Martinrea International Inc. (MRE) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen, and welcome to the Martinrea International Fourth Quarter Results Conference Call. [Operator Instructions] 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 Chief Financial Officer, Fred Di Tosto. Today, we will be discussing Martinrea's results for the year-end quarter ended December 31, 2021. I refer you to our usual disclaimer in our press release and filed documents. A few general comments for me at the outset to set the context. Pat and Fred will echo some similar thoughts and provide more context and then we will finish up with some Q&A. Welcome to 2022, a year of renewed optimism and we hope the year we finally put lingering pandemic-related headwinds in the rearview mirror. Our company and industry continue to navigate our way through some significant challenges in 2021, most of which were related to the ongoing fallout from the COVID-19 pandemic, including supply chain issues, labor shortages, cost inflation in materials, energy and other inputs and substantial new business launch activity. We are currently launching the largest volume of new programs in the company's history. And as such, launch-related costs are currently elevated. Pat and Fred will provide more detail on these. Arguably, the challenges we faced in 2021 were greater than the challenges we faced in the early days of the COVID-19 pandemic. When the automotive industry shut down for over 2 months beginning in March 2020, our revenues dropped precipitously close to 0 and many in our industry questioned their ability to survive. However, we knew what we had to do to secure our own survival and we acted quickly to reduce costs and protect our balance sheet, thereby ensuring the sustainability of our business well into the future. We quickly bounced back from those dark days, posting record results in the third and fourth quarters of 2020. The overall environment has been more erratic and unpredictable. Production volumes declined year-over-year and remains suppressed, but the impact has been uneven across programs and platforms and our sales mix has been negative. Cost inflation has been more pervasive than most in our industry expected. Labor shortages have impacted the company. Visibility has been extremely limited. These factors have made it difficult to pivot in real time in response to these changing industry dynamics. As we head into 2022, we know there will be challenges, some continuing and some new. Already this year, we dealt with border closures resulting from protests against COVID-19 pandemic restrictions, which affected our industry. These seem to have been resolved. There's conflict in Ukraine casting a cloud over Europe, global financial markets in the automotive market, especially in Europe. While the events are terrible, I believe the impact on the automotive industry are likely transitory. Undoubtedly, there will be more challenges. We live in a troubled world. However, as we look forward, we believe there are reasons to be positive. Our fourth quarter results were better than our third quarter results and we're off to a good start in the early part of 2022. We believe our results will continue to improve throughout the year as supply chain conditions normalize and industry volumes stabilize and recover. Our launch activity is also expected to normalize later this year, resulting in higher sales at better margins as volumes on these programs ramp up. We are also addressing cost inflation through commercial negotiations with our customers and other offsets. We believe that we are at the beginning of what is likely to be a multiyear cycle of strong sales and production growth, especially in North America, where most of our operations are located. Demand for vehicles is robust and likely to remain strong given pent-up demand, interest rates that although appear likely to move higher, are still low in a historical context, high savings rates and strong household balance sheets. Additionally, vehicle inventories remain near an all-time low and will likely take several years to build back up to normal levels. Pat and Fred will talk to our 2022 and 2023 outlook. As always, we continue to live our vision of making lives better by being the best we can be in the products we make and the services we provide as well as our unique culture based on our central Golden Rule philosophy. At the same time, we remain true to our lean thinking philosophy and to our entrepreneurial character. We are a technology company focused on innovation and we had some notable developments on that front during the year. Here are some of the key highlights of 2021. The full range are found in our annual information form and year-end releases. We celebrated our 20th anniversary as an auto parts manufacturer, a significant milestone for our company. In that time, a relatively short time in the industry, we have been one of the fastest-growing companies in the world. We continue to deliver industry-leading safety metrics with a total recordable injury frequency, or TRIF, of 1.37, representing a 46% improvement over last year and a 91% improvement since 2014. This is a wow statement, wow. This is significantly better than the industry average of 3.0 and is an accomplishment to be proud of. Our goal is to be the industry leader. In light of the ongoing semiconductor shortage and other headwinds we are currently facing and as a proactive measure, we reached an agreement with our banking syndicate to provide enhanced covenant flexibility. Fred will talk to that. We have excellent relationships with our lenders and we thank them for their ongoing support. We increased our investment in NanoXplore Inc. by purchasing 1 million shares in February 2021 to hold an approximate 22% interest in NanoXplore at year-end. NanoXplore is a world leader in graphene production and we are very excited about its future. Also in 2021, we have been producing the world's first graphene-enhanced brake lines for customers, a technological first. We entered a 50-50 joint venture with NanoXplore called VoltaXplore, aimed at commercializing the development of graphene-enhanced lithium-ion batteries for electric vehicles. We are excited about this potential game-changing technology. We formally established our Martinrea Innovation Development or MiND initiative with the purpose of incubating, developing and funding innovative technologies that can be directly applied to Martinrea's operations or grow independently. Martinrea currently holds 3 equity investments, including its 22% stake in NanoXplore, its VoltaXplore 50-50 joint venture with NanoXplore and a minority equity position in AlumaPower, a private company developing aluminum-air battery technology for a variety of end markets, including automotive. Martinrea is also evaluating a number of other initiatives within MiND, including additive manufacturing, robotics and software. As the industry increasingly moves towards electric vehicles, our program mix and product portfolio is evolving in lockstep with this trend. We estimate that by 2026, approximately 40% of our book of business will be on electrified vehicle platforms, which is in line with industry projections from IHS Markit in the regions we operate in. Our business is largely agnostic to propulsion type. And for the small portion of our business that is exposed, we have a broad range of products that are either in production or under development to address the transition. In fact, we believe that we have an opportunity to augment our content per vehicle as the world goes electric. 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 2022, 2023 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. With that, I will turn it over to Pat.

Thanks, Rob. Hello, everyone. As noted in our press release, we generated an adjusted net loss per share of CAD 0.12 and an adjusted operating loss of CAD 2.9 million in the fourth quarter. This is on production sales of CAD 850 million, which is down 13% year-over-year as a result of lower volumes due to chip and other supply shortages. Operating income was further impacted by mix, cost inflation, inefficiencies due to customer fluctuation and launch activity. EBITDA was positive at CAD 63 million, better than Q3 at 44.9%, though still down from Q4 of last year at CAD 132 million. We note that Q4 of 2020 was a record for the company. Results did improve sequentially over Q3 as we saw a slightly lower level of chip-related OEM production shutdowns and customer call offs during the quarter. It was encouraging to see, but we're not out of the woods yet. We continue to face volume, cost, supply challenges that had hampered our progress over the last year. We are seeing signs of these challenges easing in the early part of 2022. We expect Q1 to be notably better than Q4 with the results expected to continue to improve over the course of the year as the supply chain issues gradually sort out and our launch activity normalizes. From an industry and macroeconomic standpoint, demand for vehicles is very high. We continue to expect our plants to be operating at full capacity once production smooths and the recent program launches reach mature volumes over the coming quarters. We, therefore, remain confident in our 2023 outlook, which includes over $200 million in expected free cash flow generation for the year. In the meantime, and as always, we continue to manage costs, protect the balance sheet and ensure sustainability of our business over the long haul. During the quarter, we reached an agreement with our banking syndicate, providing us with covenant flexibility as we navigate our way through the remaining pandemic-induced challenges. Our relationship with our lenders is strong. I will have more to say on the outlook in a few moments, and Fred will address our balance sheet later on the call. Looking at our North American operations. Volumes continue to be held back by chip and other supply shortages, as I mentioned, but we're a bit better in Q4 and we have a good start to 2022. Cost inflation and labor shortages continue to impact our operation at a time when we're working through a period of heavy new business launch activity. Much of the current launch cost is driven by the fluctuation in customer pull due to the supply of chips and other components. Hence, one day we have a plant that is running full, and the next day, we have people standing waiting on the customer. The good news is these headwinds are not getting any worse at this point. So, there has been some stabilization in that sense. While labor shortages persist, they have improved in some locations and we do not anticipate having to implement any further wage increases at this time. Commercial negotiations aimed at recovering a portion of the inflationary costs that have weighed on our margins in recent quarters continue with the customers. We have had a number of positive outcomes on this front and expect that we will have more success as we move forward. As I discussed on the last call, this process will take time. As I alluded to earlier, we continue to progress through the largest period of new business launch activity in the company's history. Our launch activity has been especially high during the pandemic due to the compression of 2020 and 2021 launches but also because we've won a lot of new business in recent years. Programs we are currently launching represent approximately CAD 800 million in annual sales, touching both traditional customers like GM, Ford and Stellantis with both core products in our all electric vehicles as well as EV programs from newer customers, such as Daimler and Lucid. In the moment, these programs are resulting in higher-than-normal launch costs with the issue further compounded by the volatile production environment. This is in part driven by the abnormal customer pull due to the supply of chips and other components. This makes it difficult to flex our cost structure and match the level of volume. The good news is these programs will ultimately drive above-market sales growth and improved margins in the years ahead. Notably, as we progress in the back half of this year into 2023, our plant launch activity is expected to drop by half. So, launch costs over the time frame will drop to a lower level as well. This, combined with the expected normalization in production volumes as supply conditions in our industry improved should set the stage for a meaningful recovery in our operating results. In Europe, we are facing the same cost pressures as in North America, with energy costs being the significant and unique headwind. We continue to make good progress with our operational improvements in the region. However, this progress is currently being masked by energy supply headwinds and cost inflation. The bottom line impact of these efforts will be more visible once production returns to normal. Our Rest of World segment continues to be impacted by the same volume and cost issues as other regions, although to a lesser extent, as margins in this segment were quite healthy. Overall, our operations appear to have hit an inflection point back in the third quarter with a modest improvement in the fourth quarter and a much more meaningful improvement in Q1 to be expected. The positive momentum will continue as the year unfolds, as we have noted in the last few quarters. I'm pleased to announce that we've been awarded CAD 100 million in new business since our last call. This includes approximately CAD 50 million in our Lightweight Structures Group on the General Motors new BEV3 electric vehicle platform, CAD 35 million on various Propulsion Systems work for GM, Ford, Daimler and Tesla and CAD 15 million in our FMG Group with Lucid, GM, John Deere and Thermo King. New business awards since the beginning of 2021 have now totaled approximately CAD 300 million. I wanted to take some time and explain the drivers of the expected margin improvement that is underpinning our 2023 outlook. What this slide shows is a visual description of the drivers that will take us from what is essentially a breakeven adjusted operating income margin in Q4 to an adjusted operating income margin of 8% as implied in our outlook. The items are in order of significance. The first bucket comes from the expected recovery in our industry volumes as projected by IHS and the normalization in our sales mix. Recall that mix has been a challenge for us in recent quarters with programs such as the GM Equinox, Sierra and Silverado and the Ford Escape, which have been discussed at length in previous calls. Next, a recovery in materials, labor and energy costs achieved through successful outcomes on commercial negotiations with our customers will be a source of margin improvement. We have had some success here and we anticipate that we will have more in the coming quarters. The reality is our industry has witnessed inflationary costs that would have been hard to fathom at the time of the existing contracts were put in place. At the same time, our OEM customers have protected and even enhanced their margins through higher prices of vehicle buying customers. So, it should be expected that they share the inflationary burden with their suppliers. Most of the customers are generally accepting of this reality given the cost breakdowns customers use to build the final pricing with suppliers. And so it becomes a matter of negotiating a fair settlement. As I said, this takes time, but we continue to drive this forward and we're making good progress. Of course, there's also the possibility that material cost normalizes as supply conditions improve, which will relieve some of the pressure. On the other hand, labor costs are likely to be higher permanently. Moving on, the next bucket consists of operational improvements across our network as we continue to execute our lean initiatives. As discussed at length today and on previous calls, our operations have been impacted by the volatile OEM customer production schedules and short notice of call-offs that have created a lot of the inefficiency. This category also assumes that operations improve as a result of normalization in production schedules and volumes. So at minimum, we achieved our pre-CVOID performance levels, but we expect more from ourselves, of course. Next, the reduction in launch activity I mentioned earlier, dropping by almost half later this year and into 2023 will result in better margins. Finally, there's a small other category that contains various puts and takes. While we don't have perfect visibility, we have a clear view of what we need to do to improve operations to drive margins higher. Next, I wanted to briefly mention VoltaXplore, our EV battery joint venture with NanoXplore as we get many inquiries. VoltaXplore is making great progress and is on track towards meeting its expected milestones. We remain excited about this potential game-changing technology. Our demonstration facility in Montreal is being commissioned. The equipment is in and we're ramping up. On schedule, the feasibility study will be completed by mid-2022 with a go/no go decision on a larger gigawatt factory expected shortly thereafter. VoltaXplore envisions building a 10 gigawatt hour facility likely in 2 phases. First, the initial 2 gigawatt hour factory to start production in mid-2024, followed by an expansion to a 10 gigawatt factory in 2026. As a reminder, the key advantages we expect from graphene-enhanced lithium-ion batteries compared to competing technologies currently in the market include increased battery capacity, therefore, longer battery life, faster charging speeds, improved safety as graphene's high thermal conductivity allows for greater temperature control at lower costs. In the near future, we will hold a Battery Day at the company's demonstration facility in Montreal. The event will consist of a plant tour as well as technical discussions and presentations with senior management of VoltaXplore. I would encourage all interested investors and analysts to attend. With that, I'd like to thank the entire Martinrea team for their continued dedication and commitment in these challenging times. Our future is bright. And with that, I'll pass it to Fred.

Thanks, Pat, and good evening, everyone. As Pat noted, our business continues to face challenges from lower volumes due to semiconductor and other supply shortages as well as mix, cost inflation, operational inefficiencies and heavy launch activity. As such, our Q4 results remain well below year ago levels and below where they need to be, quite frankly. The good news is, it looks like we hit the bottom in Q3 and are now in the early days of what we believe will be a strong multiyear recovery in volumes, sales, margins and free cash flow. Taking a look at our sequential performance. Our fourth quarter results did improve over Q3 as chip-related OEM production shutdowns and customer call-offs declined slightly. We had an adjusted operating loss of approximately CAD 3 million, close to breakeven on production sales of CAD 850 million, which is up by about 7% for an incremental margin on production sales of approximately 25%. We had a higher-than-normal level of tooling sales in the quarter, and as such, our total sales were up 24% compared to Q3. Adjusted EBITDA was up by 41% quarter-over-quarter. We generated CAD 21 million of positive free cash flow in the quarter, which was largely driven by a reduction in tooling-related working capital. While we wouldn't extrapolate this amount going forward, as tooling-related working capital flows can be lumpy and unpredictable, we do expect to generate positive free cash flow on a full year basis in 2022. As Pat noted, we are off to a good start so far in Q1 as we are seeing higher volumes and greater production stability with fewer customer call-offs compared to Q4. We believe our results will continue to improve throughout the year as supply chain conditions normalize and industry volumes recover. Our launch activity is expected to normalize later this year, resulting in higher sales at better margins once these programs ramp up. We're also addressing cost inflation through commercial negotiations with our customers. Overall, while it's still early days, the outlook we provided in our last call, that is for Q4 to be slightly better than Q3, followed by a steady improvement in the first half of 2022 and an accelerated pace of recovery in the back half of the year is on track at this point. More importantly, we continue to have a high degree of confidence in our ability to achieve the targets set out in our 2023 outlook, which calls for 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. Demand for vehicles remains robust and inventories continue to trend near an all-time low. We believe this sets the stage for a multiyear period of strong industry production volume growth once supply chain bottlenecks are worked out. We also expect our sales growth to outpace industry production volume growth given the substantial amount of business that we have won in recent years that we continue to launch on. Pat walked us through the bridge to our greater than 8% margin target earlier. Drivers include volume and mix, recovery in material, labor and energy costs, operational improvements and a normalization in new business launch activity. We're ready to cover these in detail, so I want to elaborate on them again here. The other key assumption underpinning our '23 free cash flow outlook is an expected normalization of capital spending to a range of approximately depreciation as a percentage of sales. The 2 main drivers continue to be second-generation programs in our flexible [ well ] lines, which require less capital in their first iteration and getting passed through a heavy investment cycle in aluminum. We've been winning a lot of business in recent years and this has required investment. But ultimately, this is really good news given our strong return profile. Our track record of delivering on our financial targets speaks for itself and we are confident that this will continue to be the case as we deliver on our '23 outlook. Turning to our balance sheet. Net debt was essentially flat quarter-over-quarter at CAD 857 million at the end of Q4. Our net debt to adjusted EBITDA was 3.11x at the end of the quarter, an increase from approximately 2.5x last quarter. As we foreshadowed on our last call, in light of the semiconductor shortage and other challenges, we proactively amended our lending agreements with our banking syndicate during the fourth quarter to provide us with increased financial covenant flexibility. Similar to what we did in 2020, the company's calculation of its net debt-to-EBITDA ratio for covenant purposes now excludes EBITDA from Q3 and Q4 of '21 and is based on the annualized total of the remaining quarters in the relevant trailing 12-month period. In addition, the maximum net debt-to-EBITDA covenant has been increased to 4x for Q1 of this year, 4.5x for Q2 and 3.75x for Q3 before return to 3x in Q4 of 2022. We have strong relationship with our lenders and we thank them for their continued support. And with that, and I turn it back over to Rob.

Thanks, Fred and Pat. 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, so we may have to be a little careful here, but we will answer what we can. We will give answers to the questions we would like you to ask. 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.

Pat, I really appreciate the discussion on the bridge to 8% margins. But maybe if I can dig a little bit more into the cost inflation piece. That recovery that you're showing there, does that assume that all your customers reprice? I'm just trying to get a sense on what margins could be if your customers don't play ball here.

Well, it's not assuming that we get 100% of everything that's out there. There's also the request on the other side. So, you've got the inflationary numbers coming from our supply base, the Tier 2s and Tier 3s and raw material, energy, which is a big one right now. And then, of course, what we would like to recover from the customer, but you're also still negotiating with the side that's driving the inflation. So, between those 2 hills, we certainly expect to make that type of progress and we've had some good progress so far.

And so is it closer to that 50%, 75% that needs to get repriced?

No, we're not going to get into that detail. We're in negotiations. We're just telling you we're in negotiations and we gave you an estimate, that's it. You can appreciate that, I think.

No, definitely can. And then I guess, for your new business awards, is there more flexibility on pricing there, especially if the higher than normal inflationary pressures persist here? Like are you guys going to have to renegotiate some of these new contracts that you guys have just recently signed?

I would say that a lot of these things come into play later. These are things that are a couple of years out. And certainly, if there was some inflationary effect, we would be negotiating that. But our expectation is on a lot of the material cost increases, like you look at aluminum, just shot through the roof recently, a lot of that stuff is going to recover and normalize. Some things such as labor, we knew it was going to go up. It went up. We would bury that. That would be a part of your pricing, that's normal. So, we would expect that those things that need to be adjusted because bottom line at the time of launch or as you approach, we would certainly negotiate. But we also made some assumptions based on where we're sitting and what we were seeing in the environment.

And anything new that's coming our way, obviously, we're quoting with updated costs reflecting...

That's right.

The current realities.

Next question is from Michael Glen from Raymond James.

I'm just wondering, can you provide some insight into how you are impacted by these European energy prices? I mean, I know that there's a lot happening right there. But like what does this represent? And like if we're thinking of input costs into your plants, like what -- how important is energy to the overall cost structure?

Yes. It's significant in our aluminum business, in particular, just given the nature of the equipment and the processes. So, it's a pretty major input there. And it's, at this point, obviously concentrated in what's going on in Europe. So, on the last call, I articulated this would have been in November. Cost inflation at that point was hovering around CAD 40 million annually and that included material labor and energy. Energy at that point was, let's say, a smaller component of that. Since then, beginning in this year and more recently with the situation in Ukraine, that has skyrocketed even more. So, the energy piece continues to grow. And that CAD 40 million now is larger. I'm not going to get too specific. But again, we're negotiating with customers and so forth. So, I don't want to throw any specific numbers out there. But energy is a fairly significant piece to the cost headwinds we are currently facing.

It is pretty localized to Europe though, but we're not seeing it in North America at this point at all.

And are there any concerns coming about outright shortages or having to curtail to just to -- because the supply is just not there? Are there any discussions along that line?

No. I mean not at this point. I think the supply is there, I think, it's anxiety that's driving a lot of it so far that what could happen and so prices go up, which is pretty typical, but we haven't had any signs of shortages yet.

Just in a broad perspective, of course, as the customer is shutting their plant because they can't get parts from whatever -- wherever it is, that will affect our production as well, even though we've got supply of what we need. We think that Europe is obviously the critical area and all of this is under -- just under 20% of our revenue. So obviously, it could impact what's happening in Europe, probably more than in North America. North America supply chain seem pretty solid and demand exceeds supply and a lot of people are going to still try and ramp up supply in North America. But we're quite aware of what's happening in Europe. And I think you've seen some of the uncertainty from a Volkswagen announcement, a little bit from BMW, and we're monitoring that as we go.

Were you being specific to energy or being -- or talking --?

No, really specific to the energy situation. I know that it's very volatile right now.

I mean the reality on energy is Europe has got to come up with a solution really quickly to get gas from someone other than Russia. And I think that certainly, Canada, the United States and some other places, including place in the Mid-East, have got to be able to provide alternative supply as quickly as possible. At the same time, the issue is going to be how long the Russian-Ukraine situation occurs. I know that people are talking. There are many different scenarios out there is whether it's going to be a longer drawn-out affair or shorter. We're watching that as much as anyone else, but we do think that on a long-term basis, the very interesting thing here is Europe is going to have to pivot from relying on Russian energy that in the long term will be good for energy costs.

And just on CapEx, Fred, are you able to give an indication for CapEx in 2022 and also, at the same time, maybe some thoughts on working capital in 2022?

Sure. So '21 was a pretty heavy year for the various reasons we indicated earlier, a lot of new program CapEx, some compression from '20. A bunch of engineering changes customer driven as well as some higher [ expected ] volumes that are coming down the pipeline. And looking into '22, levels will continue to be somewhat elevated. I would say, somewhat similar to what they were in '21, maybe slightly lower. And as we enter into '23, the expectation is that you'll see a noticeable drop in our CapEx program predicated on 2 things. Number one, we've invested significantly in a number of flexible well lines across a number of programs. As those programs come into next generation, our investments will be lower on that replacement work. And on top of that, our aluminum group has gone through a bit of a growth spurt, some heavy investment cycle, and that's a very capital-intensive business. And over the next 12 months, we're going to meet the tail end of that. And then as we enter '23, we should start seeing that normalize. So, that's kind of builds on our '23 outlook and by '23 you expect to start generating some really significant free cash flow. As it relates to the working capital, I mean, in the fourth quarter, it was a nice tailwind. Most of it came from tooling-related working capital and that tends to be quite volatile. We may end up giving some of that back in the early part of the year, but I don't see that as a huge headwind for the year necessarily. And production working capital, you'll just see typical seasonal trends as we kind of progress through '22, probably a bit of an increase in Q1, some stabilization and then drop later in the year just based on volumes.

Our next question is from Ben Jekic from PI Financial.

I have one question just sort of similar to Michael Glen's, but my question was more aluminum and if you could jog my memory, what is your exposure to or is there any exposure in Europe to Russian aluminum because I understand they are one of the top 2 or 3 exporters of aluminum?

We have not seen any -- let's put it this way, we're not anticipating any shortage at this point. Prices have gone up quite a bit. Of course, we're protected over time because we're on an index. And of course, there's a lag to the index. But we haven't seen anything months out to say we're going to be shorted at this point.

Next question is from Peter Sklar from BMO Capital Markets.

Pat, you talked about this elevated -- can you hear me, Pat?

Yes, I can now. Go ahead.

You talked about the elevated level of launches. Can you disclose what are the major programs that you're in launch phase with now?

Well, we're still in the WL, which is the Grand Cherokee. That's a big one. The WS, which is the Grand Wagoneer, that's another big one. We've got a number of aluminum launches. We're still in [ marquee ] as volumes continue to climb because their plants are starting to smooth out a little bit. The D35, which is the Ford engine block for the F-150. We've got the Honda launch.

We continue to ramp up on the Nissan Rogue and Path...

Yes, the Rogue and Pathfinder got delayed a lot between the ship shortage and a number of other items and that's really just now ramping up. That's a big program. Geely in China, that's right. Lucid, Lucid is just getting started. That affects a number of our plants. So, like I said, about CAD 800 million worth of launch. What's complicated this is because if you think of a launch curve, and I'll keep it simple, let's say we were going to go up from 0 when you launch 10% per month, you get to 100% in 10 months or 10 weeks, let's say, 10 weeks. Well, because there's not smooth supply, that 10% per week isn't happening, it's 5%, it's 2%, it's 4%. And so that launch curve is getting spread way out and you're carrying all the costs of those people without the volume. And that's kind of what we're experiencing in a number of the launches. We see more light at the end of the tunnel this quarter, but certainly in the fourth quarter and third quarter, there was a lot of that, which created a lot of the heavy lifting, if you will, in costs.

Pat, a question for you on Europe. With the parts interruption as a result of the conflict in Ukraine, are you seeing downtime now from your customers? When like are you seeing the downtime? Is it this week or next week or what's happening?

We haven't had any indication yet of any downtime that affects our plans so far relative to the Ukraine. We still have residual downtime from chip shortage and other supply things that were in place prior to last week when the war started. But nothing that we're directly seeing as an impact, at least not so far.

But do you not sell to Volkswagen, for example, they've announced downtime?

Yes. But Volkswagen has, what, 50 plants or something over in Europe, maybe more. I mean they're talking about 1 or 2 plants and Volkswagen is not one of our bigger customers, believe it or not. I mean, we do sell to them, but they're not one of our bigger customers.

And Fred, I just wanted to ask you like can you just summarize how much has Martinrea invested in NanoXplore and VoltaXplore? Can you just kind of review your investment and --?

Yes. So, going back a few years ago, since we've been incrementing our investment in NanoXplore, we got about CAD 40 million, give or take in that investment. And obviously, that's worth a lot more today. And then as it relates to VoltaXplore, both us and NanoXplore have committed to CAD 10 million each as needed as we ramp up the demo facility. And at this point in time, we've both put in CAD 6 million.

CAD 5 million.

CAD 5 million, sorry.

CAD 5 million each.

And I don't really pay attention that closely to NanoXplore. I notice the stock has gone to CAD 4. Has there been any fundamental change at the company?

No, I think a lot of -- if you take a look at the shareholders of Nano, there's probably 4 or 5 people that together hold about 65%. So, I think it probably took a bit of a run with the retail side. But the long-term perspective of Nano remains quite solid. So, it's built the graphene plant, its focus in the next year or 2 is on graphene sales. We've announced there some. And I think that, that's a market that has a tremendous future. And then the other aspect, I guess, is that Nano holds 50% of Volta and I think we'll see the stock fluctuate from that too. But it's not particularly unusual. I don't want to put words in anyone's mouth, but I think it might have risen in value faster than we thought it was going to. But ultimately, there's a really solid business there.

Next question is from Brian Morrison, TD Securities.

If I could just follow up on the launches. It sounds like the headwind becomes a tailwind in the back half of this year. Just baked into 2023, can you just quantify what the operating margin or basis points that is? Like it sounds like 100 basis points to 200 basis points of margin improvement?

We try to avoid getting that specific, but you're probably in the ballpark, generally speaking.

And then just a macro question here, probably for Pat, I guess, but you have better visibility than most of what's going on in the industry and you acknowledge the geopolitical conflict that's obviously evolving pretty rapidly. So, just in terms of the supply chain discussions you're having with people in the industry, is there a risk to the semi issue becoming much greater? I understand that there's inputs from the region that go into this.

There's been some articles on certain things that come out of the Ukraine that are critical to chip supply. But when you talk throughout people in the industry, there doesn't seem to be any alarmists within the industry about it at this point. If that's what you were talking about chips specifically.

We will say that's what they said last time too.

Well, you got [ a statement ] they definitely have better visibility than they've ever had before.

They have better visibility on this. But I do recall a year ago, I think some people were saying, I think it was on this call, some people were saying it was a blip.

Yes.

And we said it was a blip on our call. I think we were right. But on this one, we've talked to several OEMs and a couple of steel companies about their ability to make neon. And Neon Ukraine is actually produced by some of the older, older running steelmaking processes. So, people here know how to make it. I'm not an expert in neon, but we've asked the question a couple of times and I've heard the same thing as Pat.

And then last question for Fred here is the balance sheet. I realize you have support from your lenders and you got covenant relief. Just if the industry volumes don't uptick for various reasons, any update on potentially or any plans to potentially slow your MiND strategy or the dividend? Or you're comfortable just progressing on that front?

I think at this point, we're comfortable. And as I noted in my opening remarks, just based on where we see things playing off the year, we do expect to be positive free cash flow for the year, so and the covenant relief we got from our banks, there's ample room there. It was structured that way to allow us some flexibility to get through the next number of months as these headwinds start getting behind us. So, I think overall, we're comfortable and like always, when we're faced with challenges we'll pivot and adjust as required.

We didn't reduce our dividend in 2020, either but we know the orders that we have on our book. We know that our plants are full when volumes return for whatever reason. And we know that we're going to make good money on it. So, we're pretty bullish. And the interesting thing is that there's challenge after challenge. We live in a troubled world in that sense. But we've had wars before in '56, '68, '80. This is in the first time Russia has invaded something and the market deals with it. But the market doesn't like uncertainty either and that's what we have right now. But the reality, particularly in North America, demand is robust, supply is low. People figure these things out and our plants are full.

Next question is from Krista Friesen from CIBC.

Maybe just to follow on the covenant topic there. Are there any stipulations around the covenants, such as not being able to increase your dividend or not being able to do any sort of acquisitions or they act upon your buyback?

Well, I think you worked for one of our banks, but I won't get too detailed. I don't think we intend to increase our -- I mean let's tell you what we want to do. I don't think we intend to increase our dividend in the context of where we are here. So, we wouldn't ask. I don't think we have to address it. We get asked from time to time, would you buy back stock. I don't think -- and I think we've said we're not thinking about buying back stock right now for a similar reason. In the context of acquisitions and so forth, if we saw something that made sense, we'd do it. But quite frankly, we're also recognizing of focusing on launching our product successfully and proper. So, that's where we're at.

And then just on the 8-plus percent margins in 2023, to confirm that is for the full year, that's not like a run rate that you expect to hit?

That's full year, correct.

[Operator Instructions] The next question is from Mark Neville from Scotiabank.

Fred, I think early you quoted to the CAD 40 million number in terms of inflation, can you just recap what that was? I missed it.

On the last call in November, I had articulated that point that the cost inflation headwinds we're dealing with quantified to approximately CAD 40 million on an annualized basis. And that included material, labor cost increase as well as energy. Since then, I would say that, that number has grown. And particularly this year, energy has been another fairly large headwind, some material as well. As Pat noted in his opening remarks, we haven't had to make any further adjustments on the labor front. So, it's really energy and material. So, that CAD 40 million is somewhat larger than where we're sitting here on the last call.

And in terms of energy, just curious, is there anything -- I mean could you implement like an energy surcharge or something in Europe and just how you can manage that?

With our customers, that's part of the ongoing negotiations with them at this point. So, we're working through that into the mechanisms on how we can be compensated for some of that stuff.

And just to be clear, do you guys have any sales at all into Russia or Ukraine?

No.

How far you want to go?

We don't sell there. We don't produce there. We don't pay any bribes to lease any equipment there. We stayed out of Russia.

The blockages from the Ambassador, is there anything that's sort of behind this? Would that be a material impact in Q1?

No. It didn't have any, really didn't have much impact at all. There was a lot more noise than it was a reality when it came to production. I mean some of our customers had to slow down a little bit. We didn't layoff a single person. We might have sent a few people home early on a Friday and then it was pretty much back to.

And had that went on for longer, that would...

Yes, definitely. If it had continued for a couple of weeks, it would've been a big problem.

I will do a shout out for Fred who is the Chair of the APMA and Flavio Volpe, Who is the President of the APMA. The auto part suppliers went to court to get a contempt motion or contempt judgment and an injunction against the truckers, which got the police to move. Why we had to do that? I'm not quite sure, but we did that and I think some really good work to deal with the issue. And quite frankly, once people saw that you had to move people from the bridge, it became a matter of time to move people out of Ottawa. So, auto parts suppliers should get some real kudos work for that.

It happened late in the week, which helped as well because we had a weekend coming.

Maybe just in terms of guidance, I appreciate why you haven't sort of provided quarterly guidance recently, but is there an expectation at some point you might start doing that again or no?

That's an open discussion at our end. I mean there's a lot of uncertainty and volatility right now, so we're not comfortable doing it and we'll reassess as we kind of get through the next few months.

Right, when it looked like things are starting to clear up a bit, Russia went to war. So, that makes --.

One thing after another.

Next question is from Ben Jekic from PI Financial.

This question is for Fred, and I apologize if I missed the detail, but when you say CAD 40 million cost inflation, I'm assuming that is meant from the gross profit on an annualized basis, right?

Yes, that would be material, labor and energy, and that was the number we threw out again in November on our last call.

Thank you. There are no further questions registered at this time. So, I'll return the meeting back over to you, Mr. Wildeboer.

Well, thank you very much from all of us for listening and feel free to ask any of us questions at your leisure. Have a great evening.

Thank you. The conference is now over. Please disconnect your lines at this time and we thank you for your participation.