Martinrea International Inc.

Good evening, ladies and gentlemen, and welcome to the Martin Rea International Third Quarter 2024 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 this evening are Pat DeRamo, Martin Rea's CEO, our president, Fred DiTosto, and our chief financial officer, Peter Cirulis. Today we will be discussing Martin Rea's results for the quarter ended September 30, 2024. Overall, as you will see, a good quarter. Our operating results met our internal expectations based on the reduced level of production volumes for the quarter. Our free cash flow was strong, and our EVTA was solid, with EVTA margining up year over year. My colleagues will give you more detail. I refer you to our usual disclaimer in our press release and file documents. First, Pat will make some comments on the business, then Fred on operations, then Peter on the financials, then me on some geopolitical issues including the implications of the US election as well as capital allocation, 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 EBITDA of $154.1 million and an operating income of $65.9 million in the third quarter. Q3 adjusted EBITDA margin came in at 12.5%, and operating income margin was .3% on production sales that were down about 8% quarter over quarter. On a Q3 -to-date basis, our adjusted operating income margin was 5.9%, well within our 2024 guidance. On the last call, we mentioned that we expected a return to the historical seasonal pattern in our industry, where sales were stronger in the first half of the year, with Q3 being the lowest sales quarter and Q4 being better than Q3. While we saw this play out in the third quarter, we currently see production volumes receding somewhat in the fourth quarter, as customers adjust inventory levels before the year end. As such, at this point, we expect Q4 production sales to be lower than Q3, which is atypical from a seasonality perspective. We are seeing what many of you are already aware of via our customers and our data providers such as IHS and awards. Vehicle inventories have grown at many customers, given affordability challenges and a high interest rate environment coupled with a lull in purchases due to some poor OEM product planning. Generally, OEMs have not adjusted selling prices as supply has come back onto the market, which has resulted in higher inventories on several platforms, some of which are big programs for us. This will ultimately adjust, and we do expect volumes to improve beginning in Q1. Peter will have more to say on our 2024 outlook during his remarks. While the OEM inventory correction will sort itself out, our view is that EV volume weakness is likely to persist for longer. What this means is our plans with EV business will likely remain underutilized for a period of time. Now, when faced with lower volumes, the typical industry response is to lay off people to reduce costs and protect margins. While this makes sense, reducing direct labor doesn't completely offset the pressure on margins in most cases. So the tendency for a lot of companies is to cut even deeper to make the quarter or the year look more acceptable. In my nearly 40 years in this industry, I've watched the lemmings jump off the cliff time and time again, with few exceptions. What I mean by this is during lower volume periods, our industry tends to cut too deep. This leads to an industry-wide brain drain, and when the volumes ramp up, which they inevitably do, sometimes very quickly, the OEMs and supply base miss an opportunity and fumble their way back, while missing out on what could have been a much better situation. Instead, when volumes ramp up, the industry works overtime, expedites products, cleans up from potential quality issues and scrap because it doesn't have enough people or it doesn't have enough of the right people. We end up recruiting skill that we previously laid off for retired early and end up paying more for less experienced people. There are exceptions, one example being Toyota, where I worked for many years. Yes, they had buyouts and they laid off temporary employees when they absolutely had to, but the rest stay employed. And when volumes turn up, Toyota has historically been ready to capitalize on the opportunity because they have their people so they can produce. All you need to do is look at the numbers. Of course, this is not Toyota's only advantage, but it's a big one and it demonstrates a commitment to their organization and speaks to their focus on success over the long term as opposed to short-term results. Lower volumes provide an opportunity to make operating improvements that will benefit the company when volumes ultimately improve. If we're not comparing ourselves to Toyota, they're an OEM and we're a tier one that relies on many different OEM customers. But in this light, we are going to take better advantage of the lower EV volume period. Of course, we'll flex manpower throughout the company and we'll adjust overhead based on our expectation that EVs will continue to experience lower volumes for a period of time. But we will also use the lower volumes as an opportunity to install new innovative machine learning technology that will give Martin-Raya a competitive advantage. This unique technology will promote efficiency gains on multiple fronts including safety, speed, and quality. It will ultimately reduce the cost of key inputs including labor, consumables, energy, just to name a few. Similarly, we expect to see significant uptime gains in both our major stamping and casting assets. Using our in-house resources will allow Martin-Raya to reap substantial gains in the coming years at a cost that would otherwise be greater and take longer to achieve. By acting now, we can shave a few years off of what would otherwise take five to six years to complete. This new technology is consistent with our Martin-Raya operating system and continuous improvement mindset. Our commitment to lean will help increase the speed of adoption of this innovative machine learning technology across our operations. We recently reinforced our advanced manufacturing team. The advanced manufacturing team is responsible for scaling our new machine learning technology as well as other innovative technologies, many of which were incubated in our plants across our global operations. We're investing in the future of our business with great people and leading edge technology. With that, I'd like to thank the entire Martin-Raya team for their steadfast commitment and for their continually rising to the occasion to take advantage of these great opportunities. Now, here's Fred.

Thanks, Pat. Good evening, everyone. Looking at our operations, we continue to execute well. Our Martin-Raya operating system, otherwise known as MOS, continues to bear fruit across the operations with more opportunity in front of us. Ultimately, we are very pleased with how we are managing what is in our control and capitalizing on cost-saving opportunities across all our plants around the world. In addition, we continue to make good progress in our commercial negotiations, obtaining compensation for volume shortfalls on EV programs as well as some lingering inflationary costs. These efforts are helping to lessen the impact of the current lower production sales. In North America, our Q3 performance is generally consistent -by-quarter and -by-year, with the impact of lower production sales and operating income being mostly offset by a higher level of commercial settlements, along with some productivity and efficiency improvements. As Pat alluded to, we are experiencing some additional production volume shortfalls from OEM customers, most notably Stellantis, a big customer of ours, but also some others as they adjust their inventories before the end of the year, more so than they usually would from a seasonality perspective. We have already been impacted by OEM production shutdowns, often with little to no advance warning, which, as you all know, makes it challenging to properly flex costs. The impact is being felt across all powertrain types, meaning it's not only an EV issue as we had anticipated in our Q2 earnings call. Our operating income in Europe was down in the third quarter, reflecting lower production sales and our lower level of commercial settlements, both -by-quarter and -by-year. Like North America, we are facing some incremental volume shortfalls in Europe that is carried into the fourth quarter. Likewise, our rest of the world operations were essentially at break even in the third quarter, reflecting lower production sales and a less variable sales mix. As you know, our rest of the world segment accounts for a relatively small portion of our overall business. Overall, as already noted, we are happy with how we are executing operationally. Okay, moving on, I am pleased to announce that we have been awarded a new business worth $35 million in annualized sales and mature volumes, which includes $30 million in our Lightweight Structures Commercial Group, consisting of various structured components with multiple customers, including International Motors, formerly known as Navistar, BMW, and Nissan, and also $5 million in our Propulsion Systems Group with Audi. I'd like to switch gears now, and I wanted to take a few minutes to talk about our Global Leadership Conference that we recently held in Huntsville, Ontario, a couple hours north of Toronto. The GLC brought together over 150 of our top leaders across the organization for three days to discuss the company's strategic direction and priorities for the future. It was a great event. We had leaders in attendance from every region that we have the presence in, including Canada, the U.S., Mexico, Brazil, Germany, Spain, Slovakia, China, and Japan. Leaders left the conference energized and excited about our future, and with clear direction on priorities for 2025 and beyond. While we covered a broad range of topics at the conference, there was a clear emphasis on innovation, as well as MOS, our Lean Management Approach. We spent a lot of time talking about the plan of the future. Pat spoke about how we plan to scale machine learning throughout the organization in detail. This is an important initiative to drive innovation, but not the only one. We also talked about other innovations taking place in our internal research and development efforts, as well as through our Marmaray Innovation Development Initiative, or what we would commonly refer to as MIND. We also held panel discussions, breakout sessions, and there are testimonials on how our leaders are implementing MOS initiatives across the company to strengthen our competitive position. A lot of great ideas came out of the breakout exercises, and we are now in the process of executing on a number of these ideas. Overall, we see a lot of opportunity to enhance our margin profile through MOS over time. With that said, I'd like to thank our people for their commitment to the long-term success of the company. We truly value your contribution. Thank you. Now, here's Peter.

Thanks, Fred. Taking a closer look at the results quarter over quarter, we generated an adjusted EBITDA of $154 million in the third quarter, down from $166 million in quarter two. An adjusted operating income was $65.9 million, down from the $81.6 million that we had generated in quarter two, on production sales that were down about 8%. Tooling sales increased by more than 80% quarter over quarter, reflecting some quarterly variability, which is not uncommon. On -to-date basis, tooling sales continue to trend a little over half of their year-ago levels, as they've moderated from an elevated level in 2023, in line with our expectations. Adjusted operating income margin came in at 5.3%. This reflects a 16% decremental margin on the lower quarter over quarter production sales, which is actually very good considering the production volume picture that both Fred and Pat spoke about earlier. There is also some impact from higher tooling sales, which generally carry low margins. Moving on, pre-cash flow before IFRS 16 lease payments came in at $57 million, a strong result, and higher than the $51.7 million we generated in quarter two, impacted positively by flows from non-cash working capital and lower cash taxes paid, including lease payments under IFRS 16 accounting. Pre-cash flow was $43.9 million compared to $38.3 million in quarter two. Net earnings per share would have come in at 44 cents had it not been for an unusually high effective tax rate during the quarter, driven by the rapid depreciation of the Mexican peso against the U.S. dollar, which is the functional currency for our Mexican operations, a solid result. The higher tax rate is primarily a function of a specific tax treatment of foreign currency fluctuations, which only exists under IFRS accounting rules and does not impact cash taxes or cash earnings. This resulted in us reporting an EPS of 19 cents for the third quarter. As you are likely aware, we have substantial operations in Mexico, with our Mexican sales accounting for just under 40% of our consolidated sales year to date in 2024. In situations where local and functional currencies differ, IFRS accounting rules require us to revalue the tax value of our assets and liabilities from local currency to functional currency at the reporting date, with the related foreign exchange movements impacting the tax expense for the period. As noted, this treatment only exists under IFRS accounting, so our peers that report in U.S. GAAP, for example, are not affected by this issue. It is also very important to note that these foreign exchange movements from this IFRS requirement are non-cash in nature and tend to balance out over time. The pace and magnitude of the change we have seen in the Mexican peso resulted in an outsized non-cash impact during the quarter, which was recorded as an increase in tax expense, which again will likely reverse at some point down the road as the FX rate moderates. This, along with other foreign exchange related items, resulted in an effective tax rate of approximately 70% for the third quarter. On a year to date basis, excluding these foreign exchange items, our effective tax rate would have been approximately 31%. We believe this is a better indication of what a more normalized tax rate would look like for quarter three, excluding the short-term distortions caused by this IFRS accounting requirement and fluctuating foreign exchange rates. Based on current and constantly moving FX rates, the tax rate is likely to remain elevated in quarter four. Of course, the ultimate impact on EPS in quarter four and beyond will depend on what happens to the exchange rate. But again, this is accounting noise, creating non-cash fluctuations in our effective tax rate, which in turn impacts the EPS calculation by increasing the income tax expense, which lowers the net earnings on an accounting basis only. No cash impact. I refer you to our quarter three MD&A for further clarification. Looking at our performance on a -over-year basis, third quarter operating income of $65.9 million was down from $83 million in quarter three of last year on production sales that were about 7% lower, representing a very good decremental margin of 21%. Our operating income margin of .3% was approximately 70 basis points lower -over-year. However, our quarter three adjusted EBITDA margin was actually up -over-year to .5% from .9% last year. The difference between adjusted EBITDA and operating income margin reflects higher depreciation and amortization expense, largely driven by recent investments for EB platforms, coupled with the lower than expected ramp up of their respective production volumes. In summary, the business is generating a healthy level of EBITDA. I refer you to our MD&A for further commentary on -over-year variances. Turning now to our balance sheet, net debt, again excluding IFRS 16 lease liabilities, decreased by approximately 32 million quarter over quarter to 820 million. This reflects the free cash flow profile for the quarter, as previously outlined, and roughly $9.5 million spent repurchasing approximately 826,000 shares for cancellation through our normal course issuer bid. We've mentioned on previous calls that capital allocation would be balanced between share buybacks and debt reduction. Both are important priorities for us, and we have demonstrated disciplined execution here on both fronts in the third quarter. Our net debt to adjusted EBITDA ratio ended the period at 1.46, down from 1.49 at the end of quarter two. Our target leverage ratio is 1.5 or better, so we're there, and we are comfortable at or below this level, as it allows us to execute on our capital allocation priorities while maintaining a strong balance sheet. We believe this is a prudent approach, particularly given some uncertainty that we are now beginning to see on the volume front. Rob will comment on this further in his remarks. Turning to our 2024 outlook, we are happy to report that we are well on track to meet or beat our 2024 free cash flow objectives. We project that we will come in at the high end of our free cash flow outlook range of between $100 and $150 million, excluding lease payments, or $50 to $100 million including lease payments, and potentially even better, which is a strong result in light of the lower volumes during the second half of this year. This strong free cash flow performance is driven in part by lower capex. You will note that our 2024 outlook calls for a capex of $340 million, and we expect to come in below that. What's important to note is that this largely represents a true reduction in planned capital expending rather than a deferral of capital into future quarters. We are effectively managing our capital considering the current volume environment, including the slower ramp-up of EB platforms. As it relates to the adjusted operating income margin outlook, while we saw OEM production plans beginning to moderate somewhat a few months ago, at that time it was mainly driven by lower than anticipated volumes on EB platforms, as well as some seasonality, with sales in the second half of the year being lower than the first half, which is the norm in our industry from a historical perspective. We spoke about that on the last call. Despite that softness, we were still on track to meet our 2024 adjusted operating income margin outlook. And as at the end of the third quarter, we were still on track to meet our objectives with a -to-date adjusted operating income margin of 5.9%, comfortably within our guidance range, as Pat mentioned earlier. However, the production volume shortfalls and OEM inventory correction that Pat and Fred spoke to will continue to impact production sales in the fourth quarter. And as such, we will likely come in at the low end of our 2024 sales outlook of 5 to 5.3 billion, or potentially a bit below this level, depending on how things play out through the remainder of the quarter. And our adjusted operating income margin percentage will also likely fall short of our outlook guidance range of 5.7 to 6.2%. As Fred talked about, we are currently not getting much notice from OEMs on quarter four production call-offs, which makes it challenging to properly flex costs. It is also important to note that if typical industry seasonality had played out this year, where quarter four volumes tend to be higher than quarter three, we would have comfortably met our 2024 adjusted operating income margin guidance and actually likely come in at the high end of our range at normal incremental margins. Our reduced sales and adjusted operating income margin outlook is reflective of a Q4 industry volume issue, so we're not alone in facing this headwind. As Pat noted, volumes are expected to improve once OEMs adjust inventory levels. Interest rates, which are coming down both in Canada and the U.S., with further cuts to be expected, could also lead to higher sales eventually once the lower rates start taking hold. Looking out longer term, we remain excited about the prospects of our business. As Fred noted, we have a tremendous opportunity to scale our MLS initiatives and productivity enhancing innovations across the organization to enhance our margin profile, returns on invested capital, and free cash flow. With that said, I'd like to thank our people for their hard work and perseverance in these interesting times in our industry. I now turn you back over to Rob.

Thanks, Peter. Our industry is a worldwide one, and impacted by geopolitics, economics, and significant events like the U.S. election results. Our industry challenges today are based in part on some of these realities and policies. For example, the volume challenges we are seeing in the back half of 2024, discussed by my colleagues, are largely the result of EV mandate policies and certain other policy choices, inflation, and higher interest rates. Before I talk about the election result, let me address briefly the geopolitical issues of China on our industry. To me, there is a broad consensus in Washington, but also in Canada and Mexico to some extent, that our industry has to reshore or nearshore key parts of our industry and manufacturing in general. We see that and experience that. Suffice it to say that Martin Ray is a beneficiary of nearshoring, especially given our very strong North American footprint with our significant presence throughout the region. We also have a significant presence in different parts of Europe, although our business there is much smaller than our North American footprint. So when we see tariffs against goods coming from China as announced in the U.S. and Canada, in our space this does not hurt us, and it can help us. Our products are local content. These issues exist regardless of who controls the White House or Congress. So many have asked us about the impact of the U.S. elections with the speculation of USMCA renegotiation, tariffs versus China and maybe everyone else, EV mandates, and so forth. Note that we have been here before in a sense. As Santayana once said, those who forget the past are condemned to repeat it. Well, we won't forget. I'll start with this comment. In 2016, on the day Donald Trump was elected as President of the United States, we released our Q3 numbers, record results. Our shares went down 15% or so. The market reacted to the President-elect's threat to tear up NAFTA. Over those four years, we worked through trade issues, signed the USMCA that was proclaimed as the greatest trade deal in history, saw higher tariffs, and grew our business and profits. By the time of the pandemic, our share price more than doubled. During the pandemic, our share price initially went down, but eventually returned to pre-pandemic levels by the end of 2020. That presidency was good for our industry and our company. Since that time, we have seen EV mandates, high inflation, higher interest rates, and an industry that has seen many challenges and lower valuations, including at present in the back half of 2024. Part of that has to do with government policy and geopolitics. It's not the market. We think there's demand there. People need vehicles, a lot of them. The average age of a vehicle is as high as it's ever been. So last Tuesday, we had an election. Interestingly, the day after the US election this time, our share price increased. So did the share prices of most of our peers and customers. So as we look forward, we believe that there are positives for our industry, especially in North America. We expect the economy in the US to be strong, which is very important for us, as most of the vehicles made here are sold in the US. We expect that the USMCA will be renegotiated. The negotiation process may not be pretty, but the focus will be on higher local content, not lower. Insofar as the USMCA remains in place with all three countries, this is good for us and North American suppliers. We believe that tariffs and trade policy will be focused against China, as it kind of is today. But Chinese OEM and parts makers will be targeted in terms of building subsidized plants in North America. We believe a regulatory environment that does not mandate a certain percentage of EV sales or production by requiring OEMs to make vehicles that customers don't want to buy is better for us. Let the consumer decide what to buy. Of course, there are no guarantees, as politics, trade policy, and economics are often a moving target. But we are positive. We've been there, done that, and it worked out for us just fine. We see good years ahead once we get through some of the challenges Pat, Fred, and Peter talked about, where we EV rollout and hire inventories. A final brief note related to capital allocation. Our approach is described in a recently updated investor note on our website. In Q3, we generated approximately $132 million in cash from operations. Capital expenditures were about $81 million, as we continued to invest in support of new business wins and incremental equipment needs. Next, we paid our usual quarterly dividend to our shareholders, approximately $3.7 million, or approximately $15 million on an annualized basis. As Peter noted, we purchased approximately 826,000 shares for cancellation under our normal course issuer bid. Total cash spent was approximately $9.5 million. We intend to continue to buy back some stock at these levels, but we will balance this with our goal of paying down some more debt. Our net debt was reduced by $32 million in the quarter. In the past year and a half, since our net debt hit an all-time high of $956 million in Q1 of 2023, we have paid down $136 million of net debt. We bought back 6.5 million common shares, or 8% of our outstanding shares, and we've reduced our net debt to adjusted EBITDA ratio from 1.9 to 1.46 times. I note that our net debt to adjusted EBITDA ratio was 3.3 times in Q1 2022, so we've made good progress on net debt reduction and buybacks. I also want to note that this gives us some dry powder to make key investments and acquisitions where appropriate. In that regard, we are pleased to announce that subsequent to the third quarter, we reached an agreement to purchase the assets of a Tier 2 European supplier. This company is a long-term partner of Martin Ray and we have agreed to buy the business in approximately two to two and a half years, dealing with estate planning considerations of the seller. We negotiated the transaction over the past several months, looking at a variety of alternative structures and timeframes, and have come up with an acceptable deal. We signed both a long-term supply agreement and an acquisition agreement to buy the business. I view this as part of our capital allocation, the purchase of a strategic supplier to both increase our capability and secure more supply. A very good arrangement for both us and our partner. To summarize, we invest in our business, keep our balance sheet strong, and return capital to shareholders through dividends and buybacks. In terms of allocating capital, we will consider anything that makes Martin Ray 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. Thank you for your dedication every day. Our people are performing very well. Their dedication and ingenuity underpin our numbers. 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 where we can. And thank you all for calling in.

Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1. You may cancel your question at any time by pressing star 2. Please press star 1 at this time. If you have a question, there will be a brief pause while participants register, and we thank you for your patience. First question is from David Ocampo from Cormac Securities. Please go ahead.

Good evening, gentlemen.

Good evening.

I appreciate the commentary on the margin front that relates to Q4. And it does seem like you guys have made some pretty good progress in your commercial negotiations throughout the year. Just curious, now that you have some of that behind you, how we should be thinking about the margin improvements as we head into 2025?

Yeah, it's a good question. Thanks, David. So when we look at the margin profile going forward, let's call it running into the quarter one, quarter two of 2025, I would expect in that range similar to what we have here experienced in the first part of this year, that would be the expectation. As you've heard, the quarter four looks a little bit lower than what we've anticipated at the end of our quarter two call. So there is likely to be some decremental margins that are a little bit lower, I should say higher, I guess, decremental margins higher than what we've reported here today going Q2 to Q3. But you would expect that going into next year, they would begin to normalize as the volume comes back.

Next year should be better than the second half of this year.

Got it. And then Pat, I mean you guys have always secured new business every quarter. And when you look back at the stuff that you've won this year, have you been able to put any safeguards against minimum volumes or inflationary pressures just given all the negotiations that you've had to do with your customers over the last year or two?

So I'm going to make sure I understand the question correctly. Can you repeat it one more time?

Yeah, have you been able to put any safeguards against minimum volumes or inflationary items just on the new contracts that you guys have been signing?

Yeah, so certainly on some EV products we've had what we would call complex contracts or we'll have capital being paid on the front end much heavier than on the back end, so the recovery is quicker. So I would say compared to a traditional contract that we would have on an ICE vehicle, much different in many cases, but it depends on the product. We look at the product, we think that the product is going to sell, it's in the right price range, coming from the right OEM. That contract might be a little more normal than one that we think is a little higher risk or is in a certain class of car that may or may not sell as well. And not all the same, but in general there is more protection on the EV side than there would typically be on the ICE side.

I think we've always learned a lot the last few years as we've been dealing with these commercial negotiations and not just about the entire supply base. And we're obviously bringing all that to bear as we go into market, quote, win the business and so forth. As Pat noted, we'll be selective where there's higher risk. We'll push on some of these points and try to gain some more protection in contracts. In some other cases it may not, depending on the product and what we see out looking like.

And we've had some success with what we call banded pricing. So as volumes fluctuate or go down, for example, the price would be, let's say, put into the contract at a higher price as it falls below certain volume thresholds on the downside. But

I think it's a good question because it's got to be an acknowledgement that at uncertain times there's got to be some change in the way these contracts are structured going

forward. Generally speaking, we're pretty happy with the way we've managed a good portion of the EV contracts. So the general answer

is yes.

I appreciate the details there though. Well, you guys have gone through a period of investment, a lot of that has gone into supporting new business on electric vehicles. I read Neil's letter, ROIC still running in the 11% range. That's up from pandemic levels, but still well below the 15% you guys achieved in pre-COVID. If you guys just look exclusively at your ICE business lines, are you guys back at that 15%? So all the weakness that we're seeing in that ROIC print is from EV?

Good question.

I know

we want to answer it. Well, I would say that we've been consistent. The real issue here is the EV production not meeting what customers anticipated or governments anticipated. And when that happens, you're not earning what you normally would if you're running at full capacity. Our ICE programs are running at a higher level of capacity. So I'd say at least directionally, the answer would be yes, our ROIC on... I think it's safe to say we're doing better on the ICE platform. The

other thing that's kind of attractive, despite the EV volumes going down, we are seeing some programs getting extended. And that allows us to take advantage of some things and even correct some of our material gaps that were created during the pandemic. So we may see more advantage from that over time as well, just depending on when the EV volumes actually start to climb.

Okay, that's perfect. I appreciate the commentary and all my questions. I'll go back to you, Keith. Thank you.

Thanks, David. Thank

you. Please press star 1 at this time if you have a question. Our next question is from Michael Glenn from RIM and James. Please go ahead.

Hey, good evening. So Rob, I guess I just am curious. When I listen to you speak about North America versus Europe, it seems like the set up for North America over the next few years is much more favorable than how we should think about Europe. And the headline you see out of Europe seems to be more negative than what you read out of North America with regard to EV mandates and things like tariffs. So I'm just curious, why allocate more M&A capital to Europe versus North America right now?

Are you talking about on the

supply issue? Yes, I was just talking about the

supply issue.

It's a specific technology. I don't want to get into where we use it and that type of thing at this point of view, but it's the producer, the supplier that we would be integrating. It makes a unique product. It ships very well, so the fact that it's distant isn't critical. But they're very good at what they do. I'd say superior quality delivery generally is very good, and it's a product that our customers are very happy with. So it's strategic in that nature. There are some other advantages as we talk more about it in the future, you'll understand, but I don't want to get into that level of detail just yet.

And just to

point

out, this is not a big transaction process, relatively small. In the supplier, supplies is not just in Europe, so it's a source of supply also in the rest of the world. So it's not just a mass order in transaction. In the context of the broader discussion on USMCA and EV mandates and stuff like that, I'll sit with the commentary that I made. We're going to be working through it. I think you're going to see, obviously, EV mandates go away in the United States. At least the President-elect has said that, and since the election has certainly continued to say that. I think if the EV mandates go away in the United States, we'll see Canada follow. Finance Minister Freeland or Deputy Prime Minister Freeland said that last Friday. And I think Europe's struggling with similar issues, and particularly in Germany, where you just had the government fall over dispute related, among other things, to some of the policies that we have in place. But as my colleagues indicated, the ICE vehicles are still selling, and as we sort through different things, people need our products, and ultimately we'll be okay. We think over the next five years, we talk about North America, because it's 75% of our product, but about 20% of our revenues are in Europe, and we think Europe's on the upswing over the next five years, too. I mean, you can argue this is an investment in our North American operations, because the majority of the product actually

ends up in North America. 95% of it comes to North America.

I would say, Michael, it's a special case, as was pointed out. So generally speaking, the European region is not our first priority when it comes to M&A activity.

But there's a lot of stuff available.

Oh, a lot of stuff available. Without

getting into too much more detail, there are jurisdictions in Europe that are very competitive, and I would say this is one of them.

And just coming off the conference call from one of your peers, their commentary indicated that there is a tremendous amount of rebid or work opportunities coming available from some distressed suppliers out there. Are you seeing – is that consistent with what you're seeing in the market right now?

Yeah, we are seeing some of that, and we also – it's not always distressed suppliers, necessarily, that we're seeing work become available. I think sometimes some suppliers get an arm wrestling match with the customer, and the customer starts looking around too. So it's a combination of both. But definitely it's out there.

It's an interesting dynamic, and it goes back to the discussions about commercial contracts and so forth. But the entire supply base is dealing with similar issues in terms of arm wrestling with customers. And the supply base has essentially said, look, particularly for our EVs, we want volume guarantees or we want capital up front and that type of thing. And that's certainly something that's consistent. So there may be stuff on rebid, but to a certain extent, that's just the dynamic of the industry. At the same time, there is a lot of distress in the industry. People that have not worked hard to protect their contracts have been hurt financially. And at the same time, a number of people that have almost overlevered in the EV space with capital are sitting there with half-empty plants, a lot of half-empty plants, and needless to say, they still have financial obligations and so forth as well. And that means that the supplier that is lean and has capacity and is aggressive can help out customers in the right places. So we're going to see a curve of that as well. So Rob, if you'll allow me. The answer is yes.

Don't

forget the one thing I want to remind people, in the last 23 years, whenever the industry has challenges, we find opportunities. We have found opportunities. We did that in the early 2000s. We did it after 2008. We did it even in the last five years with some smaller stuff, some takeover work, and the purchase of the assets from Metalsa in 2020. That was kind of a distressed asset purchase as well.

And Rob, maybe just to push a little bit more on the trade aspect of it. Can you just speak to Mexico in particular? I think Doug Ford was out this morning talking about maybe just setting up a -U.S. free trade agreement. If Mexico doesn't move ahead with some of the consistent policy, can you speak to how important Mexico is right now into the supply base and if that would indeed be disruptive if some action was taken on Mexico?

Sí, señor. Gracias. There's no question that what Doug is saying is, I think, correct. I didn't put words in his mouth, but in essence the discussion, and it's come from the Trump camp, but Robert Lighthizer has been clear on this. He was the trade negotiator for the U.S. and the USMCA. We worked with him. We also worked with Chrystia Freeland and her team in Canada and the Mexicans as well. We were the big presence in each, so we were involved in all of that. And it's been very clear that, listen, we're either with the United States on fundamental issues of trade, particularly with China, or we're viewed as being outside the camp. And so the federal government announced their tariffs on Chinese OEMs and also aluminum and steel actually in our plant. And we believe that we have to be aligned with the United States from a trade perspective in North America in order to support and enhance the USMCA. So Canada's gotten on board. Of course, Mexico has a brand new government. The president was inaugurated just last month, and they're sorting through the issues as well. And of course, we have a new president of the United States a week ago, or a president-elect in the United States. So they're going through those issues as well. We would support the fact that Mexico should be consistent in its approach to Chinese OEMs and suppliers with the United States and with Canada, because Canada and the US are basically aligned. And as someone with a lot of plants in Mexico, we're having lots of discussions with them too. And I think they're favorably inclined to follow that. There's going to be rhetoric and so forth, but it's, in my view, with a Mexican hat on or a Mexican sombrero on, it is certainly in the interests of Mexico to align with the United States on this. And I think it is very important for their industry. Their largest industry by far is the auto industry, and they want to take care of their people. They've got to be aligned.

Okay. Thank you.

Thank you. Thank you, Michael.

Thank you. There are no further questions registered at this time. So Mr. Woldeboer, I'll return the meeting back over to you. Oops, we just have someone that queued up. Oh, Lord. So we take him?

Yeah,

of course. Excellent. So Brian Morrison from TD, please go ahead.

Yeah, sorry, I feel like we're a little late, but can you just explain this tax rate and how it works with the depreciation of the Mexican peso and what you think your effective tax rate is going forward? I looked back several years and it's kind of a low to mid-20 tax rate. And you're pointing towards an effective tax rate of 31 percent.

Right. So Brian, thank you for the question. It's a complex matter. So let's try to simplify here a little bit. It's very complex. So when the peso depreciates, right, as it has rapidly here, especially between the second and the third quarter, there's an increase in our tax expense, right? So when the tax expense is increased, it lowers our net income, thus affecting the earnings per share. On an appreciation, we would have a decrease in that tax expense, improving our net income and subsequently EPS. Now, the foreign exchange movement of the peso is anybody's guess, I guess, going forward here. But if you look at the rate today, it's about 20.4, 20.45, so quite elevated. With, you know, let's say the geopolitics in Mexico right now, the uncertainty around their judicial system and so forth, it's likely to remain elevated. But, you know, as we mentioned, very hard to prognosticate the prognosticate rate. That being said, you should expect that our quarter for our quarter for effective tax rate will also remain elevated based upon the movement of a quarter three US dollar peso to quarter four or current current exchange rate.

And then as we look forward to next year, should we just straight line it at kind of 30 percent rate at this point in time then?

Yeah, I think looking forward, you know, that's a more, let's say, realistic rate reflective of our business and operations. Yes, Brian.

Okay, I don't want to talk about that.

Brian, just to note, these f**ked away, they're non-cash in nature and they tend to bounce out over time, right? What I like to characterize is accounting knowing that there really has no substance

to it. Yeah, yeah, no, I understand that. Thank you. I guess, and I don't really want to talk about taxes. Can you just maybe elaborate on this? I don't know if you did during the script, but certainly it was squeezed in at the end. What is this acquisition that you've done in terms of content and in terms of the magnitude of the acquisition? How big is it?

Yeah, it's a small acquisition. It's a now a tier two. So we're basically vertically integrating it. It is 95 percent of the product, which is product that's high density and packing, comes to North America. So, you know, it's a unique product. We were talking about a little earlier, high quality product that made good sense to make it a part of our, you know, part of our product offering inside. And it's about a two year process in order to complete the purchase. Yeah, it's important. This

thing is a ways out. It won't close for the two, two and a half years just for state planning purposes on the seller side. But it is it is in our view, a use of capital allocation. So in the context we talk about it, we invest in our business first. So we secure the supplier, also put a certain amount of cap tax, cap ex. We paid our dividend, we bought back some shares, we paid down some cap.

The other piece you missed is it's in a very competitive region in Europe. So we see some advantages in that that we'll talk to as we get closer to the process.

And then my last question, I think if I understood correctly, you said in the first half of 2025, you expect your margins to be similar to the first half of 24. Is that correct?

Yeah, we said better than the second half. Yeah, I guess you can kind of get there.

Okay, so we're looking at 2025, we should be thinking sort of similar way to the moment of what you had through this year.

If you look at our year to date, our year to date margins, as we go into 25 or 20, you have 25, something similar. It just depends on where the where the volumes go. Yeah,

we're going to see how this year ends up, but we'll have that discussion about next year on our... Provide you more guidance on 25 in March. That's what we do. So to be clear, the exact statement says, look, the second half of this year, 2024, as anticipated, only said the fact of March would not be as good from a revenue or market perspective as the first half of the year. And that's proving to be correct. We think we'll see a rebound next year from the second half of this year, and then we'll be more specific with our guidance ranges in March.

And is that simply a function of volumes or is it you also have a lot of efficiency and maybe commercial recoveries? What are the drivers of that?

Volume has been the primary driver.

We talked about our MOS activities, that's going to be a contributor as well. So we're looking at opportunities here to reduce our costs and so forth, and even to kind of address some of these shortfalls as well. I'm talking on the downside,

but the big difference, the detrimental was volume.

It's a combination of all those things. And there may be some takeover opportunities next year too, as another company on a call recently this evening.

Understood. Okay. Thanks very much, John.

Thank you. Thank you.

So there are no further questions registered at this time. Mr. DeBoer, I'll return the meeting back over to you.

Okay, so thank you very much for the call and the questions. If any of you have further questions or would like to discuss any issues concerning Mark and Maria, please feel free to contact Neil or any of us at the number in the press release. Thank you. Have a great evening.

Thank you. Your conference has now ended. Please disconnect your lines at this time and we thank you for your...