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spk09: All participants, thank you for standing by. Your conference is about to begin. Good afternoon, ladies and gentlemen. Welcome to the Martin Riott International 2021 Second Quarter Conference Call. Instructions for submitting questions will be provided to you later in the conference. And I'd like to turn the call over to Mr. Rob Weldeboer. Please go ahead, sir.
spk04: Good afternoon or 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 DiRamo, Martin Reyes' CEO and President, and our CFO, Fred DiTosto. Today, we will be discussing Martin Reyes' results for the quarter ended June 30. I refer you to our usual disclaimer in our press release and filed documents. Pat will speak first, then Fred, And then I'll finish up and we'll do some Q&A. Here's Pat.
spk05: Thanks, Rob. Hello, everyone. As noted in our press release, our Q2 adjusted net earnings per share came in at 34 cents, just below the low end of our guidance range that we discussed on our Q1 call of 36 cents to 46 cents. Production sales came in at $839 million, also below our guidance range of 850 to 950 million. Our adjusted operating income margin for Q1 was 4.4%, a big improvement compared to a negative 14.9% when the pandemic impacted us in Q2 of last year, where we had few sales for close to two months. Margins remain below pre-COVID levels, given the short-term headwinds we continue to face, most notably from the industry-wide shortage of semiconductors. This is having a more dampening effect on production than many expected just a few months ago. We also continue to progress through our heavy new business launch cycle with programs on the Nissan Pathfinder and Rogue, the new Jeep Grand Cherokee and Grand Wagoneer, the Ford Mustang Mach-E, the Mercedes C-Class, as well as the recent launch of the new Lucid Air, among others. While launch costs are a normal part of business, they are having an overweighted impact on our margins this year compared to a typical year, as we have many programs ramping up at the same time. Basically, a combination of the delayed 2020 and the planned 2021 programs, all launching simultaneously. The good news is these programs will generate sales growth at strong margins once supply chain bottlenecks are removed and production gets back to normal. In fact, our current plant capacity will essentially be full across the globe once normal production returns from our customers. Hence, the future looks great for our industry as well as our company. Vehicle demand remains very strong and vehicle inventories are at record lows. Despite the industry challenges of poor chip visibility that we are dealing with in the short term, we foresee a multi-year period of strong production growth once supply chain pressures ease. One of the largest customers recently commented at a supplier update that inventory is so low that once supply chains are stable, it will take more than two years with substantial overtime to rebuild normal inventory levels. This gives us even more confidence in our longer-term outlook as our 2023 guidance of margins above 8% and free cash flow of over $200 million implies. Fred will have more to say on this momentarily. Turning to our operations, we continue to experience short-term disruptions and customer releases continue to fluctuate due to the shortage of semiconductors and other supply constraints. Sales mix has also been an issue as some of our higher volume programs, such as the Chevy Equinox and Ford Escape, have endured extended production shutdowns, as highlighted on our last call. Giving an update, General Motors' Kami plant, which produces the Equinox, has been mostly shut down since February and will remain shut down until the latter part of August. EM is also taking downtime at a number of North American plants, which is even affecting some pickup truck production. Similarly, Ford's facility that produces the Escape in Kentucky was down seven weeks in Q2. These are just a couple of examples in a long list of production shutdowns announced by the OEMs. In addition to supply chain issues, labor availability continues to be challenging in certain regions. And we've had to adjust wages in select locations as a result. But these increases in specific locations and COVID-related government relief easing some next month, we expect labor availability to continue to improve in the hourly ranks. On the salary side of the business, labor demand is very competitive. This is a consequence of the high post-pandemic demand for all types of products, auto and non-automotives included. With the high demand from our customers and all the launch activity, many facilities remain busy despite the supplier disruptions that cause release fluctuation. As travel restrictions have eased in many parts of the world, our ability to move resources in needed areas to support launches and operational enhancements is improving. This ability leaves us well positioned for the eventual recovery of volumes. Though I never completely stopped visiting plants during the pandemic, I'm happy to report that I'm visiting more facilities with the ability to cross borders with fewer issues. I'm impressed with what our plants have accomplished, despite the difficulties brought on by COVID and the resulting resource and supply chain challenges. I'm also very proud of the work our SEO team has done, both inside and outside of our plants. keep our lines fed with the necessary materials to meet our production needs. I'm pleased to announce that we have been awarded $40 million in new business since our last call. This includes approximately $30 million in lightweight structures with various customers including General Motors, Ford, and Toyota, and approximately $10 million in our propulsion systems group with Volkswagen and Ford. New business awards in 2021 to date now total approximately $170 million. The pace of new business awards in recent quarters and our schedule of launch activity gives us tremendous confidence in the outlook over the next few years. I want to take a minute and provide a quick update on VoltaExplorer, our EV battery joint venture with NanoExplorer. As a reminder, VoltaExplorer will build a one-megawatt-hour demonstration facility in Montreal, Canada with the purpose of proving our new technology with graphene-enhanced lithium-ion batteries Once we're satisfied with the results, the JV will determine next steps and how best to take advantage of the technology, including the possibility of commissioning a 10 gigawatt hour manufacturing facility. We've now secured the demonstration facility in Montreal, and the equipment is being delivered over the next number of months, which puts us on track to be up and running by early next year. We expect we will demonstrate the enhancements that graphene brings by mid-2022. We're excited about Volta Explorer and its prospects, as we believe graphene-enhanced batteries can provide some significant advantages over the current products in the marketplace. Simply put, graphene should enable faster charging speeds and longer battery life, which extends driving range. Graphene enables the use of silicone anodes, which is more efficient than graphite, the current standard. The challenge with silicone anodes is that they have a limited life as the silicone expands and eventually fractures when charged. Graphene can be used to coat the silicone spheres which reduces the swelling and prevents fracturing. The result is greater energy density and capacity retention which extends battery life and driving range. Graphene enhanced batteries should be safer as graphene has high thermal conductivity provides greater temperature control, and reduces the risk of thermal runaway, which has caused fires on some current batteries in the market. This makes our graphene battery technology unique. Volt Explorer also has the potential to fill a missing piece of the Canadian EV supply chain, the domestic production of EV batteries. This is noteworthy, given the government's EV ambitions and their recent OEM announcements regarding the production of electric vehicles in Canada. There are currently a number of concerns with the current EV battery technologies, fire risk, charging time and its impact on capacity, driving range, and battery life. Our work to date shows grabbing enhanced batteries should improve all of these current challenges, some significantly. On that note, I'd like to thank the entire Martin Rea team for their continued dedication and commitment in the face of the industry supply shortages and other near-term challenges. With that, I'll pass it to Fred.
spk02: Thanks, Pat, and good evening, everyone. Overall, second quarter results showed some strong year-over-year growth from the COVID shutdown lows of 2020, but we're still below pre-pandemic levels. As Pat noted, we continue to face headwinds from the global semiconductor shortage, tight labor market conditions, and a heavy launch cycle, which impacted our results in Q2. Production volume visibility remains low, with customer shutdowns being announced or extended on short notice. This has impacted volumes on key programs, as previously discussed. Our team has done a remarkable job in the face of these challenges, and we thank them for their efforts. While commentary from automakers, semiconductor manufacturers, and industry analysts has been somewhat conflicting, our expectation is that supply-driven challenges will persist in some form through at least the third quarter and quite possibly the fourth. Given the heightened uncertainty and volatility our company and our industry is facing in the short term, we have opted not to provide quarterly guidance for Q3 at this time. Current challenges notwithstanding, we remain confident in the longer-term outlook for our business, given strong customer demand for vehicles, rock-bottom vehicle inventory levels, and our healthy order book. We believe this will set the stage for strong growth in industry volumes for at least the next two to three years once we get past the near-term supply challenges, and our growth is expected to outpace the overall industry. I will have more to say on our outlook shortly. Taking a closer look at the Q2 results, total sales almost doubled off the pandemic-induced lows we experienced in Q2 of last year. Production sales doubled, while tooling sales were up 10%. In addition to the sharp volume recovery, sales also benefited from new programs launched in recent quarters, including the Jeep Grand Cherokee and Grand Wagoneer, the Nissan Rogue, the Ford Mustang Mach-E, and others. Despite the strong year-over-year growth, sales remain below potential given the volume disruption caused by the global semiconductor shortage. This will likely continue to weigh on near-term sales, as previously mentioned. Adjusted operating income margin came in at 4.4% in Q2, a vast improvement over the loss generated in Q2 of last year, as Penn mentioned. On a year-over-year basis, margins benefited from higher volumes and productivity and efficiency improvements. Despite the improvement, margins remained below potential due to the volume impact of the semiconductor shortage previously discussed and negative sales mix, as well as higher labor costs and costs related to a heavy new business launch cycle. The good news is these launches will benefit future sales margins and profits. Importantly, our Q2 adjusted operating margin fell by 50 base points over the Q1 level on a 9% drop in production sales, for a decremental margin of production sales of 11%, or approximately 20% if you exclude the aluminum pricing temporary lag effect discussed last quarter. A solid result that is reflective of our continuous improvement, lean, and cost-discipline mindset. Regionally, our North American operations achieved an adjusted operating margin of 6%, up from a 12.7% loss in the second quarter of 2020 due to the impacts just discussed. The European margins also demonstrated a sharp improvement over Q2 of last year, but remain in a lost position given the volume challenges already discussed. and our ongoing restructuring efforts in the region, which are progressing. Our rest of the world segment continues to operate at a high level, with an 11.4% adjusted operating income margin in the quarter, a level indicative of the long-term potential of the business. Moving on to earnings briefly, adjusted earnings per share was $0.34 in Q1, a sharp increase over the $0.91 loss we generated in the year-ago quarter. In addition to the sales and margin impacts discussed previously, EPS benefited from a $0.05 net foreign exchange gain and a lower-than-normal effective tax rate of 24.5%. Pre-cash flow, as defined in our MD&A for Q2 2021, was negative $62.4 million, inclusive of a $67.9 million increase in non-cash working capital and $75 million in cash capex. The increase in non-cash working capital is both production and tooling related. The disruption caused by the global semiconductor shortage, and specifically the short notice or low lead times we are getting on production releases from our customers and other material shortages, is forcing us to carry a higher than normal level inventory. This dynamic should reverse over time as production volumes normalize. As we discussed on our last call, capital spending is somewhat elevated this year given the amount of work we have been winning, as well as customer-driven engineering changes and some deferral of spending from 20 into 21. The majority of our capital is program-related, and we only deploy capital when we win business. We earn strong returns on our invested capital, among the best in our industry, in fact, which demonstrates that we are investing well and generating good value for our shareholders. Turning to our balance sheet, net debt did increase compared to Q1 levels, largely to fund the working capital increase previously discussed. Our net debt to adjusted EBITDA was 1.84 times at the end of the quarter, which is modestly above our target at 1.5 times, but within our comfort range and well below our bank covenant maximum of 3 times. We remain committed to maintaining a strong balance sheet. As I mentioned at the start of my remarks, we are not providing the customary next quarter guidance given the uncertainty and lack of visibility we, and indeed our industry, are currently facing. However, to be clear, our conviction in the longer term prospects for our business and our company has never been better. The fact that we are dealing with a supply issue as opposed to a demand issue gives us a great deal of comfort. and the demand picture is as good as it has been in years. We see evidence of this at the dealership level, where customers are having to wait months to take delivery of popular models, and in some cases paying thousands of dollars over MSRP. We also see it in used vehicle prices, which are currently at near all-time highs. Anecdotally, we also hear stories of people putting off vehicle purchase decisions given limited model options, which suggests that pent-up demand exists. We're also executing well in our lean journey, and as such the potential to rebound to historical margin levels, or even exceed them, remains once production bottlenecks are worked out. We continue to expect our capital spending to normalize to a range approximating depreciation as a percentage of sales. The two main drivers continue to be second-generation programs and our flexible well lines, which will require less capital than their first iteration, and getting past their heavy investment cycle in the aluminum business. Keep in mind that we have been winning a lot of businesses of late, which requires investment, but is ultimately a good news story given our return profile. We don't know exactly when the semiconductor shortage will work itself out. Quite frankly, no one does. However, few, if any, expect the situation to drag on beyond 2022. And as we look beyond into 2023, our outlook, which calls for total sales, including tooling sales, of $4.6 to $4.8 billion, an adjusted operating income margin exceeding 8%, and free cash flow in excess of $200 million, seems as achievable as ever from where we sit today. Our track record of delivering on our financial target speaks for itself, and we are confident that this will continue to be the case as we deliver on our 2023 outlook. And with that, I'll turn you back over to Rob.
spk04: Thanks, Fred and Pat. With the comprehensive overview and outlook of Pat and Fred, I just want to add a few brief observations before questions. First, Our recent quarterly calls have featured detailed aspects of our business, and we provide an investor letter getting into more detail. These remain relevant. Previously, we have outlined our approach to innovation, and more recently, our approach to capital allocation. At our recent AGM, I gave an overview of culture and sustainability, which many of you on this call have heard and hopefully enjoyed. Given the fact that we just did this for you, I'm going to forego that presentation or summary thereof this evening. Neil Forester has done a great summary letter of our approach to sustainability in the context of our company culture, and you will find the presentation posted on our website. We believe we have a unique and special approach to sustainability and ESG issues, and we will undoubtedly discuss these more in future. Second. From a safety, health, and operational perspective, our company remains at the forefront of best practices in relation to COVID-19 protocols. Our people continue to be safe and feel safe in our facilities. One of the biggest issues in terms of operations has been our ability to cross borders, including the Canadian and U.S. borders for key people. Borders are still a mess, but we are going to get through this and supply chain normalcy will be good for everyone. Third, both Pat and Fred have provided a view of our operations and performance in a long-term context, as well as addressing the quarter. Both are relevant in their way, of course. Our quarterly financial results don't reflect some really positive news about the increasing value of our investments in new technologies, such as graphene and graphene-enhanced products. Our NanoExplorer investment appreciated considerably in value in the second quarter and since, not reflected in our earnings per share numbers. But there is a lot of value there, and we believe long-term there is much more to come. And we have other exciting technologies and products in the pipeline too. A key to our long-term success and sustainability will be our ability to capitalize on our technology. 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 with our answers, but we will answer what we can. Thank you for calling.
spk09: Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star one at this time if you have a question. We will take the first question from Michael Glenn from Raymond James. Please go ahead.
spk01: Hey, good evening. Pat, thanks for the update on Volt Explorer. Now, I just want to ask a few more detailed questions about that because clearly the market is giving some pretty significant valuations to different battery companies, some of which are pretty early stage. So, I mean, you talked about faster charging speeds, longer life cycle for the battery, increased driving range. Are you able at this time to give any quantification into what those might look like?
spk05: Well, the work so far has been done on, for lack of a better term, you know, mini batteries, you know, the quarter size type that go on a camera. So it's pretty early. The equipment that we've ordered and is coming, it will produce cells that are essentially the same type of cells you would use in a Tesla or what have you. And in a battery, a car battery, for instance, there's thousands of cells. So there may be 6,000 or 7,000 of these cells inside one car battery. And if you haven't seen them, it's kind of like looking at a AA battery, only it's a little bigger. And that ability to produce those cells, which are pretty much identical to what's in the market, will be able to prove the technology out. So, you know, we're not quoting specific percentages of improvement. We have confidence we're going to see these improvements. But until we can put it in one of these typical cells, we're going to hold back on, you know, guessing or predicting what that might be. But as I said, we think in some cases it could be substantial.
spk01: And in terms of the decision to establish Volta Explore, and I believe there was some lab-level type testing taking place before the establishment of Volta Explore, were you seeing, like, can you characterize the results you saw in that lab testing gave you significant confidence that you will see something favorable once you scale this up?
spk05: Well, I'm not going to go into that detail for the reasons I said before, but I will tell you we wouldn't be making the investment if we didn't have the confidence.
spk01: And at what point, I mean, it isn't a long time away. You talked about demonstrating the enhancements by mid-2022. But at what point, like, are you going to be, does Vault Explorer plan on releasing results publicly when they are available?
spk05: We haven't really discussed the method in which we're going to share the information. There are companies that talk to us about it. There could be all kinds of methods based on interests that might support this activity. I don't know if you want to add to that.
spk04: Yeah, I think, Michael, as you know, we are in joint venture with another public company, NanoExplorer. We're working together on that, and we're being careful with our information and inconsistent with what they're saying. So, you know, I think let's develop it. We're positive about this development. We think that from a number of perspectives, it's positive for us in respect to our investment in NanoExplorer. It's going to be positive for graphene. We think that graphene is an answer, but let's be specific about the results when we can be specific about the results.
spk01: Okay. And then just to a question on the Kami plant in Ingersoll. So I, cause I read articles about it and I'm just trying to figure out exactly what's happening there. So you, did you make an indication that you will be, you'll be providing product there by the end of August? And then as, as GM transitions that plant to the new bright drop platform, is that a platform that you, that you are involved in?
spk05: So, um, They were supposed to start up this month, the CAMI back with the Equinox, and it was delayed again until, I don't remember what date in September, but I think the 6th is what comes to mind. I could be off a little bit. And then they've announced the closure date. It's already been reported. So how much that will run between here and there, we really don't know. I mean, as we've talked about, the... The chip shortages, we don't have great line of sight, but the BrightDrop product is pretty low volume by itself, at least initially, compared to, you know, what they have there now. And so, you know, I think you'll see a substantial loss in volume, or maybe there'll be some other products added down the road as electrification takes off. We don't have anything significant, I don't believe, on that at this point.
spk02: We have a bit of content on the van, but nothing substantial at this point.
spk04: The other thing to bear in mind is that product's being made in Mexico, so insofar... Not the Brightfire. Not the Brightfire, but the existing Equinox. So insofar as the Equinox remains a good seller, all are part of the volume product. certainly that's lost in Canada. We'll see increased volumes for us in Mexico, and one issue for us is to make sure that we fill plants that are supplying CAMI, and that's mainly our all-field plant, and we're working on filling that plant. So that's the type of thing that we do when the customer makes these determinations. Go ahead. Sorry.
spk01: So that was sort of my next question on what you do with the incremental capacity that becomes available in Canada. You see enough work available. Like, would that have to sell into Canada from all fields, or that could sell into the U.S.?
spk05: Can you answer the question again? I'm not sure I understand what you mean by sell into Canada or sell into U.S.
spk01: Like for the excess capacity that will be in all fields, that will become available in all fields, does that have to sell into Canada or that can go across the border?
spk05: It can go across the border and, you know, as we said, we make product for the current Equinox and its sister, the Terrain, in both plants and some of those are exchanged. We actually ship there now. So some of that work will remain. We've won some other business that we previously announced that will go into all field and working on some other things as well at this time and at the end of the day that plant could stay full. Our anticipation is it will be.
spk04: The general comment that might be useful for you and for the others on the line is despite the intermittent plant shutdowns that we're seeing with the chips and everything else, by the time the work that we're doing in terms of preparing for new launches and all that type of stuff, by the time all that's in process, we're going to be full across the world in every plant.
spk05: Yeah, as I said in my initial comments, basically if we win anything significant, we may have to actually just add a plant or a significant addition. I mean, we are literally full, I think, for the first time ever.
spk01: Okay, thanks for taking my questions. No problem. Have a good evening.
spk09: Thank you. The next question is from Peter Schlar from BMO Capital Markets. Please go ahead.
spk00: Hi, this is Chang filling in for Peter. First question is, in terms of the labor shortage, is Martin Rea doing anything to kind of alleviate that pressure, like any initiative specifically that the company is doing to alleviate that labor pressure?
spk05: Yeah, I mean, in specific locations, as I mentioned in my first comments, we have made wage adjustments, you know, similar to other companies, bonus payments for staying for six months, those types of things. It's not all over in all regions. It's weighted more in the U.S. than anywhere else, and it has made a difference in our ability to man up appropriately.
spk00: Okay. And I understand that, obviously, most of the OEMs are providing some contradictory forecasts in terms of the semiconductor shortage, especially for the coming quarter. But, like, what are you hearing directly from the OEMs that you guys speak to? Kind of how much visibility are they giving you and what are they saying? What's the commentary like?
spk05: Visibility... the week out in a lot of cases. I mean, I got a text today from one of my operators that said this customer just decided or just said they're going to shut down for the next two weeks starting Friday. And so that's what, three days? Two days notice? Up until that point, we expect them to go full out for at least the next month. And we see this happen quite frequently. Now, I will tell you it's not as frequent as it was you know, in the beginning, but it's still happening quite a bit. You know, some products you can kind of bank on. A lot of the trucks and larger SUVs are pretty steady. There's been some disruption. But the medium-sized SUVs and so forth, there's a lot more disruption. I mean, you think about it, Cami hasn't run, again, like Rob said, we run in Mexico, but the Equinox has not run really up here since February in Canada. And that's a big plant with a lot of volume and specifically because of chips. But A lot of products are hit and miss, run two weeks, stop a week, run four weeks, stop a week. And I think it's going to be like that into the fourth quarter and maybe even a little bit almost likely for sure into next year.
spk04: Yeah, I think as you're finding there's some contradictory stuff, but it isn't vicious or anything. I just don't think. that they know.
spk05: Yeah, absolutely no malice in all this. They really have a hard time understanding it too. It's very complex. It's not so much that the chips go right into the OEMs. The majority of chips go into the supply base when they're put into products and then they go into the OEMs. So it's a very complicated system they're trying to manage through right now.
spk00: Okay, I understand. And can you just give us an update on the Matosa acquisitions?
spk05: Yeah, actually, it's gone quite well. Plants in China are the one place we're not seeing much disruption. The ones in Mexico, the one in Mexico, I should say, we've had some very good success. If you remember during COVID, we made some significant changes to the number of people and the organization, and it's paid off. We're very happy with it. Plant in Tuscaloosa was mostly empty and now is closed. Very full. That doesn't launch for another year or so. It's the EVA 2 from Daimler, but a lot of activity going on there. Germany is continuing to improve. We're pretty pleased with the activity now that we have people there to support it. So overall, I think we feel like we should have felt about a year and a half ago, but it's starting to come into play. So still feel very good about the acquisition as a whole.
spk09: Okay, great. Thank you. Thank you. The next question is from Mark Neville from Scotiabank. Please go ahead.
spk03: Hey, good evening, guys. Hey, I appreciate not wanting to give the Q3 guide, but just to be clear, when you do get some visibility, the expectation would be would you be back to providing the normal quarterly guidance?
spk02: Yeah, we'll make that assessment as we go here, and we'll see how things play out. But in the moment, in the next few months, it's going to be challenging to have some good visibility on what's going on. Okay.
spk03: Yeah, that's understood.
spk05: Yeah, the example I gave a minute ago on literally a few hours ago being notified we're going to be down for two weeks in one of our big plants is the reason it's very difficult to do right now.
spk03: Yeah, no, understood. And Fred, you made the comment earlier, just on the decrementals, just so I understand, it's That's sort of with the aluminum issue from Q1 that you're planning to recover Q2. Is that the comment?
spk02: Yes. So it's lower if you factor that out, but if you factor that in, and most of it balanced out in the quarter, so we don't highlight a big impact this quarter. So when you factor that in, it's roughly around 20%. Slightly lower in North America and slightly higher in Europe. Okay.
spk03: And... I guess there's the expectation that, again, there will not be sort of capex or lower capex. Just given all the issues, you still plan to spend at the level you were spending prior, is that correct?
spk02: At this point in time, the customers have not scaled back in their launch activities. So the answer to that question is yes. So we're following our customer on that front. And from that perspective, they have not slowed down.
spk05: And as I was saying earlier, we're... We're going to be packed to the brim. When the supply shortages resolve themselves, the next two or three years, just sheer volume is going to be quite incredible. We're very anxious about it.
spk03: The comments about CapEx eventually being equal to DNA, roughly what year are we talking about?
spk02: 23, so in line with our longer-term outlook. Okay, okay.
spk03: And I guess just on the, it feels like stating the obvious, but the prior commentary about mutual free cash, just given you're still spending and given all the volatility and the impact on production, I mean, break-even keys for free cash this year is probably not, I don't want to put words in your mouth, but it's probably no longer the expectation.
spk02: You cut out there for a sec. Are you referring to 21? Yeah.
spk03: Yeah.
spk02: Yeah, I mean, I think at this point, I'll have to see how the volume plays out. The way we're starting the back half of the year, it's not looking really good from that perspective. So I think there's, you know, that's at risk at this point.
spk03: Yeah, no, completely understood. Understood that. Yeah. Maybe just one last question, just to follow up on some of Michael's questions on the Volta Explorer. I guess I'm just curious, when you guys were doing the initial testing, I appreciate the comment about being small scale, but Would any customers have seen this or seen results or just ready for that? I'm just curious.
spk05: No, not so far. We're pretty early, though. We are starting to talk to customers just based on what we expect. But publicly, we're just not going to talk about how much better we think it will be until we get more data.
spk04: There's a strategy there. You can go to a customer too early, too. All right. Yep.
spk03: All right, guys. I appreciate that. Thanks for the question. Thanks.
spk09: Thank you. Our next question is from David Ocampo from Cormark Securities. Please go ahead.
spk07: Good evening, everyone. Good evening. Yeah, my first question is on the elevated operating costs that you guys are seeing, particularly as it relates to labor. Are these being factored into the future contracts that you guys are winning? And then as it pertains to your older contracts, are you able to find efficiencies in your business so when volumes do normalize, you can still get the operating margins that you guys thought you would get initially when you signed those contracts?
spk05: Yeah, I'll start this and let Fred finish it. But a lot of the labor that's driven is launch-related contracts. We've had a lot of launches that got delayed, if you recall, from 20 on top of ones from 21, which has created some excess costs in the short term until the launches smooth out, which will happen this year. At least the majority of them. There's some more launches that are obviously forthcoming at the end of this year and on into next. There is some areas where labor costs have gone up, just an hourly point of view. Our ability or... You know, plans as far as negotiating to improve our contracts certainly are in play in some cases. They're not unilateral across the company. We're not seeing wage increases everywhere by any means. More in specific plants and, again, mostly in the U.S. I don't know if you want to add to that at all, Fred. Not really, actually. I will tell you this, that at the end of the day with the volumes and where we expect to land with labor as a whole, our target for margin has not changed.
spk07: Okay, that's helpful. When I take a look at your rest of the world segment, margins continue to be at a pretty elevated level, and that's despite all the inflation that we're seeing and we've discussed on this call. I was wondering if you could sort of just talk about the fundamentals that are leading to the strong performance relative to North America and Europe.
spk02: Well, I think it's a relatively small segment for us. So China has been thus far a pretty good experience for us. We've got some good contracts there and some good platforms. The semiconductor issue has not necessarily hit us there, so we've been seeing some decent volume. And, you know, despite all the restrictions as it relates to COVID and all the issues that have come with that, the team over there has actually done quite well. So we're quite pleased with its performance and see that continuing into the future.
spk07: And, Fred, do you see this sort of normalizing in line with historical North America margins, or can they continue at this double-digit level?
spk02: Well, we were... Pre-COVID, I think one of the quarters were close to 10%, so I don't think it was too far off. I think you're almost there at this point. But, you know, I can see these current levels being sustainable for a period of time. Now, again, keep in mind, quarter over quarter, you've got, you know, some launch activity in certain quarters whenever that happens. You know, given the size of the segment, it can, you know, go up and down from that perspective. But longer term, I think where we are is something that we can achieve going forward.
spk07: Okay, that's great. That's all the questions I had.
spk09: Thank you. Our next question is from Christa Friesen from CIBC. Please go ahead.
spk08: Thanks for taking my questions. Just to follow up on the margins there, so if we, hypothetically, if we were to see the chip shortage kind of rectify itself or bottom out anyways by the end of the year, do you think we could see a return to pre-COVID margins in 2022 and then progress onto there to eight plus percent in 2023? Or would that still be a little bit ambitious?
spk02: Well, I think it is possible, of course, depending on how quickly the volume recovers. But, you know, it'll likely end up being a bit bumpy along the way. And we are continuing to launch work. So as we roll this new work online, There's going to be some costs associated with that. So I envision more of a gradual progression to the 8% as we head into 2023 as opposed to next year.
spk05: Certainly the back half of 2022, most of the big launches are done. It ought to be looking pretty good, and the chip issue certainly should be behind us by then.
spk08: Okay, perfect. And then just to follow up on Matelza, I think you mentioned on your last call that you were hoping it would contribute positively to EBITDA in the back half of this year. Is that still what's expected, or is it also kind of being impacted by the chip shortage, or just how you're thinking about that?
spk02: Yeah, we're starting to see more of an impact in volumes in Europe as it relates to chip shortage. So Q2 was worse than Q1, and Q3 has continued at that pace. So I think some of that may be a risk, and depending on the volume plays out, but it is improving, as we noted earlier. So that's positive, and we feel pretty good about heading into next year, assuming the volume is there, that it will contribute as expected.
spk08: Okay, perfect.
spk02: Yeah, okay. Good.
spk08: And then I just wanted to also ask, I know that we're seeing kind of rising COVID cases in various different areas. Is that impacting anything? do anything different because of the COVID cases or not an issue?
spk05: Not so far. I mean, you know, there were plants, for instance, in the U.S. that had started to remove masks and so forth and have, you know, put them back on. But as far as a surge in cases anywhere, you know, certainly there's parts of the world that are tougher, Mexico, Brazil. But I haven't seen any significant rise in any of our locations so far.
spk08: Okay, perfect. Thanks. Thanks for taking my questions.
spk04: Thank you.
spk09: Thank you. As a reminder, please press star 1 at this time if you have a question. Our next question is from Brian Morrison from TD Securities. Please go ahead.
spk06: Thanks very much. I just want to follow up on some of the margin questions here. So, Fred, to be clear, Metalsa EBITDA profitable in 2022, is that the message?
spk02: Yes.
spk06: Okay. Okay. And then I understand the consolidation of launch activity from 2020 and 2021 this year. I just want to clarify. So you're going through a combination of heavy launch activity and plant inefficiencies or labor inefficiencies, costs, et cetera. So it's fair to say that we expect both these issues in terms of margin impact to ease in 2022. It should be a clear tailwind.
spk05: Yeah, I mean, I wouldn't go as far as to say labor inefficiencies beyond launch. The areas where we're having labor inefficiencies are due to the launch. And, of course, we've had some wages that have increased because of the current condition of resources. So certainly after these launches get into their normal curve, I expect there to be a significant tailwind. These programs that we're launching aren't just typical launches. These are very large launches, some really big programs that, and as you recall, our newer work has a better margin profile, so I expect to do very well.
spk04: We're pretty good at launching, and we're pretty good when our plants are running. The big issue that's hit margins right now is the fact that we've got plants closed. If you take a look at the number of customer plants that were closed in the second quarter, which was more than the first quarter, it's almost like rotating strikes in a labor situation. When you have a plant like Shelbyville, which is our biggest manufacturing plant in North America, which makes the escape for seven weeks, you've got cost and you don't have revenue. that will sort itself out as volumes come back and the chips come back. That's by far our biggest hit on Mars.
spk05: That's a really good point. And the other piece to this, too, which is very unusual but noteworthy, and I should have said it when you talked about labor inefficiency, where labor inefficiency is coming into play is at certain locations when chips take the plants down in the past, it's very easy to lay everybody off, pick them back up again. you've got to be a lot more selective now because you let everybody off today and coming back. So you've got to be much more strategic in your short-term layoffs and those types of things where you can typically cut costs, where today you're taking some risks that you won't get trained people back. So we have to be smart about the way we manage that.
spk06: Okay. Thank you both. That makes a lot of sense. Fred, just in terms of tooling level, very high level in 2019, you've got this, ambitious forecast for 2023? Maybe just some color with respect to where we think Tulin should be in 2022 and 2023.
spk02: Yeah, generally speaking, again, it's somewhat volatile. Some can roll into future periods and so forth, but somewhere in the range of $200 million to $300 million over the next couple of years will likely end up being where we land, give or take.
spk06: Okay, thank you. And last question, maybe Rob, I assume this one's for you, but When you think about your holding in Nano, you did refer to a great run that you've had here. It's now up 30% since the last quarter when I asked you about it. It now makes up 20% of your market cap. Just maybe walk through what your midterm options are for holding this position.
spk04: Well, I think that a couple of things. The first thing is that our investment there, I mean, it's not just a passive investment. We've They've brought value to us. We've brought value to them. And so we've got a good working relationship as well. Also, I think we've helped support on the operational side. So that's one thought. We think that's actually a growing value business for us in the sense that we believe in graphene. We believe that they're the best producer of graphene in the world. We can almost say we are part of that. So we take this personally as well. We think there's tremendous opportunities there. We've obviously opened the doors to some extent on the automotive market with our graphene enhanced brake lines, which we think are the best brake lines in the world, and we think every customer should have them. And so there's a relationship more than just the passive shareholding there, and we can help. work with them in order to grow the business along with the other investors that we partner with in Nano, which include the Kess and Fidelity and some pretty good long-term players. We also think that working together with them on the Volta will create value for us, if nothing else, in the sale of graphene. We think graphene enhanced batteries are something for every battery manufacturer in the world to look at. So we think there's an opportunity there. And yet at the same time, we also recognize that, you know, a strategic investment at some point, if someone wants to buy part of the position, you know, we would consider it. I think we've put, but, you know, I mean, that's the same with anything else, right, in the context that we'd also sell a plant if someone made us an offer we couldn't refuse or something like that. So where we are right now, we're comfortable that we're seeing the accretion in value. We really like Saroosh and his team. We really like the opportunities there and we think it's got a lot of growth. And in terms of the value of that being 20% of our market cap, I'm not sure it's being reflected in our market cap. I think investors that are missing out on what we're doing there, which is not just a passive investment, just don't understand the picture. I agree and that's why I asked. Thank you. Yeah. I'll add to that. At the end of the day, there's a perspective on the auto parts to a certain extent that unless you're doing electrification or autonomous, that you're not in the technology game or something like that, and that's insane. The reality is that this is a very technology-driven industry. We have a lot of content on electric platforms. We have a lot to offer. Lightweighting, which is what we do, is absolutely core to every environmental green initiative that's out there involving automotive. We're heavily involved in looking at the increased electrification of the market, including making products like battery trays, including bringing lightweighting technologies And we're investing a lot of time, effort, innovative capital, and money into leading-edge technologies, graphene being one of them and some other things that we haven't disclosed yet. But we're right at the cutting edge of technology. And quite frankly, it's a different market that people should basically take a look at. Thank you.
spk09: Thank you. There are no further questions registered at this time. I would now like to turn the call back to Mr. Rob Wildeboer.
spk04: Well, thank you very much. Thanks for giving us some time this evening, and thank you very much for your questions and incisive commentary. If anyone has further questions, feel free to call us. The contact information is in the press release, and you can talk to Neil, Fred, Pat, or me at any time. Thank you very much.
spk09: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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