost pressures will be recovered or otherwise offset and/or normalize.
Next, our assumptions regarding operations and customer production inefficiency are unchanged. We saw the benefit from a more stable production environment on our financial performance in Q1, and we expect further improvement in the coming quarters. As discussed on previous calls, this erratic production environment over the last year or so has made it difficult to adjust or flex our labor in real time, resulting in poor absorption of overhead costs. With some recent improvement in production environment, we are seeing some relief on this front. As always, we continue to execute on our Martinrea Operating System, or MOS initiatives, and we continue to see a lot of opportunity here. As I've said before, we are still in the early innings of what we can achieve on this front.
Finally, we are making great progress on new program launches. We expect our launch activity and in turn, launch costs to continue to reduce as the year progresses, but that will come improve margins. The key is a continued reduction in short-term disruptions from our customers. To sum it all up, we are making good progress toward our 2023 outlook and are right where we expect to be at this point. And we are anticipating an even greater improvement in the coming quarters.
Quickly, I want to say a few words about VoltaXplore, our 50-50 JV with NanoXplore and commercializing the production of graphene enhanced lithium-ion batteries. VoltaXplore held its Battery Day on April 5 at our demonstration facility in Montreal. The event was well attended by analysts, investors and government representatives, which speaks to the level of interest in the project. The day consisted of a tour of the demonstration facility as well as presentations and technical discussions by management. The presentation is available on our Investor Relations section of our website for those that are interested.
To summarize where we're at, the demonstration facility is up and running and producing batteries. Our technology has been validated internally and by third parties and confirms the advantages of graphene enhanced lithium-ion batteries over existing technologies, which include greater capacity, longer life and faster charging speeds with enhanced safety. We remain on track with our expected milestones and anticipate that we will proceed with building a 2-gigawatt hour facility to start production in 2024, conditional on validating the project economics, obtaining financing on favorable terms and completing site selection. We expect to make this final decision over the next several months.
With that, I'd like to thank the entire Martinrea team for their continued dedication and commitment in these challenging times. And with that, I'll pass it to Fred.
Thanks, Pat, and good evening, everyone. As Pat noted, our first quarter results are much improved sequentially as we benefited from a more stable production environment with a lower level of trip related production shutdowns and customer call offs during the quarter. While we continue to face headwinds from supply shortages, cost inflation and higher-than-normal launch activity, our expectation for results to be better in the first half of this year, followed by a further recovery in the back half of the year appears to be on track thus far. As supply chain bottlenecks improve and our launch activity normalizes, we believe 2022 will be a transition year to a strong multiyear period of strong volumes, sales, margins and free cash flow, and our Q1 results are a positive data point that gives us confidence that this will be the case.
Taking a closer look at our performance quarter-over-quarter. Production sales were up 30% on industry production volumes that were up 6% in our core North American market. Our sales growth outpaced overall market growth materially given a positive mix as programs that are most impacted by the production shutdowns in the previous quarters also saw more pronounced recoveries as production began to normalize. These include programs such as the Chevy Equinox and Sierra and Silverado large pickup truck platforms that we have discussed at length on previous calls.
Adjusted operating income margin came in at 3.8%, a marked improvement from the losses generated in the previous 2 quarters and representing incremental margin on production sales of 19%. Some were lower than normal for us due to continued inflationary cost pressures we are facing in energy and material, including freight costs. Tooling sales declined during the quarter of an unusually high level in Q4, and as such, total sales were up just under 10%. Adjusted EBITDA of CAD 112.4 million was up almost 80% quarter-over-quarter, a notable achievement given the persistent industry challenges that we continue to work through. Free cash flow was negative in Q1, reflecting the timing of working capital flows for both production and tooling related capital. As noted in the past, tooling-related working capital, in particular, can be lumpy and unpredictable between quarters. Seasonality is also a factor as we tend to harvest working capital in Q4 where we tend to deploy it in Q1.
Looking at our performance on a year-over-year basis. First quarter adjusted operating income and EBITDA results were generally consistent with year-ago levels. Recall that Q1 2021 was the first quarter that we began to feel the impact of chip and other supply shortages on our operations. Of course, we expect our results to surpass these levels getting back to our pre-COVID performance and expectations.
Turning to our 2023 outlook. We continue to expect to achieve total sales, including tooling sales of CAD 4.6 billion to CAD 4.8 billion and adjusted operating margin exceeding 8% and more than CAD 200 million in free cash flow. We're off to a good start in 2022 as our Q1 results demonstrate, and we expect further improvement as we progress through the year, supply conditions and launch activity normalize and we get some relief on the cost side through some combination of input cost normalization and our cost recoveries through commercial negotiations.
As Pat mentioned, demand for vehicles remains robust, and inventories continue to trend near an all-time low, which should support strong industry production volumes for several years. We also expect our own sales growth to outpace industry volume growth given the substantial amount of business that we won in the recent years that we continue to launch on.
Finally, our capital spending is expected to decline to a range of approximately depreciation as a percentage of sales in 2023. 2 main drivers continue to be second-generation programs in our flexible well lines, which require less capital than their first iteration and getting past their heavy investment cycle in aluminum. This is one of the key drivers underpinning for our outlook for over CAD 200 million of free cash flow in 2023. Our track record of delivering on our financial target speaks for itself, and we are confident that this will continue to be the case as we deliver on our 2023 outlook.
Turning to our balance sheet. Net debt increased quarter-over-quarter to CAD 922 million in Q1. Our net debt-to-adjusted EBITDA was 3.3x at the end of the quarter, an increase of approximately 3.1x last quarter. An increase in non-cash working capital, both production and tooling-related, reflecting the timing of working capital flows, as previously discussed, contributed to the increased debt levels. Overall, we are comfortable with our balance sheet position and expect to remain well within the covenants stipulated in our amended credit agreement with our lenders that we announced last quarter.
And with that, I'll now turn it back over to Rob.
Thanks, Fred. And Pat, just one further note from me. Our AGM will occur on June 7, and proxy materials will be posted shortly. We'll have a live in-person meeting and hope to see some of you there. We'll give some presentations on the status of our industry and company. And as the AGM will be close to our Alfield facility, we are open to providing tourists to those who can make it subject to overall numbers. There are some really exciting and innovative things happening there.
And with that, we conclude our formal remarks. Thank you for your attention this evening. Now it's time for questions. We see we have shareholders, analysts and competitors on the phone, also some employees. So we may have to be a little careful with our answers, but we will answer what we can. Thank you for calling.
We will now take questions from the telephone lines. [Operator Instructions] Our first question is from David Ocampo from Cormark Securities.
I was wondering if you guys can give us an update on how we should be thinking about the uses of free cash flow, especially as we head into 2023 with that big CAD 200 million-plus guidance. I was just wondering if a bulk of this could be reinvested into VoltaXplore, just given the rollout of the facility? Or should we be thinking about this CAD 200 million as more potential for paying down debt or even shareholder distributions?
Yes, it's a good question. We're looking forward to getting to that position. I think probably initial focus would be on paying down debt. We have revolving lines and any free cash flow would do that initially. It's not clear in the context of Volta is to whether we would invest or the extent to which we would if we do, we're in the midst of looking at financing alternatives there and working with our partners at NanoXplore. We're very excited about the future for that, but we're certainly not necessarily going to put our free cash flow there. And I think there's other potential uses of that as well. But we're looking forward to positive free cash flow and strengthen our balance sheet, first of all.
That's helpful commentary. And my second one here is just following up on the inflationary pressures. I guess maybe for Pat, when you guys are negotiating new contracts with customers, are you changing the way that you have passed through provisions within the contracts. So if costs do move up or down, both you and the customer are well protected? Or should we think about the old automotive contracts as kind of status quo?
Well, we've -- for new quotes, we're certainly using the newer numbers that are out there today, but a lot more focus on indexing components and those types of things that can be indexed. Some of these costs may be more short-term, like energy cost may not go on for years and years. So there's options such as quarterly reviews and those types of things that have been discussed. So there's a method for every one of the inflationary items out there currently, and we've been tapping into all of them.
And I guess for your current contracts, do you expect the negotiations to be wrapped up prior to 2023? Or could that potentially be a risk for your 8% margin target?
Based on our rate, I would expect we'll be pretty much wrapped up this year.
Next question is from Mark Neville from Scotiabank.
Pretty impressive quarter. I guess, I can understand how sales were up sequentially. Year-over-year I think it was pretty surprising. Is it really just mix and sort of regional waiting?
Yes. I mean at the end of the day, that's really what it comes down to. General Motors, for example, is our largest customer, and we have some quite a bit of content on some large platforms there. And if you look at their production volumes in the back half of last year, they were impacted more so than most. And then we saw a fairly rapid recovery as we embarked on 2022, and we ended up in a very -- I'm not saying a perfect situation because all the customers who are still experiencing production shutdowns. But as it relates to certain of the key platforms, volumes are actually quite strong and stable.
Okay. In terms of -- I'm just trying to -- when you talk about further improvements to margin in the second half, some of it is predicated on supply chain, this is also the launch costs. I guess I'm just trying to understand how material the tailwind from lower launch costs will be because supply chains are still quite uncertain. Maybe just trying to isolate what's in your control.
So as far as launch cost goes, as I said in the last 2 calls, we've had a significant amount of launch activity more than we've ever had before in a very difficult time, especially when it comes to resources. So the costs have been higher than normal because of those 2 things, but they're receding as the customers smooth out their launch curves. One of the problems has been as a customer launches, they have a specific launch curve. And in normal times, we can follow that curve with our headcount and our cost and as the volumes go up, then our margins go up as well. But it's been very erratic for some of our biggest launches because, as I said last time, they'll run 2 or 3 days and then suddenly stop.
In the past, you could lay off people, you could send people home even for a few weeks, you can manage those types of things, and they weren't nearly as frequent. But today, given the employment situation, especially in the United States, if you do that, then they don't return to work in a lot of cases because there's so many jobs out there. So we had to manage it much different. But again, they're improving. We're seeing steadier polls from our customers on the new launches. And as that happens, our costs become more in line. We get more stability. It's still going to take some time for some of them. Some of them are still really struggling in certain platforms.
As far as material and those types of things, our logic here is that when we negotiate with a customer, ex cost for a component or a part, material is spelled out, overhead is spelled out, labor rates are spelled out and so forth. So the intent from the customer is that a lot of this stuff becomes passed through especially material. So the materials have changed a lot. And so our discussions with our customers are, that's still got to be passed through. And so far, we've had a lot of cooperation with a lot of the customers, and we're making some good headway. One of the issues -- I'd say 2 of the issues are a little bit more difficult to wrestle through. One would be logistics because a lot of this inflationary cost is transportation. And that's a little tougher because it's erratic to some extent, and energy, especially in Europe. As I said, energy costs in Europe are 7x higher than they were a year ago, and they're affecting everybody. So those are a little harder to wrestle through, but we are making good progress.
So when you're talking with your customers, more recoveries and material costs, is that retroactive? Or just sort of on a go-forward basis, like just what's reset, we can earn a normal margin. You're not trying to recover something in the last few quarters?
I would say it's not a standard approach. It's dependent on the platform, dependent on the customer, depending on the situation, things the customer needs, things that we need, and it's all negotiation. There is no single path for all customers or platforms.
Every deal...
Yes. Every deal has been a little different. That's right.
Yes. Okay. That's understood. One last question, I guess, just energy prices in Europe, again, I can understand they are way up. And just how material is that -- I don't know as part of your cost structure, what percentage is energy more specific to Europe?
Yes. And I'll provide a little bit of guidance on the overall impact of the inflationary cost increases because I did comment on it when we filed our third quarter. We had quantified at that point about CAD 40 million annualized. When we filed Q4, I noted at that point that it had increased further. And since then, it's increased even further, largely related to energy, which has jumped even more substantially since the conflict in Europe started in February. And at this point in time, that magnitude is sitting at somewhere north of CAD 100 million annualized. And as we noted, we are actively trying to recover some of that from our customers, and we have some success there. So there's some positive momentum in that. And then there's also an expectation that at some point, some of these costs will normalize later this year.
That's super helpful, Fred. And I guess -- sorry, just to follow-up on -- I think it was David's last question. Again, the -- talking about going into 2023 with sort of the negotiations done. I mean, a way to think about that sort of a big chunk of that CAD 100 million headwind is not there next year? Again, you might not recover it, but it's not there next year?
That would be the assumption, yes.
Good job in the quarter.
Next question is from Michael Glen from Raymond James.
Just to go back on to the sales volume in North America. Like when we look at it on a platform-by-platform basis, are there any -- like on the Equinox platform, is there a notable content per vehicle change between Q1 this year and Q1 last year?
No. No, that's been -- that's a fairly mature program, so it will be the same.
Okay. And same on Silverado, it would be similar type CPV overall?
Silverado would have launched before '21.
But Silverado is adding capacity. Remember, they've launched in [ Ashua ]. So they're now building Silverado's at a higher volume than previous...
But our content on that...
And when you think about like the production sales in North America for the quarter at CAD 824 million, I mean all else being equal, it's going to bounce around a bit quarter-to-quarter, but you would generally expect it should stay in and around that type of level through the balance of the year?
Well, I guess time will tell. I mean, there's still some instability in the volumes I believe with certain customers. So we're keeping a close eye on it. But I don't see it at this point, dropping drastic from those levels. So...
I think there's more...
More opportunity because if you look at the percent of the launches that we're having, the majority of them are in North America. So the benefits -- we should see some benefit as the -- some of those launches that are struggling with our customers start to smooth out. The general trend line is up.
Okay. And then just in terms of -- are you able to give some updates for CapEx guidance for this year, 2022?
Yes. At this point in time, no change based on my comments on the last call, essentially consistent year-over-year. As we head into '23, as we noted in our guidance, we expect our CapEx to decrease year-over-year. And where we sit right now, nothing has changed.
Okay. And then any thoughts on working capital through the balance of the year?
Well, obviously, in Q1, we saw an increase, as I noted in my opening remarks, we generally see that happening in Q1 based on seasonality. But of course, we also had a surge in volume in Q1 as well as so that contributes to working capital. But I'm expecting by the end of the year based on seasonality as well to essentially to normalize back again. So it's a typical trend on what we see on an annual basis as relates to working capital. So nothing unusual from where I sit.
So do you -- would you think that you can have a flat working capital year?
It really will depend on where we land on tooling, and that's the one element where it's not as predictable. It kind of jumps up and down. Right now, we're actually sitting at actually around flat working capital as related to tooling. So that's going to be the one fire, but I don't see it increasing too much year-over-year, but we'll obviously keep an eye on to manage it.
Okay. And then can you give a comment as to where you stand with Metalsa. Can you update us? I can't remember exactly the last guidance that you gave with respect to what the contribution from Metalsa should be? But can you give an update as to how we should think about that?
Yes, we're generally on track there. So I think we said for '22 would be flattish, and then we'd be positive in '23. So the one headwind that we're dealing with right now is the inflationary cost pressures in the Metalsa plant in Germany, in particular, has been hit hard by energy. So we're working through that. That's kind of masking some of the progress there. You should take that out of the equation, we're on track, if not maybe slightly ahead.
Yes, I'd say we didn't have the inflationary costs, we would be slightly ahead of plan post pandemic. Remember, we've kind of pushed off some of our activity due to the inability to get resources there. But once we got back into our cadence, I'd say we're slightly ahead, I actually visited there last month, and I was pretty pleased with what I saw.
And there's a tailwind with our Mexican operations, too. So the higher North American volumes are helping us there. And of course, with Tuscaloosa, that's a big launch for us, and that's on track.
And your customer base over in Europe, like when you have conversations with them, like how do they think about -- or how do they feel about the rest of the year in Europe?
From a volume point of view, they still seem pretty positive. At least the ones that are able to build and aren't dependent on parts from Ukraine, let's say, VW has been affected a lot by that. We don't have a lot of VW work. We have some. But we're in some higher-end vehicles, some of the EVs, for both BMW, Daimler, they're pretty -- they're still pretty positive. In the case of some of the others, it's not quite as clear. But we haven't seen a drastic volume impact at this point, just costs have been affected, again, energy being by far the greatest.
At the same time, we were talking about regionalization. North America is pretty strong. I know the markets go up and down a fair bit, but we think the underlying economy is pretty strong, especially in the United States. And so North America is, I think, pretty bullish from an auto industry perspective, there's no question that in Europe, there's a lot of uncertainty.
And so we're pretty happy to be flattish in the context of where it is, but we think the European situation is more likely better than the worse.
Yes. I visited again our German plants last week. They're really banging it out right now. They've -- for the first time in at least one of the plants, the need for people has come up this last year, so -- or this last few months. So it's -- I haven't seen it from a volume point of view, a big change.
Our next question is from Krista Friesen from CIBC.
I can appreciate that we'll hopefully see some improvement in the back half of the year. But I was hoping you could kind of speak to some of the puts and takes in Q2? And if you think that could end up being worse than Q1, just based on the fact that there should be a possibility in Q2, we could see -- the full quarter could see the war in Ukraine? Or will that be offset by the fact that you've been able to renegotiate some of your contracts?
Yes. I would say let's neutralize the war for a moment and just say it stays as is. I would expect -- I can't say sales-wise, whether it be as high or not. But the improvement activity from an operational point of view, the launch, continuing issues and cost receding some, again, it's somewhat dependent on the customers' ability to meet their curves, but we're seeing improvement there. And then our work with the customers on inflationary costs and that progress is continuing. I would expect all those to be positives for us, not understanding exactly where sales is coming in. Now there's other headwinds such as aluminum costs, as you know, have gone up. That's on an index, and it corrects itself over time. But those kind of things, we're not sure where they're going to land. But that's my 2 sense and I'll let Fred if you have a different view.
No, that's fair.
Perfect. And then I was just wondering how you're thinking about mix. It sounds like you're on some very successful programs right now. But from whatever the OEMs have been prioritizing their higher-margin vehicles, which tend to be the larger pickup trucks. And eventually, we'll see the mix shift back to something more normalized. Do you see that impacting your earnings?
Well, we've seen in the case of GM, for example, they've been pretty much running across the board. They -- I won't say their chip issue is corrected, but it's a noticeable improvement over the previous 2 quarters. Some of the other customers are still struggling. There's a little bit more hit and miss. But I don't see it getting worse. I think you're going to see that situation get better. Now if they're impacted negatively by the China lockdown, which may have some post effect, if there are parts that aren't coming when they should be or something, we don't see that. But I think it's going to get better, not worse for the other customers and where GM is at right now, as an example, is our largest customer is, frankly, as good as I've seen it in 2 years.
Congrats on a good quarter, and I'll jump back in the queue.
Next question is from Peter Sklar from BMO Capital Markets.
Pat, you've kind of answered my question, which was on aluminum. So as you know, use a lot of aluminum because of Honsel and your other casting operations. And like I understand, like you get trued up by the customer, and there's all these formulas and things in that. But I find sometimes there can be leads and lags. And just wondering if there are any distortions in Q1 or like were there any leads and lags or anything to note about the Q1 adjustments?
As relates to Q1, nothing significant. So there was really no positive or negative there. But based on the current [indiscernible] in the last couple of weeks come back down. So depending on where it lands, the impact could be bigger in the second quarter and likely negative. But it's hard to tell how significant that is at this point.
And we're kind of buying ahead. So where the price is today is 2 or 3 months out for our utilization. It's kind of like oil, whatever the price of the barrel is today isn't necessarily affecting gas right away. So there is a lag internally as well as externally.
Right. And like are you protected in all your aluminum? Or is there some...
Yes. I mean, the far majority of our material is protected. It's just when it comes to steel, which is what we use the most of, it's protected in a much shorter time frame than aluminum. There are some materials, aluminum materials, a few and some steel products that we take care of ourselves, but the far majority are covered.
Okay. And then just lastly, Pat, I just wanted to ask you. So you had this really strong recovery of operating earnings in North America during the quarter. And like what do you think was the larger factor? Was it like the revenues you generated from the favorable mix, like the revenues came in very strong? Or was the more stable operating environment where you just didn't have that customers stop go kind of production schedules? Or is it really hard to probably...
It's hard -- they both contributed, the mix contributed, the volume contributed, and we certainly have seen some improvement on the operations. But we're still getting poked a bit on operations with some of these launches, again, because of the unsteady pull. But I expect that's going to get better, like I said earlier, and it has definitely gotten better since last year. So it's just moving, but it's moving slow. And then lastly, the commercial negotiations. We've been working very hard with our customers in correcting some of the cost picture, and that's helping as well.
So that -- you felt that in Q1 then?
There was some bit of it in Q1.
Yes, certainly, a little bit of it.
Okay. And Pat, like the thing I don't understand, when you talk about this more stable operating environment, you keep referring like how that's helping your launches, but not you help all your production, not just your -- not just propels that are in launch but mature...
So if you take a look at our programs that have been stable, sales were very good on those this month with most of those -- or this quarter, most of those are -- a lot of those are GM programs. A lot of our launches are big programs, some of the big programs that we've been talking about, but the pull from the customer has been unsteady. So again, we run in 2 or 3 days and then stop and run the next week and then stop and you're carrying all this overhead and all these people, you're not getting that smoothness in the operation. And when you don't have that, there's excess cost built in. You have extra people. You try to cut some of those costs down by taking some of the people out, but then they don't come back, as I said. And it really is difficult in the operation to get the cadence going when you don't have steady pull. And some of these launches, our customers are struggling to have a steady pull, whether it be chips or something else in their supply chain, but it's better now than it was last quarter, and I expect it will continue to get better. So we'll continue to see improvement in that.
Okay. And you haven't called out any particular launch issues, which, as you know, often arise. So I assume you're happy with the launches. There's nothing significant to report there.
Yes, the launches themselves, again, we had our struggles in the front end of it with lack of resources, like I said, but now it's more the steady state that we're lacking. And again, I'm expecting that to get better. But yes, I'm a lot more happy with where we're at today than we were a year ago on some of this and a lot of it, frankly, was resources. We just couldn't get enough people.
And I want to paint the wrong figure -- they're still really tough, especially in the United States, it's still really tough, and people are working very hard to manage the day-to-day. But that's not unique to us. That's across the board for the supply base.
But like when you say resources, you're talking about engineering? Or are you talking about like people on the plant floor making the stuff?
In our case, it's more plant people, for sure. But some of those plant people are technical people, too, right? Whether you have machine repair controls, people, die makers, those types of things. And again, it's getting better, but it's been very, very tenuous at times, but better today than it was a year ago by far.
Next question is from Brian Morrison, TD Securities.
I just want to make sure I understand the path to 2023 outlook slide. So when you talk about the CAD 40 million annualized going to CAD 100 million annualized, that's all 3 buckets of material, labor and energy, correct with the recent increase just simply due to energy?
Yes, that's correct. Yes. And the 2 largest pieces of that are material and energy.
Right. So with some recovery at that point in time, CAD 100 million annualized and inclusive of Q1, that's where we currently stand, correct?
Correct.
Okay. So from a recovery standpoint, improving, we're sort of past the peak of that cost pressure.
Still seems a movement.
There still seems a movement in the moving target.
So we really work hard to try to get things on indexes so we can pass them through a lot easier, but not all components are worked that way. It's not as erratic as it was, but there is still movement.
Okay. But when I look at the next bucket, then you get to the operations, customer production inefficiencies, the flex and the labor at this point in time, it would seem that we're sort of past the peak in that bucket. Is that correct?
It's more stable than it was a year ago, as I said, it is not optimal yet. It still struggle some states more than others, frankly, but improving. We're finding all kinds of very unique ways to get people to work and stay at work and been very creative. I've been pretty proud of some of what the team has come up with to help ourselves out, so.
Okay. And in terms of having a long cycle, I understand that correctly that where we should see normalization in the second half of 2022? Or is that more into say '23?
I'd say the later -- the latter part of 2022, I would expect most of these launch curves to be pretty steady. When we say get back to normal, we're always launching something someplace. So there will still be launches, but this very high volume of launches will be reduced for sure.
So when do you see that normalizing? Is that second half? Or is that later?
Second half. I'd say mostly second half.
It could be at normal levels by the end of the year.
Yes. Yes.
Okay. That's helpful. And then just the last question, sort of housekeeping. What was the program that had the cancellation that had a restructuring charge?
I didn't hear the question.
So General Motors announced a number of months ago that they were going to cease production of the Equinox and their can facility in Ontario. And we had some work on that platform, and it resulted in a rightsizing one facility and actually a closure of another that we're in the process.
Now GM makes that vehicle in 3 plants. So they're consolidating -- and so we still have the business. We just have it in a different location.
Yes. And they're going to continue making that vehicle in Mexico [indiscernible].
Next question is from Ben Jekic from PI Financial.
I actually wanted to ask a question, but Peter asked identical questions. So I will go back in the queue.
I guess we answered.
Yes.
We have no further questions at this time, Mr. Wildeboer, I return the meeting back over to you.
Well, thanks, everyone. Thanks for spending part of your evening with us, and we hope that we've informed you well. If there's any follow-up questions, feel free to give us a call at the numbers in the press release and have a great evening.
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