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spk27: All participants, please stand by. Your call is ready to begin. Good afternoon, ladies and gentlemen. Welcome to the Martin Rea International Fourth Quarter Results Conference Call. Instructions for submitting questions will be provided to you later in the call. I would now like to turn the call over to Mr. Rob Wildeboer. Please go ahead, sir.
spk20: 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 our president and still CFO, Fred DiTosto. Today we will be discussing Martin Reyes' results for the year and quarter ended December 31, 2023. I refer you to our usual disclaimer in our press release and file documents. I will speak to Pat and Fred and then Pat again briefly and then we'll do some Q&A. 2023 was a record year for Martin Reyes in many ways. We are very pleased with the progress made during the year. Before we get to the financial numbers, which reflect solid and improving progress year over year, let's start with two very important numbers to us, our safety record and our employee survey results. Both are mission critical for your leadership team at Martin Rath and for our people also. We believe that these numbers demonstrate the underlying health and resilience of our company and are a strong base of support for our financial performance today and going forward. First, safety results. As you can appreciate, we both want and need to keep our people safe. We have been doing that increasingly well over the past decade. Our industry-leading safety metrics continue to improve again in 2023. We take safety seriously. Our total recordable injury frequency, or TRIF, was 1.10, an improvement of 9% over last year. More impressively, we have shown an 89% improvement over the last decade when we made it a priority in all of our operations. A TRIF of 1.10 is less than half of the industry standard. As you know, our company has not only grown organically over the past 20 years, we have also acquired a sizable number of troubled plants where safety may not have been the first priority. We have a safety first culture as a primary feature of our operations. Safety discussions occur daily in our plants. Our board of director meetings have a safety presentation and report. Our people come first, and we've consistently demonstrated that in normal times and also difficult times. A safe plant generally means a better work environment for our people. As well, we see positive impacts on employee satisfaction and profitability. Second, our employee survey results from 2023 are very strong, even improved over last year overall when we had record positive results. We talk about culture a lot here at Martin Rea, but if your employees don't believe in it, talk is cheap. Every year, our people complete a detailed employee survey administered by a third-party expert who performs similar surveys for many companies, including some of our competitors, and customers. We are told we have not just industry leading stats, but we are one of the best performing companies anywhere. Our employee surveys are voluntary, but we had over 15,000 surveys submitted. That's a really strong sample. We have 56 locations now in 10 countries on five continents in different product groups. That's also a good sample. We scored very well in the key categories, the way we work, which includes health and safety, work environment, teamwork, and collaboration, supporting our people, which includes communication, fair treatment, diversity, and inclusion, value and recognition, which includes compensation and incentives, career advancements, appreciation, and shaping the future, which includes personal goals, performance feedback, growth, and development. While the scores are not perfect and we can always improve and will strive to do so, Here are some answers to some critical questions. I fully understand my job role and responsibilities. 95% agree. Our location works to improve health and safety. 89% agree. I feel a sense of personal accomplishment at the end of the workday. 82% agree. I respect my plant general manager. 95% agree. Martin Rea prioritizes and encourages diversity. 90% agree. My direct supervisor treats me with dignity and respect. 89% agree. Outstanding results overall. In order to get this feedback from your people, you have to walk the talk. You have to care for your people. We believe a happy, motivated, empowered, purpose-oriented workforce is the foundation of company success in the short, medium, and long term. As some commentators have written, happiness at work leads to success. not the other way around. We agree. A strong thank you to our people. So now that we have those two sets of numbers as a baseline, let's talk briefly about our culture. We talk about our culture a lot at Martin Rant, as all our stakeholders have come to know. Our vision is making lives better by being the best supplier we can be in the products we make and the services we provide. Our mission is basically to take care of our people, our customers, our communities, and our stakeholders, lenders and shareholders. Our 10 guiding principles represent the way we approach our business. Our culture, depicted on this slide, is a standard picture for us in all our internal and external presentations. Our sustainability and success, we believe, comes down to culture. As leaders, we are the chief culture officers of the companies. Living our vision is at the core of the future. Our culture, especially as we have cultivated it more and more over the past few years, is a sustainable competitive advantage. To us, the Golden Rule means treating people the way you want to be treated. We do this regardless of formulaic DEI programs or ESG mandates that may be popular one day and less popular the next. The Golden Rule covers dignity and respect. It covers teamwork. It covers integrity and truth. It covers diversity, equity, and inclusion. It covers ESG. It covers good leadership. It helps us to be a great company. Your people have to trust you to lead them this way, to trust that you care for them. Leadership is stewardship. Progress travels at the speed of trust. In brief, we believe we work in a pretty special company, and we think our people believe that too. We work every day with purpose, serving our constituencies to the best of our abilities and taking care of our own Now, let's look at some of the other highlights of 2023. In many ways, our predictions for 2023 made early last year held true for the most part. We did experience a UAW strike in the fall of 2023 that had some short-term negative effects on second-half numbers, but the strike is over now. We saw some major geopolitical headwinds, some expected, such as the continuing Ukraine-Russia conflict with its challenges for Europe, and more trade issues involving China and some others, but also some unexpected, such as the situation in the Middle East. Despite these challenges, 2023 was a very good year with many improvements from 2022. Here are some of the highlights of 2023. A fuller description is found in our annual information form, our 2023 sustainability report, and our various year-end releases, including our latest investor presentation. We generated a record level of adjusted EBITDA of $616.7 million in 2023. This operating cash flow also translated into free cash flow for the year of approximately $195.4 million, most of it generated in the second half of the year, a new free cash flow record for our company. Fred will go into some detail. We recorded record revenues of $5.34 billion in an increase of 12.2% from 2022. We saw increased revenues from some of our key programs, but we have also launched a lot of new business over the last three years that is driving some of the growth. We've experienced huge revenue growth over that period. Our revenue increase is well over a billion dollars annually. The increase alone would make the top 100 list of top suppliers in the North American auto parts industry, according to Automotive News. Our number of employees grew to approximately 19,000 and went up approximately 3.3% from 2022 relative to a year-over-year revenue increase of 12.2%. We saw continued growth in operating margins in 2023. Year-over-year, adjusted operating income margin grew from 4.8% in 2022 to 5.6% in 2023, even with the UAW strike impact. Fred and Pat will talk to margins. Our 2023 fully diluted net earnings per share of $2.22 adjusted, or $1.93 unadjusted, was higher than the $1.76 adjusted and the $1.65 unadjusted in 2022. Our balance sheet improved year over year, ending 2023 with a net debt to adjusted EBITDA ratio excluding IFRS 16, of 1.4 to 1, the best it has been since before the pandemic, and comfortably within our target range of 1.5 to 1 or better. We maintained our dividends to our shareholders in 2023. We did not reduce dividend payments during the pandemic. We returned capital to shareholders, repurchasing approximately 2.3 million common shares under a normal course issuer bid, at a cost of approximately $29.1 million, all while strengthening our balance sheet. Quality is important to us and our customers. Many of our products are safety parts, and we won a number of quality awards in many of our plants again this year. We continue to invest in the business, given our backlog of new business. Having said that, cash capex returned to a more normal level in 2023, below depreciation and amortization expense for the year. We note that in the past four years, we have spent over a billion and a quarter dollars on CapEx, the highest for a four-year period in our history. But the majority of the spend was to launch work we had won. We did not slow down our investment activity during the pandemic, and that is a primary reason we are coming out of it with significantly higher revenues. Not many automotive parts suppliers have a similar experience. We do not believe in perfect launches. We believe in better ones each time. We had many good ones. Not only have we grown our business, we have significant content on the vehicles our customers are making, electric, hybrid, or ICE. Our portfolio is matching what the industry is making. Our lightweighting technologies are precisely what our industry needs regardless of propulsion type. We continue to both utilize and invest in leading-edge technologies in our regular operations and through Martin Ray Innovation Development, or MIND, We have investments in graphene and graphene-enhanced batteries through our NanoExplorer relationship, aluminum air battery technology through Alumapower, and several other new technologies, such as Afenco using ultracapacitor technology. We program and use our own software and have established a separate internal group called MindCan to develop it and sell it to interested third parties. We believe sustainable companies with a great culture will be around for a long time. Pat will talk more about sustainability in his remarks. We have a solid foundation. As we look to 2024 and beyond, we do so with confidence. Our future is great. We look forward to sharing it with you. And now here's Pat.
spk14: Thanks, Rob. Good evening, everyone. As noted in our press release, we generate an adjusted net earnings per share of 37 cents and an adjusted EBITDA of $140 million in the fourth quarter. Adjusted operating income margin came in at 4.4% on production sales that were just under $1.2 billion, which was basically flat year over year but down quarter over quarter. We faced some challenges in the quarter that resulted in lower operating income margin compared to Q3, First, volumes were lowered due to the UAW strike that impacted multiple plants at General Motors, Ford, and Stellantis. We flexed costs where we could to mitigate the impact. This was somewhat challenging given the tight labor market we are operating in. The strike clearly lowered production volumes and, by extension, our margin profile for the quarter. Second, I said on our previous call that we have been fortunate to not have really experienced any significant disruptions with our own supply base over the last three years. Unfortunately, I spoke too soon. We experienced a rather significant disruption with one of our suppliers during the quarter, which resulted in premium costs at an approximately 70 basis point impact on our Q4 consolidated operating income margin. Over the past three years, we've been able to mitigate disruptions coming from our supply base, This one slipped past the goalie. The good news here is we were able to protect our customers, albeit at a cost. The issue has now been resolved, so we do not expect to see an impact in Q1. On a really positive note, our free cash flow performance was exceptional, coming in at $120 million in the fourth quarter and $195 million for the full year of 2023. As we have indicated on past calls, tooling sales have been elevated this year. We collected a nice amount of tooling money in the quarter, contributing to our strong free cash flow performance. Some of this was timing related. Notwithstanding, this is a really good result for us. We've been seeing that 2023 was going to be a breakout year for us from a free cash flow perspective, and that's exactly what happened. I am really proud of the people and all the hard work they have done to make this happen. Our adjusted operating income margin for 2023 came in at 5.6%, consistent with the guidance we provided on the last call that it would likely fall short of 6%, though it would still be close, absent of the Tier 2 supply disruptions and the UAW strike we encountered during the quarter. Looking forward, there are some notable positives. The UAW strike is behind us. The supplier disruption we experienced in Q4 is behind us. Vehicle demand is still high and inventories are still below pre-pandemic levels. While EV softness and higher interest rates are likely to result in a relatively flat year-over-year industry production volume profile, we expect 2024 will be another good year with steady production sales, strong positive free cash flow, and Fred will talk about this more in his 2024 outlook in his remarks. Turning to our operations, we continue to make steady progress. The industry headwinds we've been dealing with since the pandemic, from supply shortages, inflationary cost pressures, and tight labor market conditions, are making steady improvement, and we're finding new opportunities to drive efficiencies and reduce costs through our Martin Rea operating system. Adjusting for the impact of the strike, the production environment remains generally stable in North America. As we indicated on previous calls, volumes have been weaker and below planned levels in Europe and China, and that continued to be the case. We restructured some operations in Germany during the quarter and closed a small facility in Canada, which was aimed at matching our cost structure to anticipated OEM programs and volume levels. This resulted in a restructuring and impairment charges of $28 million, with the vast majority of that being incurred in Germany. Our efforts to offset inflationary cost pressures as well as volume shortfalls on certain programs through the commercial negotiations with customers continued and we're happy with the progress. Overall, commercial activity was a bit more weighted in North America in the fourth quarter with lower level of settlements in Europe compared to Q3. As we have talked about many times, commercial settlements can create unevenness quarter to quarter and therefore, our operating performance is best looked at over long time periods. Commercial negotiations will continue to be part of our business in 2024. In addition to addressing inflationary cost pressures, we will also continue to address new program volume shortfalls, including lower than planned volumes on electric vehicle platforms, which has become a significant issue in our industry, and one that we predicted, as you may recall. Overall, we're well positioned on our EV book of business, owing to our disciplined approach to quoting on these programs. In certain cases, we've managed to mitigate some of the risks through complex contracts, which includes features such as upfront capital payments with minimum volume commitments where risk is higher, but not necessarily everywhere. Generally, we've attempted to align ourselves with platforms that we believe will have the greatest potential for success over the long term, There is a slide in our investor presentation showing the EV programs that we have content on. Overall, we continue to feel good about the long-term prospects of electric vehicles over time. However, to date, current volumes are coming in well below where they were originally projected to be by now. When you're looking at IHS and other data providers to see how the volumes are trending, they are running at less than half of plan levels in many cases. Again, this is an industry-wide issue, so we don't believe we are unique in this regard, but it's resulting in some underabsorption of overhead costs and other inefficiencies, which is likely to persist until issues that are preventing wider adoption of EVs, such as price and charging infrastructure, have progressed. In the meantime, We will need to address the gap and we'll be seeking to offset a portion of these excess costs with our customers. And this will be an area of focus of our commercial activity in 2024. Longer term, we believe we are in great shape as we are relatively propulsion agnostic and lower EV sales implies higher ice sales until the EV transition gains momentum at some point in the future. Moving on, I'm pleased to announce that we have been awarded new business worth $75 million in annualized sales at mature volumes, consisting of $65 million in lightweight structures commercial group, including various structural components with General Motors, BMW, and Nissan, along with other customers, and $10 million in our propulsion systems group with Eaton and Volvo Truck. In addition, we were awarded replacement business worth $375 million in sales at mature volumes on GM's light-duty truck platform, the T1XX-2, which benefits both our lightweight structures and propulsion systems groups. In reference to Rob's earlier comments, I'd like to take a moment and talk about some of the achievements we have made in our sustainability initiatives over the last year. We encourage you to read our 2023 sustainability report for more detailed description of our sustainability journey and how we are making a difference for our people as well as our communities in which we operate. Here are a few key highlights. Carbon intensity has reduced by 32% since our 2019 baseline. Energy intensity has reduced 23% since our 2019 baseline. Approximately 36% of our electricity usage globally is obtained through utility grids using varying percentages of renewable energy sources. We also installed on-site solar panels in facilities to help power plants with renewable energy. Next, in 2022, we set a target to reduce our carbon emissions by 35% by 2035 without the use of carbon credits. We are working on reaching that goal. Lastly, the Diversity Committee, led by me personally, formed additional subcommittees to focus on mental health, called Minds Matter. Women at Martin Rea focused on women in manufacturing and young professionals. In 2023, Martin Rea was the Center for Automotive Diversity, Inclusion, and Advancement Impact Award winner of Systemic Change, and the winner of Leadership Commitment for Advancing Diversity, Equity, and Inclusion. We think that's pretty cool. In closing, the challenges we faced in Q4 were centered on two events that we see as isolated, and hence, we remain very constructive on the year ahead. We are managing well operationally, and I would like to thank the entire Martin Rea team for their hard work and dedication. With that, I'll pass it to Fred.
spk17: Thanks, Pat. And good evening, everyone. As Pat mentioned, we faced some challenges in the fourth quarter that impacted our operating income margin. The good news is the OEW strike and supplier issue that Pat spoke about are behind us, and as such, we expect better results in the first quarter. Notably, and despite these Q4 headwinds, we generated record-free cash flow in the fourth quarter and for the full year of 2023. which allowed us to materially reduce our net debt and further improve our leverage ratio. Taking a closer look at the results quarter-by-quarter, we generated adjusted operating income of $56.6 million, which was down from $83 million in the third quarter, on production sales that were down by about 7% quarter-by-quarter. Note that adjusted operating income excludes $28.2 million in restructuring and impairment charges that Pat referenced earlier. We may see some additional restructuring costs in Q1 to round out the activity, but it will be at a substantially lower level, nowhere near what we saw in Q4. The strike impacting select plants of the Detroit 3 OEMs reduced production sales by approximately $50 million, with the vast majority of the impact taking place in the fourth quarter. Adjusting for the impact of the strike, production sales would have been down a more modest 3%, reflecting some typical seasonality in the quarter. Tooling sales were similar quarter-by-quarter. As noted on the last call, tooling sales were elevated in 2023, in part due to upfront capital payments from customers on certain programs and other volume-up requests from OEMs, which gets treated as tooling sales as per IFRS standards. We expect a more normal year of tooling sales in 2024. Adjusted operating income margin came in at 4.4%. which is down 160 basis points from the 6% we earned in Q3. Breaking it down, approximately 70 basis points of the quarter-to-quarter delta is due to the supplier issues, as Pat noted, and which is now behind us. The remaining delta is generally explained by normal decremental margins on the lower quarter-to-quarter production sales, largely driven by the UW strike, also now behind us. Moving on, Adjusted net earnings per share came in at 37 cents in the quarter, which is below the 68 cents generated in Q3, due to the same factors affecting adjusted operating income, as well as a $1.3 million net foreign exchange loss in the fourth quarter versus a $7.1 million gain in the prior quarter, which falls below operating income. Free cash flow came in at $119.9 million in the third quarter and $195.4 million for the full year of 2023, a record level for our company. As Pat noted, we experienced a nice inflow from tooling-related working capital during the quarter, which contributed to our free cash flow. Again, some of this is timing-related. Notwithstanding, if you were to assume end-of-year tooling-related working capital at roughly 2022 levels, we still would have exceeded the low end of our 23 free cash flow outlook of $150 to $200 million, which is better than what we were expecting at the time of our last call. I'm extremely proud of the hard work our team has done to make this happen. Looking at our performance on a year-over-year basis, fourth quarter adjusted operating income of $56.6 million was down 19.7% over Q4 of 2022 on production sales that were about flat. and our adjusted operating income margin of 4.4% was down 110 basis points from the 5.5% we generated in Q4 of last year. Again, the Tier 2 supplier disruption accounted for 70 basis points with the impact, with the remainder mainly reflecting our geographic sales mix. That is, the impact of decremental margins on lost sales in our higher-margin North American business, which is due to the strike, along with higher sales in our lower-margin European segment. Turning to our balance sheet, strong free cash will enable us to reduce our net debt, excluding IFRS 16 lease liabilities, by $107 million quarter-to-quarter to $782 million. We continue to make great progress on deleveraging, and this includes spending roughly $8 million buying back approximately 650,000 shares during the quarter through our normal course issuer bid. Our net debt-to-adjusted EBITDA ratio continued its downward trend and in the quarter 1.4 times, down from 1.56 times at the end of Q3 of 2023 and 1.71 times at the end of Q2 of 2023. Our leverage ratio now sits comfortably within our long-term target range of 1.5 times or better. Subsequent to the fourth quarter, we amended our lending agreements, extending the maturity of both our Canadian and U.S. dollar banking facilities out to 2027 and obtaining an additional $100 million in borrowing capacity. Pricing terms are generally similar to the previous agreements, which is a noticeable achievement given the current interest rate and credit market environment. This is a testament to the strong relationships we have with our lenders. We can't thank them enough for their ongoing support. Turning to our 2024 outlook, As Pat noted, we expect our results to improve over the fourth quarter as the disruptions that affected us in Q4, namely the UAW strike and supplier disruption, are behind us. Having said that, most industry forecasters are currently calling for a relatively flat production volume environment in 2024 in both North America and Europe, our two main operating regions. The slower-than-expected ramp-up in electric vehicle programs and higher market interest rates are likely contributing to this view. As such, it stands to reason that our production sales are also likely to be relatively flat in 2024. As noted, our tooling sales were elevated in 2023, and we expect that to normalize this year. Putting it all together, we expect total sales to be between $5 to $5.3 billion in 2024. Looking at our adjusted operating income margin and understanding that Q4 was a bit of an anomaly, We've stated on previous calls that given the fact that our operations are performing at a high level, future margin expansion will primarily be a function of volumes. Since we expect minimal volume growth in 2024, margin expansion is likely to be similar. With that in mind, we expect adjusted operating income margin to increase year-over-year and fall in the range of 5.7% to 6.2% for 2024. Moving on, we expect free cash flow of $100 million to $150 million this year. This reflects our sales and margin expectations, as well as projected capex of approximately $340 million, which is expected to be generally in line with depreciation and amortization expense for the year. The projected free cash flow is obviously lower than what we had generated in 2023, reflecting higher capex, in part due to the timing of certain capital expenditures that were planned for 2023 following into 2024. and an assumed reduction in positive tooling-related working capital flows, given that we expect a more normal level of activity this year. Notwithstanding, this represents a very healthy level of free cash flow for our business. Also expect the free cash flow quarterly pattern in 2024 to be similar to 2023, where it generated the bulk of our free cash flow during the second half of the year. Looking forward, we expect to hold our own both financially and operationally in a production environment that, while not growing, is expected to remain stable. We continue to perform at a high level. Our balance sheet is in great shape. We are delivering on our free cash flow promises and executing on our cap allocation priorities. To our shareholders and all of our stakeholders, thank you for your continued support. With that, I'll now turn you back over to Pat.
spk14: Thanks, Fred. On a final note related to capital allocation, our views are provided in an investor note on our website. However, we intend to talk about it on each call. In Q4, we generated approximately $193 million in cash from operations, and here's how we allocated it. First, capital expenditures were about $73 million. As we've always said, we invest in the business first. We need a strong core to And as we've discussed, our investments have to meet certain hurdle rates on new or replacement business. We also paid down debt, as Fred noted, with a net debt of $107 million lower quarter over quarter. So we strengthened our balance sheet. A strong balance sheet is an advantage in this industry where we have seen a lot of supplier distress over the years. Customers don't want to worry about the credit worthiness of a supply base. This is especially important given the combination of geopolitical events, strikes, interest rate pressures, and other factors that have increased stress on the supply base as a whole. We paid our usual dividend to our shareholders, approximately $4 million or $16 million over an annualized basis, providing our shareholders with positive return on their investment. Finally, we purchased 650,000 shares for cancellation of under our normal course issuer bid. Total cash spent was approximately $8 million. At our enterprise value to EBITDA multiple, which is near a historic low, we believe an investment in our own company is 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 9 million shares, which is more than 10% of the company. We all recall there was a pandemic and a few other negative things that occurred during this time frame. We paused repurchases when the UAW strike hit, which we felt was prudent. Repurchases under our normal course issuer bid continued in Q4 after ratification of the UAW agreements. We intend to buy back more stock in the next month and renew our NCIB for another year. We also continue to look 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. And we anticipate with our positive free cash flow profile, which we believe will occur on a regular basis each year, we will have greater flexibility to deploy cash in the best interests of the company. Finally, once again, a big thank you to our people. This is a challenging business in a challenging world, and we continue to deliver. Thank you for your dedication every day. So now it's time for questions. We see we have shareholders, analysts, employees, and even some competitors on the phone. So we may have to be a little careful with our answers. but we'll answer what we can. And thank you for calling in.
spk27: Thank you. We will now take questions from the telephone lines. If you have a question using a speakerphone, please lift your handset before making your selection. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a pause while participants register for questions. Thank you for your patience. First question is from David Ocampo from Cormac Securities. Your line is open. Go ahead.
spk04: Thanks. Good evening, gentlemen.
spk00: Good evening.
spk04: Just on your margin guidance for 2024, I mean, it's still quite a ways from your pre-pandemic levels when you guys were marching on to 8 plus percent. I know there's inflationary factors that kind of impact the number, but just curious where you think margins go over the medium to long term and what are the factors that are going to get you there? you know, return of light vehicle production of 17 million in North America and Europe normalizing, just any color on that would be great.
spk17: Yeah, obviously volume would be beneficial. I mean, at these levels, we're doing pretty well, but we're obviously not back at those levels pre-pandemic and so forth. So volume is a factor. We've made it clear as well in these inflationary cost pressures, we're not recovering 100% in most cases, right? So that's you know, a drag and it'll continue to be a drag for a period of time until we kind of get into next-gen programs. And then operationally, you know, I think Pat noted we're performing well generally over, you know, our plant portfolio. There's always opportunities there, so we're going to continue to push the monitoring operating system and to drive more efficiencies in the operations. I think the one major headwind that, you know, I think the industry is going to face in the short to medium term right now is the CV transition and what's going to happen with volumes and mix and so forth Clearly, volumes aren't meeting expectations on the EV front in the moment, and I don't think that's going to change in the short term. In longer term, that transition will happen and the volume will come. But the impact on margins and how the industry is going to deal with that over the next couple of years is a bit of a question mark and will kind of weigh on margins, I think, for a period of time until that gets resolved.
spk14: And I think the inflationary costs, you know, that's going to take some time. Some of those adjustments won't be made until we launch a new product. I mean, we'll improve on them, of course, but it's not going to happen overnight, as Fred talked about. I do think there's still a lot of opportunity in our operation. We made tremendous progress, but there's still more there, and we're going to focus a lot of attention on it in the meantime.
spk04: And, Pat, I think you called it up. trying to seek some commercial renegotiations, maybe for the EV side of it in 2024. Curious if you're including that in any of your margin guidance for 2024, or should we view that as upside?
spk17: No, we've factored that in. I mean, the last couple of years, commercial activity has been a big priority for us at the forefront of activity and so forth. And we just see that continuing and it's a necessity. Unfortunately, some of the deals we've cut are not baked into piece prices, so the OEMs are forcing us to come back and renegotiate on a quarterly, semi-annual basis to get that in. So those discussions will continue, and it's factored into our numbers.
spk04: Got it. And then last one, just the restructuring that you guys did in the quarter, what kind of payback should we expect on that $27 million? It sounds like there's going to be a little bit more in Q1. And just the timing of that payback, is it 24 where you guys start to reap the benefits, or maybe you get the $27 million back in over two years?
spk17: The bulk of that in the fourth quarter was in Germany, and the workforce there, for the most part, that headcount would be reduced by the end of the first quarter. So we're going to go into the remainder of the year with that lower cost base. You know, it's pretty expensive to let go people in Western Europe, in Germany in particular. So, you know, the paybacks there are probably a little higher than we normally see in North America. But, you know, one to one and a half years is generally a rule of thumb. And, you know, the numbers kind of suggest that in this case as well.
spk03: Okay, that's perfect. I'll hop back in the queue. Thanks, guys.
spk27: Thank you. The next question is from Tammy Chan from BMO Capital Markets. Your line is open. Go ahead.
spk24: Hi. Thanks for the question. I wanted to go back to your margin guidance for this year. And coming at it a different way is with industry production currently expected to be flattish and the EV headwind, what is baked into your expectations i.e., what would have to unfold for you to achieve that higher end of the margin guide? Because that would be 60 basis points, I think, of your re-improvement, which could be seen as a bit high given the industry backdrop we're in right now.
spk17: Well, I think the way I would maybe answer that is it's somewhat up from 23% and 23% We had the UAW strike, which we don't expect will, you know, some event will occur. Then we also had in the fourth quarter a supplier event, which is behind us, right? So, you know, you take that out, I think, you know, your baseline is somewhat higher. So I'm not sure you're too far off from the high end of the range, but there is a bit of a band there, and obviously, you know, mix in the EV versus ICE volume portfolio over the next little while is a little uncertain. So we kind of, you know, left some room there and some – Some, you know, range there in terms of where we can land. But overall, I don't see the high end of the range as too much of a stretch, assuming the volume is there.
spk20: Yeah, we're in February. I'll be the end of February. And a lot of things can happen in the year, but they aren't all negative. There are some good things, too. Plus, Pat talked about the improvement in operations.
spk14: Right-side operations is always an opportunity. And we're not sitting still on our material costs. I mean, we're not going to rely 100% on recovery. We're doing things on our own to reduce those costs as well. So it's a combination of things coming into play that could certainly affect a better number, if you will. But, you know, that'll take time to put in place.
spk24: Right. Okay. After a point on the items in Q4. Okay. Okay. And when you talk about volume is below plan in Europe and China, I think industry in Europe is flat. China is growing. Is it a mixed issue for you? I'm just curious how you think about these two segments going forward and the strategy here. Or is it something to do with your exposure to EVs there that's causing the volume being below plan?
spk14: Yeah, certainly, you know, we moved quicker like many others in Europe on EVs, and they're not hitting the numbers either, similar to North America. So some of that is due to that exposure. So definitely mix is playing a role in it. You know, the example in Germany is, you know, one program runs out, and some of the programs are waiting on the head volume of some of the EVs. So it definitely is having an impact.
spk20: And just with respect to China, we have a very modest footprint there. We had four plants, two closed as expected, two metallic plants that we acquired from a Tulsa in the acquisition that came with the acquisition. We knew we were going to run out of work. They ran out of work in 2023. So we're down to two plants, a fluids plant, which is quite small, and an aluminum plant. So China overall volumes is not really a big factor. And our revenue is one way or the other, where it goes up or down or stays sideways.
spk15: Thank you.
spk27: Thank you. The next question is from Krista Friesen from CIBC. Your line is open. Go ahead.
spk26: Hi. Thanks for taking my question. Maybe just to follow up on your comment on free cash flow priorities, can you speak to if you're seeing anything kind of in the M&A environment and if that's becoming more attractive for you given where your leverage ratio is now?
spk20: I think the short answer is yes. I think it's, you know, in the context of how we look at things, a few things. Strategic investments, we see some opportunities in some new technologies. Nano Explorer was an example in that. We still believe in graphene. And we're seeing some of those. And one of the interesting things, and also in our MIND initiative, is the number of people who approach us because of our operational expertise and our strategic investments. strategic partner expertise. We're seeing opportunities to effectively deploy our capital, but also our people and improve our technology partnerships in that sense. Back to your real focus in the context of M&A, there are a number of suppliers under pressure. The last three years in the pandemic led them to probably have weaker balance sheets in some ways. A lot of people have more debt. A lot of people are a little more stretched. It's a tough market out there. We thrive in tough markets because there are opportunities. Now, some of those opportunities may come from just quoting work and saying, you know, a supplier with a strong balance sheet has a tremendous opportunity to ensure that, you know, we can provide product on time and all that type of stuff. And customers do look at that. They do look at the stability of the supply base. We're a very strong supplier in all the markets that we are. But at the same time, we do get a lot of teasers and inquiries and, you know, are you looking and so forth. We have powder on the balance sheet, and that's not a bad thing to have. We also have a very good banking relationship. We also have a very good banking relationship. You know, today's environment, in order to extend – extend a syndicate, which is quite large, $1.3 billion in capacity, with good terms, with strong banks, gives you flexibility there, too. So we like that.
spk26: Is there a particular geographic area that you would look to focus in on, or are you kind of open to all opportunities?
spk20: Probably not China, probably not Antarctica. Africa, I don't know. We have a plant in Africa. I think North America is a good place for us. We really like the USMCA. We like our positioning. Europe has its challenges. We think it's got its broad geopolitical challenges and the Russia-Ukraine war and EV turnout and all that type of stuff are challenges. I think, we think, Europe less likely unless it's compelling.
spk14: It's got to be the right type of situation, including what can it add to our story relative to lightweighting and so forth. Does it make sense from a product point of view and from the footprint point of view? So something we certainly would study a lot more before we jump in. Yeah, absolutely.
spk26: Sure. And then maybe just I'm wondering if you're kind of seeing anything on any of your programs. Obviously, inventory is still historically low, but there appears to be still a bit of a mixed issue with inventory kind of closer to more normalized levels on pickups, for example, but not at normal levels on other platforms. Are you hearing anything from the OEMs in terms of kind of slowing down on certain programs and ramping up on others?
spk14: We haven't, we actually, you know, to some extent would have expected some things to slow a little bit, but they haven't. Others had, as you know, especially when it comes to, again, EVs. But, you know, you're also seeing some of the customers are starting to get ready to throw some money on the hood, which could actually spur production somewhat. But the volume has been pretty steady of our ICE vehicles in particular, and trucks have done well. Funny enough, in Europe, some of the products that are actually doing very well are engine blocks, which is a surprise at this stage of the game. We're not seeing, again, other than EVs, not seeing anything that we see as a signal of a slowdown at all. And some of the vehicles that, frankly, hadn't been selling or, I should say, been produced, a couple of years ago, are actually in pretty high production now. And a lot of that was due to chip shortages and moving the chip shortages or the chips to higher profitable vehicles. Now that they're more plentiful, you're seeing some of the smaller vehicles and so forth start to pick up the pace again.
spk20: From a broad perspective, we think North America is in pretty healthy shape. If you look at the past 12 calls or whatever, we said we thought the U.S. was in strong economic shape wasn't going to have a recession. We think we're right on that. We would say that a potential tailwind for later in the year is interest rates. We do think they're at a level that they're probably tempering sales to some extent. Not a lot, but I think a number of people are perhaps waiting with their purchases until the weather's better and pricing may be better too because of interest rates. So I think we're like everyone else, thinking that rates will come down at some point. Not sure when they'll start and how fast they'll come down.
spk14: In my experience, once one OEM starts putting, you know, I would say significant amounts of money on the hood, not because it's end of year, but because they want to sell more, there tends to be others that follow. So I think it could be very interesting.
spk25: Great. Thank you for the color. I'll jump back in the queue.
spk27: Thank you. The next question is from Michael Glenn from Raymond James. Your line is open. Go ahead.
spk02: Hey. Just on the supplier disruption that you guys had, I know you probably can't give all the details, but I'm just curious. Why did the expense of this disruption fall onto your P&L and not the OEM?
spk14: Well, it's our supplier, first off. And there's directed suppliers and then suppliers that are your choice. And this is one of our longtime suppliers. They actually had a subsupplier issue with material. And so there was a stretch of time where the material wasn't available, which caused downtime internal to our supplier. Then we had logistics issues due to weather and so forth that compounded it. We're not talking about, you know, weeks and weeks of not having material, but it's a high level of material that, you know, has pretty high volume. And missing it by, you know, a few days to half a week can be pretty significant in our business.
spk17: And I mean, the end result is we fell behind, you know, expedites, internal premium costs and so forth. We did protect the customer, although it did come at a cost. But as we noted in our opening remarks, the issue is behind us. We've got to move on from it. It's not always the customer's fault.
spk14: Like I said in my speech, these disruptions have been happening in the supply base for three years continuously. And we've been particularly fortunate, and our SEO team has done an excellent job, of assuring we didn't have this type of disruption. This really is the first one of any significance that we've dealt with, which, frankly, given the supply base and the issues that have been out there, it's pretty damn good in my book. It's just unfortunate. And it's behind us.
spk02: Behind being it ended in Q – this was all contained in Q4, to be clear?
spk09: Yeah. Yeah, it was all contained. All contained.
spk02: Okay. And – With the outlook, and Rob, you talk about there being a number of suppliers being under pressure. Is there potential, like this type of situation of a supplier being unable to give you the material that you need, is this something that is of increasing risk as we think about 2024?
spk20: it's a two-sided coin. So, and if you look at, say, auto news or whatever, there is a view that a number of suppliers are going to use this year to strengthen their balance sheets, right? They're going to, with consistent volumes and everything else, there are going to be some suppliers that have some challenges. Our focus typically is on our competitors and our discussions with our customers are, we're here, we can do this, you know, we can effectively put up new lines for you, et cetera. And, you know, we're not going to come back for a price increase because we've got real financial challenges. This is something, you know, just we always try to show you how we think. But, you know, since we started 22 years ago, 23, 22 and a half years ago now, this has been consistently one of our modus operandi, which is basically understand where your competitors are and so forth. And if you can provide a customer solution, and when they'll work because of your situation, location, abilities, strength of balance sheet, great. But sometimes the customers look to you to actually help in a context when sometimes the best help is taking over a supplier or some business or even in certain cases that we're finding, helping other potential suppliers.
spk14: So we tend to look more toward other tier one know in our interest not so much the tier two so our supply base in particular I'm not going to say there's any significant interest out there there might be at some point but you know the financial concerns of our suppliers especially our big ones like the one we were talking about earlier their volumes are good and I'm not concerned But as Rob said, in the tier one side, sometimes the customer, and we have been approached over the last three years by customers asking us to take a look at different assets that are in trouble that we could take over. But it's got to make sense for us at the end of the day. And the last few years, it hasn't made sense, so we didn't approach it.
spk20: I would say this. We talk about culture a lot. You guys never write about it. But we have other people on the phone. It is a difference. We've taken over poorly performing suppliers, and we bring a different way of doing things operationally and on the floor. And that is something that provides opportunity for us. Customers know that. Customers know that they can rely on us. And in some of these situations, we get asked to come in. often by the owner or some of the owners of the competitors and so forth. And I'm not just talking about public competitors. There's private competitors as well, some of which you don't and some of which you don't. But that's the nature of our business. I would say we are extremely well poised coming out of 2023 with the strength of our balance sheet, free cash flow, all the things we're talking about, to take advantage of those types of opportunities to help our customers. And if we can help our customers, a lot of good things happen. And that also translates on the commercial discussions that we may have, the winning of new work, the trade-offs and everything else. These are all arrows in our quiver that we use really well.
spk02: Okay. And, you know, if I think of M&A, it's, I can't, you know, for me, M&A and auto parts is like the history of M&A and auto parts is there's a lot of situations that have struggled. If you do something now, are the level of guarantees that you get from your customer going to be different than they were in the past?
spk14: Say for us to do it, they would need to be probably to some extent. And Rob touched on it very well. Commercial settlements, work, future business growth, all those things would be key. Certainly, with the way the supply base is today versus 20 years ago, the deal you would want to make would be different, certainly, than it was 20 years ago. There's less suppliers out there, and there's less places for the OEMs to go to to get people to take over, frankly. You might be a little more picky.
spk20: Just on the M&A, just so people don't say, hey, we're really in the hunt or whatever, You know, we've been pretty good at M&A. We've been pretty good at getting distressed situations and turning them around. We recognize it takes time. We think we're better than most at that. But, you know, of the 10 or 11 or 12 acquisitions we've done in 22 years, we've turned down 1,000. So we're pretty particular, and it's got to fit. So, you know, in the meantime, as we said, We've got some cash. We think a good investment is ourselves. We want to buy back some more stock. We've, you know, been, I think, buying back 10%, more than 10% of our company in the last five years with three years kind of a write-off because of the pandemic has been pretty good as well. So, you know, we're just here to run a business in the right way and deploy our capital in the best way. And, you know, what we talk about today could change a week from now. And that's why we just basically... illustrate for you how we approach these things.
spk30: Okay. Thank you. You're welcome.
spk27: Thank you. Once again, please press star 1 on your device's keypad if you have a question. The next question is from Brian Morrison from TD Securities. Your line is open. Go ahead.
spk07: Thanks very much. Hey, Fred, can you just talk to me about how you view the cadence of your margins as you go throughout the year?
spk17: That's a good question. I mean, we model it out, obviously, based on, you know, IHS volumes of sulfur. That's how we budget. And what that suggestion is, is you're going to get back to maybe a more typical seasonality in the industry, right? So, you know, better in the front half, maybe weaker in the back half. But I'm somewhat skeptical on whether that happens or not, because I think there's still some volatility, you know, mix and so forth. And, you know, if interest rates start decreasing later in the year and incentives, you know, the OEMs and so forth. So I'm not convinced it will necessarily play out that way. But, you know, if you, you know, review the, you know, forecasters out there, that's kind of how they're modeling it. But, you know, it may not happen that way. But, you know, front half may be stronger than the back half. But, you know, the seasonality may not play out as expected. And what is... Yeah. Yeah.
spk06: What is the North American production volume assumed in your forecast?
spk17: So we rely on IHS, so they're forecasting 15.7, I think, at this point. Okay. So relatively flat year over year. Okay. And I'm sorry.
spk07: Gotcha. I'm sorry. I missed what you said about the EV costs and how they'll weigh on the pressure on your margin. Can you just give us some sort of ballpark, like what that – impact could be? Because I look at your margin guide and you start at five, six, and you get sort of 20, 25 basis points from tooling. You get 15 to 20 from your tier two improvement. You get 15 to 20 from your strike. So you're at the high end of your margin guide. What are the offsets that bring you back down?
spk17: Well, what you have, and this is again, an industry thing. So, you know, suppliers have made investments in EV platforms and, So those assets are coming online, that depreciation is coming online, that overhead is coming online. And now that we're in production, those volumes are nowhere near what we modeled the expectation at. So you got that extra cost without the extra sales until you start hitting those planned levels. So we're not unique in that. I think you're going to see that in a number of different suppliers and peers. So, you know, you're going to see a higher depreciation rate from us going forward because these assets are coming online, and unfortunately, the bombs aren't hitting yet, right? And not just depreciation. I also got overhead tied to these platforms.
spk20: So here's a simple way, a simple guy like I understand. So let's say you got a factory. It's 50% EV, 50% ice. And the ice volume comes along just fine, so that half of the factory is, you know, running at optimal levels. On the EV, let's say they sell 40% of what the plant volume is. And so that half of the plant is running at the low capacity with the overheads and stuff that Fred said. And let's say even you have higher ice production, you can't take, for the products we make, to a certain extent, the EV line production and put it over to ice, right? So you have a plant that's not running optimally. And we have 56 plants and a lot of them have some EV production in their plants. And so the reality is that a lot of plants aren't running as optimally as we would like them to be. And that is the industry issue for everybody.
spk14: Part of the complexity is that, you know, if the EV launched at a lower level that stayed steady week after week, day after day, it would be helpful. We would still have the issue that Fred described, but it would be better. The problem is what we're seeing in the moment is the customer plant will go down for a month or two and then come back up. And so you have to have some semblance of a workforce there to produce. You can't have them all there. So those costs are very hard to flex. You know, we're getting better at it as these things smooth out, but with the lack of volume, it's compounded the problem some.
spk07: So I understand and I appreciate the concept, but I'm wondering how much margin pressure you've baked into your forecast from this.
spk19: How can I tell you that?
spk14: Nice try. It's very difficult to say, given the fluctuation.
spk07: Well, I ask because there's going to be a wide range of estimates that come out tomorrow based on that. So just lastly, on your free cash flow, you talk about how strong it is and how cheap you are. Instead of the M&A discussion, why are we not looking at an aggressive NCIB or even potentially an SIB?
spk20: Well, you know, someone mentions M&A and everyone, it's like, you know, a fountain. M&A, as we've said, we're very selective on M&A. It's nice to have powder and so forth. I think that we said we'll be buying on our NCIB and we'll renew our NCIB and, you know, Buying 10% over five years is actually a pretty good one, and three of those years you're not buying. I think that's important. I think a strong balance sheet is important, and our target was 1.5 to 1 or better, and we're there. But that doesn't mean as soon as you're at 1.4, you jump up to 1.5 again.
spk14: I think it's important that there's not something that we're ready to select on the menu. at the moment in M&A. It's just that we're, if the menu's there and it looks attractive, we're in a position now where we could look, but we're not in that spot at the moment.
spk07: Yeah, the only reason I ask is you mentioned that your free cash flow is going to be $100 to $150 million this year, and you're trading at three times EBITDA.
spk20: Yeah, you're right, you're right, you're right. You know, some guys are at higher multiples because they've managed to lower their EBIT today, so...
spk28: Thank you very much.
spk27: Thank you. There are no further questions registered at this time. I would like now to turn the meeting back over to Mr. Will DeBoer.
spk20: Well, thanks, everyone. I really appreciate you taking some time this evening. If any of you have further questions or would like to discuss any issues concerning our company, please feel free to contact any of us or Neil Forrester is on the press release. And have a great evening.
spk27: Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation. you Good afternoon, ladies and gentlemen. Welcome to the Martin Rea International Fourth Quarter Results Conference Call. Instructions for submitting questions will be provided to you later in the call. I would now like to turn the call over to Mr. Rob Wildeboer. Please go ahead, sir.
spk20: 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 our president and still CFO, Fred DiTosto. Today we will be discussing Martin Reyes' results for the year and quarter ended December 31, 2023. I refer you to our usual disclaimer in our press release and file documents. I will speak to Pat and Fred and then Pat again briefly and then we'll do some Q&A. 2023 was a record year for Martin Reyes in many ways. We are very pleased with the progress made during the year. Before we get to the financial numbers, which reflect solid and improving progress year over year, let's start with two very important numbers to us, our safety record and our employee survey results. Both are mission critical for your leadership team at Martin Rath and for our people also. We believe that these numbers demonstrate the underlying health and resilience of our company and are a strong base of support for our financial performance today and going forward. First, safety results. As you can appreciate, we both want and need to keep our people safe. We have been doing that increasingly well over the past decade. Our industry-leading safety metrics continue to improve again in 2023. We take safety seriously. Our total recordable injury frequency, or TRIF, was 1.10, an improvement of 9% over last year. More impressively, we have shown an 89% improvement over the last decade when we made it a priority in all of our operations. A TRIF of 1.10 is less than half of the industry standard. As you know, our company has not only grown organically over the past 20 years, we have also acquired a sizable number of troubled plants where safety may not have been the first priority. We have a safety first culture as a primary feature of our operations. Safety discussions occur daily in our plants. Our board of director meetings have a safety presentation and report. Our people come first and we've consistently demonstrated that in normal times and also difficult times. A safe plant generally means a better work environment for our people. As well, we see positive impacts on employee satisfaction and profitability. Second, our employee survey results from 2023 are very strong, even improved over last year overall when we had record positive results. We talk about culture a lot here at Martin Rea, but if your employees don't believe in it, talk is cheap. Every year, our people complete a detailed employee survey administered by a third-party expert who performs similar surveys for many companies, including some of our competitors, and customers. We are told we have not just industry-leading stats, but we are one of the best-performing companies anywhere. Our employee surveys are voluntary, but we had over 15,000 surveys submitted. That's a really strong sample. We have 56 locations now in 10 countries on five continents in different product groups. That's also a good sample. We scored very well in the key categories, the way we work, which includes health and safety, work environment, teamwork, and collaboration, supporting our people, which includes communication, fair treatment, diversity, and inclusion, value and recognition, which includes compensation and incentives, career advancements, appreciation, and shaping the future, which includes personal goals, performance feedback, growth, and development. While the scores are not perfect and we can always improve, and we'll strive to do so, here are some answers to some critical questions. I fully understand my job role and responsibilities. 95% agree. Our location works to improve health and safety. 89% agree. I feel a sense of personal accomplishment at the end of the workday. 82% agree. I respect my plant general manager. 95% agree. Martin Rea prioritizes and encourages diversity. 90% agree. My direct supervisor treats me with dignity and respect. 89% agree. Outstanding results overall. In order to get this feedback from your people, you have to walk the talk. You have to care for your people. We believe a happy, motivated, empowered, purpose-oriented workforce is the foundation of company success in the short, medium, and long term. As some commentators have written, happiness at work leads to success, not the other way around. We agree. A strong thank you to our people. So now that we have those two sets of numbers as a baseline, let's talk briefly about our culture. We talk about our culture a lot at Martin Rant, as all our stakeholders have come to know. Our vision is making lives better by being the best supplier we can be in the products we make and the services we provide. Our mission is basically to take care of our people, our customers, our communities, and our stakeholders, lenders and shareholders. Our 10 guiding principles represent the way we approach our business. Our culture, depicted on this slide, is a standard picture for us in all our internal and external presentations. Our sustainability and success, we believe, comes down to culture. As leaders, we are the chief culture officers of the companies. Living our vision is at the core of the future. Our culture, especially as we have cultivated it more and more over the past few years, is a sustainable competitive advantage. To us, the Golden Rule means treating people the way you want to be treated. We do this regardless of formulaic DEI programs or ESG mandates that may be popular one day and less popular the next. The Golden Rule covers dignity and respect. It covers teamwork. It covers integrity and truth. It covers diversity, equity, and inclusion. It covers ESG. It covers good leadership. It helps us to be a great company. Your people have to trust you to lead them this way, to trust that you care for them. Leadership is stewardship. Progress travels at the speed of trust. In brief, we believe we work in a pretty special company, and we think our people believe that too. We work every day with purpose, serving our constituencies to the best of our abilities and taking care of our own. Now, let's look at some of the other highlights of 2023. In many ways, our predictions for 2023, made early last year, held true for the most part. We did experience a UAW strike in the fall of 2023 that had some short-term negative effects on second-half numbers, but the strike is over now. We saw some major geopolitical headwinds, some expected, such as the continuing Ukraine-Russia conflict with its challenges for Europe, and more trade issues involving China and some others, but also some unexpected, such as the situation in the Middle East. Despite these challenges, 2023 was a very good year with many improvements from 2022. Here are some of the highlights of 2023. A fuller description is found in our annual information form, our 2023 sustainability report, and our various year-end releases, including our latest investor presentation. We generated a record level of adjusted EBITDA of $616.7 million in 2023. This operating cash flow also translated into free cash flow for the year of approximately $195.4 million, most of it generated in the second half of the year, a new free cash flow record for our company. Fred will go on to some detail. We recorded record revenues of $5.34 billion in an increase of 12.2% from 2022. We saw increased revenues from some of our key programs, but we have also launched a lot of new business over the last three years that is driving some of the growth. We have experienced huge revenue growth over that period. Our revenue increase is well over a billion dollars annually. The increase alone would make the top 100 list of top suppliers in the North American auto parts industry, according to Automotive News. Our number of employees grew to approximately 19,000 and went up approximately 3.3% from 2022 relative to a year-over-year revenue increase of 12.2%. We saw continued growth in operating margins in 2023. Year-over-year, adjusted operating income margin grew from 4.8% in 2022 to 5.6% in 2023, even with the UAW strike impact. Fred and Pat will talk to margins. Our 2023 fully diluted net earnings per share of $2.22 adjusted or $1.93 unadjusted was higher than the $1.76 adjusted and the $1.65 unadjusted in 2022. Our balance sheet improved year-over-year, ending 2023 with a net debt-to-adjusted EBITDA ratio excluding IFRS 16 of 1.4 to 1, the best it has been since before the pandemic, and comfortably within our target range of 1.5 to 1 or better. We maintained our dividends to our shareholders in 2023. We did not reduce dividend payments during the pandemic. We returned capital to shareholders, repurchasing approximately 2.3 million common shares under a normal course issuer bid at a cost of approximately $29.1 million, all while strengthening our balance sheet. Quality is important to us and our customers. Many of our products are safety parts, and we won a number of quality awards in many of our plants again this year. We continue to invest in the business, given our backlog of new business. Having said that, cash capex returned to a more normal level in 2023, below depreciation and amortization expense for the year. We note that in the past four years, we have spent over a billion and a quarter dollars on capex, the highest for a four-year period in our history. But the majority of the spend was to launch work we had won. We did not slow down our investment activity during the pandemic, and that is a primary reason we are coming out of it with significantly higher revenues. Not many automotive parts suppliers have a similar experience. We do not believe in perfect launches. We believe in better ones each time. We had many good ones. Not only have we grown our business, we have significant content on the vehicles our customers are making, electric, hybrid, or ICE. Our portfolio is matching what the industry is making. Our lightweighting technologies are precisely what our industry needs regardless of propulsion type. We continue to both utilize and invest in leading-edge technologies in our regular operations and through Martin Ray Innovation Development, or MIND, We have investments in graphene and graphene-enhanced batteries through our NanoExplorer relationship, aluminum air battery technology through Alumapower, and several other new technologies, such as Afenco using ultracapacitor technology. We program and use our own software and have established a separate internal group called MindCan to develop it and sell it to interested third parties. We believe sustainable companies with a great culture will be around for a long time. Pat will talk more about sustainability in his remarks. We have a solid foundation. As we look to 2024 and beyond, we do so with confidence. Our future is great. We look forward to sharing it with you. And now here's Pat.
spk14: Thanks, Rob. Good evening, everyone. As noted in our press release, we generate an adjusted net earnings per share of $0.37 and an adjusted EBITDA of $140 million in the fourth quarter. Adjusted operating income margin came in at 4.4% on production sales that were just under $1.2 billion, which was basically flat year over year but down quarter over quarter. We faced some challenges in the quarter that resulted in lower operating income margin compared to Q3, First, volumes were lowered due to the UAW strike that impacted multiple plants at General Motors, Ford, and Stellantis. We flexed costs where we could to mitigate the impact. This was somewhat challenging given the tight labor market we are operating in. The strike clearly lowered production volumes and, by extension, our margin profile for the quarter. I said on our previous call that we have been fortunate to not have really experienced any significant disruptions with our own supply base over the last three years. Unfortunately, I spoke too soon. We experienced a rather significant disruption with one of our suppliers during the quarter, which resulted in premium costs at an approximately 70 basis point impact on our Q4 consolidated operating income margin. Over the past three years, we've been able to mitigate disruptions coming from our supply base, This one slipped past the goalie. The good news here is we were able to protect our customers, albeit at a cost. The issue has now been resolved, so we do not expect to see an impact in Q1. On a really positive note, our free cash flow performance was exceptional, coming in at $120 million in the fourth quarter and $195 million for the full year of 2023. As we have indicated on past calls, tooling sales have been elevated this year. We collected a nice amount of tooling money in the quarter, contributing to our strong free cash flow performance. Some of this was timing related. Notwithstanding, this is a really good result for us. We've been saying that 2023 was going to be a breakout year for us from a free cash flow perspective, and that's exactly what happened. I am really proud of the people and all the hard work they have done to make this happen. Our adjusted operating income margin for 2023 came in at 5.6%, consistent with the guidance we provided on the last call that it would likely fall short of 6%, though it would still be close, absent of the Tier 2 supply disruptions and the UAW strike we encountered during the quarter. Looking forward, there are some notable positives. The UAW strike is behind us. The supplier disruption we experienced in Q4 is behind us. Vehicle demand is still high and inventories are still below pre-pandemic levels. While EV softness and higher interest rates are likely to result in a relatively flat year-over-year industry production volume profile, we expect 2024 will be another good year with steady production sales, strong positive free cash flow, and Fred will talk about this more in his 2024 outlook in his remarks. Turning to our operations, we continue to make steady progress. The industry headwinds we've been dealing with since the pandemic, from supply shortages, inflationary cost pressures, and tight labor market conditions, are making steady improvement. And we're finding new opportunities to drive efficiencies and reduce costs through our Martin Rea operating system. Adjusting for the impact of the strike, the production environment remains generally stable in North America. As we indicated on previous calls, volumes have been weaker and below planned levels in Europe and China, and that continued to be the case. We restructured some operations in Germany during the quarter and closed a small facility in Canada, which was aimed at matching our cost structure to anticipated OEM programs and volume levels. This resulted in a restructuring and impairment charges of $28 million, with the vast majority of that being incurred in Germany. Our efforts to offset inflationary cost pressures as well as volume shortfalls on certain programs through the commercial negotiations with customers continued and we're happy with the progress. Overall, commercial activity was a bit more weighted in North America in the fourth quarter with lower level of settlements in Europe compared to Q3. As we have talked about many times, commercial settlements can create unevenness quarter to quarter and therefore our operating performance is best looked at over long time periods. Commercial negotiations will continue to be part of our business in 2024. In addition to addressing inflationary cost pressures, we will also continue to address new program volume shortfalls, including lower than planned volumes on electric vehicle platforms, which has become a significant issue in our industry, and one that we predicted, as you may recall. Overall, we're well positioned on our EV book of business, owing to our disciplined approach to quoting on these programs. In certain cases, we've managed to mitigate some of the risks through complex contracts, which includes features such as upfront capital payments with minimum volume commitments where risk is higher, but not necessarily everywhere. Generally, we've attempted to align ourselves with platforms that we believe will have the greatest potential for success over the long term, There is a slide in our investor presentation showing the EV programs that we have content on. Overall, we continue to feel good about the long-term prospects of electric vehicles over time. However, to date, current volumes are coming in well below where they were originally projected to be by now. When you're looking at IHS and other data providers to see how the volumes are trending, they are running at less than half of planned levels in many cases. Again, this is an industry-wide issue, so we don't believe we are unique in this regard. But it's resulting in some underabsorption of overhead costs and other inefficiencies, which is likely to persist until issues that are preventing wider adoption of EVs, such as price and charging infrastructure, have progressed. In the meantime... We will need to address the gap and we'll be seeking to offset a portion of these excess costs with our customers. And this will be an area of focus of our commercial activity in 2024. Longer term, we believe we are in great shape as we are relatively propulsion agnostic and lower EV sales implies higher ice sales until the EV transition gains momentum at some point in the future. Moving on, I'm pleased to announce that we have been awarded new business worth $75 million in annualized sales at mature volumes, consisting of $65 million in lightweight structures commercial group, including various structural components with General Motors, BMW, and Nissan, along with other customers, and $10 million in our propulsion systems group with Eaton and Volvo Truck. In addition, we were awarded replacement business worth $375 million in sales at Mature Volumes on GM's light-duty truck platform, the T1XX-2, which benefits both our lightweight structures and propulsion systems groups. In reference to Rob's earlier comments, I'd like to take a moment and talk about some of the achievements we have made in our sustainability initiatives over the last year. We encourage you to read our 2023 sustainability report for more detailed description of our sustainability journey and how we are making a difference for our people as well as our communities in which we operate. Here are a few key highlights. Carbon intensity has reduced by 32% since our 2019 baseline. Energy intensity has reduced 23% since our 2019 baseline. Approximately 36% of our electricity usage globally is obtained through utility grids using varying percentages of renewable energy sources. We also installed on-site solar panels in facilities to help power plants with renewable energy. Next, in 2022, we set a target to reduce our carbon emissions by 35% by 2035 without the use of carbon credits. We are working on reaching that goal. Lastly, the Diversity Committee, led by me personally, formed additional subcommittees to focus on mental health, called Minds Matter. Women at Martin Rea focused on women in manufacturing and young professionals. In 2023, Martin Rea was the Center for Automotive Diversity, Inclusion, and Advancement Impact Award winner of Systemic Change, and the winner of Leadership Commitment for Advancing Diversity, Equity, and Inclusion. We think that's pretty cool. In closing, the challenges we faced in Q4 were centered on two events that we see as isolated, and hence, we remain very constructive on the year ahead. We are managing well operationally, and I would like to thank the entire Martin Rea team for their hard work and dedication. With that, I'll pass it to Fred.
spk17: Thanks, Pat. And good evening, everyone. As Pat mentioned, we faced some challenges in the fourth quarter that impacted our operating income margin. The good news is the OEW strike and supply ratio that Pat spoke about are behind us. And as such, we expect better results in the first quarter. Notably, and despite these Q4 headwinds, we generated record-free cash flow in the fourth quarter and for the full year of 2023. which allowed us to materially reduce our net debt and further improve our leverage ratio. Taking a closer look at the results quarter-by-quarter, we generated adjusted operating income of $56.6 million, which was down from $83 million in the third quarter, on production sales that were down by about 7% quarter-by-quarter. Note that adjusted operating income excludes $28.2 million in restructuring and impairment charges that Pat referenced earlier. We may see some additional restructuring costs in Q1 to round out the activity, but it will be at a substantially lower level, nowhere near what we saw in Q4. The strike impacting select plants of the Detroit 3 OEMs reduced production sales by approximately $50 million, with the vast majority of the impact taking place in the fourth quarter. Adjusting for the impact of the strike, production sales would have been down a more modest 3%, reflecting some typical seasonality in the quarter. Tooling sales were similar quarter-by-quarter. As noted on the last call, tooling sales were elevated in 2023, in part due to upfront capital payments from customers on certain programs and other volume-up requests from OEMs, which gets treated as tooling sales as per IFRS standards. We expect a more normal year of tooling sales in 2024. Adjusted operating income margin came in at 4.4%. which is down 160 basis points from the 6% we earned in Q3. Breaking it down, approximately 70 basis points of the quarter-over-quarter delta is due to the supplier issues, as Pat noted, and which is now behind us. The remaining delta is generally explained by normal decremental margins on the lower quarter-over-quarter production sales, larger driven by the OWA strike, also now behind us. Moving on, Adjusted net earnings per share came in at $0.37 in the quarter, which is below the $0.68 generated in Q3 due to the same factors affecting adjusted operating income, as well as a $1.3 million net foreign exchange loss in the fourth quarter versus a $7.1 million gain in the prior quarter, which falls below operating income. Free cash flow came in at $119.9 million in the third quarter and $195.4 million for the full year of 2023, a record level for our company. As Pat noted, we experienced a nice inflow from tooling-related working capital during the quarter, which contributed to our free cash flow. Again, some of this is timing-related. Notwithstanding, if you were to assume end-of-year tooling-related working capital at roughly 2022 levels, we still would have exceeded the low end of our 23 free cash flow outlook of $150 to $200 million, which is better than what we were expecting at the time of our last call. I'm extremely proud of the hard work our team has done to make this happen. Looking at our performance on a year-over-year basis, fourth quarter adjusted operating income of $56.6 million was down 19.7% over Q4 of 2022 on production sales that were about flat. and our adjusted operating income margin of 4.4% was down 110 basis points from the 5.5% we generated in Q4 of last year. Again, the Tier 2 supplier disruption accounted for 70 basis points with the impact, with the remainder mainly reflecting our geographic sales mix. That is, the impact of decremental margins on lost sales in our higher-margin North American business, which is due to the strike, along with higher sales in our lower-margin European segment. Turning to our balance sheet, strong free cash will enable us to reduce our net debt, excluding IFRS 16 lease liabilities, by $107 million quarter-to-quarter to $782 million. We continue to make great progress on deleveraging, and this includes spending roughly $8 million buying back approximately 650,000 shares during the quarter through our normal course issuer bid. Our net debt-to-adjusted EBITDA ratio continued its downward trend and in the quarter 1.4 times, down from 1.56 times at the end of Q3 of 2023 and 1.71 times at the end of Q2 of 2023. Our leverage ratio now sits comfortably within our long-term target range of 1.5 times or better. Subsequent to the fourth quarter, we amended our lending agreements, extending the maturity of both our Canadian and U.S. dollar banking facilities out to 2027 and obtaining an additional $100 million in borrowing capacity. Pricing terms are generally similar to the previous agreements, which is a noticeable achievement given the current interest rate and credit market environment. This is a testament to the strong relationships we have with our lenders. We can't thank them enough for their ongoing support. Turning to our 2024 outlook, As Pat noted, we expect our results to improve over the fourth quarter as the disruptions that affected us in Q4, namely the UAW strike and supplier disruption, are behind us. Having said that, most industry forecasters are currently calling for a relatively flat production volume environment in 2024 in both North America and Europe, our two main operating regions. The slower than expected ramp-up in electric vehicle programs and higher market interest rates are likely contributing to this view. As such, it stands to reason that our production sales are also likely to be relatively flat in 2024. As noted, our tooling sales were elevated in 2023, and we expect that to normalize this year. Putting it all together, we expect total sales to be between $5 to $5.3 billion in 2024. Looking at our adjusted operating income margin and understanding that Q4 was a bit of an anomaly, We've stated on previous calls that given the fact that our operations are performing at a high level, future margin expansion will primarily be a function of volumes. Since we expect minimal volume growth in 2024, margin expansion is likely to be similar. With that in mind, we expect adjusted operating income margin to increase year-over-year and fall in the range of 5.7% to 6.2% for 2024. Moving on, we expect free cash flow of $100 million to $150 million this year. This reflects our sales and margin expectations, as well as projected capex of approximately $340 million, which is expected to be generally in line with depreciation and amortization expense for the year. The projected free cash flow is obviously lower than what we had generated in 2023, reflecting higher capex, in part due to the timing of certain capital expenditures that were planned for 2023 falling into 2024. and an assumed reduction in positive tooling-related working capital flows, given that we expect a more normal level of activity this year. Notwithstanding, this represents a very healthy level of free cash flow for our business. Also expect the free cash flow quarterly pattern in 2024 to be similar to 2023, where it generated the bulk of our free cash flow during the second half of the year. Looking forward, we expect to hold our own both financially and operationally in a production environment that, while not growing, is expected to remain stable. We continue to perform at a high level. Our balance sheet is in great shape. We are delivering on our free cash flow promises and executing on our cap allocation priorities. To our shareholders and all of our stakeholders, thank you for your continued support. With that, I'll now turn you back over to Pat.
spk14: Thanks, Fred. On a final note related to capital allocation, our views are provided in an investor note on our website. However, we intend to talk about it on each call. In Q4, we generated approximately $193 million in cash from operations, and here's how we allocated it. First, capital expenditures were about $73 million. As we've always said, we invest in the business first. We need a strong core to And as we've discussed, our investments have to meet certain hurdle rates on new or replacement business. We also paid down debt, as Fred noted, with a net debt of $107 million lower quarter over quarter. So we strengthened our balance sheet. A strong balance sheet is an advantage in this industry where we have seen a lot of supplier distress over the years. Customers don't want to worry about the credit worthiness of a supply base. This is especially important given the combination of geopolitical events, strikes, interest rate pressures, and other factors that have increased stress on the supply base as a whole. We paid our usual dividend to our shareholders, approximately $4 million, or $16 million over an annualized basis, providing our shareholders a positive return on their investment. Finally, we purchased 650,000 shares for cancellation under our normal course issuer bid. Total cash spent was approximately $8 million. At our enterprise value to EBITDA multiple, which is near a historic low, we believe an investment in our own company is 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 9 million shares, which is more than 10% of the company. We all recall there was a pandemic and a few other negative things that occurred during this time frame. We paused repurchases when the UAW strike hit, which we felt was prudent. Repurchases under our normal course issuer bid continued in Q4 after ratification of the UAW agreements. We intend to buy back more stock in the next month and renew our NCIB for another year. We also continue to look 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. And we anticipate with our positive free cash flow profile, which we believe will occur on a regular basis each year, We will have greater flexibility to deploy cash in the best interests of the company. Finally, once again, a big thank you to our people. This is a challenging business in a challenging world, and we continue to deliver. Thank you for your dedication every day. So now it's time for questions. We see we have shareholders, analysts, employees, and even some competitors on the phone. So we may have to be a little careful with our answers. but we'll answer what we can. And thank you for calling in.
spk27: Thank you. We will now take questions from the telephone lines. If you have a question using a speakerphone, please lift your handset before making your selection. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a pause while participants register for questions. Thank you for your patience. First question is from David Ocampo from Cormac Securities. Your line is open. Go ahead.
spk04: Thanks. Good evening, gentlemen.
spk00: Good evening.
spk04: Just on your margin guidance for 2024, I mean, it's still quite a ways from your pre-pandemic levels when you guys were, you know, marching on 8 plus percent. I know there's inflationary factors that kind of impact the number, but just curious where you think margins go over the medium to long term and what are the factors that are going to get you there? Is it you know, return of light vehicle production of 17 million in North America and Europe normalizing, just any color on that would be great.
spk17: Yeah, obviously volume would be beneficial. I mean, at these levels, we're doing pretty well, but we're obviously not at the back of those levels pre-pandemic and so forth. So volume is a factor. We've made it clear as well in these inflationary cost pressures, we're not recovering 100% in most cases, right? So that's you know, a drag and it'll continue to be a drag for a period of time until we kind of get into next-gen programs. And then operationally, you know, I think Pat noted we're performing well generally over, you know, our plant portfolio. There's always opportunities there, so we're going to continue to push the monitoring operating system and to drive more efficiencies in the operations. I think the one major headwind that, you know, I think the industry is going to face in the short to medium term right now is this EV transition and what's going to happen with volumes and mix and so forth Clearly, volumes aren't meeting expectations on the EV front in the moment, and I don't think that's going to change in the short term. In longer term, that transition will happen and the volume will come. But the impact on margins and how the industry is going to deal with that over the next couple of years is a bit of a question mark and will kind of weigh on margins, I think, for a period of time until that gets resolved.
spk14: And I think the inflationary costs, that's going to take some time. Some of those adjustments won't be made until we launch a new product. I mean, we'll improve on them, of course, but it's not going to happen overnight, as Fred talked about. I do think there's still a lot of opportunity in our operation. We made tremendous progress, but there's still more there, and we're going to focus a lot of attention on it in the meantime.
spk04: And, Pat, I think you called it up. trying to seek some commercial renegotiations, maybe for the EV side of it in 2024. Curious if you're including that in any of your margin guidance for 2024, or should we view that as upside?
spk17: No, we've factored that in. I mean, the last couple of years, commercial activity has been a big priority for us at the forefront of activity and so forth. And we just see that continuing and it's a necessity. Unfortunately, some of the deals we've cut are not baked into piece prices, so the OEMs are forcing us to come back and renegotiate on a quarterly, semi-annual basis to get that in. So those discussions will continue, and it's factored into our numbers.
spk04: Got it. And then last one, just the restructuring that you guys did in the quarter. What kind of payback should we expect on that $27 million? It sounds like there's going to be a little bit more in Q1. And just the timing of that payback, is it 24 where you guys start to reap the benefits, or maybe you get the $27 million back in over two years?
spk17: The bulk of that in the fourth quarter was in Germany, and the workforce there, for the most part, that headcount would be reduced by the end of the first quarter. So we're going to go into the remainder of the year with that lower cost base. You know, it's pretty expensive to let go people in Western Europe and Germany in particular. So, you know, the paybacks there are probably a little higher than we normally see in North America. But, you know, one to one and a half years is generally a rule of thumb. And, you know, the numbers kind of suggest that in this case as well.
spk03: Okay, that's perfect. I'll hop back in the queue. Thanks, guys.
spk27: Thank you. The next question is from Tammy Chan from BMO Capital Markets. Your line is open. Go ahead.
spk24: Hi. Thanks for the question. I wanted to go back to your margin guidance for this year and coming at it a different way is with industry production currently expected to be flattish and the EV headwind, what is baked into your expectations i.e., what would have to unfold for you to achieve that higher end of the margin guide? Because that would be 60 basis points, I think, of your improvement, which could be seen as a bit high given the industry backdrop we're in right now.
spk17: Well, I think the way I would maybe answer that is it's somewhat up from 23% and 23% We had the UAW strike, which we don't expect will, you know, some event will occur. Then we also had in the fourth quarter a supplier event, which is behind us, right? So, you know, you take that out, I think, you know, your baseline is somewhat higher. So I'm not sure you're too far off from the high end of the range, but there is a bit of a band there. And obviously, you know, mix in the EV versus ICE volume portfolio over the next little while is a little uncertain. So we kind of, you know, left some room there and some, you know, some range there in terms of where we can land. But overall, I don't see the high end of the range as too much of a stretch, assuming the volume is there.
spk20: Yeah, we're in February. I'll be the end of February. And a lot of things can happen in the year, but they aren't all negative. There are some good things, too. Plus, Pat talked about the improvement in operations. Right-side operations is always an opportunity.
spk14: And we're not sitting still on our material costs. I mean, we're not going to rely 100% on recovery. We're doing things on our own to reduce those costs as well. So it's a combination of things coming into play that could certainly affect a better number, if you will. But, you know, that'll take time to put in place.
spk24: Right. Okay. After a point on the items in Q4. Okay. Okay. And when you talk about volume is below plan in Europe and China, I think industry in Europe is flat. China is growing. Is it a mixed issue for you? I'm just curious how you think about these two segments going forward and the strategy here. Or is it something to do with your exposure to EVs there that's causing the volume being below plan?
spk14: Yeah, certainly, you know, we moved quicker like many others in Europe on EVs, and they're not hitting the numbers either, similar to North America. So some of that is due to that exposure. So definitely mixes playing a role in it. You know, the example in Germany is, you know, one program runs out, and some of the programs are waiting on the hit volume of some of the EVs. So it definitely is having an impact.
spk20: And just with respect to China, we have a very modest footprint there. We had four plants, two closed as expected, two metallic plants that we acquired from Tulsa in the acquisition that came with the acquisition. We knew we were going to run out of work. They ran out of work in 2023, so we're down to two plants, a fluids plant, which is quite small, and an aluminum plant. So China overall volumes is not really a big factor in our revenues one way or the other, where it goes up or down or stays sideways.
spk22: Got it.
spk15: Thank you.
spk27: Thank you. The next question is from Krista Friesen from CIBC. Your line is open. Go ahead.
spk26: Hi. Thanks for taking my question. Maybe just to follow up on your comment on free cash flow priorities, can you speak to if you're seeing anything kind of in the M&A environment and if that's becoming more attractive for you given where your leverage ratio is now?
spk20: I think the short answer is yes. I think it's, you know, in the context of how we look at things, a few things. Strategic investments, we see some opportunities in some new technologies. Nano Explorer was an example in that. We still believe in graphene. And we're seeing some of those. And one of the interesting things, and also in our MIND initiative, is the number of people who approach us, we have our operational expertise and our strategic expertise. strategic partner expertise. We're seeing opportunities to effectively deploy our capital, but also our people and improve our technology partnerships in that sense. Back to your real focus in the context of M&A, there are a number of suppliers under pressure. The last three years in the pandemic led them to probably have weaker balance sheets in some ways. A lot of people have more debt. A lot of people are a little more stretched. It's a tough market out there. We thrive in tough markets because there are opportunities. Now, some of those opportunities may come from just quoting work and saying, you know, a supplier with a strong balance sheet has a tremendous opportunity to ensure that, you know, we can provide product on time and all that type of stuff. And customers do look at that. They do look at the stability of the supply base. We're a very strong supplier in all the markets that we are. But at the same time, we do get a lot of teasers and inquiries and, you know, are you looking and so forth. We have powder on the balance sheet, and that's not a bad thing to have. We also have a very good banking relationship. We also have a very good banking relationship. You know, today's environment, in order to extend – extend a syndicate, which is quite large, $1.3 billion of capacity with good terms with strong banks gives you flexibility there too. So we like that.
spk26: Is there a particular geographic area that you would look to focus in on or are you kind of open to all opportunities?
spk20: Probably not China, probably not Antarctica. Africa, I don't know. We have a plant in Africa. I think North America is a good place for us. We really like the USMCA. We like our positioning. Europe has its challenges. We think it's got its broad geopolitical challenges and the Russia-Ukraine war and EV turnout and all that type of stuff are challenges. I think, we think, Europe less likely unless it's compelling.
spk14: It's got to be the right type of situation, including what can it add to our story relative to light weighting and so forth. Does it make sense from a product point of view and from the footprint point of view? So something we certainly would study a lot more before we jump in. Yeah, absolutely.
spk26: Sharon, maybe just I'm wondering if you're kind of seeing anything on any of your programs. Obviously, inventory is still historically low, but there appears to be still a bit of a mixed issue with inventory kind of closer to more normalized levels on pickups, for example, but not at normal levels on other platforms. Are you hearing anything from the OEMs in terms of kind of slowing down on certain programs and ramping up on others?
spk14: We haven't. We actually, you know, to some extent would have expected some things to slow a little bit, but they haven't. Others had, as you know, especially when it comes to, again, EVs. But, you know, you're also seeing some of the customers are starting to get ready to throw some money on the hood, which could actually spur production somewhat. But the volume has been pretty steady of our ICE vehicles in particular. Trucks have done well. Funny enough, in Europe, you know, some of the products are actually doing very well are engine blocks, which is a surprise at this stage of the game. But we're not seeing, again, other than EVs, not seeing anything that we see as a signal of a slowdown at all. And some of the vehicles that, frankly, hadn't been selling or, I should say, been produced, a couple of years ago, are actually in pretty high production now. And a lot of that was due to chip shortages and moving the chip shortages or the chips to higher profitable vehicles. Now that they're more plentiful, you're seeing some of the smaller vehicles and so forth start to pick up the pace again.
spk20: From a broad perspective, we think North America is in pretty healthy shape. If you look at the past 12 calls or whatever, we said we thought the U.S. was in strong economic shape wasn't going to have a recession. We think we're right on that. We would say that a potential tailwind for later in the year is interest rates. We do think they're at a level that they're probably tempering sales to some extent. Not a lot, but I think a number of people are perhaps waiting with their purchases until the weather's better and pricing may be better too because of interest rates. So I think we're like everyone else thinking that rates will come down at some point. Not sure when they'll start and how fast they'll come down.
spk14: In my experience, once one OEM starts putting, you know, I would say significant amounts of money on the hood, not because it's end of year, but because they want to sell more, there tends to be others that follow. So I think it could be very interesting.
spk25: Great. Thank you for the color. I'll jump back in the queue.
spk27: Thank you. The next question is from Michael Glenn from Raymond James. Your line is open. Go ahead.
spk02: Hey. Just on the supplier disruption that you guys had, I know you probably can't give all the details, but I'm just curious. Why did the expense of this disruption fall onto your P&L and not the OEM?
spk14: Well, it's our supplier, first off. And there's directed suppliers and then suppliers that are your choice. And this is one of our longtime suppliers. They actually had a subsupplier issue with material. And so there was a stretch of time where the material wasn't available, which caused downtime internal to our supplier. Then we had logistics issues due to weather and so forth that compounded it. We're not talking about, you know, weeks and weeks of not having material, but it's a high level of material that, you know, has pretty high volume. And missing it by, you know, a few days to half a week can be pretty significant in our business.
spk17: And, I mean, the end result is we fell behind, you know, expedites, internal premium costs, and so forth. We did protect the customer, although it did come at a cost. But as we noted in our opening remarks, the issue is behind us. We've got to move on from it.
spk20: It's not always the customer's fault.
spk14: Like I said in my speech, these disruptions have been happening in the supply base for three years continuously, and we've been particularly fortunate, and our SEO team has done an excellent job of assuring we didn't have this type of disruption. This really is the first one of any significance that we've dealt with, which, you know, frankly, given the supply base and the issues that have been out there, it's pretty damn good in my book. It's just unfortunate. And it's behind us.
spk02: Behind being it ended in Q – this was all contained in Q4, to be clear?
spk09: Yeah. Yeah, it was all contained. All contained.
spk02: Okay. And – With the outlook and Rob, you talk about there being a number of suppliers being under pressure. Is there potential like this type of situation of a supplier being unable to give you the material that you need? Is this something that is of increasing risk as we think about 2024?
spk20: it's a two-sided coin. So, and if you look at, say, auto news or whatever, there is a view that a number of suppliers are going to use this year to strengthen their balance sheets, right? They're going to, with consistent volumes and everything else, there are going to be some suppliers that have some challenges. Our focus typically is on our competitors and our discussions with our customers are, we're here, we can do this, you know, we can effectively put up new lines for you, et cetera. And, you know, we're not going to come back for a price increase because we've got real financial challenges. This is something, you know, we always try to show you how we think, but, you know, since we started 22 years ago, 23, 22 and a half years ago now, this has been consistently one of our modus operandi, which is basically understand where your competitors are and so forth. And if you can provide a customer solution, and win the work because of your situation, location, abilities, strength of balance sheet, great. But sometimes the customers look to you to actually help in a context when sometimes the best help is taking over a supplier or some business or even in certain cases that we're finding, helping other potential suppliers.
spk14: So we tend to look more toward other tier one know in our interest not so much the tier two so our supply base in particular I'm not going to say there's any significant interest out there there might be at some point but you know the financial concerns of our suppliers especially our big ones like the one we were talking about earlier their volumes are good and I'm not concerned But as Rob said, on the Tier 1 side, sometimes the customer, and we have been approached over the last three years by customers asking us to take a look at different assets that are in trouble that we could take over. But it's got to make sense for us at the end of the day. And the last few years, it hasn't made sense, so we didn't approach it.
spk20: I would say this. We talk about culture a lot. You guys never write about it. But we have other people on the phone. It is a difference. We've taken over poorly performing suppliers, and we bring a different way of doing things operationally and on the floor. And that is something that provides opportunity for us. Customers know that. Customers know that they can rely on us. And in some of these situations, we get asked to come in. often by the owner of the or some of the owners of the of the competitors and so forth and i'm not just talking about public competitors as private competitors as well some of which you don't and some of which you don't but but uh that's the nature of our business i would say we are extremely well poised coming out of 2023 with the strength of our balance sheet free cash flow all the things we're talking about to take advantage of those types of opportunities to help our customers And if we can help our customers, a lot of good things happen. And that also translates on the commercial discussions that we may have, the winning of new work, the trade-offs and everything else. These are all arrows in our quiver that we use really well.
spk02: Okay. And, you know, if I think of M&A, it's – I can't – you know, for me, M&A and auto parts is – like the history of M&A and auto parts is there's a lot of situations that have struggled. If you do something now, are the level of guarantees that you get from your customer going to be different than they were in the past?
spk14: Say for us to do it, they would need to be probably to some extent. And Rob touched on it very well. Commercial settlements, work, future business growth, all those things would be key. Certainly, with the way the supply base is today versus 20 years ago, the deal you would want to make would be different, certainly, than it was 20 years ago. There's less suppliers out there, and there's less places for the OEMs to go to to get people to take over, frankly. You might be a little more picky.
spk20: Just on the M&A, just so people don't say, hey, we're really in the hunt or whatever, You know, we've been pretty good at M&A. We've been pretty good at getting distressed situations and turning them around. We recognize it takes time. We think we're better than most at that. But, you know, of the 10 or 11 or 12 acquisitions we've done in 22 years, we've turned down 1,000. So we're pretty particular, and it's got to fit. So, you know, in the meantime, as we said, We've got some cash. We think a good investment is ourselves. We want to buy back some more stock. We've been, I think, buying back 10%, more than 10% of our company in the last five years with three years kind of a write-off because of the pandemic has been pretty good as well. So we're just here to run a business in the right way and deploy our capital in the best way. And what we talk about today could change a week from now. And that's why we just basically illustrate for you how we approach these things.
spk30: Okay. Thank you.
spk20: You're welcome.
spk27: Thank you. Once again, please press star 1 on your device's keypad if you have a question. The next question is from Brian Morrison from TD Securities. Your line is open. Go ahead.
spk07: Thanks very much. Hey, Fred, can you just talk to me about how you view the cadence of your margins as you go throughout the year?
spk17: That's a good question. I mean, we model it out, obviously, based on, you know, IHS volumes of sulfur. That's how we budget. And what that's suggesting is you're going to get back to maybe a more typical seasonality in the industry, right? So, you know, better in the front half, maybe weaker in the back half. But I'm somewhat skeptical on whether that happens or not, because I think there's still some volatility, you know, mix and so forth, and, you know, interest rates. they're decreasing later in the year and incentives, you know, the OEMs and so forth. So I'm not convinced it will necessarily play out that way. But, you know, if you, you know, review the, you know, forecasters out there, that's kind of how they're modeling it. But, you know, it may not happen that way. But, you know, front half may be stronger than the back half. But, you know, the seasonality may not play out as expected. And what is... Yeah. Yeah.
spk06: What is the North American production volume assumed in your forecast?
spk17: So we rely on IHS, so they're forecasting 15.7, I think, at this point.
spk06: Okay.
spk17: So relatively flat year over year. Okay. Gotcha.
spk07: I'm sorry. I missed what you said about the EV costs and how they'll weigh on the pressure on your margin. Can you just give us some sort of ballpark, like what that – impact could be? Because I look at your margin guide and you start at 5.6 and you get sort of 20, 25 basis points from tooling. You get 15 to 20 from your tier two improvement. You get 15 to 20 from your strike. So you're at the high end of your margin guide. What are the offsets that bring you back down?
spk17: Well, what you have, and this is, again, an industry thing. So, you know, suppliers have made investments in EV platforms and So those assets are coming online, that depreciation is coming online, that overhead is coming online. And now that we're in production, those volumes are nowhere near what we modeled the expectation at. So you got that extra cost without the extra sales until you start hitting those planned levels. So we're not unique in that. I think you're going to see that in a number of different suppliers and peers. So you're going to see a higher depreciation rate from us going forward because these assets are coming online and unfortunately the bombs aren't hitting yet. And not just depreciation, I also got overhead tied to these platforms.
spk20: So here's a simple way, a simple guy like I understand. So let's say you got a factory, it's 50% EV, 50% ice. And the ice volume comes along just fine. So that half of the factory is running at optimal levels. On the EV, let's say they sell 40% of what the plant volume is. And so that half of the plant is running at the low capacity with the overheads and stuff that Fred said. And let's say even you have higher ice production, you can't take, for the products we make, to a certain extent, the EV line production and put it over to ice, right? So you have a plant that's not running optimally. And we have 56 plants and a lot of them have some EV production in their plants. And so the reality is that a lot of plants aren't running as optimally as we would like them to be. And that is the industry issue for everybody.
spk14: Part of the complexity is that, you know, if the EV launched at a lower level that stayed steady week after week, day after day, it would be helpful. We would still have the issue that Fred described, but it would be better. The problem is what we're seeing in the moment is the customer plant will go down for a month or two and then come back up. And so you have to have some semblance of a workforce there to produce. You can't have them all there. So those costs are very hard to flex. You know, we're getting better at it as these things smooth out, but with the lack of volume, it's compounded the problem some.
spk07: So I understand and I appreciate the concept, but I'm wondering how much margin pressure you've baked into your forecast from this.
spk19: How can I tell you that?
spk14: Nice try. It's very difficult to say, you know, given the fluctuation.
spk07: Well, I ask because there's going to be a wide range of estimates that come out tomorrow based on that. So just lastly, on your free cash flow, you talk about how strong it is and how cheap you are. Instead of the M&A discussion, why are we not looking at an aggressive NCIB or even potentially an SIB?
spk20: Well, you know, someone mentions M&A and everyone, it's like, you know, a fountain. M&A, as we've said, we're very selective on M&A. It's nice to have powder and so forth. I think that we said we'll be buying on our NCIB and we'll renew our NCIB and, you know, Buying 10% over five years is actually a pretty good one, and three of those years you're not buying. I think that's important. I think a strong balance sheet is important, and our target was 1.5 to 1 or better, and we're there. But that doesn't mean as soon as you're at 1.4, you jump up to 1.5 again.
spk14: I think it's important that there's not something that we're ready to select on the menu. at the moment in M&A. It's just that we're, if the menu is there and it looks attractive, we're in a position now where we could look, but we're not in that spot at the moment.
spk07: Yeah, the only reason I ask is you mentioned that your free cash flow is going to be $100 to $150 million this year, and you're trading at three times EBITDA.
spk20: Yeah, you're right, you're right, you're right. You know, some guys are in higher multiples because they've managed to lower their EBIT today, so...
spk28: Thank you very much.
spk27: Thank you. There are no further questions registered at this time. I would like now to turn the meeting back over to Mr. Will DeBoer.
spk20: Well, thanks, everyone. I really appreciate you taking some time this evening. If any of you have further questions or would like to discuss any issues concerning our company, please feel free to contact any of us or Neil Forrester is on the press release. And have a great evening.
spk27: Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.
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