Martinrea International Inc.

This conference is being recorded. Our participants, please stand by. Your conference is now ready to begin. Good evening, ladies and gentlemen. Welcome to the fourth quarter results conference call. I would now like to turn the meeting over to Rob Wildeboer. Please go ahead.

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 to our network. With me this evening are Patrick Rameau, Martin Reyes' CEO, our President, Fred DiTosto, and our CFO, Peter Cerullis. Today we will be discussing Martin Reyes' results for the year and quarter ended December 31, 2024. Lots to talk about. I refer you to our usual disclaimer in our press release and filed documents. As you probably know, to avoid technical difficulties, we generally prerecord our calls. We'll start with that. And then in our Q&A, we will address the immediate tariff issues in more detail as the situation is evolving sometimes by the hour. On this call, I will provide a brief overview of the current industry, geopolitical and trade environment. Then Pat will outline some key lights and highlights of our 2024 year and make some comments on the business, then Fred on operations, then Peter on the financials, and we'll do Q&A. 2024 was an eventful year for Martin Ray in many ways. We saw some major events take place on the world stage that are affecting our industry and our business, including a major slowdown in EV electrification growth, especially in North America and the European Union, geopolitical tensions in many areas which affect trade and other relationships, and the United States election that has introduced increased focus on tariffs, trade, and the renegotiation of the USMCA. Before we get to some company highlights, let's reflect briefly on the environment in which we operate. Our company started its history as an auto parts company in 2001. Indeed, one of our first activities was to buy three stamping presses in September. Just after signing the purchase order, we had 9-11. We and our industry had a major challenge. Our industry made it through very successfully, as did we, raising money to pay for the presses. We have seen many challenges since that time, including the financial crisis of 2008 and 9, where two of our customers went bankrupt, a renegotiation of NAFTA, a pandemic where our industry shut down completely, a major semiconductor chip shortage which caused huge distress, and a move to electric vehicles that has not met expectations in terms of rollout. A great many challenges. And there will be more. We will say this with confidence. After every challenge, we have emerged stronger as a company with better operations and with a strengthened corporate culture. These situations have provided opportunities to get better at what we do and to grow over time. We are still a relatively young company in our industry, and we have grown from a startup to a $5 billion company in 24 years to over 50 locations and 18,000 people in many countries and continents. Challenges create opportunities. We have bought assets or built new plants to satisfy and grow our customer base consistently over time. And we think this will occur over the second half of this decade also. People need mobility, they need vehicles, and they need parts for vehicles. Our industry needs strong suppliers. We'll be there. On a shorter-term basis, the EV revolution, as some call it, has not rolled out as quickly as many believed. EV take-up by consumers is difficult for many given the cost of EVs and the lack of infrastructure. Many consumers do not want an EV, but would prefer to drive an ICE or internal combustion engine vehicle or a hybrid. The reality is that EV mandates don't really work. You cannot force people to make what consumers do not wish to buy, and eventually the market speaks. The consumer is indeed king. And in democracies, every consumer is also a voter. And elected officials will listen to their voters. So we are seeing EV mandates pulled back and sales and production of EVs have flattened. This is a structural challenge for our industry and has created huge overcapacity in the automotive industry. We and many others, even those of us who are conservative in our forecasts, have underutilized capacity on EV-related lines. The geopolitics of the day is also very relevant for our company and industry. It seems fairly obvious to us that there is a security and economic divide in our world, headed by the United States on the one hand and China on the other. This affects our company and industry, as policies adopted by the United States and others are dealing with the growth of Chinese companies. either exporting parts and vehicles or attempting to establish assembly or parts plants in North America or Europe. We have increasingly seen tariff and trade policies to address that. In this context, given our strong footprint in North America, there are opportunities for us to grow. Also, higher local rules of origin requirements are good for companies like ours. We have always believed in a fortress North America approach in the sense that the North American auto industry is very strong with a production footprint that utilizes the strength of the United States, Canada, and Mexico. Given the geopolitics, we're also focused on intra-regional footprints, and so we are limiting our footprint in China, as Pat and Fred will discuss. The third challenge we face as a company and an industry relates to tariffs. We were very close to the negotiations of the new NAFTA several years ago, and we believe that the resulting USMCA was very good for the industry and our company. The USMCA was a nice update and upgrade in many ways, and the higher local content rules for North American suppliers were positive for us. When signed, we knew that a renewal of the USMCA was due by mid-2026, and frankly, we have spent the last two years as an industry considering what that means. Well, it now appears that we are effectively into the negotiation process. Each participating country is reviewing the agreement, and we believe there will be intense negotiation of several aspects of the agreement. Regarding automotive, there will be a push for higher rules of origin by the United States, which could benefit suppliers such as ourselves. Despite much public speculation, we see a path to a modernization of the agreement to preserve and enhance the development of North America's largest manufacturing industry. Tariffs on autos and parts within North America hurt the industry and ultimately increase costs to consumers and are not in the interest of the United States, Canada, or Mexico. We need to align. We will need to negotiate a new agreement, but there is opportunity. In the meantime, We will adjust appropriately to any tariffs as we did for steel and aluminum tariffs several years ago. Our public and private posture is and will be to encourage free trade in the automotive industry within North America. It benefits consumers and producers in all three North American countries. We're going to have to work through these issues over the next while. Turning to the year just past, with some comments on 2025 as well, Pat will outline a few highlights. Note that we have much detail in our year-end filings, including our annual information form and our sustainability report, as well as our financial filings. Companies do not live by a calendar, as we all know. We have to report results over a finite time period. But our long-term view is that sustainable companies are those that look to the future, embrace it, and capitalize on the opportunities presented by it. That's what we do. We look forward to 2025 and beyond with great confidence. We are stronger today than we were a year ago. Our people support us in that view, and we thank them for their service. Our strength is in our people. We look forward to sharing the future with you. And now, here's Pat.

Thanks, Rob. Good evening, everyone. Let me start with a few highlights from this past year. Our safety results continue to trend in the right direction. Our total recordable injury rate, or TRIF, In 2024, among the very best in our industry. There's no better way to show your people you care. In that regard, 2024 was a great year. Our employee survey results continue to come in strong. We work to make people's lives better with our golden rule approach. It's a living thing, not just a slogan. When you visit our locations, it's clear, and we're proud of our people and our progress, meeting the challenges of this business. There were some sales headwinds in the fourth quarter, hence revenues were down slightly in 2024 at just over $5 billion. At the same time, our adjusted EBITDA came in at roughly the same place as it did in 2023, and our EBITDA margin percentage actually increased as we continued to drive improvement into our facilities. A year ago, when we announced our 2024 outlook, we indicated that our adjusted operating income margin would likely be higher in the first half of the year than the second half, and that's exactly what happened. In the fourth quarter, many of our customers slowed or halted production across multiple platforms, mostly to adjust inventory levels. Despite that, our adjusted operating income margin came in at 5.3% for the year in the top third of our peer group. We're confident this will continue to climb. We maintained a strong balance sheet with a net debt to adjusted EBITDA ratio under our target of 1.5 times or better. At the same time, we returned significant capital to our shareholders in 2024. We maintained our dividend and repurchased over 5 million shares under our normal course issuer bid. A lower share count bodes well for the shareholders as we see improvements in the future financial results. We won multiple quality awards from a variety of customers in 2024, a strong base for new business awards and replacement work. We invested in our business with approximately $275 million in capital expenditures in 2024. We made good progress reducing carbon emissions, reducing them by 17% since 2019 toward our goal of 35% in 2035 without the use of carbon credits. With this, we became more energy efficient, reducing our energy intensity, that is our energy consumption relative to sales, by 23% since 2019. We have also reduced the amount of waste destined for landfills by 54% since 2019. 83% of our locations now divert more than 90% of their waste away from landfill. Good progress on our journey toward our zero landfill initiative. We are embracing technology in both our operations and in our strategic investments. Our advanced manufacturing team is moving forward machine learning installations across the plant network to improve the performance of our lines and heavy assets. As discussed on the last call, we expect these efforts to produce significant benefits in terms of safety, speed, and quality. Our MineCAN software subsidiary is increasing its book of business with new customers. Our Martin Rea innovation development portfolio includes companies that are leading edge in graphene, aluminum powder for additive manufacturing, aluminum-air batteries, and ultracapacitor technology. We are helping our strategic partners incubate these innovative technologies with many benefits for our company, both strategic and financial. Turning to business, on the last call we pointed out that production sales would likely drop in the fourth quarter as Stellantis and other OEM customers adjusted their vehicle inventories. This impacted our results in the fourth quarter with sales and margins falling below normal levels. While this correction continues to some extent in the first quarter, we believe we will see better production volumes in the coming quarters. We continue to establish ourselves as a consistent generator of strong free cash flow, with 2024 full year free cash flow coming in at just a bit below last year's record high. Our continuous drive to find efficiencies by reusing flexible capital, as well as some program extensions which require less capital, contributed to the strong performance. We expect another solid free cash flow year in 2025. Peter will elaborate on this. As previously discussed, EV volumes have been weak, both in Europe and North America. Our European operations have more exposure to EVs as a percentage of sales. Since we believed EV volumes would be slower to ramp up than many other industry observers expected, we protected ourselves by negotiating what we call complex contracts and we were paid upfront capital, depending on the platforms. However, we continue to see volumes lower than even we expected. In fact, some EV programs are running at less than 20% of the volumes that we reported when we won the program and invested the capital. Given this dynamic, like others in our space, we wrote down some EV assets during the fourth quarter, which Fred will elaborate on. Additionally, we will further restructure for operations in Germany in 2025 and look at consolidation opportunities at some of the other facilities which are underutilized due to the low EV sales. It continues to be important to have a presence in Europe to support the customers and their global programs. Plus, it's a hub for engineering and innovation. Outwithstanding, given the high cost nature of the region, specifically in Germany, Our focus will be less about growth and more about maintaining our footprint and making the operations leaner and stronger. The Chinese market in general is focused on EV growth and has a lot of excess capacity. We're very small in China, and we are negotiating with local partners to minimize our footprint and exposure. We believe partnerships are the best avenue for growth in Asia. While maintaining our presence in Europe and pursuing growth opportunities in the Americas, continued emphasis on localizing production in North America, primarily from Asia, we see a lot of opportunity for our largest footprint. We are also announcing an enterprise-wide project to reduce our annual SG&A expenses by approximately $50 million, which will take 12 to 18 months to implement, with the savings coming from a combination of reduced corporate overhead costs as well as expense reduction at the plant level. we already see leaner ways of operating as a business with a focus on optimizing processes and eliminating redundancy. We expect to generate significant results from this activity. While the ramp up of EV volumes is slow, we are seeing more ICE extensions filling the gap. This is a bit of a silver lining, particularly since most of these programs were capitalized years ago. So from a pure volume standpoint, we are protected as fewer EV sales means more ICE vehicles are being sold, all things being equal. We will be underutilized on certain assets, so we expect some drag on margins until the volumes improve or current programs roll over and we can reset economics. There is some stagnation in new programs as OEMs revamp their new vehicle portfolios. We will take this time to focus on more cost reduction to improve profits and what will likely be a relatively flat market over the next few years. Despite a flat market, we see margins improving with our continued focus on operations and the various cost-saving projects I discussed. With that said, I'd like to thank the entire Martin Rea team. I appreciate all our people's hard work. And now I'll turn it over to Fred to discuss operations in more detail.

Thanks, Pat. Good evening, everyone. Looking at our operations, we continue to execute well, notwithstanding the volume headwinds we are facing due to the OEM inventory correction and EV-related headwinds that Pat talked about. We are driving operational improvements through our monitoring operating system and we continue to receive recoveries for volume shortfalls and lingering inflationary cost increases through commercial negotiations with our OEM customers. Both initiatives are yielding positive results who ultimately set us up nicely for when the market turns, as it always does. In North America, Q4 adjusted operating income was down a quarter of a quarter, reflecting decremental margins on lower production sales, again, due to the OEM inventory correction, which is primarily a North American issue. Still, margins were solidly positive in this segment. North America is by far the largest portion of our business, representing over 75% of our total sales, and the key driver to our margin profile. We are happy with our operating performance in the region and have been for quite some time. North America will continue to be the profit center of our business. Conversely, we lost money in Europe during the quarter, despite the region being in relatively good shape operationally due largely to volume and mixed headwinds. As Pat noted, we will be executing on some further restructuring in our German operations which we started in the first quarter of 25 and expect to complete in Q2. In conjunction with the strategy of maintaining our presence in the region, we will continue to drive a continuous improvement mindset in the operations there. Europe, for us, will remain an important part of our business for various reasons. We visited operations in Germany recently, and it is clear they are embracing the principles of our modern operating system. which will inherently yield results as we move forward into 2025 and beyond. We have strong, capable people and teams in Europe. Notwithstanding, the margin profile is not expected to be what North America is for us, given the high cost nature of the region, particularly in Germany. Although a small piece of the pie, we also lost some money in our rest of the world segment in the fourth quarter, with our two plants in China representing the majority of the segment. Pat talked about how we view the Chinese market. The positive news here is that we were originally very cautious in our strategy for China. And ultimately, I think we were right. On a relative basis, we don't have a lot of capital on the ground in China, unlike others. And when you look at our overall book of business, we are not relying on sales from the Chinese market to drive our profitability. China has become a tough market for foreign companies to operate in and make money at the appropriate hurdle rates. given the risk profile, especially recently. The future does not bode well for foreign companies with too high an exposure in China, as many in our industry have acknowledged. Given the dynamics we are facing in both Europe and China, our strategy for those regions moving forward, and an impairment test required by IFRS standards based on certain triggers, we concluded that the carrying value of certain assets in Europe and our rest of the world segment were impaired, and needed to be written down. We also recognize a minor impairment charge in our North American segment, which, like Europe, is largely EV-related. Altogether, we recorded a non-cash impairment charge of $129 million in the fourth quarter. These figures were derived using a discounted cash flow evaluation of all our cash-generating units based on board-approved budgets consistent with IFRS accounting standards. despite the record impairments which has to be done at a cash generating unit level under IFRS. Going through this exercise reaffirmed our view that our stock is undervalued. The other thing to keep in mind is that we also have assets on our balance sheet with market values that are well in excess of their book values, which are based on historical cost. The best example is our real estate portfolio, which is being carried on the books at approximately $200 million has a market value that is more than double that, according to our real estate consultants. Accounting standards do not allow for such assets to be written up, but the value is there and not reflected on our balance sheet. Peter will elaborate on our outlook in a few moments. Moving on, I am pleased to announce that we have been awarded a new business worth $40 million in annualized sales and mature volumes. which includes $35 million in structural components with Toyota and our lightweight structures commercial group, and $5 million in our fluids business with General Motors and our propulsion systems group. We continue to make good progress building our book of business with Toyota, a focus for us as we continue to diversify our customer base. We see our book of business with Toyota continue to grow as we build on this recent momentum with them. New business awards in the last four quarters have totaled $230 million. We continue to have a relatively healthy pipeline of new business quotes they were working on with a higher than normal level of program extensions in front of us, as Pat talked about. Program extensions generally provide us with an opportunity to reprice product, which is a good thing. As that evolves and as next generation new vehicle programs start kicking in over the next few years, we will inherently be able to fully build in the higher inflationary costs that we've had to absorb over the last few years into the economics of the new programs. This will ultimately help our margin profile over time since we've not been able to recover all the higher material and labor costs through our mid-cycle commercial negotiations with our customers. 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. Now, here's Peter.

Thanks, Fred. Looking at the results quarter over quarter, we generated an adjusted EBITDA of $131.7 million in the fourth quarter, down from $154.1 million in quarter three. And adjusted operating income was $40.1 million, down from the $65.9 million that we had generated in quarter three on production sales that were down about 10%. Adjusted operating income margin came in at 3.5%. This reflects a 22% decremental margin on the lower quarter over quarter production sales driven by the OEM inventory correction that Pat and Fred had discussed. There's also some impact from higher tooling sales which generally carry low or no margins. Moving on, free cash flow before IFRS 16 lease payments came in at 76.4 million, a strong result, and higher than the 57 million we had generated in quarter three driven by positive working capital flows and lower interest costs. Including lease payments under IFRS 16 accounting, pre-cash flow was $63 million compared to $43.9 million in quarter three. As Pat alluded to, pre-cash flow was $183.8 million, excluding lease payments, on a full-year basis in 2024, just below the all-time high number we had set in 2023 and well above our guidance range of $100 to $150 million. We are harvesting a lot of free cash flow from the business and we expect this to continue. I will elaborate on this when discussing our outlook in a few moments, but it's worth highlighting that we are generating historically high levels of free cash flow at a time when margins remain below their longer term potential. We have the ability to generate higher free cash flow over time, which is something that we are very focused on. Adjusted net earnings per share would have come in at 19 cents, had it not been for the unusually high effective tax rate during the quarter, driven by the rapid depreciation of the Mexican peso against the US dollar, which is the functional currency for our Mexico operations. As you may recall, we saw this issue in the third quarter, and we mentioned it on the last call that quarter four could also be impacted as the peso has continued to depreciate against the US dollar. As a result of this issue, we reported an adjusted EPS loss of 21 cents. Importantly, as we have talked about on the last call, this tax treatment of foreign currency fluctuations is non-cash, so it does not impact cash taxes or cash earnings. These foreign exchange movements tend to balance out over time, so the impact will likely disappear as the peso stabilizes and could even reverse at some point if the peso appreciates. The issue only exists under IFRS accounting, something to keep in mind when comparing our results to those of our peers. who report under U.S. GAAP or other non-IFRS accounting standards. I refer you to our 2024 MD&A for further clarification. Looking now at our performance on a year-over-year basis, fourth quarter adjusted EBITDA of $131.7 million was down 6% from $140.1 in quarter four of last year, while adjusted operating income of $40.1 million was down from $56.6 million of quarter four of last year. on production sales that were down about 10%. Our operating income margin of 3.5% was approximately 90 basis points lower year over year, reflecting the decremental impact of lost production sales due to the OEM inventory correction, with production call-offs from our customers often coming on short notice. On a positive note, our adjusted EBITDA margin was up year over year despite lower sales, a testament to our strong operating performance. I refer you to our MD&A for further commentary on year-over-year variances. Turning now to our balance sheet, net debt, excluding IFRS 16 lease liabilities, decreased by approximately $7 million quarter-over-quarter to $813 million. This reflects the free cash flow profile for the quarter, as previously outlined, partially offset by non-cash foreign exchange translation driven by the weakening of the Canadian dollar against the U.S. dollar, and roughly $12 million spent with purchasing 1.2 million shares for cancellation to our normal course issuer bid. Our net debt to adjusted EBITDA ratio ended the period at a strong 1.47, consistent with where we were at at the end of the quarter three at 1.46. Our target leverage ratio is 1.5 or better, so we're in our target range 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 at the same time. Turning to our 2025 outlook, as Pat noted, we expect our results to improve in the coming quarters as the OEM inventory correction runs its course. Having said that, most industry forecasters are calling for slightly lower production volumes in both North America and Europe in 2025. Part of this reflects a continuation of the inventory correction into quarter one, as well as a continued uncertainty of the ED adoption rate. With this in mind, we expect total sales to be between 4.8 and 5.1 billion for the year. Turning to our margin profile, we expect adjusted operating income margin to fall within a range of 5.3% to 5.8%, which represents an increase year over year, despite the expected flat volume environment. Positively, we expect another strong year of free cash flow in the range of 125 to 175 million, or 75 to 125 million excluding lease payments under IFRS 16 accounting. This implies cash capex of approximately 300 million. Please note that our free cash flow outlook excludes any expected cash restructuring costs resulting from the planned restructuring that both Pat and Fred spoke about earlier. As Pat noted, We continue to establish ourselves as a consistent generator of strong free cash flow. We have a strong organizational focus on free cash flow and prudent management of our capital spending. As Pat discussed, the delayed ramp up of EV programs and related program extension on ICE vehicles is also contributing to a reduction of capital required in our business. Please note that our 2025 outlook does not reflect any impact from the potential implementation of tariffs or government policy changes in the U.S. or any other region. Looking further out, we expect margins to improve in 2026 and beyond, despite what is currently a relatively muted vehicle production outlook from IHS and other forecasters, as we deliver benefits from our SG&A reduction project, restructuring actions, and MOS initiatives. We believe there is upside to the industry volume forecast if the U.S. economy remains strong. Overall, absent any impacts to the market from a potential trade war, we expect to deliver strong financial performance in 2025, especially as it relates to free cash flow, notwithstanding the continued industry challenges and uncertainty that we are all aware of, and results should improve beyond that. We continue to perform at a high level. Our balance sheet is in great shape. and we are delivering on our free cash flow promises and executing on our capital allocation priorities. With that said, I'd like to thank our people for their hard work and perseverance in what are certainly interesting and dynamic times in our industry. Now it's time for questions. We have shareholders, analysts, employees, and even some competitors on the phone. So we may need to be a little bit careful, but we will answer what we can. And thank you for calling in.

Before we actually get to the Q&A, a few further words on tariffs. We know they're the issue of the day, as I noted earlier. These are indeed terrifying times. Where we sit today is there are virtually no tariffs on our products tonight. Our view on North American tariffs is simple, and I mentioned it earlier. No tariffs for auto or auto parts made in North America that comply with local content rules. We think we'll get there ultimately. If there would be tariffs, a few points. Most of our parts go to the customer in truck country, so no tariff would be paid on those shipments. Parts across the border to a customer that would have a tariff would be paid for by the customer as importer of record. Parts across the border as an in-truck company transfer where we are the importer of record that would give rise to a tariff, well, we would be talking to the customer about passing it on much as we did with inflation during the pandemic. As for parts that we buy from suppliers, our contracts with our suppliers have them paying any tariff. So tariffs would cost us some, but most of the costs would not be directly borne by us at the end of the day. The bigger issue is the effect on the industry. Higher tariffs would cost the OEMs a fortune if they absorb them, but tariffs passed on to the consumer would cost the industry if consumers bought materially fewer vehicles. and that would happen, a bad result for the auto industry. I believe that tariffs are fully implemented and not withdrawn would cause the industry to shut down in a very short time. Some don't seem to grasp this. If Tier 2 or Tier 3 suppliers don't ship product or cannot afford tariffs to get product, the supply chain breaks down and people don't make cars. Some in our industry, frankly, wanted to see this happen. Let the tariffs be implemented, have the industry shut down, and demonstrate the real cost of tariffs. Then we'll see some sanity restored quickly. We support the USMCA in indeed improving it. We think we are working already on a solution. Indeed, we have been in discussions with USTR and others in the US. So on to questions.

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. We thank you for your patience. First question is from David Ocampo from Cormac Securities. Please go ahead.

Thanks for taking my questions. Yeah, I just wanted to start on tariffs. I know many of your peers have already answered a number of questions over the last two days or so, but I was wondering if you guys have seen any erratic changes to production schedules just from your customers, just given the ongoing daily change in tariff policy, and then as a follow-up to that, how quickly can you guys adjust your labor force? Should we just look at the pandemic as kind of a guidepost of what could happen if the 25% tariffs do come to fruition?

Oh, yeah, go ahead, sir. So if I understood your first question right, did anything change yesterday? The answer is no. We ship received just like we always do. Um, so we didn't see any slowdowns at the border, um, or anything of that nature. Um, but it was only, as you know, one day, um, what I would anticipate is, is Rob referred to if, if the tariffs did come in place, the supply chain would start to look like it did during the pandemic. I would say more so during the chip shortage, where you would probably have different plants going up and down continuously based on supply chain disruptions due to the fact that especially the smaller tier suppliers who can't afford to pay tariffs, don't pay tariffs, can't pass them on, and you start to see the supply chain disrupt, plan shutdown, and I think it would look very similar. Others might say, okay, well, the incentive is, well, why don't you localize? I would give that answer in two ways. One is there's no capacity in the United States localized to, at least nothing significant. And if you did have some capacity and localized to the U.S., the employment rate would not support that capacity. In other words, it's already at 4% in the U.S. It's probably not going to get a hell of a lot better no matter how much work you put there. Plainly, there just isn't enough people with the right skill sets to take on much more capacity. At the end of the day, I don't see how this can benefit the industry or the U.S. directly as it stands. I don't think it'll last. Any changes will take a long time. Yeah, if we were going to move anything around, it doesn't happen overnight, as any supplier or a lien would tell you.

One of the things that we have lots of plants in the States. We've got twice as many people in the U.S. as we do in Canada, and we've got plants from Michigan all the way down to the people of Mississippi. Some have extra capacity, so if they're Our awards of product and so forth in the United States, we've got a greater footprint. And we've definitely been growing our U.S. footprint over time compared to Canada, for sure.

Yeah, I should have been more specific in referring to supplier capacity. Absolutely. Supplier capacity, not our capacity. We do have some open capacity. It's true.

Yeah, that totally makes sense, and hopefully logic does prevail there. But just moving on to the second line of questioning, You guys talked about the impairment charge that you took in the quarter. It does seem like it is largely or mostly responsible to the lower adoption of EV vehicles. But when we think about your commercial settlements that you guys are negotiating or have negotiated, are they offsetting a majority of this write-down, or is there still quite a big gap between the write-down and what you're ultimately receiving from the OEMs?

That's a good question, David. So when we kind of think about that, Tosca moving on to the microphone. When we think about that in terms of the commercial settlements, I would say that for the most part, the write down of the EV portion of the write down would be more or less offset with a lot of the commercial settlements. Of course, that depends on the timing of the settlement. Not all of the settlements are are even, if you will, over the timeframe that we negotiate them. So I would say for the most part of the EV-related piece of the write-down, yes.

Maybe I'll just elaborate a little bit. So the write-down is a reflection of the future cash flows expected for those assets. I'm referring to EV-related assets. So when we did that exercise, at the end of the day, there was a shortfall, and that shortfall included any commercial settlements. I think part of the challenge is OEMs are open to compensating you for capital, but the fixed cost element of the commercial claim tends to be a lot more difficult, and that's where we're probably falling more short to some extent. So we are using benefits from the commercial activity, but as we've said in the past, including on the inflationary cost increases, we're not getting everything that we're looking to get.

And in some respects, we're sharing the pain, if you will.

I'll put it this way. I think we're being conservative. I think we're recognizing what's happening in EVs, and I think that probably a lot of people should be looking at things our way.

Okay. And then just as a clarification question, I don't think I heard it on the call, but the S&A cost savings of $50 million, what's the potential cash charge to that? And is that $50 million of savings and exit 25 run rate, so something that we could expect to flow through in 26?

I'll characterize that a little bit more for you. So the $50 million, is the total package that'll take, as Pat mentioned, somewhere between 12 and 18 months to fully realize, right? So that's called the run rate number. As far as the charges to realize that, some of those are built in already as part of our, call it European restructuring for the most part. So there are some costs there that we've pointed out in the guidance slide. We have, in terms of all restructuring, not just SG&A, but footprint restructuring and so forth, about $55 million of what we think the cost or the charge would be in terms of cash.

Okay. That's perfect. I'll hand over. Thanks for answering all my questions. Very much.

Thank you. Thank you. The next question is from Michael Glenn from Roman James. Please go ahead.

Hey, good evening. So I guess my first question is I'm looking at the actions you're taking with Europe and as well with China. So should we think about you completely exiting those markets at some point in the future?

I would say not Europe. Europe to us is very important. And as I said, it's a technical hub, a lot of innovation. Our customers are there that we do global work for. which is one of the reasons we went there in the first place. So we don't have any intention to exit Europe at all. Uh, but we don't see a lot of growth, uh, in the, in the short term. So we're going to focus very heavily on continuing to lean the operations out, continue to make them more profitable as we go forward. But, but no intention to close anything at this point. As far as Asia goes, Especially China. You can see this for Japan and Korea as well. We don't see growth opportunity as far as having plants there because, as you know, China's way over capacity as it is, and as is a lot of Korea and Japan. So there's still a lot of global platforms. There's still a lot of opportunities there. So partnering with Asian partners in growth opportunities for North America or Europe certainly is a strategy.

And that's been our strategy for 20 years, to tell you the truth. Our original relationship with China was to have a manufacturing relationship with a Chinese stamper while we did work in North America to service our clients. We went in with a fluids plant when our customers were looking at worldwide platforms, and we secured business for North America and Europe by also being in China. That's less true now, given the fact that our North American customers are less busy in China. And with respect to our aluminum operation, we were servicing customers for China, and we're working on partnership opportunities. So in that context, we've always... had a relationship and the product that we've made there, we've made really good money on over the years. But the way we're looking at it is how does the future shape up? What's the best way to do the future? And from a risk reward perspective, we think it's better to partner JV, work together with good folks in China.

Okay. And then the, The commentary you gave on the real estate assets being worth more than double what book value of those assets are, can you just try to give a little bit more information on the potential? Is there an opportunity for you to monetize those assets? I'm just trying to understand what you could do with those real estate assets.

but we use them. So, you know, the point was more when you're looking at balance sheet write downs, you know, my thought on accounting is whenever you can write something down, they ask you to do it. Whenever there's opportunity to write something up, you don't do it. That tends to be the bias. But, you know, we've got a good real estate portfolio. That's something that's valuable when you're talking about things like credit, looking at lenders. We've got very good credit lines and the real estate, even though we have unsecured credit lines because of the strength of our balance sheet, it's something that is in essence utilized in the context of your borrowing capacity and so forth. So, you know, we're not talking about spinning it all off in a reit or something like that, but there is value there and that's something that we just know there's, you know, there's ore in the ground, so to speak. And that was the key point that there's value if it's not on a balance sheet. Yeah.

And then one of your – General Motors has made some commentary suggesting that they could move some production to – they have some production capacity available that they could transfer into to try to circumvent some of the tariffs in Mexico, I believe. Would you – and you're indicating that you have some capacity available in the U.S. – I'm just trying to understand, with some of the moves that your suppliers are talking about, would you have capacity aligned to supply them in those markets, or it would be much more complicated than that?

Yeah, so, okay, let's make an assumption that, using your example, a GM was to move work into one of their buildings where they have open capacity, like, you know, maybe like Kansas City. where they had been running the, you know, P vehicles and have since, um, you know, closed, not closed it, but it's idle until the new bolt arrives there. So obviously we were supplying them there from one of our plants and that plant is an industrial plant. And it was also a plant that supplied GM, uh, for the automotive side. Well, obviously that capacity is now available. So that would be one example. In plants that are highly EV-capacitized, there's open space or open potential for using some of that equipment on other products because the sales are so low. So from where we sit, that would be the open capacity we have, space and possibly some equipment based on, frankly, lower sales or changes in what the OEMs have done. But our supply base, Tier 2, Tier 3, are very stretched. So my concern would be trying to move those supply chains because of tariffs. I would focus more on what we might do if our customers do it. But as you know, we've said this many times, we're kind of driven from where the assembly plants are. So if we see a shift, obviously we can adjust to it. I don't know if that answers your question.

Let me put a little bit of flesh on the commentary just in terms of production and location and that type of stuff in North America, which is the North American footprint has been developed over decades. It's hard to move. In Canada, we make 1.5 million vehicles. We buy 1.85 million or so. Mexico makes about 3 to 3.5 million. In the United States, makes the rest, which is 11 to 12 million capacity. We, with the nature of our product, which tends to be large, we tend to locate fairly closely to where our customers set up their plants. And that's actually one of the strengths that we have as a company. We say, where do you need us to be? Because we're probably fairly close by, especially on metallics and fluids. Our aluminum group is in Mexico. And so those decisions are made over long periods of time and very, very hard to move. I think that, and I've seen some discussion about, you know, where production goes and so forth. It's very difficult to do. And the reason that you've seen growth in, for example, the Southern United States and Mexico is the OEMs are making determinations on the two things that they always look at, which is all in cost and risk. And one of the biggest risks in the United States in many places, getting people to work in the plants and in the supply base around where they're producing. So I know this discussion that we're going to encourage certain things in certain places, but it's very difficult to do. The one thing that I will say that I think is likely to happen over the tariff negotiations within the USMCA and internationally is we're likely to see tariffs on other countries like Europe and Asia, which is going to make it more likely that those OEMs set up more production capacity in North America than they did before. That's particularly true, for example, in some of the Japanese companies. It is speculated, and we'll see. But to a certain extent, one of the issues in terms of capacity utilization in the States is there's four to five million vehicles imported into North America from non-North American jurisdictions. And so if you want to increase production in North America, one way that would benefit all jurisdictions is effectively dealing with that issue. And I think it's quite common.

Yeah, I agree with that. Moving a plant from Mexico to the U.S. or Canada to the U.S., It would take a long time and be very disruptive. It's not going to happen overnight. Most vehicles, with some exception with trucks, aren't duplicate-tooled, so it's a huge physical undertaking.

You may recall that until the WTO ruled against Canada back in the late 90s, that the Canadian message to the OEMs was, you sell here, you build here. And WTO didn't like it, but it doesn't seem like a lot of countries are following the WTO these days. But there are incentives to produce here, for example, and there are disincentives to not produce it here. And those are part of the tools in the toolbox that different jurisdictions have. And, you know, at the end of the day, we talk about tariffs in the USMCA. There's three countries negotiating here, and they all have arrows in their quiver.

Thanks for the information.

Thank you. Our next question is from Donovan from CIBC. Please state your last name and proceed with your question.

Hi, good evening. Can you give a bit more detail on your enterprise-wide project to reduce your annual SG&A expenses? What specifically are you planning to do to achieve this reduction?

Yeah, so thank you. Thank you, Donovan. So as far as the SG&A project is concerned, what we're taking a look at is bringing our MLS activities that we've been successful with on the shop floor, really taking them into the administrative areas. So utilizing the same, let's say, expert MLS resources, using those lean principles in our administrative functions, so kind of the back office elements. starting with obviously groups of professionals, let's say in finance or supply chain, that are in the different regions of the world. It could be reducing overlaps between, let's say, our regions, or really looking at regionalizing certain things that are at plant level, regionalizing them, or let's say between them. redundant functions between the plants and the corporate functions, if you will. As you know, Martin Rea is a highly decentralized organization, so looking to reap some benefits there in terms of the rationalization, if you will, of some of those processes.

Thank you. And can you comment on your capital allocation priorities in 2025? Will share buybacks continue to be as much of a priority this year as it was last year?

I'll make a comment. I think we're probably not going to do too much buying back shares in April. I do think that our capital allocation strategy remains as it is. First, we invest in the business, and we're going to invest again this year. That includes some technology. We also allocate money to debt reduction projects. which I think is important to have a strong balance sheet. And I think over the last couple of years, probably for about every dollar that we bought back in shares, we did $1.5 to $2 in terms of debt reduction. That's a pattern that we kind of like, but I do think that next quarter we're going to hold off on buybacks and see where we go. There's going to be a lot of noise, and you all know that because you're writing a lot probably on a daily basis. for the next little while. I actually think what we're looking to see here is an accelerated renegotiation of the USMCA, which was supposed to be reviewed in 2026. We've been advocating and a number of people in our industry have been advocating, let's just get it done and understand that the US has some concerns on rules of origin. They want it to be higher or more strictly interpreted. We agree with that. They are upset with some other aspects of USMCA that do not relate to the auto business. Let's deal with that. And let's just also deal with the fact that there's concerns about automotive overall. And by the way, and the one underlying thing that I think people got to realize is in the context of the auto business, the real threat to the U.S. auto industry, it's not Canada and Mexico. It's China. And part of the vibrancy of the North American auto market requires all three jurisdictions working together, including the fact that Mexico has talented people and has some cost advantage and labor-intensive industries, but it's a very good place to do stuff. Mexico can, in effect, replace a lot of the Chinese products that the industry has taken from China over time, and Canada's got a very good and robust auto and auto parts industry also, and together we make really good competitive vehicles. That should be the focus, and I think that's where we're going to end up.

Thank you. That's all for me.

Thank you. Please press star 1 at this time if you have a question. Next question is from Brian Morrison from TD. Please go ahead.

So, Rob, you're always good at giving opinions here, and I want you to follow on what you were talking about with protecting the Chinese from coming into North America. You know, tariffs aren't sustainable. It's going to disrupt the industry. It's too capital intensive to move. You know, it's going to take a long timeframe to do so. So I asked this question last night to one of your peers. What's it take to get to the ending? Like, is it moving some of the U.S. pickup trucks assembly from Mexico to the U.S.? Is it future manufacturing commitments to the U.S.? ? What do you think the end game is to get this issue behind us?

Well, nice that there was a target.

Yeah, I mean, fair question. We're all having the discussions. What I find in a lot of discussions in Canada, Washington, and Mexico is is there's violent agreement that we need Fortress North America for this industry and other industries. Like, it's violent agreement. If you talk to the trade folks in Washington, they would be saying we shouldn't be having tariffs in this industry. It is a tax on the people of the United States. And one interesting argument that a lot of people are saying that makes a lot of sense is just do nothing. Let the tariffs go in. The people it's going to hurt are our people in the U.S. We have about 4,000 of them that voted for lower prices, more jobs, stronger economy, more job security, and they're going to get higher prices, less jobs, less job security, weaker economy. And you're seeing a crescendo of that type of discussion happening in the U.S. And then just wait it out and wait for the midterms, which are coming. And there are a lot of people that are very concerned about higher fertilizer prices, energy price, and everything else in that context. My best scenario for where we get through over the next period of months with a new USMCA is one where you have free trade of goods in auto between the three countries, number one. more strictly applied rules of origin which the U.S. wants. Don't forget there was a tribunal where Canada and Mexico argued for a looser interpretation and won that tribunal. The U.S. has basically said that's not what we believe should happen and we're going to get it because we're going to get it when we renegotiate in 2026. So I would like that done earlier. I think that what you have to do and what the U.S. wants to see is higher penalties for not complying with the USMCA. Right now the penalty is 2.5%, which means some people don't follow the local content rules. You increase that penalty to 25%, you have a different issue. And then what you've got to do is recognize that there are certain places that are making lots of vehicles and shipping them into North America. And it's efficient for them because of the exchange rate and the fact that there isn't a high enough tariff on them. And so you put all that together, and the argument is you want a stronger North American industry, you want a stronger U.S. industry. This is how you get there. If you have the tariffs and the stuff that we're talking about, you will have a weaker U.S. industry. You will have the three Detroit, the Detroit three or whatever you want to call them based on where their head office is. They will be weaker. They will have a higher cost structure. They will have to charge more for their vehicles, including pickup trucks, which are bought by people in the Midwest that are, you know, the voting base of this president and his party. And And I think that, you know, at the end of the day, logic's going to win out. The other thing is that the way the tariffs are being imposed, it's a negotiating aspect as opposed to, you know, I'm not sure that anyone believes we're going to have tariffs on the auto industry for two years. It's just not going to happen. It doesn't work. And so in that context, I think they're a method of negotiation. We'll have to see. Don't forget, I'm actually surprised in the auto industry, that we had tariffs earlier this week. And I'm starting to think we really have tariffs because we're in for so short a time. I think it's more to send a signal than anything else. And when it comes to April, we'll see. But it's not in the interest of the United States or its OEMs to have tariffs in their supply chain.

There's a lot of few Americans. As one of the few Americans in this room, I can attest that the United States can't do this alone. It definitely has to have a combination of the three countries to recover, or this industry will be in big trouble.

Yeah, I agree. I'm just trying to figure out what makes the administration think that they have a win so that we can get beyond the tariffs.

I think you've got to think about it like this. You've got an administration that wants to get a lot done very fast, And when they go into the tool shed to see what tools they're there that can be used really quickly, it's just one of the very few. And I agree with Rob 100%. It's not – I don't think we're going to see it in auto. It makes no sense, and it shuts everything down.

Well, I'm going to put my legal hat on and just venture an opinion. The tariffs under the USMCA are illegal. We have a three-party agreement. Tariffs are the purview of Congress, not the president. And at the end of the day, the use of an emergency power, to say it's fentanyl, is meant to justify the tariffs. But at the end of the day, almost on a daily basis, you're seeing the U.S. Supreme Court say that you do not have the legal authority to do that. And there's a history of the statute that's being used. There are a number of lawsuits ready to go, including on the tariffs on this issue. But ultimately, the USMCA was ratified by Congress. The change has got to be ratified by Congress. And I think you're going to see that more and more. And, you know, what's happened in Washington, I was in Washington a few weeks ago, actually even made it to the White House in the West Wing where people do walk around just like they do in a TV show. And, you know, it seems to be a lot of walking around and, you know, just have the discussion. And, you know, there's almost shock and awe, which is get a whole lot done in a short period of time. And that was the message from there. and in the House and in the Senate, which is basically we have a short time to get a whole bunch of things done. Let's get moving. And by the way, a number of those have been very successful, according to people that have been trying to do it, and in some, perhaps less so. The other thing that's interesting is until the last week, I would say that tariffs in Washington were barely making the top five, certainly maybe making the top ten, but they were not front of mind. They're front of mind now. And I think a lot of people are really focusing and saying, what the heck is going on here? This, this hurts Americans. Right.

I appreciate that. Can I ask a couple quick questions as well? So, and this is more on the financial side. So free cash flow, 150 million relief liabilities, 50 million cash refraction charges, 55 dividend. That gets you about 30 million of free cash flow this year. Um, I understand you want to keep the cash cushion. I respect that. But then you have this graph, Nano Explorer, pardon me. It now makes up 17%, incredibly 17% of your market cap. I know you have a long-term supply agreement. Is this the best use of capital at this time? I mean, you could buy back 20% of your company with proceeds from that. I'm just curious as to what your thoughts are on that.

I think it's certainly something you'd like to put it this way, and I think you've asked this on a number of occasions. There's a price at which we'd sell, but we are big believers in graphene. You see it, and so at the end of the day, and if you follow Nano, and I'm sure you do, you're a really smart guy. In that context, the trigger point for Nano is basically adoption and orders, and You know, I hate to say this, but every time we look at it, people are getting closer to adopting it in a bigger way. And so in that context, you know, we look at all our capital allocation. We're not saying that we're a permanent holder of that. And so at some point, we would certainly consider lowering our interest in that. But, you know, the other thing... and I'll just put it out there, I said it, on different things. There is an open issue as to whether you can use graphene in aluminum. And if you do, that's a world-changing event. And there are people studying it, and some people say it isn't ever going to happen, and some people say we can do it. We're kind of believers in every now and then you look at something that can be a game changer. If that would be possible, if we work toward that, that would be an absolutely wonderful thing, including for our company. We have over a billion dollars in revenues using aluminum. And it makes it more conductive, which is really, really, really good. So a lot of people are spending time on that. If that happens, we're in a pretty good position to benefit from it.

Okay, thank you, Don. Thank you.

Thank you. There are no further questions registered at this time, so Mr. Will DeBoer, I'll return the meeting back over to you for closing remarks.

Okay, well, thank you very much for spending part of your evening with us, and we know that you're all busy talking about tariffs in our industry. A lot of really good analysis from you on what's happening. If you have any questions on our company or If you have any questions on what's going on in the industry and what's coming up coming April 2 or so forth, feel free to call us. You have our names and you have our information to contact us in the press release. So have a great evening.

Thank you. Your conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. This conference is no longer being recorded. This conference is no longer recorded.