Martinrea International Inc.

All participants, please stand by. Your conference is now ready to begin. Good evening, ladies and gentlemen, and welcome to the Martin Rea International Second 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 Wildemore. Please go ahead, sir.

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 DeRamo, Martin Reyes' CEO and President, and our CFO, Fred DiTosto. Today we will be discussing Martin Ray's results for the quarter-ended June 30, 2022. I refer you to our usual disclaimer in our press release and file documents. I will speak briefly, Pat will speak, then Fred, and we'll do some Q&A. I am going to be very brief today and focus on one takeaway point for you, and one only. Better times are ahead for us and for automotive suppliers. Write that down. Embrace that concept and brand it on your foreheads. Despite all you read about, war in Ukraine, interest rates, inflation, recession, house prices, supply chains, labor shortages, erratic production schedules, cyber, pandemic, climate change, tariffs, Joe Biden, Donald Trump, whatever. So much doom and gloom. Despite all that, better times are coming for us. As this quarter shows, we had a good quarter. making decent money even today, and will continue to improve. I went into this outlook in detail in my speech at our annual general meeting in June. You can see it or read it by accessing our website. I won't repeat it here. It's fairly lengthy with a lot of data. The fact is that automotive parts suppliers, note I'm saying suppliers, not OEMs or dealers, have been in a recession for over two years. We are hit when production volumes are down We were hit badly in 2020 when the industry stopped for three months. The second half of 2020, we came back strong. But since that time, we have been hit by supply shortages, inflation, and so on. But things are looking up. For us, production is going to increase from here, and that will help us. Even if there is a general recession next year, production volumes are up. That's what drives our revenue and profit to a great extent. There's a lot of demand for what we make. inventories are low, and people got to buy vehicles. Sales are down these days because production is down. Sales will go up as production does, and production will go up. Pat and Fred will talk about our company, operations, and financials, and you can see the strength of our company and what we are doing in so many ways from them. But once again, my point is this. Things are decent now, and they're going to get better. I believe the company and our outlook have never been stronger. And now here's Pat.

Thanks, Rob. Hello, everyone. As noted in our press release, we generated an adjusted earnings per share of 32 cents and an adjusted operating income of 46 million in Q2, up 17% year over year. Production sales came in at 1.1 billion, up 25% year over year. Adjusted operating income margin came in at 4.1%. Much improved over Q3 and Q4 of 2021. and better than Q1 of 2022 on lower production sales. While the production environment has improved compared to the back half of last year, we continue to deal with supply-related disruptions with our customers. At the same time, we've made good progress on recovering inflationary costs through commercial negotiations. I'm proud of the team. This is a cumbersome activity, and they have worked diligently throughout the year with our customers. We have concluded a number of agreements on favorable terms and will achieve more inflationary adjustments before wrapping up these discussions. The negotiations are ongoing, and we expect them to be substantially complete by the end of the year. Keep in mind, commercial discussions tend to be a normal part of the business, though at a much lower level. We are making good progress on margin recovery. Having said that, margins are still below our potential and our outlook for next year as we continue to be held back by cost inflation, program launches, primarily where customers have not achieved ramp volumes due to chip and other supply shortages, as well as continued production disruptions. On the cost side, energy remains a significant headwind in Europe. Natural gas prices continue to move higher, which impacts our overall operations in the region. As discussed earlier, we are looking for our customers to share this inflationary burden. Other commodities such as steel and aluminum are beginning to normalize from very high levels. Of course, a large portion of our input costs, but not all are protected from price fluctuations and these commodities through OEM resale agreements in the case of steel and other pricing pass through mechanisms in the case of aluminum. Overall, While the environment remains challenging, our Q2 performance is where we expected it to be, and our results are expected to improve in Q3 and beyond as these challenges subside and customer production smooths. This should set the stage for a multi-year period of strong production volumes, margins, and free cash flow, with the majority of our plants essentially running at full capacity as vehicle inventories remain historically low and demand still high. As such, we expect 2023 to be a strong year for us. Turning to North American operations, our Q2 operating income performance was generally consistent with Q1 on lower production sales. As mentioned, we are still seeing disruptions from the customers, though better than we saw last year, particularly in the back half of last year. And as I mentioned earlier, we are making good progress on recovering inflationary costs. We continue to launch on the largest book of business in the company's history worth 800 million in annualized sales once these programs reach mature volumes. As I've said over the past year, this record program activity has resulted in higher than normal launch costs, which has been compounded by the volatile production environment we're experiencing. The good news is we are now hitting an inflection point where you should start to see these costs decline more meaningfully. resulting in better margin performance. This, of course, assumes that customers are meeting ramp-up volumes, which so far is hit and miss. Post-pandemic, with continually improving supply issues, we are picking up progress on our lean or martinrea operating system activity. Resource constraints inhibit speed, but as the workforce stabilizes, we continue to see great potential. This, along with continued commercial settlements, will improve our margin profile as well. Turning to Europe, operating income turned positive this quarter, given the recovery of inflationary costs and continued operational progress. Energy costs remains a significant headwind in this segment, and as such, we are devoting a lot of time and effort to recovering our fair share of these extra costs. We are still a long way from where we need to be in Europe, but I'm happy with the progress being made in the face of some pretty significant challenges. In our rest-of-world segment, we continued to perform close to break-even, given weaker volume and mix year-to-date, as well as the strict COVID lockdown measures in China, which made it difficult for people to come to work in both our facilities as well as our customers' plants. I'm pleased to announce that we have been awarded $85 million in new business since our last call, $70 million in our lightweight structures group, which includes additional volume on the Ford Mach-E and additional content on the GM BEV3 electric vehicle program. In our propulsion systems group, we have a $15 million addition in volume. As you will note, we continue to win meaningful work on EV platforms with key customers. Now I'd like to look forward and take a moment to talk about the great progress we are making on our project breakthrough strategy. Launched in 2019, project breakthrough is both a product strategy as well as a commercial strategy. It involves the company marketing itself to customers through three major product groups. Lightweight structures, which includes body and white, suspension and other structural applications, primarily steel and aluminum, propulsion systems, which relates to products to propel or stop the vehicle. Products like engine blocks, transmission housings, battery enclosures, electric motor housings, as well as fluid system products, including thermal management solutions. And last, our flexible manufacturing group, or FMG, which includes automotive module assembly and components for various industrial applications. In essence, Project Breakthrough is is intended to grow our revenue and margins by providing more value-added products to our customers. It represents an evolution in our business model from being a supplier of components that are more commoditized in nature to one that provides highly engineered systems and assemblies that often contain multiple unlike materials. This involves combining different types of steel and or aluminum using complex joining methods, a capability in which we are quite advanced. Project Breakthrough also is intended to forge deeper long-term partnerships with our customers by providing them with a reliable product engineering source, an area that we have grown and have strong capability. We've introduced a number of Breakthrough products to our customers since launching the strategy in 2019, which are unique in the marketplace. We spoke about a number of these products at our AGM back in June, and we have published an investor newsletter called project breakthrough, progress to date, outlining these products. I'll touch on a few of these, but I would encourage you to check out the newsletter and the video from our annual general meeting, both of which are available on our website. First, the Stellantis Jeep Grand Cherokee Front Rail Assembly. This is the front rail assembly on the new Grand Cherokee. It contains multiple materials as well as advanced technologies and joining processes. and therefore has a high degree of value add to our customer. The assembly has a hydroformed upper tail and a die-cast shock tower that involves joining Gen 3 advanced string steel with aluminum using a combination of structural adhesives and advanced fastening and welding techniques. We provide these assemblies for both the ICE and plug-in hybrid variants of the Jeep Grand Cherokee. Next, we have the front and rear subframes for the Ford Mach-E, On this, we are fully responsible for design and development as well as validation of these products on a very tight timeline. They consist of multi-material front subframe that has a lower-pressure die-cast hollow aluminum rear attached to a welded steel front structure and a one-piece low-pressure die-cast hollow aluminum rear subframe. Moving along, we have the Lucid Air front subframe, which is made of hollow low-pressure die-cast and extruded aluminum components. What makes this product unique is that it is joined by using only structural adhesive and rivets. There's no welding involved, which is a first in my experience. The rear subframe is a one-piece hollow aluminum die-cast structure. Last for today, but certainly not least, we have our graphing enhanced brake line that we introduced in late 2020, which has recently been named a 2022 Automotive News PACE Award finalist. Graphene Guard is a patented technology that coats brake lines with graphene in order to provide industry-leading abrasion protection, a rate reduction of up to 25% compared to a standard brake line due to the elimination of components and improved chemical resistance and high temperature performance. The brake line is currently in production on three programs of Ford, the Ford Super Duty Truck, the Ford Explorer and Lincoln Aviator, and the Ford Edge and Lincoln Nautilus. as well as the Sierra and Silverado heavy-duty trucks with General Motors. We have made some great progress in both product and process innovation since launching Project Breakthrough in 2019. We've introduced some truly unique products to the market that are complex and value-added, in that they solve problems or deliver superior attributes to our customers. Some of these are an industry first. I'm excited about the work our team has done to bring these innovative products to market. Innovation is ingrained in the Martin Rea culture, and Project Breakthrough is a cornerstone of our innovation efforts. It is a key aspect of our organic growth story and is expected to help drive sales growth and margin expansion well into the future. Lastly, I'd like to thank the Martin Rea team. I'm very impressed with the work we have been accomplishing, especially over the last few months, and I applaud your efforts. With that, I'll pass it to Fred.