Martinrea International Inc.

Good evening, ladies and gentlemen. Welcome to the Martin Rea International Third Quarter Results Conference Call. Instructions for submitting questions will be provided to you later in the call. I would now like to turn the meeting over to Mr. Rob Wildeboer. Please go ahead, sir.

Good evening, everyone. Thank you for joining us today. We always look forward to talking with our shareholders. We hope to inform you well and answer questions. We also note that we have many other stakeholders, including many employees, on the call, and our remarks are addressed to them as well, as we disseminate our results and commentary through our network. With me are Pat DiRamo, Martin Reyes' CEO and President, and our CFO, Fred DiTosto. Today, we will be discussing Martin Reyes' results for the quarter-ended September 30, 2023. I refer you to our usual disclaimer in our press release and file documents. I will speak, then Pat, then Fred, then me again briefly, and then we'll do some Q&A. Before Pat and Fred focus more particularly on the company, our progress, and our results, a few overview comments on how we see the world. The UAW strikes were disruptive, messy, and more acrimonious than they should have been. Not a material impact on our great Q3, but it impacts our fourth quarter and year end, just as the GM strike in 2019 impacted our fourth quarter then. But it could have been a lot worse. We now have labour peace at our largest customers for years. A good thing. And customers have to make up production after the strike, which bodes well for the first half of 2024. We continue to believe the industry is stable, with volume set to expand in the coming years, particularly in North America. We went into the reasons for this in some detail in our past two annual shareholder meetings, including our last one in June, and on some of our recent calls. But I'm going to make just a few quick points, given recent developments, to bring it to the present. The North American economy remains in pretty good shape. as we've been saying for many months and now most agree with us. The underlying U.S. economy is solid, unemployment is at low levels, and there is strong underlying demand for housing and autos. People's confidence is increasing and people know they can find work. The U.S. consumer, who drives 70% or so of the U.S. economy, is in decent shape. Note that U.S. consumers often have long-term mortgages at fixed rates, so increases in interest rates do not hurt homeowners in the U.S. as much as in Canada. Second, there remains a shortage of vehicles and inventory while being rebuilt has some ways to go. U.S. SAR and production levels are rebounding but are still not at historical levels. by which I mean average levels over the past 20 years, roughly the lifetime of our company. We continue to see production and sales of vehicles going up in 2024 from 2023 and up in 2025 from 2024, a good background for our business. Let me address interest rates. Interest rates, I think, have peaked in Canada and are close to peaking in the US. As I've said before, our company started 22 years ago, so at least in terms of interest rates, we were back where we started. Note that in 2001, USR was higher than it has been in 2023. When US population was 285 million people, today it is 340 million. Think about that. I do believe that today some people are holding off on auto purchases because of higher interest rates. not to mention higher auto prices, but the reality is that people get used to paying interest and the market adjusts. When you're used to 0% financing, a rate of 2.9% or 3.9% looks punitive. When rates are generally over 5% for a while, such an interest rate looks like a bargain. And I imagine we will see some competitive auto financing in the next few years. We are seeing some of it now. Core inflation is coming down by whatever measure. Note that we have seen reduced prices or reduced rate of price increases in many areas recently. We also believe the rate of wage increases to help workers deal with inflation in the economy will moderate. Looking at the UAW, for example, a lot of the increase was the catch-up to broader wage hikes seen in the economy in recent years. Geopolitically, We share the concerns of everyone about conflict in the Ukraine, in the Middle East, and potentially elsewhere. We don't want to see another energy crisis, which is why I personally believe we should be ensuring adequate or surplus energy supplies. Overall, then, our industry is in pretty good shape, as is our company. That's not to say, of course, that there are not or will not be some headwinds. Supply chains have challenges, albeit reduced. There will be geopolitical issues. EV sales projections may be way too optimistic. OEMs must learn to make money on EVs, etc. But I think there is a tendency to be overly negative when looking at things through a short-term lens. And so sometimes it helps to take a step back, look further out, and put things in perspective. And we just had a record quarter with solid free cash flow. We are positive and pumped. With that said... Here's Pat.

Thanks, Rob. Good evening, everyone. Our third quarter financial results were strong and generally consistent with the prior quarter from a production, sales, and operating margin perspective. Adjusted EBITDA continued at record levels, coming in at $163 million, and adjusted operating income margin was 6%. Free cash flow was up nicely quarter over quarter as expected. Solid performance overall. Fred will provide some more color on this. As Rob spoke earlier, we saw the UAW workers at the Detroit 3 OEMs go on strike in multiple locations, which began on September 15th. As many of you are aware, the UAW has reached agreements with Ford, Stellantis, and General Motors, which is great news. In Canada, Unifor quickly reached settlements with the Detroit 3 Canadian operations. The US OEM plans affected by the strike action are coming back online. As such, The restart and ramp back up has begun, but it will take some time to get back up to full volume and it could be a bit bumpy depending on the readiness and performance of the supply base. Our plans are in place and we are executing with no problems. The strike did not have a significant impact on our Q3 results given the limited scope and the fact that it was only in effect for a few plans for the final two weeks of the quarter. With that said, will have more impact on Q4 production volumes and results. While we have made great strides in diversifying our customer base in recent years, the Detroit 3 OEMs still account for close to two-thirds of our sales. The plants that were impacted by this strike action cover a number of different platforms, including some significant and profitable programs for the Detroit 3. We do have content on the affected platforms, so we were directly impacted. There have also been some spillover effects, most notably lower engine block production in some cases. We have managed the situation in flex cost effectively. The labor reductions in some situations are a bit tricky in the tight labor environment because we want to make sure we have the workforce as the volumes come back. As such, we have been careful, adjusting prudently, knowing full well that we would be called upon to turn things back on in short order. What production volumes will look like in the fourth quarter is a little unclear at this point, given the strike action, as well as the pace of the restart and ramp up of customer plans. But that said, we are providing you with an update on our 2023 outlook. Notwithstanding the strike, we are confident that we will meet, if not exceed, the high end of our previous sales outlook of $4.8 to $5 billion, as we were tracking well ahead of this pace as of Q3, in part due to higher than expected tooling sales, which Fred will provide more color on in a moment. Given a lower volume projection in Q4, including the strike impact and some potential unevenness around the restart and ramp-up, we may fall short of the low end of our 6% to 7% target margin range, but we should still be close. The higher tooling sales, which tend to be at low or no margin, is also a factor in this. Likewise, we continue to expect record free cash flow for the full year of 2023, but could also end up below the low end of our $150 to $200 million target range. Again, we should be close. Overall, a really strong year. I would like to emphasize we were on track to meet our outlook heading into the fourth quarter before the strike, and we expect any lost volumes as a result of the strike to be made up over the coming quarters. History has demonstrated that this is typically what happens. For example, following GM's strike in 2019, the company worked overtime to rebuild lost volumes in order to meet demand and prevent sales losses. There continues to be a lot of upside in our industry. Automotive sales in our core North American market remain resilient. Production is expected to grow in the coming years, and there's still a lot of pent-up demand and not enough vehicle inventory. Of course, we are mindful of macro risks such as higher interest rates and inflation, but overall, we remain upbeat about the long-term prospects of our business. Turning to our global operations, in North America, our adjusted operating income margin declined quarter over quarter on production sales that were down by about 2%. As we indicated on the last call, the timing of commercial settlements results in some peaks and some valleys, in our financial results and margin profile between quarters. We had a lower amount of settlement money in Q3, which explains part of the margin decline. The lower production sales and higher tooling sales quarter over quarter were also factors. Again, tooling sales tend to earn low to no margins. We are performing well operationally in North America, at least as good if not better than we were performing prior to the pandemic. This reflects the continued progress we have made in our Martin Ray operating system initiatives. Given that our operations are performing at a high level, future progress will primarily be a function of volumes. On that note, volumes have been relatively consistent, setting aside near-term distortions as a result of the strike. Supply chain pressures are easing, though we do continue to deal with some issues that are impacting production, such as labor availability in the United States. As Rob mentioned earlier, volumes on a number of electric vehicle programs have been slower to ramp up. This doesn't come as any surprise to us. While this impacts us to some extent on EV volumes, it stands to reason that fewer EV sales will likely translate to more ICE vehicle sales. On the cost side, inflationary headwinds are generally better compared to the last few years, though persist in some areas of the business. Our efforts to offset these costs, as well as program volume shortfalls through commercial activity, are ongoing. We saw some settlements in the third quarter and expect more in the future. Commercial activity will continue in 2024, though we expect it at a more moderate pace. Turning to Europe, adjusted operating income margin improved quarter over quarter. As we alluded to on the last call, the third quarter benefited from favorable commercial settlements in Europe. Besides the commercial activity, which has yielded positive results, the region continues to deal with weaker than expected production volumes and inflationary pressures. While these headwinds did not worsen in the third quarter, they have yet to improve in any meaningful way. In our rest of world segment, a small portion of our overall business representing about 3% of the third quarter production sales, adjusted operating income margin was higher quarter over quarter, similar to Europe, commercial settlements and our rest-of-world segment drove a strong performance in the quarter. Production volumes in China overall have also been weaker than expected. I am pleased to announce that we have been awarded $80 million of new business since our last call, consisting of $70 million in our lightweight structures commercial group and $10 million in our propulsion systems group with multiple customers. Year-to-date, new business awards have totaled $300 million. Overall, we are pleased with the third quarter performance. We continue to manage our operations well, despite the headwinds. I want to thank the Martin Rea team for their hard work in delivering these results, as well as their dedication and perseverance. With that, I'll pass it to Fred.