Martinrea International Inc.

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.

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, then Pat and Fred, and then Pat again briefly, and then we'll do some Q&A. 2023 was a record year for Martin Rea 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 sizeable 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 ten 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 company. 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, 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. 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 create 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 and 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.