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 Fourth Quarter and Year-end Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Rob 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 annual 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 and year ended December 31, 2020. I will make some opening remarks about 2020 and some highlights from a unique year. Pat will make operational and strategic comments and give you his perspective. Fred will review the financial results, 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, AIF and full financials have been or are being filed on SEDAR. 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 in our remarks and we hope in the Q&A. Some highlights of the quarter or year, 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. Welcome to 2021, a year of hope, of opportunity and better days ahead. These are welcome words for many after the unique challenges of 2020, most of which related to the impact of the COVID-19 pandemic and the shutdowns and lockdowns related to it. The past year saw challenges that were not foreseen a year ago, including an unprecedented shutdown of our industry and most of our customers worldwide for months, where our revenues dropped precipitously close to 0 and many were talking about the very survival of many in our industry, talk about sustainability, morphed into talk about survival. Some might argue there is not much good to say about is such a stressful year. And yet, we believe that this may have been our finest hour to date as a company. We are so very proud of how our people and our company responded to the crisis and the fact that we ended the year stronger and more focused than ever on our long-term success and future. Our vision is making lives better by being the best we can be in the products we make and the services we provide. This was a year that we put that vision to the test. In terms of making lives better, our first focus is on our people. Those that serve our company every day is our employees. In a pandemic, our top priority is to keep our people safe. We are in a central industry and across the world, we have not, for the most part, been subject to government and poll shutdowns, but we need to keep our people safe. And not only must our people be safe, but they must feel safe. They must know that we have their interest at heart. It's also a critical part of our golden rule culture to treat people the way we want to be treated. And so safety was and is our focus. We developed and worked with our industry to develop leading safety protocols for our plants. We put them into practice within days of the declaration of COVID-19 as a pandemic. We always practice safety and seek to lead the industry, but this, of course, was a special case. We are happy to say that we've had an outstanding record in our plants with our safety protocols. Many of our people have stated they feel safer at work than any place other than home, and our safety protocols have been used in many other industries and workplaces. We are proud to say but we do not have any recorded instance of in-plant transmission of COVID-19. At the same time, our hearts reach out to some of our people in Mexico who contracted COVID-19 in the community and passed away. And to those who have had family members or loved ones who have been lost. We also found ways to assist our communities in the fight against COVID-19. While never having made medical equipment before, we contributed to the effort to provide sufficient ventilators by making over 70,000 ventilator stands. There is now a surplus. We knew that there was a need for masks, and so we learned to make masks. And now can make over 100,000 level 3 medical masks per day, if needed. We provide masks to all our people, to their families and to communities all over the world. We have made monetary and in kind contributions to charities, food banks, schools, churches and people who are in need that we could help. Our people pitched in and contributed with their time, effort and money. In the spring, with the shutdowns of our industry, we had to take extreme measures to cut costs, and we laid off almost 14,000 people on a temporary basis. This may have been the toughest decision we ever had to make at Martinrea, but it was necessary to ensure company survival. And 1 of the best times in our history was the process of bringing them back. Today, most of our people are now back and some plants are expanding as we launch new work. It has been said wisely that the best social policy is to give someone a job, our people need to have work, meaningful work and an ability to sustain themselves and their families economically by coming to work. We did that, and we are proud of it. We talk about culture a lot at Martinrea because it matters so much to us. In 2020, we put much of what we talk about into practice. Our central golden rural philosophy was core to our actions. At the same time, we remain true to our lean thinking philosophy into our entrepreneurial character, all were exemplified in our key metrics. Here are some highlights of the year. The full range are found in our annual information form and year-end releases. Our revenues rebounded in the second half of 2020 to almost normal levels and our second half results showed record earnings, both our third and fourth quarter results had record adjusted earnings per share. Despite the cash losses and borrowings, we had to make in the first half of the year before our industry restarted production in June. We ended the year with a strong balance sheet, similar to the very strong balance sheet we had at the end of 2019. Our lending relationships are excellent, as demonstrated by lender support during the year. We have always treated our lenders as partners. We were able to expand our facility in order to ensure we had sufficient liquidity during the pandemic, we had a fairly unique arrangement with our lenders where they treated our second quarter, the one with pandemic related losses as a onetime event that could be ignored for bank covenant purposes. Thank you for your support. After a stock price decline in the early days of the pandemic, Martinrea shares ended 2020 on a positive note, higher than the year-end closing price of 2019, bringing value to our shareholders in a pandemic year. Even during the shutdowns, our management team met daily to look at process improvements so that we could come back more efficiently than before, never let a crisis go to waste. We believe that these improvements will help Martinrea for years to come. In addition to COVID-19 safety measures, we continue to improve on our regular safety metrics, looking to provide our employees with a safe work environment. Our total recordable injury frequency measures were down 25% and our lost time injury frequency measures were down 19% for the year. Over the last 6 years, they are down 81% and 72%, respectively. This is great progress. And we are significantly better than industry average with a goal to be the industry leader. Note that safety is not just important as a safety measure, but we believe good safety measures help illustrate efficiency, lean activity, less waste and, of course, care for our people. We're a technology company, and we had much success in internal technology improvements and process innovations. We also introduced some great new products, including a graphene enhanced brake line now approved for customer use in 2021 that we believe is leading edge. Our partnership with NanoXplore, the world's leading producer of graphene is a technological breakthrough strategy also. We had 2 very successful investments in 2020. Our investment in NanoXpolre, which we increased during the year, has increased in value by over $80 million as we remain as large as shareholder. Our purchase of several metallic plants from Metalsa during the pandemic, increased our metallic footprint in Europe, China, Mexico and South Africa and brought us new metal-related technologies. We believe the value of the assets and what they will bring over the years is significantly higher than the modest purchase price. We have been very involved with national, state and provincial governments in Canada, the United States, Mexico and Europe, in dealing with government policy and support, proper protocols, border issues, trade issues, testing and screening and vaccination policy. Our industry, the automotive industry is the largest manufacturing industry on Earth and it is incumbent on us to lead the way out of both health and economic challenges. We are pleased at our industry performance and Martinrea's contribution to it, many have worked tirelessly and productively to return our societies to something resembling normalcy. It's coming. And as noted earlier, we believe we strengthened our culture in the face of challenges. 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 in the past. In order to be sustainable for the long term, a company has to be profitable, safe, build great products, take care of its customers and people and have a culture that is embraced by the people. Sustainable companies with great cultures will be around for a long time. We believe we have a company poised to excel in 2021, 2022 and beyond, and we are committed to deliver for our shareholders and all our stakeholders. We thank you for your ongoing support. We have a great future together. And now here's Pat.
Thanks, Rob. Hello, everyone. As noted in our press release, our strong momentum continued in Q4 with volumes that have not let up and margins above year ago levels. Our Q4 adjusted net earnings per share came in at $0.55, just above the high end of our guidance range that we discussed on our Q3 call of $0.46 to $0.54. Our adjusted operating income margin for Q4 was 6.2%, inclusive of our acquired Martinrea Metalsa Group, up from 5.6% in Q4 of last year. Production sales came in at $982 million, also inclusive of our Martinrea Metalsa Group, on the higher side of our range of $900 million to $1 billion. Excluding the acquired assets of Metalsa, adjusted operating income margin for the fourth quarter would have exceeded 7%, led by our North America and Rest of the World segments. A good result despite the renewed upward COVID trend this past November and December where Mexico and Germany were hit particularly hard in some of the key facilities, impeding some integration and launch activities. Looking at our operations. Currently, we are seeing tremendous fluctuations in releases from many customers. This is a combination of the chip shortages and harsh winter weather in the Southwest U.S. all causing significant downtime to our customers. In Mexico, most customers saw production downtime due to lack of natural gas caused by the winter weather in Texas. The weather and natural gas problems have subsided, but the chip shortage will persist for some time. In the short term, these issues are creating many disruptions to the automotive supply chain in Q1. While automakers are prioritizing production of high demand, higher-margin trucks and SUVs, some of these platforms have stopped production for weeks at a time. These stoppages will have an effect on our Q1 results. Temporary losses include key products like the Equinox, Escape and even some large trucks and SUVs. The good news is that overall demand is strong, and we believe the OEMs will make up as much production as possible in the back half of 2021. The low inventories could carry well into 2022, which would support high levels of demand for much longer. As I alluded to earlier, lockdowns and other public health restrictions due to COVID-19 pandemic, delayed our integration and restructuring efforts of our Martinrea Metalsa operations in Bergneustadt, Germany, which carried over into the early part of this year. While our longer-term prospects for this business are unchanged, our progress has been slowed, mainly due to the continuing travel restrictions. As discussed on our last call, we have a front-end loaded launch schedule in 2021. Some of which is due to the 2020 pandemic related to delays, while other launches were targeted for early 2021. High content launches include the Nissan Pathfinder in Rome, the new Jeep Grand Cherokee and Grand Wagoneer, the Ford Mach-E Mustang, the new Volvo XC40 and the Mercedes C-Class at our recently acquired Metalsa plant in Germany, all part of our Lightweight Structures Commercial Group. In our Propulsion Systems Commercial Group, we've had a number of big launches as well, including the D35 6 cylinder engine for the Ford F-150. The Class 8 Daimler transmission and significant break and fuel content on the Jeep Grand Cherokee. In our flexible manufacturing group, we are launching a product for the new Ford Maverick, GM's electric commercial van and an Isuzu truck as well as various industrial products for John Deere & Caterpillar. Some of these product launches are in our plants in Mexico and Germany. Launches are always a lot of work and launches in countries that have been highly affected by the pandemic are even more challenging. Despite this, and for the most part, we've had great success. So between the pandemic chip shortages and the weather, I'd say I've never seen people work so hard to call for success to keep new product flowing. I'm very proud of the tremendous ongoing efforts of our Martinrea teams. Order and quoting activity remains high, with $115 million in new business awarded since our last call. This includes $75 million in lightweight structures, with our various customers, including BMW, Volvo, GM, Audi and Toyota; $10 million in propulsion systems for Tesla, and $30 million in our flexible manufacturing group with various customers, including Volvo, John Deere and General Motors. Of the $115 million in total new business awarded during the quarter, $45 million relates to pure electric vehicle platforms, including GM's new EV Hummer, the Tesla Model Y and the Audi E6. Looking forward, I wouldn't be me if I didn't discuss our progress on graphene and our Nano investment. We recently invested another $4 million in NanoXplore, bringing the adjusted cost base of our investment to $41.5 million. This compares to a current market capitalization of $130 million based on a closing price of $3.71 on February 25 for a total return of 213%, which we're happy about. Of course, as we mentioned on our last call, our relationship with NanoXplore goes much deeper than our financial investment. Our graphene enhanced brake lines are on schedule to be in vehicles this year. There has been a virtual cornucopia of interest in this product from multiple customers. Currently graphene enhanced fuel lines are under development, and there's a lot of interest in this product as well. We've been asked on multiple occasions what electrification will do to our product lineup. Though our business is largely agnostic to electrification. Let us go a bit deeper, starting with where we're at and where we're going with EVs. Today, just under 10% of our booked business is tied to EV or hybrid platforms. We see this increasing to 25% over the next 5 years. The expected shift is broadly in line with IHS assumptions regarding EV adoption rates in various regions. Asia leading the transition followed by Europe, with North America moving more slowly, though we expect this may accelerate based on recent customer announcements. We have already won meaningful business on some key electric and hybrid programs, including the Daimler, EVA 2, Geely PMA-1, Ford Mach-E, GM EV Hummer, Tesla Model Y and the Audi premium platinum electric platforms, and we expect the pace of EV wins to only accelerate. Looking at this evolution from a product standpoint, if you sum the products we produce in our lightweight structures, propulsion systems and flexible manufacturing group divisions roughly 80% of our current products are completely agnostic to the propulsion system, be it ICE, hybrid or pure EV. For the remaining 20%, assuming the world goes 100% electric, the need for engine blocks and fuel lines dissipates at a relative rate. However, what is lost with these products can be made up with other products specific to EV platforms such as battery trays, electric motor housings and thermal management systems. We've already won some of these products, and we are in production with battery trays. We have taken a detailed product by product, look at our business and based on current and future products, we project that our opportunity on pure electric vehicle, as measured by the addressable content per vehicle is actually greater than on an ICE platform. Specifically, we estimate our total addressable content per vehicle on an EV platform to be a roughly $2,150 to $3,800 compared to $2,000 to $3,300 on an ICE platform. Part of the reason is due to the more complex, higher value-added nature of EV components compared to their ICE counterparts. Equally important here is that the majority of our heavy capital is flexible, specifically high and low-pressure casting machines, stamping presses, weld lines, break tube rolling and assembly, extrusion lines as well as suspension assembly equipment. As we've said for years, the move to EV can benefit our business without detrimenting our capital investments. For more details on this topic, please see this quarter's investor newsletter titled, Martinrea's position in an electric future in the Investor Relations section of our website. On that note, I'd like to thank the Martinrea team for their continued commitment with all the key launches, the high volumes as well as managing so much change in these very dynamic times. And with that, I'll pass it to Fred.
Thanks, Pat, and good evening, everyone. As Pat mentioned, Q4 was a very strong quarter for us, a record fourth quarter from an adjusted EPS perspective. With sales, adjusted operating income and EBITDA margins and adjusted EPS above year ago levels and in line with expectations. We are operating at or near pre-COVID demand levels in North America and China with a slow ramp-up in Europe, which is quite impressive considering our industry essentially ground to a halt around this time last year. As previously noted, our team has done an outstanding job managing through a very challenging period. We thank them for their hard work and dedication to organization. Taking a closer look at the Q4 results. Total sales in Q4 were up approximately 17% year-over-year or approximately 5%, excluding $108 million of sales from our recently acquired Martinrea Metalsa Group. We achieved this result despite a 25% decline in tooling sales, off a very high level in Q4 '19 as production sales increased 25%. Recall that Q4 '19 results were impacted by the UAW GM strike, which resulted in approximately $65 million in lost production sales during that quarter. Volumes have recovered sharply from the rock bottom levels hit in Q2. Clearly, the automotive industry has bounced back more quickly than many expected. Vehicle sales have been robust. Demand is high, and the vehicle inventory levels remain low in North America, particularly on truck, SUV and CV platforms, where we have the majority of our platform exposure. This bodes well for future sales. Adjusted operating income was $66.1 million, representing a 6.2% margin, an increase over the 5.6% margin we generated in the year ago quarter. Excluding the operations of our recently acquired Martinrea Metalsa Group, which had an operating loss of $3.9 million during the quarter, on $108 million of sales, adjusted operating income margin would have exceeded 7%. Margins were driven by our North American operations, reflecting strong volumes and a positive year or sales mix lower tooling sales, which typically earn low margins and productivity and efficiency improvements across the organization, partially offset by operational launch-related inefficiencies at certain operating facilities, some of which can be attributed to the ever-changing COVID-19 pandemic and the operational challenges that have come with it. Government wage subsidies for active employees totaling $2.1 million also helped on a year-to-year basis, though as expected, the impact was much lower compared to the previous quarter. In Europe, we generated positive operating income, an improvement over the loss generated in Q3, the margins remain well below potential, reflecting a slower volume recovery and pandemic-related delays in the integration of our German Martinrea Metalsa operations, as previously mentioned by Pat. These integration delays are likely to delay the Martinrea Metalsa Group achieving its breakeven EBITDA target in 2021. Notwithstanding, the longer-term outlook for the acquired business is still intact. We continue to feel very good about the acquisition and its prospects for the future. Our Rest of the World segment continues to generate strong results, hitting a healthy 12.9% operating margin in Q4. A level indicative of the long-term potential of the business. Moving on to earnings quickly. Q4 adjusted net earnings per share was a solid $0.55, as Pat noted, a record for Q4, driven by our sales and margin profile for the quarter. A lower effective tax rate also contributed to the EPS for the quarter. Going forward, we expect the tax rate to normalize and approximate annual rate of 27% to 28%, subject, of course, the mix of earnings and any changes to tax rates in any of the countries we operate in. Free cash flow, as defined in our MD&A for Q4 2020 was essentially breakeven for the quarter, inclusive of $100.4 million in cash CapEx. Certain new program capital additions previously delayed during the second quarter COVID-related shutdowns moved into the back half of the year, in particular the fourth quarter, as preparations for new program launches resumed as things got back to normal from a program cadence perspective. CapEx additions for the year were $303 million, including $21 million of CapEx-related to the acquired Martinrea Metalsa operations. CapEx for 2021 is now expected to increase to approximately $325 million, including the Martinrea Metalsa Group, based on our current backlog of business, inclusive of some recent new business wins, capital required for a number of customer-driven engineering changes and additional capacity to be put in place due to stronger-than-expected volumes, and as a result of some spend moving into '21 from '20. Further, recall that in Q3, we benefited from a large inflow of production-related working capital. We indicated on the last call that a portion of it was timing related and will reverse in the coming quarters. While it did, but the increase in production-related working capital was substantially offset by a further decrease in tooling related working capital, which again is expected to normalize over the next couple of quarters. Notwithstanding 2020 full year free cash flow was strong, ending the year at $62 million, far exceeding our original expectation of breakeven. A strong result by all accounts, especially when you consider the COVID-related headwinds the company faced during the year. Further, our balance sheet continues to be strong. Given our end of year net debt position, which was essentially flat compared to Q3 levels and continued strong EBITDA performance, we were able to further reduce our net debt to adjusted EBITDA ratio to 2.11x, and approximately 1.6x for bank covenant purposes, reflecting our amended credit agreement, allowing us to exclude Q2 2020 EBITDA from the calculation. Our leverage ratio remains within our comfort range and well below our bank covenant maximum of 3x. We ended the year essentially back at pre COVID-19 net debt levels and we funded an acquisition during that time, among other things. A very good result and reflective of the strength of the business. Finally, looking forward, while our performance in the fourth quarter was strong, our business continues to face some challenges, which Pat discussed earlier. Raw material shortages is another headwind we and the industry are currently dealing with, which has driven material costs up significantly, in particular, as it relates to the price of steel and aluminum. These higher commodity costs do not necessarily directly impact our steel metal forming business since we are predominantly on OEM resell programs, but it does impact our aluminum business on a temporary basis. Our sales contracts in aluminum have mechanisms in place to treat the cost of aluminum as pass-through by proportionately increasing our customer pricing when the cost of aluminum increases and vice versa when it decreases, but it is done at set times during the year on average every 3 months. So when the price of aluminum goes up suddenly, like it did near the end of 2020, we are negatively impacted for, on average, 3 months until our pricing to our customers gets adjusted up to reflect the higher commodity costs. In our aluminum business, we refer to this as temporary lag. The impact from this temporary lag on Q1 is projected to be approximately $8 million are about $0.78 a share. This cost headwind will essentially disappear and balance out in Q2 and could actually turn into a tailwind, albeit a temporary one, if commodity prices drop at some point. As a result, reflecting this temporary lag as well as some of the other headwinds Pat alluded to earlier, including incremental launch related costs, driven by the high-volume of launch activity, and the volume choppiness resulting from the shortage of semiconductor chips, we expect first quarter production sales to be in the range of $900 million and $1 billion, and adjusted net earnings per share to be in the range of $0.36 and $0.44. Excluding the material temporary lag in our aluminum business, our Q1 EPS guidance range would be approximately $0.07 to $0.08 higher. A strong quarter considering the challenging environment. While these headwinds will impact their results in Q1, the good news is underlying demand remains strong. Since Q2, vehicle sales have been robust, and as noted earlier, vehicle inventory levels continue to remain low, which should continue to drive production for the foreseeable future. The fact is we are a growth industry. There may be hiccups along the way, like the semiconductor issue the industry is currently faced with, but we are optimistic about the future and the longer-term outlook for the business and the industry. As such, looking at the remainder of the year, beyond Q1, subject, of course, to overall volumes and the extent of the impact the semiconductor issue will have on production volumes, in particular, as it relates to how much lost volume OEMs will make up later in the year once the chip supply stabilizes, we currently expect 2021 total sales, including tooling sales to approximate 2019 levels and 2021 adjusted EPS to approach 2019 levels, both inclusive of the recently acquired Martinrea Metalsa Group. And beyond 2021, we see sales and earnings growth continuing. We expect 2022 to be better than 2021, with sales and earnings expected to exceed 2019 levels. In 2023 to show top line and bottom line growth from 2022 levels, as our backlog of business takes hold and new program launches ramp up and reach mature volumes. The future is bright and full of opportunity. In closing, overall, we are very pleased with our performance in the fourth quarter and are very positive about the future. While our business and industry are facing some near-term challenges, we remain fully confident in our team as well as the longer-term prospects and outlook for the business. That concludes our remarks. Thank you for your attention this evening. Now it is time for questions. We see we have shareholders, analysts and competitors on the phone, so may have to be a little careful here, but we will answer what we can. Thank you for calling.
[Operator Instructions] And the first question is from Michael Glen from Raymond James.
Fred, I think you said -- did you -- can you repeat the CapEx for next year, did you say it was $325 million next year 2021?
Yes. Approximately $325 million, yes.
Okay. So that -- it feels like that is an incremental bump from what at least I was thinking of. Can you -- like in terms of that ramp up, is there some delta there in terms of some added programs that we're thinking about?
Yes. So I'll line this in my opening remarks, there's really 4 drivers to it. We've won some incremental new business that was not originally contemplated in our original estimates so that drove some projected CapEx. We're also seeing a fair number of engineering changes with some of our existing programs that are planning to launch and that's driving some additional capital as well. So once you've been awarded the business, if there's changes and it requires capital, you're obligated to follow through with that. The third thing is there's some visual capacity that we need to put in place in certain spots just based on the stronger-than-expected volumes. So that's come into play. Then lastly, there's been some amount of spend that has moved from '20 to '21. So we're seeing a bit of a compression for '21 just based on those factors.
Okay. And with that higher CapEx spends, like for next year on a free cash basis, are we looking at something closer to breakeven than on free cash flow?
Yes. You're probably close. So there's a couple of things. So there's the CapEx that's factoring in. And one thing I'll add with the CapEx. Our longer-term view of CapEx remains intact. We do believe that it will start normalizing coming down. I think you're just seeing some compression in '21 that's hitting us. And the other thing I'll note is, we did perform better-than-expected in 2020 from a free cash flow perspective. And that was on the back of tooling-related working capital. So I've talked about this the last couple of quarters. So we ended up coming in better than expected. So that was a tailwind for us. We did a good job in managing that. But that will normalize at some point. I'm expecting over the next couple of quarters and we will act as a bit of a headwind, or working capital headwind in '21. So based on those 2 factors and the current outlook, I think we'll be in and around breakeven free cash flow. And then once '22 comes around, that's poised to be a fairly strong year. And there's no reason why we can get back to 2019 levels in 2022.
Okay. And then just one more. Just curious, with all of these Canadian investments being announced, I think Ingersoll is going under some transition, Oakville, Fort Oakville and Oshawa. Like how do you guys feel about your ability to participate as those plants change over their programs and move more towards EV?
Yes. Certainly -- this is Pat, by the way. Certainly, as those programs get formed, if you will, some of these discussions, the actual model and timing has not been laid out. But certainly, our expectation is we have capacity here. We're servicing those plants now. With the Canadian capacity. So the expectation would be we'd have a very good position to win some of the new work as it's announced, and we received the RFQs and so forth. It's still a little early in some cases. And at least a few examples. The current models have been extended in order to create time to develop those vehicles. So again, we're not -- we haven't been privy to a lot of what's going to be coming, but we anticipate that we'll participate as a percent as much as we do now. How much volume it will be is yet to be determined from the customer.
Just on a broader perspective, we're very appreciative of the continuing strength, I guess, of the Canadian auto sector, 1 of the concerns that has expressed a lot is that less of a Canadian footprint is something that is an issue for Canadian plants. We're largely agnostic because we produce for our customers wherever they are and actually about 85% or so of our revenues are outside Canada right now. But of course, we like to produce well for all our plants. So the fact that these various OEMs have increased their commitment means that we're going to have plants going down the road in the future, and you avoid the speculation of what's going to happen in Fort Oakville, what's going to happen to Windsor. So we've been part of that discussion with the Feds in the Province and everything else. And we think that's overall a good thing. The other thing is, we've focused on electrification, given some of the stuff that Pat talked about in his remarks. Are good for that aspect of our business and the fact that we're local and can work with those people on electrification programs is a good thing.
And again, I would expect that the capital that we have invested in those plants, for the most part, will be able, especially the flexible capital that we've talked about in the past to be able to apply pretty readily.
And the next question is from Brian Morrison from TD Securities.
I apologize. It was muted. First question, in terms of the guide for 2021, can you just talk about what your North American production volume forecast is? And then I understand the headwind of the chip shortage in the first half of the year, similar to some of your peers, do you anticipate that to be made up in totality in the second half of the year?
In terms of '21, we forecast on budget base on IHS. We make some adjustments depending on information that we directly obtained from the customer. But broadly speaking IHS is driving our outlook. And as it relates to the chip shortage, I mean, it's a bit of a moving target. The back -- the first half of the year has clearly been impacted, Q1 significantly, and we're expecting an impact on the second quarter. The back half of the year should get better. We're being told the volumes will be made up. The question is whether it will be made up in the back half of the year, and that's an open question. And my personal view is it probably going be difficult to make it all up this year, but that will likely come into plan '22 and help the volumes in that year.
I think the reality is that for a number of people, and this probably came from some of the people in the business, it kind of underestimated the impact of the chips in the first quarter. That's kind of the way it came through, and we think it's going to have an impact in the first quarter, as we said, also in the second quarter. But the long-term view is demand is still strong. Inventories are still low. We're going to see a pretty robust production program and sales program heading through the next 2.5 years. And just to give a sense of the chip issue. If you take a look at all the OEM announcements, there's like 100 weeks down in Q1 from various customers, including places like Cami, which are down basically till the middle of April, which is a good program for us. When you have that situation, you're not getting revenues or profit. And that's why they're going to sell those vehicles over time, and that's going to be a good thing. We look at it is kind of like the rotating strike nature of what happened with GM at the end of 2019 or a little bit with the equivalent of shutting down some plants last year.
Right. Moving on to Metalsa, I heard in your prepared comments, you don't plan on reaching your 2020 EBITDA breakeven in '21. Does the positive $30 million in 2022, does that still hold? And then is it fair to say that Metalsa is about a 100 basis point drag on the operating margin this year, which would probably imply that you're going to get somewhere in the neighborhood of 9% operating margin ex Metalsa in the second half? Does that all sound correct to you?
So first off, in terms of Metalsa, really, the core activity here is in the German plant. The other facilities that we acquired are actually doing quite well. So the task has always been and continues to be turning around that facility. And all these travel restrictions and pandemic-related delays and so forth, obviously pushed that back a few times. We've done a number of these in the past. And we're really good at it, but we've never done one in the middle of pandemic. So it's created some challenges and some further delays here. With that said, the longer-term outlook for the business is still intact, assuming things open up and we're able to get people in and get the activity moving, we believe we can potentially hit $30 million next year. We're not ready to give up on that yet. It's just a matter of how the next few months go. And I anticipate that over the course of the year, things there will get better. And then the expectation is near the back half of the end or the end of the year on a run rate basis, we may end up being positive. And if you exclude Metalsa, yes, I mean, if you look at our Q3 margins, I mean, they were north of 9% this quarter, a little less so. But yes, the rest of the business has been doing quite well in this volume environment so.
Yes. I can reiterate what Fred said about the 5 of the 6 plants are -- actually have come around quicker than we expected, which is good news. But every time I talk about the fact that we're going to get some people over there and get busy. And the pandemic actually gets a little better overall. It seems like the borders get harder to cross. And it's been very frustrating and slow, but we do have people there now, and we are making progress, but it's just not super predictable relative to being able to get people in and out of there the way we need to.
Just a very brief comment on the borders, like the chaos at the borders from our various lockdown, our regulators and everything else is an incredible pain for our industry, and it's quite frankly, ridiculous. Everything is getting better, except for the government policy that we're seeing. It is just absolutely outrageous. And we've expressed that view. We're seeing tremendous opening in the United States in a lot of different places. We stayed open as an industry in terms of production. But when you have issues, sending people into Germany because they can come back and get quarantine for 14 days in a hotel somewhere, it's just simply outrageous. And I would say that just about everyone in our industry is saying the same things. We're just -- it's time to move on. There are good things happening, and we've got to recognize that.
Okay. My last question is on -- probably for Fred. In terms of the cost savings, you took some -- you benefited in the second half of the year, I am sure from some temporary cost savings such as travel. I'm sure some of these temporary savings became permanent. You also took some restructuring initiatives. Maybe just ballpark what the contribution of your cost-saving initiatives are to your operating margin? And then lastly, just maybe give us an update on what your tooling sales for 2021 should be about?
So in terms of the cost savings, we talked about this on the last call. I don't think the view there has changed. We reduced about 7% of our workforce across the board, and that represented among other things, about $20 million to $30 million of cost savings. So nothing in that perspective has changed. So that benefit continues to be there. And it's reflected in our margins, excluding the Metalsa Group, as you noted earlier. And in terms of tooling sales, so obviously, this year was a little lower than what we had anticipated, it was past year 2020 just based on some of the delays, that's coming off a very high year in 2019. I don't see us getting back to that level in '21, but it will probably be something more normal in the range of $200 million to $250 million, give or take. And again, that's quite volatile as well, just based on PPAPs and timing and so forth. So it's not always easy to predict.
Sorry, did you say $250 million?
Yes. $200 million to $250 million, correct.
And the next question is from Mark Neville from Scotiabank.
If I maybe ask a Metalsa question, I guess, a different way. And just with the breakeven maybe being pushed out. And then for 2022, I guess, roughly help or how many months or how far behind do you think you sort of are at this point?
I would say broadly speaking, and again, so just let me back up a sec. So we've outlined the task here, the activities. So we're doing whatever we can to get people to help push these along. And it's been very spotty. Again, you get people in there for a period of time and then they got to come back and then you can't get them back in and it's very difficult to maintain some continuity there. If I were to compare it the way we managed the mesh to turn around, we had a presence there every day for 12 months, and we have not been able to do that here, anywhere near that. So say, on average, I mean, it's hard to peg how far behind we are, but I would say anywhere from 4 to 6 months, give or take. And as soon as things open up, I anticipate that the activity will accelerate.
Okay. I guess just on that, if -- I guess I'm thinking the -- again, to go from $0 to $30 million. I presume it's not sort of all dependent on fixing just one plant. I guess, is there some sort of volume assumptions in there and sort of mix, I'm just curious what else sort of bridges the gap to $0 to $30 million?
Well, operationally, it's really the German facility. But the other aspect to it as well is there's a backlog of business that we're going to be launching there as well. So some of that business will be coming online over the next couple of years, and that will help turn the margin profile to what we're more accustomed to.
Okay. Maybe just on the raw materials. Just so I understand, again, it's all aluminum, the Q1 hit or the Q1 impact? And so I understand the pass through, is it sort of -- is that on 100% of, I guess, the business? Or is it a certain percentage and the rest you're going to go negotiate? I'm just sort of curious how it works?
The vast majority of our aluminum contracts have these type of adjustment mechanisms in place. So I would say 100% of our aluminum business is subject to this temporary lag.
Right. Okay. Maybe just 1 question on the EV. Just so, I guess, understand it. Again the CPV is higher. And again, there are certain products, obviously, that, I guess, go away, including engine blocks, but the stuff that sort of is incremental battery trays, I think you mentioned motor housings and thermal. So you have product or you are producing sort of the battery trays and no one contract, so you've 1 work for the motor housing, motor housings and thermals, is that correct?
Yes. We have thermal products. We have battery trays in production, and we've won motor housing is just -- it's an engineering now. It hasn't been launched. So in each of these areas, we have different phases of progress, but it's ongoing.
Okay. But again, I guess, to sort of -- on that CPV sort of potential, is there anything in there, I guess, that you're not -- you haven't won any business that sort of -- that sort of makes up that CPV or is it all this that and you have real contracts today?
Yes. We have real contracts and have RFQs, and we have production. So we pretty much -- on the products that we discussed. Now there's many products that we're not going to build, but -- or we don't build yet. But for the things that we discussed on the call, yes.
And generally, when we say we want something is because we have a contract for it.
Yes. I guess, one of the big wins. Yes, one of the most interesting wins we had is a motor housing. It's interesting, when you look -- compare an engine block to a motor housing, an engine block weighs a lot more, as he said, "Well, geez, it's a great product to have", but we get paid for complexity more than we get paid for weight because, as Fred said, the aluminum passes through ultimately. So complexity is important and things like motor housings can be very complex parts, so they can be lucrative at times.
And the next question is from Peter Sklar from BMO Capital Markets.
Pat, on the Metalsa plant in Germany, I'm wondering if you can describe from an operational perspective, like what the issues are, is it processes or labor or the capital you have in the plant, pricing, capacity utilization, what exactly are the issues there?
You pretty much described them all.
Do you want to go?
I mean, different pieces. I would tell you, if you compare it to our other plants, and I'm being serious, we have all of those issues. And we have opportunities. The good news is a month ago, the guy who runs the Metalsa group came back from Germany. He was able to get in there, and we went through his report. And there's a significant amount of low-hanging fruit, but it takes resources to help get that plant in line with the way we run things. And we just haven't been able to get them there. So it's not going to take a lot of capital to improve the situation. It's going to take a lot of practice. There is excess labor for sure and scrap and those types of things. We do have some pricing issues, some of which we're going to be able to address as it turns out. So we're going to get there. It's just been having the right people there for the right amount of time. As Fred said, when Meschede was resolved, they had a team there for over a year, and we haven't been able to do that. But we will be able to do that. We have a lot of people lined up. We have people there now. It's just getting them back and forth that's really become a headache for a lot of folks. It's a lot of anxiety when you're coming back from Germany after being in some place for a month, I'm wondering if you're going have to spend 2 weeks in a hotel or get to see your family. So those things stress a lot of people at times.
Yes. I also don't, in terms of the fact that the rest of the plants we acquired are doing quite well.
Very well.
Plants in China are performing well financially. One in Mexico is doing quite well, the one in Tuscaloosa is going to be ramping up a big program there, and it will be a key contributor to our portfolio down the road. So we're quite happy with the overall picture, but we knew from the beginning that the task was Germany, and we're on it.
Okay. Just wanted to move on to the Sol semiconductor issue. IHS has been kind of quiet so far on their Q2 production outlook. So I'm just wondering are you seeing the Q2 releases yet? And do you have a view on how bad it could be in Q2?
Well, the problem, Peter, is, it changes, even in the last 2 days, it's changed substantially. And it's not something we're getting a lot of warning about. It will -- a couple of days out, they'll announce next week we're down. So I think there -- the part of the problem is the reason they're not talking about it is because the industry and the OEMs are very blind to this. And their notification of receiving the semiconductors is only like a week out from what I understand. So they don't have line of sight themselves, and therefore, they can't tell the supply base. And I think everybody is afraid to guess at this point. My guess which I'm not afraid to make because that's all it is, I guess, is that we're going to be bumpy into Q2. How long into Q2 or whether it goes into Q3? It's hard to say right now.
As a matter of fact, I mean, it's already flowed into Q2 because earlier this week, Jim announced the Cami done in mid-April, Fairfax done mid-April, SOP down to the end of March.
Right. And I think we're going to see more, certainly.
Having said that, this problem will resolve itself. When you've got the White House, having discussions with Taiwan, saying that your semiconductor company, which is the largest producer in the world should be thinking about focusing on making parts for the automotive industry. And we'd really appreciate that probably tied suddenly to the fact that having aircraft carriers in the seas around Taiwan and the South China sea, you're going to get some focus, I think. And that's the first thought. The second observation is some of this lumpiness, it's all kind of pandemic and lockdown-related, right? Like we know that the chip makers basically are trying to sell their capacity. They thought that they had extra capacity and would have extra capacity for a while, so did the OEMs. And so it's an adjustment in the supply chain, just as we've seen adjustments in a number of places, including steel and aluminum.
Yes. And it's not just the chips. It's a lot of materials that are under distress, a lot of raw materials. And the good news is, is that they're getting some time to adjust. But I think if you didn't have the chip shortage, there would probably be a steel shortage or an aluminum shortage right behind it or probably even more likely a resin shortage.
Right. Okay. Fred, I just want to ask you, like, I think the depreciation level in the fourth quarter kind of jumped to a new level. Was there just some catch-up from the earlier quarters of the year? Or is the depreciation charge in the fourth quarter, the new level?
So we had some new equipment come online with some launches, so that, for the most part, what drove it. And I would expect that to continue. So that would be a new baseline.
Okay. And then just lastly, I'm looking correctly, like it looks like Europe had quite a bounce back quarter in terms of profitability relative to where you were in the earlier quarters of the year. And so I'm just wondering if you can talk like what happened there for such a strong result in Europe?
Yes. I mean, ultimately, it was driven by volume. So the recovery in Europe has lagged North America and China. And sequentially, we saw a higher volume in Q4 compared to Q3. So that's really what drove it. And the Tulsa facility in there, I would say, it was similar quarter-over-quarter. So it was really volume-driven in the rest of our business.
[Operator Instructions] And the next question is from Krista Friesen from CIBC.
You've made good progress delevering over the past few quarters. Could you discuss how you think about your buyback and returning cash to shareholders at this point?
It's something -- in terms of capital allocation, we've basically said, first, invest in the business, keep a strong balance sheet and look at certain investments, including technology investments and then look at distribution to shareholders. So I think it's something that we'll talk about. I don't think we're going to do buyback in the first half of the year, we'll see where we go. I think that -- and this is talking a lot of our people and a lot of our shareholders as well. I think we've said we're comfortable at the 1.5 to 1 range in terms of debt to EBITDA. And that's a place we'd like to be -- we're there pretty well for bank covenant purposes. But we want to be comfortable there before we assess some of the things that we're doing. I hope that's -- it's a bit of a fudgy answer, but certainly something that we bear in mind, we just think that we're still in a pandemic, and we've got a lot of launches. We see some uncertainty in that type of stuff. So we want to be prudent, and that's our thinking right now.
That makes sense. And just on CapEx, just wondering where you think your CapEx intensity normalizes out to? And if you think you can get to maybe a mid single-digit percentage of revenue closer to where some of your peers are?
Yes. That's the target. Again, it's always subject to new business wins. So it's good and it's bad. So the fact that we have CapEx means we're winning work. But with some of the investors we made, some of the flexible lines that we've put in place as some of this next-gen product comes up, we expect that our CapEx profile will normalize to something more comparable to our peer group.
Great. That's great. And then I was just wondering on your cash flow from operations is pretty much at 100% conversion rate from EBITDA. And I realize there will be some moving parts in working capital over the next year. But do you think this 100% conversion is sustainable long term?
Well, with some growth, you'll have some working capital headwinds there, obviously, as you continue to grow, and we do expect some growth in our business. Heading into next year, I noted earlier, we got this tooling-related working capital headwind. Again, that is somewhat volatile, but I do expect it to normalize at some point. So you won't see a similar conversion next year. But they should improve in '22.
There are no further questions at this time. I would like to turn the meeting back to Mr. Wildeboer.
Well, thank you very much, everyone, for participating on the call. If any of you have any questions or would like to discuss any issues contact Martinrea, please feel free to contact any of us or Neil Forster, at (416) 749-0314. Thank you. Have a great evening.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.