Martinrea International Inc. (MRE.TO) has released its first-quarter 2024 financial results, showcasing an adjusted net earnings per share of $0.62 and an adjusted EBITDA of $163 million.
The company noted a rebound in North American production sales following disruptions in the previous quarter, while European sales improved yet remained below targets. A new program launch with BMW (ETR:BMWG) in China is expected to boost sales in the Rest of World segment.
Despite inflationary pressures, Martinrea remains committed to adapting across propulsion types and is actively engaged in commercial negotiations. The company's financial outlook for 2024 remains consistent, with projected total sales ranging from $5 billion to $5.3 billion.
Key Takeaways
- Adjusted net earnings per share at $0.62, with adjusted EBITDA of $163 million.
- North American production sales rebound after Q4 2023's disruptions.
- European sales sequentially higher but below planned levels.
- New program with BMW in China anticipated to increase Rest of World segment sales.
- Company remains adaptable to various propulsion types amid inflationary pressures.
- New business awards and replacement business expected to contribute $180 million in annual sales.
- 2024 financial outlook reaffirmed, with sales projected between $5 billion and $5.3 billion.
- Net debt to adjusted EBITDA ratio at 1.51x, indicating a healthy balance sheet.
- Continued shareholder returns through strategic investments, share repurchases, and dividends.
Company Outlook
- Martinrea expects increased production sales in the Rest of World segment due to a new BMW program in China.
- The 2024 outlook remains stable with sales estimates between $5 billion and $5.3 billion.
- Adjusted operating income margin projected at 5.7% to 6.2%, with free cash flow expected to be $100 million to $150 million.
Bearish Highlights
- Production sales in Europe still below planned levels, indicating challenges in the region.
- Inflationary costs are a concern, with the company engaged in negotiations to mitigate impacts.
Bullish Highlights
- New business awards and replacement business total an estimated $180 million in annual sales.
- The company is comfortable with its margin outlook and expects to generate consistent free cash flow.
- Positive restructuring efforts in Europe are anticipated to benefit profitability over the next 1 to 1.5 years.
Misses
- Despite improved production sales, there was no substantial recovery reported in the current quarter.
Q&A Highlights
- Supplier issues from Q4 2023 resolved with no significant recoveries impacting current quarter.
- Confidence expressed in the European market's performance post-restructuring.
- EV volumes are expected to remain low for some time, but demand and growth potential exist.
- The company is focusing on battery technology and potential sales from cheaper EVs with shorter ranges.
- Commercial recoveries are tough but factored into the company's outlook, with expectations to meet objectives.
- Operational performance is strong, with supply line stability and ongoing improvements identified.
In summary, Martinrea International Inc. is navigating a period of industry transition with a focus on operational efficiency, strategic growth, and shareholder value. The company's robust financial outlook and strategic initiatives position it well to capitalize on future market developments, particularly in the EV sector.
Full transcript - None (MRETF) Q1 2024:
Operator: Good evening, ladies and gentlemen, and welcome to the Martinrea International First Quarter 2024 Results Conference Call. Instructions for submitting questions will be provided to you later on in the call. I would now like to turn the call over to Mr. Rob Wildeboer. Please go ahead, sir.
Rob Wildeboer: Good evening, everyone. Thank you for joining us today. We always look forward to talking with our shareholders, and we hope to inform you well and answer questions. We also note that we have many other stakeholders, including many employees on the call, and our remarks are addressed to them as well as we disseminate our results and commentary through our network. With me are Pat D'Eramo, Martinrea CEO; and our President and CFO, Fred Di Tosto. Today, we will be discussing Martinrea's results for the quarter ended March 31, 2024, a very solid quarter, as you see from our press release. I refer you to our usual disclaimer in our press release and filed documents. First, Pat will make some comments then Fred then me, and then we'll do Q&A. And now here is Pat.
Pat D'Eramo: Thanks, Rob. Good evening, everyone. As noted in our press release, we generated an adjusted net earnings per share of $0.62 and adjusted EBITDA of $163 million in the first quarter. Adjusted operating income margin came in at 6%, which is 160 basis points better than the fourth quarter on production sales that were up about 8%. Recall that in the fourth quarter, we were impacted by the UAW strike and a significant disruption by one of our suppliers, both of which were resolved at the end of last year. Operationally, we continue to perform very well. Industry headwinds from the supply shortages, inflationary cost pressures and tight labor markets continue to improve. Production volumes in North America had a decent start to the year as the industry bounced back from the strike that affected Q4 and a number of our top platforms had strong production volumes quarter-over-quarter. While Q1 production sales in Europe were sequentially higher, they remain below planned levels. Production sales in our smaller Rest of World segment were down quarter-over-quarter, but are expected to increase over the coming quarters as we launch and ramp up on the new program we won in China or BMW. Despite the overall production sales growth, the industry continues to face headwinds from lower than many expected ramp-up in electric vehicle programs, resulting in underutilized assets in the industry. We are experiencing some of this also as we have discussed in the past. Based on our current product offering and capabilities, fundamentally, we are largely agnostic to propulsion types, so we can adapt our business over time to any mix of BD ICE (NYSE:ICE) or hybrid vehicles using our existing footprint and asset base. Commercial negotiations aimed at offsetting inflationary cost pressures as well as some volume shortfalls on certain programs continue with our customers, and I'm happy with the progress our team has made on this front at the start of the year. Quarter-over-quarter commercial settlements were higher in Europe, steady in North America and lower than the smaller Rest of World segment. Commercial activity will continue to be a key focus through the remainder of this year. Moving on, I'm pleased to announce that we've been awarded new business with $30 million in annualized sales at mature volumes, consisting of $20 million in lightweight structures commercial group and $10 million in our propulsion systems group with existing customers, including General Motors (NYSE:GM) and Toyota (NYSE:TM). In addition, through our awarded replacement business on both lightweight structures and propulsion systems with approximately $150 million in annual sales and mature volumes with a variety of OEMs, including General Motors, Ford (NYSE:F) and Honda (NYSE:HMC). Overall, we're pleased with the performance of our first quarter, while EV softness and higher interest rates are likely to result in relatively flat year-over-year industry production volume profile, we expect 2024 will be a good year with steady production sales and strong positive free cash flow. I would like to thank the entire Martinrea team for their hard work and dedication in these continued challenging times. With that, I'll pass it to Fred.
Fred Di Tosto: Thanks, Pat, and good evening, everyone. As our first quarter results demonstrate, we had a good start to the year as we bounce back from the disruptions we faced in Q4 from the strike and supplier issue that Pat mentioned earlier and that we spoke about in the last call. First quarter adjusted operating income margin rebounded to a level consistent with the third quarter, with first quarter adjusted EBITDA margin actually up 50 basis points over Q3 last year before these short-term disruptions surfaced. I am proud of the work our team has done in delivering these results. Taking a closer look at the results quarter-over-quarter, we generated an adjusted operating income of $79.2 million, up from $56.6 million in Q4. On production sales that were up about 8%, reflecting a rebound in industry production volumes coming out of the strike and strong production numbers on some of our core programs. As expected, tooling sales declined by nearly half, representing a more normal level as a percentage of total sales. Adjusted operating income margin came in at 6%, up 160 basis points quarter-over-quarter. Note that adjusted operating income excludes $6.3 million in restructuring charges, which reflects the rightsizing of certain operations in North America and Europe that we previously announced. Based on some incremental cost-saving opportunities identified, we may see some additional restructuring charge in the next quarter or two, though at a reduced rate. Moving on. Adjusted net earnings per share came in at $0.62 in the quarter, a big improvement over the $0.37 generated in Q4 due to the same factors affecting adjusted operating income as well as a $4.9 million net foreign exchange gain, which compared to a $1.3 million net foreign exchange loss in the fourth quarter. Free cash flow came in at negative $1.4 million in the first quarter, significantly better than the negative free cash flow of $31.5 million in Q1 last year, a good start to 2024. We generate experienced a normal seasonal build in non-cash working capital in the first quarter of any given year, and this year was no exception. Excluding lease payments under IFRS 16 accounting, Q1 2024 free cash flow was negative $13.7 million compared to negative $42.2 million in Q1 last year. As I indicated on the last call and similar to 2023 results, we expect to generate the bulk of our free cash flow in the back half of the year. Looking at our performance on a year-over-year basis, and I'll be brief. First quarter adjusted operating income of $79.2 million was up about 5% on production sales that were up by 1.4%. And our adjusted operating income margin of 6% was up 20 basis points from the 5.8% generated in Q1 of last year. I'll refer you to our Q1 MD&A for commentary and year-over-year variances. Turning to our balance sheet. Net debt, excluding IFRS 16 lease liabilities, increased by $74 million quarter-over-quarter to $857 million. This reflects the free cash flow profile for the quarter, as previously outlined as well as the funding of approximately $22 million in cash restructuring costs, roughly $16 million spent to repurchase approximately 1.35 million shares under our normal course issuer bid, an $8 million investment in Equispheres Inc., a leading edge supplier of aluminum powder for additive manufacturing or 3D printing applications. And about $4 million in dividends, along with some negative noncash foreign exchange translation, driven by the weakening of the Canadian dollar against the U.S. dollar during the quarter. Rob will elaborate some more on our capital allocation activities following my remarks. Our net debt to adjusted EBITDA ratio ended the quarter at 1.51x, up from 1.4x at the end of Q4 2023. While our leverage rates was slightly higher quarter-over-quarter for the reasons I explained, it remains within our long-term target range of 1.5x or better, and we intend to keep it that way. Turning to our 2024 outlook. It remains unchanged, and we remain on track to meet it based on our Q1 performance. As a reminder, our 2024 outlook calls for total sales of between $5 billion and $5.3 billion, and adjusted operating income margin of 5.7% to 6.2% and free cash flow, excluding IFRS 16 lease liabilities of $100 million to $150 million. Lease payments are currently running at approximately $12 million per quarter. So, the free cash flow outlook, including IFRS 16 lease payments is roughly $50 million to $100 million. As noted, we expect to generate the bulk of our free cash flow in the second half of the year, which, again, is similar to what we experienced in 2023. Looking forward, we expect a solid year, both financially and operationally. We continue to perform at a high level, and our balance sheet is in great shape. With that, I'll now turn it back over to Rob.
Rob Wildeboer: Thanks, Fred. A final note related to capital allocation. Our approach is described in an investor note on our website. In Q1, we generated approximately $39 million in cash from operations. Capital expenditures were about $58 million as we continue to invest in support of new business wins and incremental equipment needs. We made an $8 million strategic investment in Equispheres. Equispheres is a leading-edge company, developing innovative technologies for the production and use of advanced materials, including high-performance aluminum powder for additive manufacturing or 3D printing applications. The proven technology of Equispheres enables printing speeds that are up to 9x faster than industry standards, thereby lowering production costs by as much as 80%. Equispheres is a specialist in aluminum powder and Martinrea is an expert in aluminum components. The high-performance powders that Equispheres supplies should enable us to provide increasingly complex and sophisticated assemblies, and other products to our customers, which is the main goal of our project breakthrough strategy. Next, we paid our usual dividend to our shareholders approximately $4 million or $16 million on an annualized basis. Lastly, we purchased approximately 1.35 million shares for cancellation under our normal course issuer bid, as Fred noted. Total cash spend was approximately $16 million. We believe our stock is a great investment, particularly at the current valuation, which is near its historic low on a multiple basis. We repurchased approximately 1.7% of the outstanding shares of the company during the quarter, which is fairly aggressive, especially considering that we are only active in the month of March after coming out of blackout following the release of our Q4 results. We renewed our normal course issuer bid for another year, and our intention is to continue to buy back stock at these levels. To summarize, we have invested in our business, made some positive, strategic investments, kept our balance sheet strong and returned capital to shareholders in the quarter with our dividends and buyback. In terms of allocating capital, we will consider anything that makes Martinrea better, but not at the expense of our strong financial status. We believe consistent free cash flow generation is the road to a higher valuation. Finally, 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. 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 will answer what we can. And thank you for calling in.
Operator: Thank you, Mr. Wildeboer. We will take questions from the telephone lines. [Operator Instructions] Our first question is from Tamy Chen from BMO. Please go ahead.
Tamy Chen: Hi good afternoon. Thanks for the question. I wanted to circle back on the supplier issue that you had and talked about from last quarter. And I am just wondering if in the Q1 results, was there an accrual that you received from this because the suppliers could have delivered?
Rob Wildeboer: No. That issue is essentially behind us at the end of last year.
Tamy Chen: But I thought the issue was that the supplier couldn’t deliver at least as a call you said last quarter that I thought when that happens, usually you would receive a compensation was there not that element?
Rob Wildeboer: No.
Fred Di Tosto: No, no. This is a long-term supplier, and we don't necessarily do that. I mean we know that some customers go after their suppliers when they have a problem, but that's not our philosophy fundamentally.
Rob Wildeboer: Yes. As we said, we said it was a fourth quarter issue.
Tamy Chen: Okay, understood. And my second...
Pat D'Eramo: I mean there is associated cost with that that we will get some recovery from but nothing substantial for this quarter or going forward.
Tamy Chen: Okay, got it. And my second question is for Europe. It's been a bit volatile for the last number of quarters. I understand part of it is the factor of recoveries. Just trying to get a sense of the business, the underlying business and where is that and how we should think about that and then the element of recovery over the coming quarters? Thanks.
Rob Wildeboer: I mean, as we noted, Europe, I mean it's a smaller segment compared to North America. So, you do tend to see some volatility particularly in this environment the last couple of years with all the commercial negotiations. So, you see some up and down. You've got to kind of look at the margin profile over a longer period of time. I mean, operationally, I think overall, it's performing well. So, I think from that perspective it’s in good shape. We are experiencing some volume headwinds there, in particularly some of the EV platforms. So that's a bit of a headwind that we're all dealing with. I think longer term, we're happy with where we are considering some of the systemic differences between Europe and North America from a cost perspective. We do expect it to continue to be positive, in particular after some of the restructuring we have done there. So, we are happy with where we are, and we see a pretty good path in that segment overall. It's a good question though, yes.
Operator: Thank you. Our next question is from Michael Glen from Ramond James. Please go ahead.
Michael Glen: Okay. Maybe just first question, like the sales guidance of the 5% to 5.3%. Given what you saw happen in Q1, I guess, one of the questions that we were getting quite a bit exiting last quarter was, that looked like a really conservative guide. Like do you see yourself trending towards the higher end of that range, given what you saw in Q1?
Rob Wildeboer: From my perspective, I think, the quarter results kind of validate our outlook to some extent. I mean, if you extrapolate Q1 over four quarters within the range. With that said, there is a potential expectation here based on some forecasts that the back half of the year, the volume will get back into some level of seasonality. So, the back half, maybe lower than the front half. But overall, I think, we are comfortable with what the guidance we provided. And I think we are coming in within that range.
Pat D'Eramo: Yes. When you're looking at year-over-year, remember, we had a lot of tooling revenues last year, which were kind of one-off in the tooling. That was certainly higher than we would normally have. So even though we had $5.3 billion or something, I think, the tooling was higher by a couple of hundred million than what you usually be, right? So.
Michael Glen: Okay.
Pat D'Eramo: Having said that if volumes come up, it's a good thing. Like I do think in a very general sense, and you folks that are analyzing the industry are very good at pointing out that the EV rollouts by a lot of people are a lot slower than was anticipated. So, I think that that is a downdraft on the industry for the next couple of years in that context. But at the same time, volumes can surprise you. The other thing that, I think, we think is pushing down on sales as the interest rates, particularly in the United States, where most of these vehicles are sold. And I think people got to get used to where they are, and hopefully, they come down a bit. When people are used to very low interest rates for a very long time, a 7% or 6% or 5% interest is certainly something that is a headwind. But as people get more used to it, it's less of a headwind. And the other thing that we're seeing is incentives from the OEMs are actually increasing. And so, you might see 3.9% for 60 months or something like that, which is now viewed much more favorably than it would be, say, four years ago and what would be viewed as a big penalty.
Michael Glen: Okay. And you mentioned the EVs, and I was just trying to get an idea, you've made some capital investments towards some EV programs. To what degree are you able to give us an idea how much those are dragging right now on your overall margins?
Pat D'Eramo: I wouldn't say directly, but I can tell you we have a variety of negotiations that took place at the front end of a lot of the EV vehicles. The one extreme where all capital was covered upfront and our risk was minimized all the way to some programs that we have high confidence that there will be good volume sales where that wasn't necessary. And everything in between, including getting capital quicker upfront, and volume commitments and those types of things. So, we're comfortable with where we are, but it's still capital that's not running at full out. Most of the EV programs have launched, they're just at lower volumes. So, it's really going to be a matter of how quickly they ramp up. We had seen some delays, but most of them are starting up. They're just not hitting the numbers that they originally were going to be focused on. And then there are some past [ph] EV programs whose volumes haven't reached what they were supposed to as well that seemed like they will steady out at a lower level, and we've adjusted for a lot of that.
Fred Di Tosto: And it's a tough question to get too granular on just based on our capital program and so forth and the way our plants run. But you saw an uptick in our depreciation in the last few quarters or so that's a byproduct of that. And I think it's safe to say that based on our planning, we thought our sales would have been a little higher at this point at EVs been where they were supposed to be, right? So, there is an impact there. But to specifically quantify it, it's not an easy thing to do.
Pat D'Eramo: Yes. And we played this pretty well. We expect that EVs would have a much slower start than what the public anticipated. But as Fred implied, it's probably even slower still than what we anticipated.
Fred Di Tosto: Yes, on the positive side, as the industry normalizes and basically sorts itself out as opposed to artificial pushes or poles, I think that that's good for everyone in the industry.
Pat D'Eramo: And what we are seeing is some rise and some ICE products that was unexpected. In fact, in some of our engine programs, we can't make enough almost, I mean, the demand is super high. So, in some areas, you could pick up some work you otherwise thought was going to diminish.
Michael Glen: And the restructuring, I know that you're taking some restructuring charges, but is any of that – I haven't read through everything yet, but is any of that related to charges on EV program specifically? And are we – should we think about a scenario where you do need to take some impairments against some of this EV capital that you've invested up to now?
Rob Wildeboer: I'm not expecting any impairments. I think longer term, the expectations of AM will come. As it relates to the restructuring, some of it was volume related and some of it tied to EV programs – and some of it – it's just cost saving opportunities identified across the operations.
Pat D'Eramo: We made a lot of improvements in some of our facilities in Europe that allowed us to do some of this as well.
Michael Glen: Okay. Thanks for taking my questions.
Operator: Our next question is from Jonathan Goldman from Scotiabank. Please go ahead.
Jonathan Goldman: Good evening and thanks for taking my questions. Maybe to start off, one for you, Pat, sticking with the EV theme. Given the industry reset and EV volumes that were lower versus the original plan, do you think we've bottomed? Or is there more downside risk to volumes in the near term.
Pat D'Eramo: For EV specifically?
Jonathan Goldman: Yes, exactly.
Pat D'Eramo: Yes. I think – I don't know that it's bottomed, but my belief is it will remain at a low level for a period of time, maybe a longer period of time than most. Still more people buying them than in the past when you look year-over-year, but you've also seen in some particular companies whose volumes have gone down. So, my feeling is it's going to ride on the low side for a while. We're seeing, again, some programs, studies being done to current ICE programs and hybrid programs. studies are being done to extend. So, I think the OEMs are really rethinking the whole product lineup, and you've seen it in the papers and so forth and we're seeing it on our side as well. And so, they'll pick up, but I'm not expecting or hoping it's going to be anything significant in the next year.
Rob Wildeboer: The customers can, right? That's the nature of the industry, and you can't mandate a sale. And we think that's actually a good thing, but customer sort things out, and that's better for the business because people can adjust on the base of what the customers are willing to buy, what they're willing to buy and at what price. There's a lot of and out there hearing a lot of pent-up demand still. And I think that if you look at the average age of vehicles and so forth, it's approaching 13 years, there's a lot of people willing to buy. The question is when and what.
Pat D'Eramo: And I think there's another piece of this that's fallen out that we've seen in the last year or so. There's a whole lot of focus on how far can you go on a battery charge. And I think what the OEs have found with some of the lower-priced EVs is that a lot of the EV buyers are not going that far every day. So, they don't need 500 or 600 miles, and you need 250 miles whatever. And so, the battery technology they can put in those vehicles is lighter and cheaper. And so, I think there's a lot of efforts going on for that right now. And I think as those come into market and the cheaper EVs that's associated with those batteries that maybe only go 250 miles or less I think you'll see a pickup. We saw it pick up on some products that we did not have the distances and so forth to some of the more expensive EVs. And I think you're going to see more of that come in the next couple of years. And I think that will help sales a lot.
Jonathan Goldman: No, that's great color. I really appreciate that. And I guess my second question then really nice improvement in profitability in Europe. I guess, Fred, how much of the restructuring benefits have you realized to date? I think you were discussing somewhere equal to the charge you took of $28 million over six quarters. How is the cadence of those benefits been so far?
Rob Wildeboer: As I know, some of it was volume related, some of the cost opportunities and restructuring in Germany in Europe and Germany particularly quite expensive. So we're starting to see the benefit of that. And I think from a payback perspective, I know one to one and a half years is generally a rule of thumb in Europe. So that kind of answers your question, I think.
Jonathan Goldman: Yes. No, got it. And then maybe to see one more one on the commercial recoveries. I believe on your last call you discussed our guidance makes in at least some level of recoveries. Some of the stuff we're leading automakers are making pretty aggressive comments around no more claims. Is there any change in terms of your expectations for recoveries at this point?
Fred Di Tosto: From my perspective, no. So, as I know, we did bake in some of that in our outlook. So, I think we achieved our objectives in Q1 as Pat now in his opening remarks. Those discussions are getting, I would say, they are getting tougher, but they were always tough. And we'll work through that. And we're confident that we'll be able to meet our objectives this year on that front.
Pat D'Eramo: It's to be fair. Sometimes you see – we'll make a comment and throw out a comment that they're not going to do certain things. But the majority of OEMs, they're fair. They're tough, but they're fair and they work with us. We're not asking for money that we don't need or deserve through whatever process and they know that. And we have the math with it, they know that, and they're working with us. It doesn't make it easy, but they're not all bad. Let's put it that way by any means. In some are particularly good, and those are the best ones to work with.
Rob Wildeboer: Yes. So, as you know, our industry is very collaborative on technology and so forth. And if you're a leading-edge supplier, we get invited to the table for folks. There are things that we need that they need from us as we need from them. The other thing is that the industry is in fairly good shape. OEMs have made a lot of money. And at the end of the day, even though we're spending a lot of capital on EVs and such, it's very good to be making money. We've been in times in this industry when the customers are not making money, and that's not a good place to be.
Fred Di Tosto: And then keep in mind, 70% to 80% of every vehicle out there is made by the suppliers. So, there's definitely a lot of need for good suppliers and the OEMs know it, and they want to treat their suppliers well because they need them as they go forward. Call.
Jonathan Goldman: Got it. Thanks for taking my questions.
Operator: Thank you. Next question is from Krista Friesen from CIBC. Please go ahead.
Krista Friesen: Thanks for taking my question and congrats on the quarter. I was just wondering, obviously, you've moved past the supplier issues that you saw in Q4. But when you think of Q1, how smooth are operations running now versus pre-pandemic? Are things pretty close to normal? Or is there still room for improvement?
Pat D'Eramo: It's funny to say that because we were having this discussion this week as we were assessing making sure if you could take out all the inflationary and costs that have happened, where would we be sitting and our assessment is we're actually running measurably better operationally than we ever have. If you had to take the impact of the pandemic and all the cost creeps that have gone on with inflation, I think you'd see some fantastic numbers. So, I feel real good about the operation. I haven't felt better about it. And we have a few plants that are struggling with a few issues here and there, but compared to the last five years, it's substantially less. And our supply lines, again, we've been pretty lucky with the exception of last quarter, but stability is definitely noticeable in areas where before it has been pretty volatile, especially in the United States. The U.S. had workers, that type of thing we're very volatile. But this past year, it's gotten much better...
Rob Wildeboer: And sometimes the ups and downs come from the customer that's dealing with other supplier, but that's better than it was to.
Pat D'Eramo: Yes. Yes, I agree. So, I'm pretty happy with our operations right now.
Krista Friesen: Okay. Great. And then maybe I guess – as we think about the rest of the year, I mean, Q1 was quite good. Where is the potential – where do you see the potential upside? Does it really come down to volume surprising to the upside? Or are there any kind of internal levers that you can pull? Where could we see kind of more room there?
Pat D'Eramo: I think there's three things. Volume, obviously being the quickest and easiest. There are still a lot of operational opportunities. It's funny as you start to get better; you find more opportunities to get even better. So, our plan for ability to identify opportunities just continues to improve. So that's an internal lever that we're definitely pulling I'd say lastly, there are certain materials we have exposure on that aren't directly covered by our customers, like a lot of our materials not on resale for certain products. And we're starting to see some opportunities to go to other suppliers and reduce our material costs. So, I think over the course of this year, we'll start to see some improvement in that. So, as we go into next year, we'll have a better base, I believe.
Krista Friesen: Okay. Prefect. Thanks. I’ll jump back in the queue.
Pat D'Eramo: Thanks.
Operator: Thank you. Next question is from Brian Morrison from TD Securities. Please go ahead
Brian Morrison: Thank you. Good evening. Good quarter, sales margins, capital allocation. I want to follow up on a couple of questions commercial recoveries. When you talk about that, I understand it's getting more difficult, but are you going after labor or commodities or both at this point in time? What's the forefront?
Pat D'Eramo: Most of it in the past, a lot of it was inflation, labor, those types of things. On a go-forward basis, it's more volume related, I would say.
Rob Wildeboer: Yes.
Pat D'Eramo: Some volume and still some nice sharing material. Yes, some underlayment.
Brian Morrison: Okay. And then I guess I want to ask on that in terms of volumes. Do you have any risk sharing or minimum guarantees within your EV contract? And then conversely, on the new ICE contracts that you take in, are there sunset provisions like volume guarantees within those as well?
Pat D'Eramo: Volume guarantees just straight up very rare, but there are – especially on EVs, as I said earlier, there are contracts that we have that have some protection in them, some – a lot of protection and others, not as much, but we negotiated a lot of that as we went into the EV space. I wouldn't say there's anything unusual in the base space currently that's different than before.
Rob Wildeboer: But volume guarantees are very rare in our world. We love to happen, but. And it's not going happen.
Pat D'Eramo: If you don't get some type of recovery for a program that goes south when the OEs know that there's less suppliers that are willing to come to the party in new programs. So, it's – they work with you.
Brian Morrison: Okay. And then I guess just housekeeping. Fred, maybe in terms of cadence of margins on a going-forward basis, should we think that they should be pretty consistent as we proceed through the rest of the year? Or do you expect some sort of volatility? And maybe can you address that specifically with respect to the second quarter?
Fred Di Tosto: Yes. I mean, I alluded to it a bit earlier. So obviously, a good start to the year. Q1 met our expectations. We're expecting a good second quarter as well. Back half year should be strong as well. We may see some lower volumes based on seasonality, again, I'm basing that on what some of the forecasts are showing and we kind of model after that. So, what that happens on us to be determined. Again, it's a great start drop and that could be a bit of a tailwind on volumes and so forth, so that can help. But overall, that's kind of how I currently see the year playing out, all kind of reflected in our outlook. At this point, we feel pretty comfortable with our margin along for the year.
Brian Morrison: And do you have good visibility like 13, 14 weeks of releases still?
Fred Di Tosto: Yes and no. I mean the old days where you get releases and they tend to happen doesn't always happen these days, right? So sometimes you can't rely on them. So, there's still some volatility from that perspective. So, wish you could be more definitive, but gotten a lot better, but complete visibility, probably not there yet.
Pat D'Eramo: What will happen, there's still supply issues out there with BOEs, and you'll see a release for a week and you'll get to Friday and the release will drop out because they've had a part problem during the week. So that's the volatility we still see quite a bit of.
Fred Di Tosto: Much better.
Pat D'Eramo: But, it's still happening.
Brian Morrison: Okay. And the last question, Fred. Any kind of color, and maybe it's in here. I haven't seen yet a couple of us had a prior call. Tuning sales for the year. Can you give us a ballpark? I have about 250 in there?
Fred Di Tosto: Yes. We were at 65 [ph] for the quarter. So I think in the last call, I mentioned $250 million to $300 million, so in and around that range, I think we're still trending to it.
Brian Morrison: All right. Well done. Thank you.
Fred Di Tosto: Thank you.
Pat D'Eramo: Thank you.
Operator: Thank you. [Operator Instructions] Our next question is from David Ocampo from Cormark Securities. Please go ahead
David Ocampo: Thanks. Good evening everyone. I just had a two-part question for me, and it’s most surprised on EV, but have you guys ever disclosed how much capital that you guys have deployed into those programs that are specific mainly the EV where you can't kind of switch it over to ICE? And then the second part of that is when we think about the compensation that you guys are seeking, is the compensation required in order to kind of hit your return on capital threshold? And if you guys don't get any compensation, you guys would be essentially, below – that return to capital and destroying value?
Fred Di Tosto: I kind of missed the first question. It came across a little been muffled.
Pat D'Eramo: The dividing how much capital we spend on these versus ICE.
Fred Di Tosto: Yes, we don't disclose it that way. We kind of just kind of outline our capital program in total. But if you go back to similar releases, there's been quite a nice mix between EVs and nice wins that we've announced. So, I think I would say if I heard just off the top of my head, I generalize the mix, I would say it's fairly balanced over the last two, three years in terms of what we've won, and that was kind of align itself with the capital we deployed in the organization. The second question?
David Ocampo: Yes, sorry. Just on the compensation. Is it required to hit your return on capital threshold or is it not?
Fred Di Tosto: To some extent, yes, because when you’re short on a volume obviously, your original modeling, it would be challenging to kind of hit those returns. So, to some extent, yes. And that's a very good tricky right because a lot of the OEMs don't want to pay for profits and all that kind of stuff. So that's where the [indiscernible] form negotiate. But when you're dealing with the volume expectation, yes, I mean, it's safe to say that we're trying to target those returns that we signed up to initially.
Pat D'Eramo: Yes, it is fair to say that the volume shortfalls have been an EV program is rather a nice programs – right so on.
David Ocampo: And can you refresh us what your IRR targets are or return on investment capital targets are?
Fred Di Tosto: Yes, we started off in IRR 15 and we have disclosed this in the past. And as rates have gone up, we've increased to some extent from that level. So, we're a bit higher than 15.
David Ocampo: Got it. That's it for me. Thanks everyone.
Fred Di Tosto: Thanks.
Pat D'Eramo: Thank you.
Operator: There are no further questions registered at this time. So, I'll return the meeting back over to you, Mr. Wildeboer.
Rob Wildeboer: Well, thank you. It's amazing. I'll quick a call can happen when there was a playoff game – and we hope everyone has a chance to watch elite [ph] victory if it happens. Thank you for the questions and discussions. At the end of the call, let me summarize on after the group three takeaways for Propulsion agnostic system supports solid results in a volatile EV environment, which I think we talked of in the quarter, we produced good results with solid margins and free cash flow and we will have free cash flow this year. The first quarter was a very good start to that much better than last year. And we think there's value of the stock more buyers. So, if any of you have further questions, I want to talk to any of us or Neil Forster, please feel free to contact any of us, the information is in the press release. Thank you, and have a great night.
Operator: Thank you. Your conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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