Martinrea International Inc.

Good evening, ladies and gentlemen, and welcome to the Martin Luya 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.

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 DiRamo, Martin Reyes' CEO, and our President and CFO, Fred DiTosto. Today, we will be discussing Martin Reyes' 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 file documents. First, Pat will make some comments, then Fred, then me, and then we'll do Q&A. And now, here's Pat. Thanks, Rob. Good evening, everyone. As noted in our press release, we generated an adjusted net earnings per share of 62 cents and adjusted EBITDA of $163 million in the first quarter. Adjusted operating income margin came in at 6%. which is 160 basis point 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 the number of our top platforms had strong production volumes quarter over quarter. While Q1 production sales in Europe were sequentially higher, they remained 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, for 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 type, so we can adapt our business over time to any mix of EV, 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 in 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 worth $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 and Toyota. In addition, We were awarded replacement business on both lightweight structures and propulsion systems with approximately $150 million in annual sales at mature volumes with a variety of OEMs, including General Motors, Ford, and Honda. 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 and 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 Martin Rea team for their hard work and dedication in these continued challenging times. With that, I'll pass it to Fred. Thanks, Pat, and good evening, everyone. As our first quarter results demonstrate, we had a good start to the year as we bounced back from the disruptions we faced in Q4 from the strike and supplier issue that Pat mentioned earlier and that we spoke about on 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 base 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 to quarter, we generated an adjusted operating income of $79.2 million, up from $56.6 million in Q4, On production sales, they 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 base points quarter-by-quarter. Note that adjusted operating income excludes $6.3 million in restructuring charges, which reflects the right size and 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 62 cents in the quarter, a big improvement over the 37 cents 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 generally experience a normal season of build and 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 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-to-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 base points from the 5.8% generated in Q1 of last year. I refer you to our Q1 MD&A for commentary on year-over-year variances. Turning to our balance sheet, net debt, excluding IFRS 16 lease liabilities, increased by $74 million quarter-per-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 Ecospheres 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 non-cash 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 1.51 times, up from 1.4 times at the end of Q4 2023. While our leverage raised to a slightly higher quarter for the reasons I explained, it remains within our long-term target range of 1.5 times 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 and $5.3 billion, an adjusted operating margin of 5.7 to 6.2%, and free cash flow, excluding IFRS 16 lease liabilities, of $100 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 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 now turn it back over to Rob. 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 continued 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 nine times faster than industry standards, thereby lowering production costs by as much as 80%. Equispheres is a specialist in aluminum powder, and Martin Ray 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 spent 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 multiples basis. We repurchased approximately 1.7% of the outstanding shares of the company during the quarter, which is fairly aggressive, especially considering that we were 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 the shareholders in the quarter with our dividends and buyback. In terms of allocating capital, we will consider anything that makes Martin Rant 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'll answer what we can. And thank you for calling in.

Thank you, Mr. Wildeboer. We will now take questions from the telephone lines. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star one at this time if you have a question. There will be a brief pause while participants register, and we thank you for your patience. Our first question is from Tammy Chen from BMO. Please go ahead.