ABC Technologies Holdings Inc.

Greetings and welcome to the ABC Technologies Q1 Fiscal 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Nathan Barton, Director, Investor Relations. Thank you, sir. You may begin.

Thank you, and thanks to everyone for joining us today for ABC Technologies Q1 Fiscal 2022 Earnings Conference Call. With me on the call are Todd Scheffelman, President and Chief Executive Officer of ABC Technologies, and David Smith, Chief Financial Officer of ABC Technologies. This call is being webcast live on ABC Technologies' Investor Relations website, and the webcast and accompanying slides will be available for replay for 12 months following this call. The content of today's call is the property of ABC Technologies. It can't be reproduced or transcribed without prior written consent from the company. Before we begin, I would like to remind you that today's call will include forward-looking statements within the meaning of applicable securities law. which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings within the Canadian Securities Regulatory Authorities on CDAR. Please review the disclaimer on slide two of the earnings presentation for additional information. We assume no obligation to update any of these forward-looking statements or information unless required by law. I want to remind our investors that we are on a fiscal year that began July 1st, 2021. All references to our fiscal Q1 fiscal 2022 are to our fiscal quarter ended September 30th, 2021. And Q1 fiscal 2021 are to our fiscal quarter ended September 30th, 2020. References to fiscal 2022 are to the 12 months ending June 30th, 2022. and fiscal 2021 are to the 12 months ending June 30, 2021. I also want to note that while ABC shares trade in Canadian dollars, the company reports its financials in U.S. dollars.

With that, I'd like to turn the call over to Todd Scheffelman. Thank you, Nathan, and good morning, everyone.

We've continued to focus on controlling the controllable in our business and making adjustments to production and our workforce to assure we are ready for both the ongoing supply chain issues that the industry faces in the short term, as well as help us emerge stronger for the future. We began our fiscal year on July 1st with a positive mindset and anticipation that the worst of the semiconductor shortages might be behind us, and the industry volume would begin to slowly increase over the quarter versus the prior months. However, the reality of the quarter quickly revealed a significant worsening of OEM production volumes from chip shortages versus the prior quarters in an environment in which calendar 2021 production will likely be down year over year, even compared to the COVID-based lows of the last year. This has certainly impacted ABC despite the best efforts of the team. Regardless of these near-term realities, which will be behind us at some point, We look to the macro environment and data points like record new and used car prices that show that demand for vehicles is extremely strong. We still believe that as the semiconductor supply returns to normal and the OEM production environment normalizes, ABC and the auto industry are going to have multiple years of running at a high level to meet the demand of the consumer market and rebuild at least a portion of the 2.5 million units of inventory that have been consumed. We are confident that ABC is positioned to grow at above market rates when production returns, as evidenced by the recent new business wins and our reputation as a go-to lightweight supplier in the market. Our focus remains on building our long-term capabilities to grow our business both organically and through acquisition to better serve our customers and stakeholders globally. Our organization will be stronger as the industry continues through its recovery, and we continue to be excited to capitalize on the opportunities presented by the current and future environment. Starting here on slide four, as many of you know, this quarter's results are comparable to a first quarter last year where the industry was quickly coming out of the COVID lockdowns that shut down automotive production for almost two months, and OEMs were running at a high level of production prior to any significant supply disruptions occurring. This quarter, we faced an overall market down more than 26% from expectations just a few months earlier, with our largest customers seeing year-over-year reductions in production volumes of 20% to as much as 50%. And some of our largest platforms are seeing reductions of 30% to even 80% or more year-over-year as the limited supply of chips is being funneled where possible to only the highest profitable platforms for the OEMs. While we'd like to say that these shortages and production volatility are going to end in the very near term, it is ABC's view that shortages will continue through the end of calendar 2021 and begin to moderate through calendar 2022. We don't see industry-wide supply fully demeaning demand or opportunity to build inventory until calendar 2023. While current operating results continue to be impacted by the semiconductor shortages, The OEMs are not stepping back on commitments to future platforms, with robust new program discussions and quoting activity starting our fiscal year. While we anticipated this quarter to be fairly slow from a new business wins perspective, as new business awards are typically lumpy over the year, we did secure over $100 million in lifetime new business wins, including multiple BEV wins that for the first time exceeded our ICE wins for the quarter. On another positive note, I'm pleased to report that ABC has again won Nissan Supplier Diversity Award, which recognizes suppliers who exceed Nissan's objectives by successfully expanding opportunities for diverse businesses using certified minority suppliers. Since 2012, ABC supplier diversity span has totaled over 860 million with over 125 certified suppliers. This is a testament to ABC's belief in creating not only a diverse workforce, but supply base as well. Finally, in addition to being committed to diversity, ABC is committed to the environment and recently completed a thorough study of our product portfolio and production techniques that revealed that approximately 92% of ABC's products are recyclable. While we are pleased with this figure, we are always working to decrease waste and environmental impact and are innovating with new materials and processes to drive more improvement. I also want to note that our third annual ESG report has been released on ABC's investor website, which highlights our achievements in our sustainability journey and is an important tool by which we grade our progress each year in being a good steward to the environment. During the first quarter, we also had a major development within our shareholder ranks as ABC's former majority owner, Cerberus, sold its remaining stake to funds managed by Oak Tree Capital Management. Oak Tree has appointed three board members, replacing those associated with Cerberus, who will be leaving the board. As a preeminent global investor firm with decades of experience creating value, we believe Oak Tree will be a supportive addition to ABC's vision to further grow the business into a global, lightweighting powerhouse. Now let's get into the first quarter highlights shown here on the slide. I want to start by saying that while the results you see here today were largely out of ABC's control due to the global chip shortages, we are not taking these results lying down, and we are not certainly happy with them. Over the course of the last quarter and the last several quarters, we have taken a number of steps to reduce overhead costs, including reducing overhead staffing in our plants, reduce discretionary spending, a more measured hiring of staff, deferral of nonessential costs, and we will continue to adjust our cost structure as needed going forward. Our revenue for the first quarter declined to $163.4 million from $258.4 million in the year-ago period, which at that time reflected an operating environment that was running on all cylinders to make up for the lost volume as a result of the lockdowns during the COVID-19 pandemic. Adjusted EBITDA declined to negative $11 million from positive $41 million last year, and adjusted free cash flow was negative $60 million due to the declines in operating results and the effects of unwinding of working capital from the significant production slowdowns. On the next slide, as we've done in prior quarters, we will be briefly discussing the impacts of the supply chain disruptions on our fiscal Q1 2022 results. As you can see on slide five, our results continue to be impacted by the global semiconductor shortages, with this quarter, we hope, representing a bottoming of the production environment for North America. Actual production volumes for Q3 were more than 26% below IHS projections released just in the middle of June, with the entire second half of calendar 2021 anticipated to be down a similar amount. For our fiscal first quarter, several of ABC's top customers' production volumes declined at a greater rate than the overall market, with revenues falling 30%, 40%, even 50% from the initial IHS-based assumptions, with significant negative volatility across multiple of our top vehicle platforms. We've also continued to feel an impact from elevated resin prices on the 50% portion of our resin that is not hedged. Prices for polypropylene are still about 80% above the 10-year average levels. With high-density polyethylene, our other major resin supply is over 30% above the 10-year average. Thankfully, we're beginning to see some stability and even price declines in the market, with additional reductions expected in the coming months based on IHS forecasts, though these will take a little time before you expect to see the lower resin prices flow in through our financial results. As COVID outbreaks and lockdowns continue to be an issue in many parts of Asia that are key to the semiconductor supply chain, views of when the long-awaited production volume recovery will occur have been pushed back by at least another quarter. Though we expect chip shortages to moderate over the coming three to four quarters and volume to improve sequentially from this quarter's lows, industry experts are not calling for sufficient chip supply to actually recover any significant amounts of lost volume and rebuild dealer inventories until early 2023. As we have provided in past quarters, at right you'll see a bridge of the impacts of our financial results from OEM production stoppages, primarily due to semiconductor shortages as well as elevated resin costs. We estimate that semiconductor-related loss volume negatively impacted fiscal Q1 by $119 million of revenue, or almost 40%. and $37 million impact on adjusted EBITDA. We were also impacted by delayed launches on a new vehicle that had high ABC content, which resulted from an unrelated supplier production issue that reduced the quarter by about $8 million of revenue and a little more than $2 million of EBITDA. On resin, where we estimate the financial impacts by comparing current prices versus the 10-year average price for our two highest volume resin types, polypropylene and high-density polyethylene, We estimate ABC's fiscal Q1 was negatively impacted by about $7 million of adjusted EBITDA. Not included explicitly as an add-back is a certain level of operating inefficiency that resulted from the frequent stops and starts in our production brought on by significant changes in the production schedules from our OEM customers, which we estimate impacted profitability and margin by 250 to 300 basis points from normal levels. Moving on to slide six, which gives you an update on the macro environment and what we view as the clearest sign of the currently corked potential for the market to explode when ship supply returns to the industry. Since we last spoke, IHS has further downgraded expectations for FY22 and the first half of FY23, though not as significantly as the September revision that occurred prior to our FY21 year end results call. However, despite the negative headlines, we remain positive as we have seen a very similar environment to this following the COVID shutdowns last year, with an explosive reversal to production happening at a moment's notice, and ABC stood to the ready for our customer OEM production volumes. Currently, IHS is projecting a more normalized production environment while not returning until the second half of calendar 2022. But part of the job as a Tier 1 supplier is to be ready to produce at OEM's production schedules, which has recently been more optimistic than those of IHS. Unfortunately, this need to stand at the ready on a weekly basis given releases from our customer also causes an inability for ABC to fully flex down some of the variable cost components of its operating module, which you clearly saw in our results for the quarter. While we, like the rest of the industry, are hoping that IHS will end up being conservative in their loss volume assumptions and timing, the current reality is that there are at least 4 million vehicles that have been lost in North America alone that need to be made up over the coming years. IHS is now projecting production of 4.4 million units per quarter through 2028. Looking back at the five-year average of quarterly production pre-pandemic of just under 4.3 million, this means we'll likely build up only about 400,000 to 500,000 additional vehicles annually to replace the currently depleted inventory, resulting in five to seven years of higher than average production just to replenish dealer lots. This is great news for ABC and the entire industry. As you can see on the right, the inventory in the U.S. right now continues to fall to record low levels, registering only 900,000 vehicles in the most recent month. Industry inventory is now well below the level seen during the financial crisis, with only 22 days on hand and still falling. If any of you have tried to find a new or used car recently or observed the vehicle prices out there, demand is still as strong as ever, and we're looking forward to the opportunity to meet it with supply as soon as we can. Moving to slide seven, as I mentioned in my opening remarks, we're still seeing robust quoting activity from the OEMs, and have had a solid first quarter. We received over 100 million of new lifetime business wins, which was ahead of our plan for the quarter. These wins were spread out across the D3 and several European and Asian OEMs. One of the most exciting parts of our wins this quarter is that this is the first quarter ever where EV wins have exceeded ICE-based vehicle wins, as we have had one large EV win along with several other additions to platforms on which we've already won business. While new business can be very lumpy, we expect we'll continue to see EV wins being a larger and larger percentage of our overall book of business moving forward. On the left side of the slide, you'll also see an important launches for the quarter. It goes without saying that due to the chip shortages, volumes of these platforms will be ramping up slower than we normally would expect to see. But obviously the Frontier and Civic are high volume platforms for Nissan and Honda respectively. The Ford Super Duty is one of the vehicles that Ford will be doing all they can to keep chips flowing to that platform as it is a highly profitable vehicle for them. And then the Hummer is, of course, GM's halo vehicle entry into the high-end BDV utility market that we think will see a ton of growth in the coming years to match the significant pre-production demand. As far as launches for the quarter, we had almost 20 new program launches on a number of platforms around the world with D3 European and Asian OEMs as well as several Tier 1 suppliers. On slide 8, we want to take a minute to talk about some of the new product and technologies that we are introducing to customers and implementing internally to drive greater productivity and cost efficiencies. We touched on these in earlier phases of development during the IPO Roadshow, and in the case of biopolymer fillers, are actively presenting this new material development to customers as a more eco-friendly replacement opportunity versus 100% fossil fuel-based plastic resin. Not only are blended biopolymers an important sustainable solution that is more environmentally friendly than traditional parts made with 100% plastic resin, we also have seen lower mass, reduced cycle time, reduced energy usage, and certain improved material mechanical properties while still meeting our customers' stringent requirements. By increasing the adoption of materials with organic biomass, such as wood pulp, future ABC parts can rely on inputs from more sustainable sources with a lower environmental impact, consistent with our goal of serving our customers' needs while reducing our footprints. The other technology I wanted to highlight today is a process that ABC has developed in-house called variable cooling, which is a novel process innovation that helps reduce overall cycle time or the time it takes to produce a part. Variable cooling utilizes a patent-pending process involving induction heating elements for only a small portion of the overall production cycle versus the current standard of constantly heating during the entire cycle of production. This results in shorter production cycle time, which in turn increases the throughput of the machinery. Based on the case studies done for our key customer, we have seen increased productivity of more than 20% in our machines for certain blow molded parts. What this means is ABC can free up an additional 20% of production capacity for new programs, which in turn provides an opportunity to bring in more business with lower ABC investment. These benefits will allow ABC to further improve our competitiveness while driving continuous process improvement in our production for new programs that are actively pursuing. These are the kind of innovations we are currently working on within ABC as an important aspect of constantly striving to reduce costs while maintaining quality and output for our OEM customers, which has been a differentiator for ABC for many years. On slide nine to sum things up, while we are certainly not pleased with the current state of the industry and the resultant financial outcomes ABC delivered this quarter, We have taken and are continuing to take steps to mitigate additional downside to results. We also believe this quarter may be seeing the bottoming in negative revisions to IHS projections as well as actual production. However, as I said earlier, this is not an issue that's going away tomorrow, but we believe it will gradually and continually improve. We continue to build a strong book of new business wins with over 100 million of lifetime revenues with a majority being EV wins. Though we're seeing SAR results that hampered significantly by the lack of vehicles on dealer lots, we're still seeing the consumer demand for vehicles is extremely strong as evidenced by record prices for both new and used vehicles in the market right now. The industry is also seeing several million vehicles of inventory shortfall to make up for us and we are excited about the opportunity to run at accelerated levels in the future to deliver on current demand as well as the inventory rebuild that is so desperately needed in the market right now. And finally, consistent with our previous disclosures to investors, we remain very focused on opportunities to grow through acquisitions and are seeing as well as actively evaluating a number of exciting opportunities. We remain extremely positive on the long-term prospects for ABC and are focused on the strategies required to deliver on those expectations.

With that, I'll turn it over to David.

Thanks, Todd. I'll take just a few minutes here to go through some of the highlights of the fiscal first quarter, and then we'll move on to Q&A from the audience. The charts on slide 11 show sales, adjusted EBITDA, and free cash flow for our fiscal first quarter. It also shows our estimate for the financial impacts of the current supply chain disruptions, so you can see where we believe the business would have performed under normal circumstances. It's important to note in this quarter we are comping to relatively strong results from our first fiscal quarter 2021 that benefited from the restart of OEM production without significant supply disruption following the COVID-19 lockdowns that began to ease in May of 2020. ABC's revenue for Q1 fiscal 2022 declined almost 37% from the $258.4 million to $163.4 million due almost entirely to semiconductor-related production stoppages, as well as interruptions at one of our OEM customers related to issues with another supplier. As Todd mentioned earlier in his prepared remarks, though industry production in the quarter was down 25% year-over-year, many of our customers saw their volumes decline greater than the market, and certain platforms from which ABC derives high CPV saw volumes decline between 30% to more than 80%. Though cost of sales decreased on an absolute basis as a percentage of revenue, COGS increased significantly to 99.4% of revenue from 80.9 in Q1 fiscal 2021. Operating leverage was lost as ABC must maintain a certain level of headcount to run machines, even for limited periods, to satisfy OEM demands, and therefore ends up with less fixed cost absorption, hurting gross margin as we've seen this quarter. SG&A expenses were $28.3 million compared to $29.4 million, which of course a decline on absolute basis, but as a percentage of revenue, SGN expenses increased to 17.3% in the current quarter from 11.4% in Q1 fiscal 2021. Though Q1 fiscal 2022 saw higher wages and share-based compensation expenses year over year due to being a public company, this was more than offset by reduced foreign exchange losses and lower transaction recruitment and bonus expenses. ABC reported a net loss of $28.2 million in Q1, compared to net income of $9.3 million in Q1 of the prior year. The net loss per share in Q1 fiscal 2022 was $0.54, compared to earnings per share of $0.18 in the same quarter last year. Both figures are on a basic and fully diluted basis. Adjusted EBITDA for Q1 fiscal 2022 declined to negative $11.3 million, from positive EBITDA of $41.2 million. The adjusted EBDA margin for the quarter was negative 6% compared to positive 14.2% last year. Adjusted free cash flow for the quarter was negative 59.5 million versus positive 56.5 million in Q1 fiscal 2021. Both these are results for the current quarter, obviously stemming from the combination of significantly lower revenue due to semiconductor shortages, higher input costs primarily due to increased resin costs, and inefficient plant operations due to short notifications by OEMs of their own plant closures. In the case of free cash flow, our results were also negatively impacted by working capital tightening, which saw reduced receivables as a result of production call-offs, while inventory increased as the ABC was forced to produce parts for OEM facilities that were shuttered with minimal advance notice, along with increasing ocean transit times of overseas materials related to port delays and freight driver shortages. I'll note for modeling purposes again that our adjusted EBITDA includes our 50% proportionate share of our JV's EBITDA, and likewise, the computation of adjusted EBITDA margin includes 50% of the JV's revenue in the denominator. Because the JV is included in the income statement on the equity method basis, you need to refer to our MD&A to see the JV proportionate sales and adjusted EBITDA details. Our MD&A is filed on CDAR and is also available on our investor website. Moving to slide 12, which shows our cash usage for the quarter. Cash from ops saw a significant negative impact from a similar network in capital tightening to what we saw during COVID last year, as ABC had much lower receivables coming in the door versus the payables that continue to unwind over time. While we did pull back on our capex spend, which was fairly efficient in absolute dollars basis, on a normalized revenue, because of the speed and severity at which this quarter's production volume and revenue declined, we were not able to ratchet back capital spending sufficiently to stay under our target of about 5.5% of revenue. Most of our capital spending is for future programs, which will launch in post-semiconductor shortage environments. Due to the ongoing production slowdowns affecting not only ABC, but also our JVs, we did not receive any dividends in this quarter. On slide 13, you'll see a snapshot of our capital structure and liquidity. As you'll note, due to the rapid decline in industry production, we've drawn our revolver and have seen leverage increase commensurate with that draw and the decline in operating results. As a result, we proactively negotiated covenant relief with our lender group that will run through Q2 of fiscal 2023 or calendar Q4 2022, while the industry gets through what we believe will be the worst of the semiconductor-related slowdown. To the extent we see operating results improve greater than our expectations, we will see ABC using excess cash to pay down debt. It should be noted, of course, that our leverage level is primarily explained by the abnormally low EBITDA brought on by the semiconductor crisis. So to some degree, just the passage of time and improved operating results should see leverage brought back down. All that said, we still have sufficient liquidity available to fund our operating needs, just over $120 million of total liquidity available. In any case, the company will continue to focus on enhancing its liquidity position. With that, I'll turn it back over to Todd for a few closing remarks.

Todd? Yeah, thanks, David.

As you've seen this quarter with ABC, as well as the broader auto supplier universe, In some ways, we're in an environment like we've never experienced before, where demand is massively outstripping supply with no recourse to answer for the moment. But in other ways, it's similar to parts of what we experienced during COVID last year, but with less widespread full shutdown of all plants across the industry. What we learned during that time is that ABC is able to control our costs, but also support our workforce and be immediately ready for our customers' volumes to pick back up, which can restart with little notice, a scenario that we're all anxiously awaiting at the moment. As we've seen the rate of negative change slow in the most recent IHS volume revisions, we're hopeful that our Q1 fiscal results represent the bottoming for production and we can see volumes improve, albeit slightly, throughout the fiscal year. However, as we've discussed at the beginning of our current fiscal year, there is still a lot of uncertainty out there. And as a result, we're maintaining our existing view that the auto production environment is still exhibiting a level of volatility, which makes it nearly impossible to accurately provide financial guidance. We will continually revisit this position as the year goes on and plan to provide guidance as conditions stabilize in the market. As we've previously demonstrated, ABC has significant positive operating leverage when things get going again, and we're looking forward to that in the not too distant future. With that, I will conclude our prepared remarks. Thank you, everyone, for listening and for your support. David and I are now happy to take your questions.

We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question is from Ryan Brinkman from JP Morgan. Please go ahead.

Hi, thanks for taking my questions. Maybe first wanted to ask around how you're thinking about managing working capital, including after it looks like your inventory rose, I think 18 million sequentially, even as your sales were down 70. I mean, we've been hearing a lot from other suppliers this quarter about both intentional and unintentional inventory builds, maybe like intentional in order to secure components or commodities which are in danger of being in short supply to build a cushion or unintentional because of sudden automaker shutdowns and order cancellations, including toward the end of the quarter. So what would you say were the drivers of your inventory increase and how and when do you see those drivers playing out or even maybe reversing and I know you're not guiding the fiscal 22 EBITDA, but how should investors broadly be thinking about cash flow tracking and 22 relative to whatever EBITDA that you do print, including because of the trend in working capital or other considerations such as CapEx?

Yeah, Ryan, I just appreciate the question. And I'll start off and then let David jump in there. But I would say that we've got a mixture of some of the increases are from intentional builds, both to protect on some materials that are short in the marketplace. Also, just some different program launches coming up that we typically want to build for. But I would say a majority of it is unintentional through actions of quick shutdowns. Typically, what we were seeing over this quarter was volumes from our customer just being a lot higher than You know, the schedules were supposed to be, and then all of a sudden on Thursday we'd get a call and say, all right, we're not doing that next week. And so we'd just be, you know, stuck with a significant amount of finished goods from canceled call-offs with virtually no notice at all. I'd say the other thing that we've got is just from the supply chain route right now, what used to take, say, six weeks on the water from Asia is now a 12-week. on the water. So if you're trying to cancel something, you're back at least 12 weeks. So it just led to these overall inefficiencies in the whole supply chain right now, whether it's unloading ships at the ports in California, getting trucks to transport across the United States to our facilities. All of those lead times have just backed up substantially. And you put that into a combination where We've got erratic customer releases happening with literally one day notice to not ship after we've produced parts for them for a whole week. It's just really made it very difficult. So we're already starting to see some of that fall off right now. November, we've got, I'd say, a vast majority of all customer plants are back up and running, albeit at not a full state of production, but at least they're running. And so we've seen already some inventory reductions over the last week and a half as the volumes have picked back up. So I think this is a temporary spike. We're certainly focused on it. And we'll be able to drive that down. But I'll let David comment a little bit more. But a lot of the working capital increase was not only inventory, but also just the unwinding of the payables and receivables as well. So David, you want to add to that?

I do. Thanks, Todd. And good morning, Ryan. Good to talk with you again. So I think Todd mentioned some of the things related to inventory, and I think a bunch of the things were what you had mentioned, and that's really relative to the production inventory. But of the $18 million, $10 million of that really is tooling inventory. And as Todd mentioned in his prepared comics, we have a lot for our customers. Life continues on, and there's a bunch of new program launches. are in the queue so we are we expect to be having uh these programs meet the customer certification requirements during this quarter and partially into our third count our third fiscal quarter and uh and we would expect to see that that tooling inventory come down as it naturally does uh in the process of of getting the customer to sign off on it and uh and then ultimately pay for it so i think you see about 10 million of the 18 million is a bit of a spike related to that but i think that's just normal customers moving on programs launching All, I think, good things for the business. I think the other thing, too, that's just a little bit at play here with respect to the inventory is some of the higher prices that we're paying on the residence side creep in ultimately to the inventory balance as well. So there's a bit of that that's at play. And then I'll just echo Todd's sentiments relative to working capital. I think the diligence we have around managing working capital is really unchanged, and we keep driving on all fronts, but it really is the business activity that's causing the swings. But I would expect us to get back right in line with historical levels as soon as business starts to normalize, which, again, I think we're looking forward to in the next couple of quarters.

Okay. Thanks for the comprehensive answer. That's very helpful. And I wanted to ask you on another broad theme we've been hearing from suppliers this quarter, which is the negotiation with automakers for the recovery of non-commodity supply chain costs. So I think many suppliers are 80% or more covered with regard to commodity cost pastors and their contracts, but they don't have mechanisms in place to recover such things as labor, ocean shipping, freight, diesel, electricity, natural gas, all this stuff. So I wanted to check in on how you think you may be positioned to recover non-commodity supply chain costs, including because I know you have less commodity pass-throughs, less automatic commodity pass-throughs than most suppliers, maybe like 50% versus their 80 or 90 or something. Does that less automatic commodity pass-through help you or hurt you when it comes to recovering the non-commodity costs? I'm not sure if maybe it might help because you're already regularly engaging in discussions with customers about the commodity costs because they're not automatic, or so you can just tack on the request to those conversations, or... if it somehow makes it more difficult because you've already got more wood to chop in discussions already just to recover the commodity cost, let alone the non-commodity cost. How should we be thinking about this?

Yeah, Ryan, so I think the way I look at this is, you know, I've been doing this a long time and dealing with customers for a long time, and, you know, there's no single customer that you walk in and say, I've had an increase in cost, and they automatically say, oh, that's unfortunate. Here's a bunch of money. So it's always going to be a negotiation. It's always going to be a discussion point that flows into the business and crosses multiple fronts. Typically what we see is when we're in an environment like this that we do have some trade-offs with what their expectations are for year-over-year price givebacks. These types of costs always enter into those discussions and negotiations. And I'd say we've had some pretty good success over time and currently on certainly making the customers aware of what the issues are and to use those as leverage points on just overall negotiations that are continually going on with our customers. So I'd say we're actively engaged, have been for a significant amount of time. It's just an ongoing part of the business. And I'd say we're as successful as others in the industry are. on recovering, never enough, but I'd say a fair share of what we've been trying to target through various mechanisms of negotiation.

Okay. And lastly, just wanted to ask about some of those potential acquisitions that you might be considering, such as the ones that were referenced in the press release announcing the transaction between Cerberus and Apollo, just given the softer industry volume backdrop, how does that impact potential acquisitions? Does it make it easier to be a buyer? Do you think it could lead to more opportunities or aid in price negotiations? Anything to report on that front?

Yeah, so I guess I would, without tipping our hand on exactly what's going on, I'd just say that we've got significant focus on this. We're spending a lot of time on it. I think that the industry... The situation itself is opening opportunities up that probably would not have been there previously. But I would also say along with that that the recent softening of the market has really not deterred from some of the ongoing conversations that we've had with companies on areas that we're looking at right now. So I'd say it's in the near term and the future it will maybe make the market better for some M&A activity. It certainly has not slowed down the activity that we've been involved with over the last several months, and we just view that this is a continued great market opportunity for us to consolidate the plastic space. That's our focus, and that's what we're spending a lot of our time on, and so I don't think it hampers. I think there's maybe a little bit of additional lubrication in the system because of the the significant backdrop of lowering volumes and more pressure on the supply base. So we view that as an opportunity, and we'll continue to do so. But we're not going to make acquisitions outside of our swim lanes that we think are the important ones to take a look at. We'll stay within what we think is the right area of focus. But I think you'll see that... There's a lot of opportunity in the market, and we're hopeful to be able to have conversations in more detail when they mature. I can't necessarily give any indication of when that might be, but we just say that we're very active in the acquisition area.

Very helpful. Thanks for all the color.

The next question is from John Chu from Desjardins Capital Markets. Please go ahead.

Hi, good morning. So just further on on the resin prices, so can you maybe just go into more detail about the pass-through mechanisms? You have three months and six months is where you generally can do some of that pass-through, but are the majority of those contracts fall into the three months or the six months? I'm just trying to get an understanding of when we might see some of that adjustment taking place, whether it could be sooner or maybe later because they're more weighted towards the six-month part. Sure.

So again, I think that the majority of the contracts are going to be on a six-month lag. There's, you know, if you say it's 70-30 or something like that, just real rough approximate terms. But there's more that do adjust on the six-month term.

And is it fair to say that as... Sir, go ahead. No, please go ahead.

Sir, and is it fair to say then that as resin prices seem to be coming off, that as these mechanisms take place, that you actually might get a bit of a tailwind if resin prices continue to fall? Is that until the next six-month adjustment? Is that a potential tailwind at some point?

When prices are fluctuating significantly, that's exactly the trend we will see, where we may be getting price increases exactly at the time when our actual costs are falling. But you need to look it over the course of a longer term, and it does balance out. But it is very possible that based on the way the index is calculated, we will be getting price increases when our actual costs are falling.

Okay, great. And then just in terms of the volume outlook, you talked about how the industry average was down around 25%, but some of your particular important platforms were down 30%, 40%, and upwards of 80%. Presumably, that's just based on the OEMs preferring to focus on some of their higher margin platforms. Is it safe to assume that going forward, as you still go through this chip shortage, that your volumes are going to continue to lag the industry average until we start to get more normalized chip supplies?

Yeah, I would say, John, that what we're seeing right now is that, as we mentioned earlier, as of November 1st, some of our largest customers, all of their production plants are up and running. And albeit not at full volumes, but they are running the plants now, whereas in the past they were not. So as chips become more available, Basically, a lot of the chips were stolen from the CUV market and put into the pickup truck market. While we've got great concentration in pickup trucks, just overall the CUV market is a much larger volume, and that's where a lot of our bread and butter is. As the chip supply continues to build, you'll see more CUVs be built, which I think will certainly help our volumes and be a tailwind for us going forward. This last quarter, even all of the big three pickup trucks were all hit pretty substantial during the quarter from what was the expectation going into the quarter. So even pickup trucks were hit this past quarter. We think going forward, that's going to change over and pickup truck demand will be met. And then the excess capacity, we know that a lot of the OEMs are really feeling a lot of inventory pain. by not having CUVs in the marketplace right now. So there's an increased focus on what can be done, maybe bypassing options is an example of you've seen on some of the OEMs have already announced that, but they just need to get vehicles into the marketplace. So we think that will be helpful as most of those vehicles entering will be CUVs where we've got above market concentration.

Okay, and this last question.

Todd, some of those CUVs, And some of the CVs do have like low, low days on hand, right? Single or maybe just in the teens in terms of days on hand. So there really is a big driver behind that to try to rebuild that pipeline.

Okay, great. And then just last question, just on a revenue recognition question here. So a lot of OEMs have vehicles sitting just on the lot still waiting for chips or whatnot, right? Do you get to recognize the revenue if you contributed to that vehicle that's just sitting on the lot, or does it have to be fully complete before you can actually recognize that provision? I'm just wondering if there's a buildup of revenue that hasn't quite been recognized yet that you've already submitted.

That's a really good question. But the terms of our contracts are such that we've completed the revenue earning process at the point in time when we've made the delivery process. and none of it is contingent upon the customer actually selling the vehicle on into the marketplace. And so I can tell you that with all assurances, you know, we bill and we're getting paid within the customary times from the time that we've delivered to the customer production facilities. Okay, that's helpful. Thank you.

As a reminder, it is star one to ask a question. The next question is from Jaideep Kumar from BMO Capital Markets. Please go ahead.

Thanks for taking the question. First, to the workforce and your prepared remarks, I was hoping you could expand on that and just tell us how you're handling labor with the constantly changing production schedules. Are you sending people home? Any caller there would be great.

Yeah, appreciate the call or the question for sure. It's something that we certainly spend a lot of time on. And a lot of it depends on You know, certainly the focus we have is how do you flex your labor while still have the ability to to retain it? And the key thing for us is we operate in a lot of, I'd say, tight labor markets and the markets have continued to be tight. So we've looked at a various variety of different options on how we can do work share programs to share work hours. Maybe not everybody gets as much as they would like, but at least we're sharing the hours. We have looked at some layoffs in certain areas and then just looked at what we can do to continue to use as much labor without being wasteful with it. It's not like we can build parts ahead. There's just not the racks for our parts. There's no quantity of those in the system to build ahead. So we basically build the order. So if our customers aren't running Typically, our labor is not running at the same time. So we just do a number of retention mechanisms. We're constantly being in touch with people, making sure that they're at the ready, even though they might not be working full shift during the week, and just making sure we've got engagement with them. But it is a delicate balance, and it's also hard for us to manage the labor costs when we still have schedules from our customers for let's say a Monday and we have to, you know, pre-produce those parts by at least a couple of days. So on Thursday, we're building parts for Monday. And then all of a sudden we get notification halfway through Thursday afternoon that the customer is not going to be building on Monday. Then all of a sudden we have to stop at that point in time. So when you, you know, have, literally half a day's notice on what to do with your labor. It's very difficult to manage it in an efficient way. So I think our plants have done the best that we could given the constant juggling and then start up and start down their shutdown that we've seen. And just also wanted to give one more example of that is, you know, during the beginning of the crisis, we've had several examples of where a customer would tell us on Thursday they're not going to produce for two more weeks. And then your thought would be, all right, so you can lay off that labor for two weeks. But then we've had multiple instances where the customer would come back in the middle of the following week and say, oh, no, we found chips now. We're going to start producing the following Monday. So you can't necessarily rely on the last information you have because the startups and shutdowns have been so quick with little lead time and notice. It's just been a very difficult balancing act for us.

Maybe just to follow up to that, are you still seeing that the notices or the changes are still just as bad in Q2 compared to Q1, or at least as far as you can tell so far in the quarter?

And I would say we're positive on not hearing a lot of bad news here recently. So the quick shutdowns that we had seen during the third quarter calendar year in particular seem to have been dropping off significantly. Typically, our customers were having meetings with the supply base on Thursdays to tell us whether or not they were going to be producing on Monday or not. There really haven't been those calls for the past several weeks as the schedule seemed to be a little bit firmer than we've seen. So from that aspect, we just look at this as no bad news is actually good news for us. And we do see a little bit more strength in the overall So there is room for some optimism that we're moving forward, but you never know where the bottom is until you're well past it. And while we can be hopeful that we're past the bottom of this frustrating market that we're in right now, until we've got several data points that we can put together, which is really going to be several weeks, if not months, of production without interruption, then we can look back and say we've seen bottom, but early indications are that the production call-offs are certainly less frequent than they've been in the past.

And just one last one for me. Were there any program launches delayed in fiscal 21 in this quarter as a result of the semiconductor shortage, and should we expect higher launch costs in fiscal 22 as some of these delayed programs launch and coincide with planned program launches?

Yeah, I think the big one that we called out on page – Page five of the presentation was at 1 a.m. There was a supplier related issue unrelated to ABC that delayed the launch of a major vehicle that we had significant content on. That was probably the biggest launch delay. And it was I'll call it somewhat related to COVID as I won't go into the details of what it was, but I'd say it was semi related to COVID. We haven't seen a significant delay in launches from our other customers. It's just been lower volume wrap-ups than we've typically seen. So I don't expect that we're pushing any launch costs out into future months that would be of any significant consequence for us to look at. David, I don't know if you want to add to that or not.

No, that is my thought. There's been some little things, months or two months here, nothing significant, and I don't think anything will have any kind of a material impact.

Okay, got it. That's helpful. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Todd Shettleman for any closing remarks.

Yeah, thank you. So, you know, we've talked about a lot of different topics here, and just in closing, I would say, you know, this was a very tough quarter for us, and I can say it was a frustrating quarter as well. You know, this is difficult when you Don't have a lot of control over what your revenue is going to be on very short notice of time. But we can't let that frustration get in our way. We're really looking at what we can do to continue to focus on how do we better the company for the exit of the chip crisis and be better than we entered the crisis. And that's really where our focus is at, as well as on the M&A activity. We're starting to see some strengthening in the volumes over these last few weeks, which had been the anticipation coming out of the third calendar quarter, which was our first fiscal quarter. And as I mentioned, a lessening of the production call-offs. So I think there is just some small glimmers of positive news out there. But just overall, while we're dealing with this current situation where extremity positive on the future. We think that this recovery will be coming up. It will be happening at some point in time. We've got a lot ahead of us and we think that we will definitely exit this as a better company than we entered it and are spending a lot of time on making sure we take care of both the near term as well as the long term of this company, which we have a very positive view of. With that, I appreciate your continued support and for listening to us over the past hour. We'll have conversations with some of you, but if you have further comments or questions, please get a hold of Nathan, and we'd be happy to continue the conversation.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.