Martinrea International Inc.

and we expect further improvement in the coming quarters. As discussed on previous calls, this erratic production environment over the last year or so has made it difficult to adjust or flex our labor in real time, resulting in poor absorption of overhead costs. With some recent improvement in production environment, we are seeing some relief on this front. As always, we continue to execute on our Martin Ray Operating System, or MOS, initiatives And we continue to see a lot of opportunity here. As I've said before, we are still in the early innings of what we can achieve on this front. Finally, we are making great progress on new program launches. We expect our launch activity and in turn launch costs to continue to reduce as the year progresses. With that will come improved margins. The key is a continued reduction in short-term disruptions from our customers. To sum it all up, we are making good progress toward our 2023 outlook. and are right where we expect to be at this point. And we are anticipating an even greater improvement in the coming quarters. Quickly, I want to say a few words about VoltaExplorer, our 50-50 JV with NanoExplorer aimed at commercializing the production of graphene-enhanced lithium ion batteries. VoltaExplorer held its battery day on April 5th at our demonstration facility in Montreal. The event was well attended by analysts, investors, and government representatives, which speaks to the level of interest in the project. The day consisted of a tour of the demonstration facility, as well as presentations and technical discussions by management. The presentation is available on our investor relations section of our website for those that are interested. To summarize where we're at, the demonstration facility is up and running and producing batteries. Our technology has been validated internally and by third parties. and confirms the advantages of graphene-enhanced lithium-ion batteries over existing technologies, which include greater capacity, longer life, and faster charging speeds with enhanced safety. We remain on track with our expected milestones and anticipate that we will proceed with building a 2-gigawatt-hour facility to start production in 2024, conditional on validating the project economics, obtaining financing on favorable terms, and completing site selections. We expect to make this final decision over the next several months. With that, I'd like to thank the entire Martin Rea team for their continued dedication and commitment in these challenging times. And with that, I'll pass it to Fred.

Thanks, Pat, and good evening, everyone. As Pat noted, our first quarter results were much improved sequentially as we benefited from a more stable production environment with a lower level of chip-related production shutdowns and customer call-offs during the quarter. While we continue to face headwinds from supply shortages, cost inflation, and higher than normal launch activity, our expectation for results to be better in the first half of this year, followed by a further recovery in the back half of the year, appears to be on track thus far. As supply chain bottlenecks improve and our launch activity normalizes, we believe 2022 will be a transition year to a strong multi-year period of strong volumes, sales, margins, and free cash flow, and our Q1 results are a positive data point that gives us confidence that this will be the case. Taking a closer look at our performance quarter-by-quarter, production sales were up 30% on industry production volumes that were up 6% in our core North American market. Our sales growth uppaced overall market growth materially, given a positive mix, as programs that were most impacted by the production shutdowns of previous quarters also saw more pronounced recoveries as production began to normalize. These include programs such as the Chevy Equinox in Sierra and Silverado large pickup truck platforms that we have discussed at length on previous calls. Adjusted operating income margin came in at 3.8%, a marked improvement from the losses generated in the previous two quarters, and representing incremental margin on production sales of 19%. Some will lower than normal for us due to the continued inflationary cost pressures we are facing in energy and material, including freight costs. Tooling sales declined during the quarter, off an unusually high level in Q4, and as such, total sales were up just under 10%. Adjusted EBITDA of $112.4 million was up almost 80% quarter-by-quarter, a notable achievement given the persistent industry challenges that we continue to work through. Free cash flow was negative in Q1, reflecting the timing of working capital flows for both production and tooling-related capital. As noted in the past, Tooling-related working capital, in particular, can be lumping and unpredictable between quarters. Seasonality is also a factor, as we tend to harvest working capital in Q4, but we tend to deploy it in Q1. Looking at our performance on a year-over-year basis, first quarter adjusted operating income and EBITDA results were generally consistent with year-ago levels. Recall that Q1 2021 was the first quarter that we began to feel the impact of chip and other supply shortages on our operations. Of course, we expect our results to surpass these levels, getting back to our pre-COVID performance and expectations. Turning to our 2023 outlook, we continue to expect to achieve total sales, including tooling sales, of $4.6 to $4.8 billion, an adjusted operating margin exceeding 8%, and more than $200 million in free cash flow. We're off to a good start in 2022, as our Q1 results demonstrate, and we expect further improvement as we progress through the year as supply conditions and launch activity normalize, and we get some relief on the cost side through some combination of input cost normalization and our cost recoveries through commercial negotiations. As Pat mentioned, demand for vehicles remains robust, and inventories continue to trend near an all-time low. We should support strong industry production volumes for several years. We also expect our own sales growth to outpace industry volume growth, given the substantial amount of business that we won in the recent years that we continue to launch on. Finally, our capital spending is expected to decline to a range approximating depreciation as a percentage of sales in 2023. Two main drivers continue to be second generation programs and our flexible well lines, which require less capital than their first iteration. and getting past their heavy investment cycle on aluminum. This is one of the key drivers underpinning our outlook for over $200 million in free cash flow in 2023. Our track record of delivery on our financial target speaks for itself, and we are confident that this will continue to be the case as we deliver on our 2023 outlook. Turning to our balance sheet, net debt increased quarter-by-quarter to $922 million in Q1. Our net debt to adjusted EBITDA was 3.3 times at the end of the quarter an increase from approximately 3.1 times last quarter. An increase in non-cash working capital, both production and tooling related, reflecting the timing of working capital flows as previously discussed, contributed to the increased debt levels. Overall, we are comfortable with our balance sheet position and expect to remain well within the covenant stipulated in our amended credit agreement with our lenders that we announced last quarter. And with that, I now turn you back over to Rob.

Thanks, Fred and Pat. Just one further note from me. Our AGM will occur on June 7 and proxy materials will be posted shortly. We'll have a live in-person meeting and hope to see some of you there. We'll give some presentations on the status of our industry and company. And as the AGM will be close to our all-field facility, we are open to providing tours to those who can make it subject to overall numbers. There are some really exciting and innovative things happening there. And with that, we conclude our formal remarks. Thank you for your attention this evening. Now it is time for questions. We see we have shareholders, analysts, and competitors on the phone, also some employees, so we may have to be a little careful with our answers, but we will answer what we can. Thank you for calling.