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spk07: Good evening, ladies and gentlemen. Welcome to the Martin Rea International Third Quarter Results Conference Call. Instructions for submitting questions will be provided to you later in the call. I would now like to turn the meeting over to Mr. Rob Wildeboer. Please go ahead, sir.
spk04: Good evening, everyone. Thank you for joining us today. We always look forward to talking with our shareholders. 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 September 30, 2023. I refer you to our usual disclaimer in our press release and file documents. I will speak, then Pat, then Fred, then me again briefly, and then we'll do some Q&A. Before Pat and Fred focus more particularly on the company, our progress, and our results, a few overview comments on how we see the world. The UAW strikes were disruptive, messy, and more acrimonious than they should have been. Not a material impact on our great Q3, but it impacts our fourth quarter and year end, just as the GM strike in 2019 impacted our fourth quarter then. But it could have been a lot worse. We now have labour peace at our largest customers for years. A good thing. And customers have to make up production after the strike, which bodes well for the first half of 2024. We continue to believe the industry is stable, with volume set to expand in the coming years, particularly in North America. We went into the reasons for this in some detail in our past two annual shareholder meetings, including our last one in June, and on some of our recent calls. But I'm going to make just a few quick points, given recent developments, to bring it to the present. The North American economy remains in pretty good shape. as we've been saying for many months and now most agree with us. The underlying U.S. economy is solid, unemployment is at low levels, and there is strong underlying demand for housing and autos. People's confidence is increasing and people know they can find work. The U.S. consumer, who drives 70% or so of the U.S. economy, is in decent shape. Note that U.S. consumers often have long-term mortgages at fixed rates, so increases in interest rates do not hurt homeowners in the U.S. as much as in Canada. Second, there remains a shortage of vehicles and inventory while being rebuilt has some ways to go. U.S. SAR and production levels are rebounding but are still not at historical levels. by which I mean average levels over the past 20 years, roughly the lifetime of our company. We continue to see production and sales of vehicles going up in 2024 from 2023 and up in 2025 from 2024, a good background for our business. Let me address interest rates. Interest rates, I think, have peaked in Canada and are close to peaking in the US. As I've said before, our company started 22 years ago, so at least in terms of interest rates, we were back where we started. Note that in 2001, USR was higher than it has been in 2023. When US population was 285 million people, today it is 340 million. Think about that. I do believe that today some people are holding off on auto purchases because of higher interest rates. not to mention higher auto prices, but the reality is that people get used to paying interest and the market adjusts. When you're used to 0% financing, a rate of 2.9% or 3.9% looks punitive. When rates are generally over 5% for a while, such an interest rate looks like a bargain. And I imagine we will see some competitive auto financing in the next few years. We are seeing some of it now. Core inflation is coming down by whatever measure. Note that we have seen reduced prices or reduced rate of price increases in many areas recently. We also believe the rate of wage increases to help workers deal with inflation in the economy will moderate. Looking at the UAW, for example, a lot of the increase was the catch-up to broader wage hikes seen in the economy in recent years. Geopolitically, We share the concerns of everyone about conflict in the Ukraine, in the Middle East, and potentially elsewhere. We don't want to see another energy crisis, which is why I personally believe we should be ensuring adequate or surplus energy supplies. Overall, then, our industry is in pretty good shape, as is our company. That's not to say, of course, that there are not or will not be some headwinds. Supply chains have challenges, albeit reduced. There will be geopolitical issues. EV sales projections may be way too optimistic. OEMs must learn to make money on EVs, etc. But I think there is a tendency to be overly negative when looking at things through a short-term lens. And so sometimes it helps to take a step back, look further out, and put things in perspective. And we just had a record quarter with solid free cash flow. We are positive and pumped. With that said... Here's Pat.
spk02: Thanks, Rob. Good evening, everyone. Our third quarter financial results were strong and generally consistent with the prior quarter from a production, sales, and operating margin perspective. Adjusted EBITDA continued at record levels, coming in at $163 million, and adjusted operating income margin was 6%. Free cash flow was up nicely quarter over quarter as expected. Solid performance overall. Fred will provide some more color on this. As Rob spoke earlier, we saw the UAW workers at the Detroit 3 OEMs go on strike in multiple locations, which began on September 15th. As many of you are aware, the UAW has reached agreements with Ford, Stellantis, and General Motors, which is great news. In Canada, Unifor quickly reached settlements with the Detroit 3 Canadian operations. The US OEM plans affected by the strike action are coming back online. As such, The restart and ramp back up has begun, but it will take some time to get back up to full volume and it could be a bit bumpy depending on the readiness and performance of the supply base. Our plans are in place and we are executing with no problems. The strike did not have a significant impact on our Q3 results given the limited scope and the fact that it was only in effect for a few plans for the final two weeks of the quarter. With that said, will have more impact on Q4 production volumes and results. While we have made great strides in diversifying our customer base in recent years, the Detroit 3 OEMs still account for close to two-thirds of our sales. The plants that were impacted by this strike action cover a number of different platforms, including some significant and profitable programs for the Detroit 3. We do have content on the affected platforms, so we were directly impacted. There have also been some spillover effects, most notably lower engine block production in some cases. We have managed the situation in flex cost effectively. The labor reductions in some situations are a bit tricky in the tight labor environment because we want to make sure we have the workforce as the volumes come back. As such, we have been careful, adjusting prudently, knowing full well that we would be called upon to turn things back on in short order. What production volumes will look like in the fourth quarter is a little unclear at this point, given the strike action, as well as the pace of the restart and ramp up of customer plans. But that said, we are providing you with an update on our 2023 outlook. Notwithstanding the strike, we are confident that we will meet, if not exceed, the high end of our previous sales outlook of $4.8 to $5 billion, as we were tracking well ahead of this pace as of Q3, in part due to higher than expected tooling sales, which Fred will provide more color on in a moment. Given a lower volume projection in Q4, including the strike impact and some potential unevenness around the restart and ramp-up, we may fall short of the low end of our 6% to 7% target margin range, but we should still be close. The higher tooling sales, which tend to be at low or no margin, is also a factor in this. Likewise, we continue to expect record free cash flow for the full year of 2023, but could also end up below the low end of our $150 to $200 million target range. Again, we should be close. Overall, a really strong year. I would like to emphasize we were on track to meet our outlook heading into the fourth quarter before the strike, and we expect any lost volumes as a result of the strike to be made up over the coming quarters. History has demonstrated that this is typically what happens. For example, following GM's strike in 2019, the company worked overtime to rebuild lost volumes in order to meet demand and prevent sales losses. There continues to be a lot of upside in our industry. Automotive sales in our core North American market remain resilient. Production is expected to grow in the coming years, and there's still a lot of pent-up demand and not enough vehicle inventory. Of course, we are mindful of macro risks such as higher interest rates and inflation, but overall, we remain upbeat about the long-term prospects of our business. Turning to our global operations, in North America, our adjusted operating income margin declined quarter over quarter on production sales that were down by about 2%. As we indicated on the last call, the timing of commercial settlements results in some peaks and some valleys, in our financial results and margin profile between quarters. We had a lower amount of settlement money in Q3, which explains part of the margin decline. The lower production sales and higher tooling sales quarter over quarter were also factors. Again, tooling sales tend to earn low to no margins. We are performing well operationally in North America, at least as good if not better than we were performing prior to the pandemic. This reflects the continued progress we have made in our Martin Ray operating system initiatives. Given that our operations are performing at a high level, future progress will primarily be a function of volumes. On that note, volumes have been relatively consistent, setting aside near-term distortions as a result of the strike. Supply chain pressures are easing, though we do continue to deal with some issues that are impacting production, such as labor availability in the United States. As Rob mentioned earlier, volumes on a number of electric vehicle programs have been slower to ramp up. This doesn't come as any surprise to us. While this impacts us to some extent on EV volumes, it stands to reason that fewer EV sales will likely translate to more ICE vehicle sales. On the cost side, inflationary headwinds are generally better compared to the last few years, though persist in some areas of the business. Our efforts to offset these costs, as well as program volume shortfalls through commercial activity, are ongoing. We saw some settlements in the third quarter and expect more in the future. Commercial activity will continue in 2024, though we expect it at a more moderate pace. Turning to Europe, adjusted operating income margin improved quarter over quarter. As we alluded to on the last call, the third quarter benefited from favorable commercial settlements in Europe. Besides the commercial activity, which has yielded positive results, the region continues to deal with weaker than expected production volumes and inflationary pressures. While these headwinds did not worsen in the third quarter, they have yet to improve in any meaningful way. In our rest of world segment, a small portion of our overall business representing about 3% of the third quarter production sales, adjusted operating income margin was higher quarter over quarter, similar to Europe, commercial settlements and our rest-of-world segment drove a strong performance in the quarter. Production volumes in China overall have also been weaker than expected. I am pleased to announce that we have been awarded $80 million of new business since our last call, consisting of $70 million in our lightweight structures commercial group and $10 million in our propulsion systems group with multiple customers. Year-to-date, new business awards have totaled $300 million. Overall, we are pleased with the third quarter performance. We continue to manage our operations well, despite the headwinds. I want to thank the Martin Rea team for their hard work in delivering these results, as well as their dedication and perseverance. With that, I'll pass it to Fred.
spk03: Thanks, Pat, and good evening, everyone. As Pat mentioned, our Q3 performance was solid. EBITDA continued at record levels. We generated strong free cash flow reduced our net debt and leverage ratio, and maintained adjusted operating income margin at a healthy level. Taking a closer look at the results quarter-by-quarter, we generated an adjusted operating income of $83 million in the third quarter, which was essentially flat over Q2 on production sales that were also flat at $1.25 billion. Note that in our industry, the third and fourth quarters are typically the weakest because of holidays and scheduled downtime, so these are really good results. Adjusted operating margin came in at 6%, consistent with the 6.1% when generated in Q2, despite a 17% increase in tooling sales, which typically earn low or no margins for the company. This is on top of a 71% increase in tooling sales in Q2 compared to Q1. Tooling sales are coming in much higher this year than our original expectation, potentially exceeding $400 million for the year. In addition to some timing effects, this is also reflective of upfront capital payments we are receiving from some OEMs on CIR and EV programs and other volume-up requests, which gets treated as tooling sales as per IFRS standards. To elaborate on this a bit, on most programs, capital paid by suppliers is typically recovered in the piece price of the part over the life of the contract. Given the uncertainty surrounding EV adoption rates and the ramp-up of EV sales that Pat and Rob spoke to earlier, we are, in some cases but not all, cutting deals for capital payments up front from the OEM ahead of program launch in those situations where we see volume risk is elevated. Moving on, adjusted net earnings per share came in at 68 cents in the quarter, higher than the 62 cents we generated in Q1, a great result. This included a $7 million net foreign exchange gain in the quarter. Free cash flow came in at $79.2 million, a really good result and a notable improvement over the $25.4 million generated in Q2, as expected. On the last call, we spoke about the drivers that we expected would enable us to generate free cash flow in the back half of the year, including positive working capital flows and significantly lower cash taxes. I'm happy to see that this is playing out as anticipated. Looking forward, working capital and cash taxes should remain tailwinds in Q4. Obviously, Q4 volumes are impacted by the strike, as Pat noted, but regardless, we continue to expect record free cash flow on a full year basis in 2023. Looking at our performance on a year-over-year basis, Third quarter adjusted operating income of $83 million was up 19.1% over Q3 of 2022, and production sales that were 10.9% higher. And adjusted operating income margin of 6% was up from the 5.8% generated in Q3 of last year. Recall that Q3 of 2022 was the quarter where we started to see some better results fall on a low point in our industry when supply-related production disruptions were at their worst. As such, the year-to-year comparisons are becoming less pronounced. The sequential comparison continues to tell a better story of how we are performing operationally. Turning to our balance sheet, net debt, excluding IFRS 16 lease liabilities, declined by $48 million quarter-to-quarter to $889 million in Q3. We continue to make good progress on deleveraging. and this includes spending roughly $11 million buying back approximately 800,000 shares during the quarter through our normal course issuer bid. Our net debt to adjusted EBITDA ratio continued its downward trend, ending the quarter 1.56 times, down from 1.71 times at the end of Q2 2023. Our leverage ratio is basically at our long-term target range of one and a half times or better. Overall, we are pleased with our third quarter performance. We continue to perform at a high level despite industry hindwits. Our balance sheet is in great shape, and we are executing on our capital allocation priorities. To our shareholders and all of our other stakeholders, thank you for your continued support. And with that, I now turn it back over to Rob.
spk04: Thanks, Fred. One final brief discussion about capital allocation, now that you have heard our operational and financial positions. Our views on capital allocation are provided in an investor note on our website for reference, but we intend to specifically talk to it each call. In Q3, we generated approximately $153 million in cash from operations, and here is how we allocated it. First, capital expenditures were about $62 million. As we have always stated, we invest in the business first. We need a strong core. As we have discussed, our investments have to meet hurdle rates on new or replacement business. We also paid down a good chunk of debt, as Fred noted, with net debt about $48 million lower quarter over quarter, and so we strengthened our balance sheet. A strong balance sheet is an advantage in our industry, where we have seen a lot of supplier distress over the years. Customers do not want to worry about the credit worthiness of their supply chain as a financially distressed supplier becomes a problem for the customer. This is especially important these days as we see the combination of geopolitical events, UAW strikes, interest rate pressures and so on having increased the stress on the supply base substantially. We paid our usual dividend to our shareholders, approximately $4 million. or $16 million on an annualized basis, providing our shareholders with a positive return on their investment. Finally, we purchased approximately 1% of our shares for cancellation under our normal course issuer bid, or 800,000 shares. Total cash spent was approximately $11 million. At our enterprise value to EBITDA multiple, which is at or near our historic low, We believe an investment in our own company is a good investment. It also rewards our supportive shareholders with a greater piece of the company without having to write a check. Note that in the last five years, since the beginning of 2018, we have bought back over 8.5 million shares, 10% or so of the company. We all recall there was a pandemic and a few other negative things that occurred during that time. We paused repurchases when the UAW strike hit, which we felt was prudent. Repurchases under our normal course issuer bid will likely be lower in Q4 as we work through the disruptions related to the strike and uncertainty surrounding the restart and ramp back up to more normal volume levels. We are also looking at some investment opportunities that would benefit us. Having said that, we continue to believe that buybacks are a good use of capital given where our stock is trading at, and we anticipate with our positive free cash flow profile, which will occur, we believe, on a regular basis, we will continue to have greater flexibility to deploy cash in the best interests of the company. Finally, as Pat and Fred also mentioned, a big thank you to our people. This is a challenging business in a challenging world, and you continue to deliver. Thank you for your dedication every day. So now it's time for questions. We see we have shareholders, analysts, and even some competitors on the phone, but also employees. So we may have to be a little careful with our answers, but we'll answer what we can. Thank you all for calling.
spk07: Thank you, Mr. Wildeboer. We will now take questions from the telephone lines. 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, there will be a brief pause while participants register for questions, and we thank you for your patience. First question is from Michael Glenn, Raymond James. Please go ahead.
spk05: Hey, good evening. Maybe just to start, sorry, and I apologize for this, but we're missing a few of the numbers, I think, right now for the segments, but Can you just clarify the expectation for the operating margin heading into Q4, like what we should be thinking about there within North America and Europe?
spk03: I think our opening remarks pretty much provided the guidance for the year, so I think you can probably do some math and back into what the fourth quarter looked like. We were obviously seeing some blind headwinds related to the strike and so forth in the fourth quarter, so that's a little unclear in terms of where all that ends up. given how the restart and the ramp-up happened. In addition to that, it's unclear on whether or not the OEMs make up lost volume this quarter. Overall, we do expect them to make up the lost volume over time, but how much of that is in the fourth quarter is a little unclear. So, you know, I think at the end of the day, we said operating margin, free cash flow-wise, we're probably going to fall short of our low end of the range, but we will be close. And that's for the year. It's for the year.
spk05: Okay. And... Pat, thinking about, or Fred maybe even, thinking about CapEx spending in 24, can you give an updated view on where that should hit?
spk03: Yeah, so this year, the guidance we provided, we'd be essentially in line with depreciation and amortization as a percentage of sales, and that's essentially materializing. So our CapEx spend has dropped year-over-year considerably. And we're not ready to give specific guidance for next year, but overall I'm expecting next year to be in line with depreciation and amortization as a percentage of sales as well, just generally speaking.
spk05: Okay. And then, Rob, when you talked about looking at some investments, I guess you're probably talking about M&A. Can you just maybe dig a little more into that, what you might be thinking about or size or timing or anything like that?
spk04: Well, if I told you what I was really thinking about, I think that would probably be inappropriate. But right now I'm thinking about dinner, actually. But, you know, we see lots of opportunities from time to time. It's not necessarily, you know, M&A, and it's not necessarily elephant hunting or anything like that. There are opportunities. We've made some strategic investments that you've seen, NanoExplorer being one of them, for example. And we continue to see opportunities there. So we assess a lot of those at any particular time. And we've got to see what we're going to do. It's premature to talk about anything other than that. I will say, and I think this is probably true for anyone in the auto business, there's a fair bit of stress out there in some areas. And so the merchant bankers and the investment dealers are pretty busy. But I think... you can assume we're not elephant hunting. We're looking at investments that allow us to basically show our ability to invest in technology and build it up. Okay, thanks for taking the questions.
spk03: No questions. Thank you.
spk07: Thank you. Our next question is from Tammy Chen from BMO Capital Markets. Please go ahead. Hi, thanks for the question.
spk00: On Europe, I think a quarter or two ago, some of the headwinds have been, I think you were going through some launches, some negative production. I mean, you kind of alluded to that a bit on the call today. So aside from, like if we were to pull out the recovery, is the segment, like how is that segment performing? Has it been improving? Is it profitable or still a bit uneven at this point?
spk02: As far as the performance goes, the plants that we have over there, I would say most of them are performing better than pre-pandemic. There are a few that have launched on top of volume increases. So obviously when there's a launch, there's always a little bit more distress. But in a couple of the plants, one in particular, they – increased ice volume products at the same time they were launching EV products. It was a lot of work. I would say we're over the hump. Operationally, I'm feeling pretty decent as we go into 2024. As far as the market itself, it's been very flat. I don't know sales-wise where it's headed, but we anticipate it will be pretty flat as we go into next year.
spk03: I think ultimately, financially, it's The biggest challenge here right now is the volumes aren't hitting planned levels. That's putting some pressure on the business overall. We are offsetting some of that as well as inflationary pressures with commercial activity and so forth. We saw some of that come through in the third quarter. But the expectation, or I should say the hope, is that the volume will end up coming back to planned levels.
spk04: As we indicated in our remarks, The rate of uptake for EVs is something that we're all monitoring. I think we've seen some cutbacks from some OEMs. And to a certain extent, as we fill our plants with EV products, they tend to be either delayed or ramp up more slowly. And as Pat said in his remarks, the reality is that the ice production may increase but may not necessarily offset what we're having for EVs. I think that's true for basically everyone.
spk02: Yeah, it's just interesting because it's Europe. In Europe, the expectation was the adaptation rate would be much higher even in North America. But all the EV launches, and we've done a number of them, are just going slow so far. And interestingly enough, there are ICE products that we expected to go down that have actually gone up. So it's just kind of a strange situation that I'm sure will level out in the next year or so. Yeah, just a policy thought.
spk04: EVs are coming. I think a lot of people want them. They're coming, actually at a lower rate than government's mandate. Best thing for the industry would be reduce government EV mandates and allow the industry to evolve the way it should. And I think you'll have a lot of smoothness.
spk00: Oh, I see. Okay. And so to confirm, when you say the biggest challenge is involving not hitting plant levels, I'm sorry, is that because of the whole EV discussion in Europe in those plants, or is it something else, is it negative customer mix, or just the industry's been flat?
spk02: I think it's just flat as a whole compared to what you would expect post-pandemic. I think there's probably some concerns with people as to what do I buy But we're seeing ice volumes up a little higher and the EV volumes lower than expected. But the market as a whole is lower than expected. In Europe? In Europe. This is Europe specific. We absolutely think something different in North America.
spk00: Right. Okay. My second question is a bit more further out in timeline. I'm just wondering, just with all the puts and takes between the Detroit three now have some higher costs in their structure from the new contracts with the UAW, there's the whole EV component to consider. In terms of how you think about the business's margin trajectory, you're kind of at around 6% now. Do you think over the more medium term you can get to 7% or higher, or do you think there's some puts and takes there, some structural factors that might offset that. Thanks.
spk02: That's a really good question because the transition is taking longer than everybody expected. We've launched ICE programs, a number of them, all going slower than expected. But as Fred said, we cut some pretty good deals from a capital point of view, but it's still a capacity that's not... hit its numbers yet, but it will, and then ice volumes that are a bit higher than expected. So in that environment where you're going to that inflection point, I wouldn't expect margins to jump up significantly in the next year or two, but I think once the market does its shift into EVs, given the investments that are out there, I think you'll start to see a more normalized market as we did before the pandemic.
spk04: I think, Tammy, you're probably the expert on this, looking at what's happening with a lot of suppliers. On a relative basis, our operating margins are better than most, and I think some other people are seeing some challenges as well. But I think with respect to the OEMs also, recognize that even though the cost of labor has gone up, significantly with the UAW contracts, and I think they've said this, that might result in $800 per car. It's not pricing the cars out of reach of different folks and all that type of stuff. And our customers in North America are making pretty good money, as the UAW so often pointed out. So in that sense, I think there's certainly money to be made. If you look at the underlying pent-up demand and desire for new vehicles and the fact that, you know, the vehicle age, average vehicle age is now approaching 13 years, I think you're going to see the ability for our customers to make good margin on vehicles for a long time.
spk02: Yeah, I think one more key point in all this relative to margins is, you know, we recovered a lot of our inflation, as did a lot of the industry, but we didn't recover 100%. So over the course of the next few years as the new products launch and the inflationary pressure is relieved because newer products have the inflation adjustments in them for the most part, and of course we expect inflation will continue to drop on a relative basis. So I think you'll see that normalize as well. The good news from where I'm sitting is operationally we're running as well or better than we were before the pandemic. And so really it's a matter of volume and the EVs taking off as expected over time.
spk00: Got it. Thank you.
spk02: Thank you.
spk07: Thank you. Next question is from Brian Morrison from TD Securities. Please go ahead.
spk01: Thanks very much. A couple of questions, please. So Fred, just starting with that increase in tooling costs, um, it looks to me like it's about a hundred million dollars higher than what you thought, obviously margin, uh, decremental. Will this reverse in 2024 or is this going to remain a headwind with respect to tooling costs?
spk03: No, at the current time, um, this, uh, I would characterize as a bit of an anomaly for, for 23. Again, it's a lot of it's based on some of these commercial deals we cut, uh, on some of these more, let's call them riskier volume situations. So we weren't, um, willing to make those investments. So we've got customers to front some of that up front. So it's being treated as tooling. I don't expect a lot of that going forward beyond 23. So I'm expecting next year for the tooling sales line to normalize. Back to what we typically see in any given year, let's call it 200 to 250.
spk01: Okay, so if my math is correct, that should be positive to the operating margin to the tune of maybe 20 basis points.
spk03: Percentage-wise, correct, ballpark.
spk01: Great. Okay, so when you talk about guidance for 2024, I think if I heard you correctly, you said that it will revert back to margin performance specifically. It will revert back to just incremental margins as opposed to launch costs and cost recovery and some efficiencies. Is that the message?
spk03: I'm not sure exactly what you mean. We haven't really been specific about next year. We're talking more broadly about I was referring to the tooling. That won't necessarily be a headwind heading into next year. And from a macro perspective, we do see the market volume in North America specifically improving, so that should support a pretty good year from a margin perspective. But at this point in time, we're not ready to give specific guidance.
spk01: That's fair. Can you say high level? Will launches be a tailwind? Will cost recovery be a tailwind next year?
spk03: Well, I would say heading into the back half of this year, I would say our launch activity... has really normalized. We're always launching work. We're coming out of a very heavy launch cycle. I was actually looking at some numbers. I mean, we've added close to $2 billion of sales if you compare our sales line to 2020. I know there was a bit of a dip related to COVID and so forth, but that's a lot of business we brought online, right? So a lot of that's behind us, and I'm expecting the next 12 to 18 months to be a more normal level of launch activity.
spk01: Okay, so just high level then. You should have positive impact from incremental margins, positive impact from launch costs, I assume some efficiency. But you do have tailwinds, is the message.
spk04: Yeah, I think so. I would agree. Having said that, we also mentioned a number of potential headwinds in this industry every time I turn around. There's a war somewhere. There's something else somewhere else or a strike. So if there's another black swan event, we're going to talk about that. I think the only thing is we get a black swan event every six months.
spk03: EV transition is one item that we highlighted here that is a bit of an unknown, I think, for the entire industry at this point.
spk01: Okay.
spk02: If you wanted to summarize it, volumes are going to be good. We really believe that. What the EV volume is versus the ICE volume is very unclear. And then when the OEMs layer back in some of the strike losses, probably be in the front end of next year, if not the remainder of this year. Okay.
spk01: Okay. And then I guess this is probably my key focus here is I really appreciate, and I think investors do as well, this focus on free cash flow, which was very strong this quarter, and also your balance sheet improvement. You're operating at near full capacity, so you're optimizing your assets and your free cash flow. I just want to make sure, when you talk about M&A, that this remains your focal point. It's your priority. We're not going to be taking a step back and looking at distressed assets again, are we?
spk04: I think that's right unless there's something we can't refuse. So if you go take a look at the Metalsa acquisition that we did and the price we paid for that and what we have in there in assets and we have, you know, We've got a challenging asset in Europe, but we've got a couple of gold ones in North America. And so when you can get something like that, it's really good. And in the context of capital allocation, we look at all that stuff. We look at that on a consistent basis. I'm very happy that our balance sheet is strengthening. We all are. Very happy that the financial numbers are getting better. 1.5 or better was our target yesterday. way back in 2017 and 2018. We got there and then, you know, we went up. We continue to, you know, just recall how much work we won in 2019. We continue to invest in that throughout the pandemic and now, normalizing now, increase our business organically by a substantial amount. And we've been working very hard to get back to that range, you know, 1.5 times or better is a good place to be. I think it's also important for a company like ours to keep our powder dry, but we are not actively searching big M&A, as mentioned. There are no elephants in our crosshairs right now. That's right.
spk01: Okay. That's what I'd like to hear. Thank you.
spk04: All right. Thank you.
spk07: Thank you. Please press star 1 at this time if you have a question. Our next question is from Krista Fritzen from CIBC. Please go ahead.
spk06: Hi, thanks for taking my question. I was just wondering, can you kind of provide us with an update on just the state of the supply chain and what level of call-offs you're seeing from the OEMs, if you're able to kind of separate that from the impact of the strike over the past little while here?
spk02: Yeah, so first off, with our internal supply chain, meaning the Tier 2 that we purchased from, As the strike started to, or at least the contracts looked like they were going to get negotiated and we were going to get a settlement, we immediately started putting our feelers out to our supply base to try to get a feel for are there any potential problems or distress. And in the moment, our internal supply chain, we don't see or foresee any problems. Now, our supply chain is a lot smaller than our customers, and we have seen some customer disruption over the last week It's not clear how impactful it will be, but you'll see a shift or shifts coming out of some of the customer plans based on something going wrong in the supply base as they have started back up from the strike. We anticipated this. We talked a little bit about it in our speeches, but I haven't seen anything super critical at this point that's going to take anybody's legs out from under them. We're keeping our eye on it. I know the OEMs are all over it. And I think they expected some pain as they started back up again.
spk06: Right. That makes sense. And can you just provide us with an update on how you're finding the labor environment right now? Are you able to... to hire as many people as you need and at a reasonable price?
spk02: Yeah, the toughest place we've had since the pandemic by far and away has been the United States. And I would say it's better. In fact, we visited a couple of our plants this week, and both of them talked about the fact that the labor situation has improved. That said, it is not what it was prior to the pandemic. Obviously, we worked on labor rates and so forth during the pandemic, like everybody else, and it's certainly helped stabilize it, but we're keeping our eye on it. Frankly, we have moved work out of the U.S. into Mexico and into Canada to help the situation and are currently still doing that until we see what we consider a completely stable workforce. The good news is we've got capacity. or places we can add some capacity in Canada and Mexico, and so we've been able to shift some production to help ourselves.
spk06: Perfect. Thank you. I'll jump back in the queue.
spk04: Thank you.
spk07: There are no further questions registered at this time, Mr. Wildeboer, so I'll return everything back over to you.
spk04: Thanks very much, everyone, for taking time this evening to listen to us. If any of you have further questions or would like to discuss any issues concerning Mark Moran, feel free to contact any of us or Neil Forster at the number in the press release. And have a great evening.
spk07: Thank you. Your conference has now ended. Please disconnect your lines at this time. We thank you for your participation.
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