Martinrea International Inc.

All participants, thank you for standing by. The conference is ready to begin. Good evening, ladies and gentlemen. Welcome to the Martin Rea International Second Quarter 2025 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 today. We always look forward to talking to our shareholders, updating you on our business, and answering questions. We also note that we have other stakeholders, including many employees, on the call, and our remarks will be addressed to them as well as we disseminate our results and commentary to our network. With me this evening are Pat DiRamo, Martin Reyes' CEO, our President, Fred DiTosto, and our CFO, Peter Cyrillus. Today, we will be discussing Martin Reyes' results for the second quarter and a June 30, 2025. Overall, a strong quarter across the board. I am really happy about our Q2 performance. The results, I think, show that production levels are relatively stable and that we are really good operators. We have good profits, operating margin, and free cash flow in Q2. Congrats to the team. My colleagues will walk you through the results later in the call. I refer you to our usual disclaimer in our press release and our file documents. On this call, I will make a few short comments on the trade and tariff situation and geopolitics at the end. Pat will outline some key highlights of the quarter and make some comments on the business and some really great initiatives we have going on. Fred will discuss operations, and then Peter will review some financial highlights, and then we'll do Q&A. And now, here's Pat.

Good evening, everyone. We're pleased with our performance in the second quarter, both operationally and financially. Margins were notably higher compared to the first quarter, reflecting continued operating improvements and negotiated commercial recoveries from our customers. Vehicle production volumes and production sales also improved quarter over quarter, as inventories returned to a more normalized level, a lower-than-normal level, in fact. Peter will elaborate on our financial performance in more detail. Overall, we had a good first half of the year. Our Q2 and first half operating performance is among the best. in our peer group. Recall that USMCA-compliant auto parts are exempt from Section 232 auto tariffs, which is a positive for us as well as our industry. This is a very good thing. We do have some tariff exposure on some product that we get from Tier 2 suppliers and from parts affected by steel and aluminum tariffs, so there is some tariff impact in our results. Overall, we believe our exposure is manageable. Given the operational improvements, actions we are taking with SG&A, and planned recoveries from customers, we expect to offset a substantial portion of the tariff impact. As such, we are maintaining our 2025 outlook. Peter will elaborate on this more in his remarks. Switching gears, on previous calls, I've discussed our in-house development of machine learning and our plan to install this AI technology across the enterprise. I referred to its impact on plant safety, product quality, and productivity built on our martinrea operating system strategy. Now I'd like to get a little more specific on the benefits we are seeing from three types of machine learning technologies that we developed, and we have more under development. First, we've installed adaptive welding software that we refer to as ADAM on multiple production lines and pilot facilities. The results have been very good with substantial reduction in well-destruct testing, including a reduction in man hours, as well as over 9,000 pounds of scrap and nearly 13,000 kilowatt hours of energy saved each week. And that's not the best part. We also improved the efficiency line from 79% to 94%, resulting in a significant reduction in labor costs on an annualized basis. Our spot welding using Adam is virtually expulsion-free, which significantly improves weld quality, weld tip changes, and line maintenance. All in, total annual savings of these projects came in at $3.5 million in our pilot plan. This is one of those, you kidding me, wow moments. When installing Adam in our second facility, we were able to speed up the line, avoiding $8 million in contractor integration costs and enabling us to commit to a volume increase for our customer. Second is our AI vision system. We haven't thought of a fun name for this one yet. This system is more advanced than the typical vision systems used in our industry. With this system installed in some pilot lines, we have reduced inspection and repair costs in our MIG welding cells. We use it across the company to inspect for part presence and more complicated defects, in many cases eliminating manual checks entirely. We're already saving in inspection and repair costs. In some cases, we've implemented improved vision capability to existing cameras and x-ray machines and modified our software to enhance our capabilities with little hardware costs. Barnray has developed its own tools for synthetic data generation and environmental control to make this product even more robust. We are also piloting the vision system to become the eyes of our autonomous vehicles, what we call AMRs, or autonomous mobile robots. We'll then become AIVs, or autonomous intelligent vehicles. This is an in-house project that will allow us to eliminate predetermined paths and safely move to any desired location on the shop floor. We are using stereoscopic camera algorithms to make a 3D image in a process similar to how humans see depth. This provides a 360-degree coverage enabling us to measure relative velocities of objects that are in the line of sight. We are using visual simultaneous locating and mapping technology, or VSLAM, giving us the ability to track vehicle movement in a dynamic plant environment. Lastly, we have developed what we call press health monitoring, substantially reducing unplanned repairs using early warning analytics. On the four pilots we've run on various presses, we've estimated we've saved over $900,000 in unplanned maintenance to date. I can even break that down. This early warning system allowed us to avoid a $400,000 crown repair, a $300,000 flywheel shaft repair, a $150,000 link repair, an $84,000 motor repair. You get the idea. This is not including any costs associated with the potential of outsourcing of dyes. Press health monitoring is now in the process of being installed on all our large presses, as well as newly purchased machines across Martin Reyes. We are also piloting health monitoring on our first high-pressure aluminum die-cast machine. This level of detail is important to communicate to you. It's not just a generic use of the term AI. It's real machine learning at Martin Rea, and it's more than a dream. It's the real deal. Now, I wouldn't extrapolate those numbers I just gave you across all our plants because every plant is different, but it gives you some perspective of the opportunity we see in front of us with machine learning, and it's meaningful. So now you have some real data on three technologies we have piloted with great results. We're now in the process of deploying the first machine learning tools, and we expect to see the benefits from this activity for many years to come. Plus, I discussed a new vision technology that is under development that will make its way to the factory floor over the next 12 to 18 months. Very exciting times. I want to finish off with a few words on our SG&A cost reduction program. As we indicated on previous calls, we are targeting to achieve a $50 million annual cost savings, and we have a team in place that is helping the business units identify opportunities. We're executing on a variety of initiatives, such as centralizing activities and business functions, logistics costs, efficiency improvements, and much more. We're committed to hitting our target by the middle of next year. Many thanks to the Martin Rea team for their hard work in these dynamic times. With that, I'll turn it over to Fred.

Thanks, Pat. Good evening, everyone. Looking at our operations, we continue to execute well. We are driving results through operating improvements and efficiencies, cost reductions, and ongoing investments in machine learning and other innovations that are enhancing productivity, as Pat talked about. We also continue to receive recoveries for OEM volume shortfalls, lingering inflationary costs, and now tariffs through commercial negotiations with our OEM customers. Looking at our segments starting with North America, adjusted operating income was up 20% year-over-year, representing an adjusted operating income margin of 8.5% on production sales that were down 5%, reflecting productivity and efficiency improvements and favorable commercial settlements. Very strong results by all accounts. Our performance is exceptional in North America, the main profit driver of our business. In Europe, we posted an operating profit in the second quarter, up from losses in Q1, and in particular Q4, demonstrating some positive momentum in the region. The trend in Europe is improving, as we are benefiting from continuing operating improvements as well as the restructuring actions we have taken. Profitability in our rest of the world segment was also positive in Q2, ending the quarter at an adjusted operating income margin of 4.3%. As you know, this is a small segment for us, accounting for less than 3% of our consolidated sales, and changes in bonds and a small number of programs, as well as commercial settlements, can result in swings in profits in this segment from quarter to quarter. As we indicated on previous calls, our strategy is to maintain a minimal footprint in this segment, and this has not changed despite the positive results we had in this segment in the first half of the year. Again, overall, we are in good shape operationally, executing our plans well and driving improvements wherever we can. I would say we are doing well in managing what is in our control. Moving on, I am pleased to announce that we've been awarded a new business worth $40 million in annualized sales and matured volumes, which includes $18 million in structural components in our lightweight structures commercial group from Stellantis and other customers, and $22 million in our flexible manufacturing group with Volkswagen's new Scout Motors division and Volvo trucks. New business awards over the last four quarters have totaled $175 million. we continue to have a healthy pipeline of RFQs that we're working on with the higher-than-normal level program extensions in front of us. These program extensions generally allow us to reprice business to fully build in the higher inflationary costs that we've had to absorb over the last few years, which will ultimately help margins. We're also seeing a number of takeover business opportunities, which, if prudent, we will look to capitalize upon. This is something we have always been very good at. With that said, I'd like to thank our people for their commitment to the long-term success of the company. We are performing well. We truly value your contribution. Thank you. Now here is Peter.

Thanks, Fred. Looking at the results year over year, adjusted operating income came in at $86.1 million, up from the $81.6 million that we generated in Q2 of last year, on production sales that were down about 5%. Adjusted operating income margin came in at 6.8%, up 50 basis points year over year, reflecting operational improvements, lower SG&A, and some depreciation benefit from the asset impairment write-downs that we took at the end of last year. This supports the statements of both Pat and Fred that operations are performing well. As Pat noted, our results improved substantially over the first quarter, reflecting higher production sales as vehicle production volumes rebounded following the OEM inventory correction that took place in quarter four and quarter one, as well as the margin benefit from operating and other improvements. Moving on, free cash flow before IFRS 16 lease payments came in at $72 million, up from $51.7 million in Q2 of last year, largely reflecting a positive year-over-year change in non-cash working capital. Including lease payments under IFRS 16 accounting, free cash flow was $57.9 million. We are well on our way to meeting our full year 2025 free cash flow outlook of $125 to $175 million based upon our solid first half performance and a typical seasonal pattern in working capital flows as well as continued discipline with capital expenditures. We said we would become a consistently solid free cash flow generator and you can see that this is the case. Moving on, adjusted net earnings per share came in at 66 cents, up from 58 cents in the second quarter of 2024, which reflects the higher adjusted operating income, lower interest expense given lower debt levels and interest rates, and a slightly lower effective tax rate compared to last year's second quarter. I think the trend line for interest rates is likely down more than not, which is good for us. Turning now to our balance sheet, net debt excluding IFRS 16 lease liabilities decreased by approximately $73 million over quarter one to $792 million, reflecting the strong free cash flow generation in the quarter. Our net debt to adjust the EBITDA ratio ended the quarter at 1.5x, down from 1.64 in quarter one, and at our target of 1.5 or better. We think this is a good place to be as it allows us to execute on our capital allocation priorities while maintaining a solid balance sheet. Our customers like financially strong suppliers as well. Moving on, we are maintaining our 2025 outlook which calls for total sales of 4.8 to 5.1 billion and adjusted operating income margin of 5.3 to 5.8% and free cash flow of 125 to 175 million. We are on track to meet this outlook based upon our strong first half performance. We expect production sales to be somewhat lower in the second half of the year compared to the first half based upon the typical seasonal pattern in our industry. with the summer and holiday season shutdown periods in the third and fourth quarters. Margins are also likely to be somewhat lower in the second half than in the first half, reflecting normal decrementals on production sales. Importantly, we see our tariff exposure as manageable with a significant portion of the impact expected to be offset by cost actions and commercial negotiations with our customers, as Pat talked about earlier. We are confident in our ability to meet our 2025 outlook, particularly on free cash flow, which is likely to come in at the high end of the outlook range or better. given opportunities that we are seeing to reduce CapEx and optimize working capital through continuous improvement initiatives as well as ICE extensions. Looking further out, we are starting to see examples of production volumes being reshored to the U.S., as well as inquiries from our customers regarding readiness plans for moving volumes or relocating next-generation programs. We are seeing this not only from the Detroit 3, but also from our European and Asian OEM customers that are potentially looking to establish new facilities in the U.S. This is good news, as it may lead to higher production volumes in the U.S., which would be beneficial for North American suppliers. With that, I would like to thank our people for their hard work and perseverance in these continually evolving times. And now, I turn you back over to Rob.

Thanks, Peter. I'll talk briefly on tariffs as everyone on the call is familiar with the general landscape, the U.S. tariffs on Canada and so forth. Happy to take questions in the Q&A. My general comment to you all is there is a lot of noise, but for our industry, please let's take a valley. Things are not so bad, probably better than the headlines. People are adjusting. I think we'll get to a decent place. and in the meantime recognize that auto suppliers are for the most part not paying tariffs here, and the tariffs on Canadian assembled vehicles have the lowest tariffs of any country shipping autos to the U.S. because of their credit for U.S.-made parts. On the last call, I outlined my view of a five-part plan for auto in North America and said that this is where I think we should get to, which would be best for the North American auto industry and supply base, consistent with the U.S. view of a stronger U.S. auto industry. To remind you, here are the five points. One, free trade in autos and parts between the U.S., Canada, and Mexico. Two, higher North American content in vehicles produced in North America in terms of higher rules of origin requirements or stricter interpretation rules. The U.S. has been advocating for that in interpreting the current USMCA. Canada and Mexico have opposed as of automakers, but this is a good way to go and will be good for all North American-based auto suppliers who are everywhere throughout North America. Studies have shown the content rules have increased production and jobs in the U.S. and North America. Three, higher penalties for noncompliance with rules of origin. Not a 2.5% penalty, which many simply accept, but higher and punitive, like 25%. Four, measures to attract assembly into North America. Make it worth it to build here if you sell here. This could include carrots, such as investment tax incentives, or potential sticks, such as quotas or tariffs. Note that North Americans buy between 19 and 20 million vehicles a year, but imports account for close to 5 million. Imagine another 2 to 3 million vehicles built in North America. Everybody wins here. including the supply base with North American content rules. We used the carrot approach to encourage EV investments in Canada. Even though EV adoption has stagnated, there is an effective way to encourage investment. The U.S. agreements with the EU, Japan, and South Korea for a 15% tariff encouraged this to happen to some extent, in effect. Five, I believe tariffs on China are appropriate, but more than that, North America should not support direct Chinese investment in parts or auto companies in North America. The reality is that all Chinese parts suppliers and OEMs are in effect extensions of the state and subsidized by it, and their investments do not add new investment, but they displace investment from market-oriented firms. Do all this, and we have a really solid North American market. And all this can happen quickly, with the U.S. being the biggest beneficiary in my view. As I said previously, We are lurching towards this. I think it is important for Canada and Mexico to continue to fight for zero tariffs on autos assembled in their jurisdictions, eventually as part of a USMCA renewal or otherwise. Over time, I believe in North America. I believe it is in the best interest of the U.S. to have a strong North America. I believe it is good for all of us. I believe we will have a prosperous U.S. and North America over the coming decade. The clouds and overhang will not last. And as Peter and others have pointed out, tariff impacts to date have been manageable. Good news. Finally, a bit on capital allocation. We invested in the business as usual in the quarter and generated some good free cash flow. We used the balance of the free cash flow to pay down debt, which brought our net debt to EBITDA ratio to our target of 1.5 times or better. Good news. We did not buy shares under our NCIB in the quarter because of the tariff discussions. We are encouraged by the latest developments on this front, as I said, particularly as it relates to tariff exemptions for USMCA-compliant auto parts. We'll see how the tariff discussion and overall macro environment unfolds over the coming months. We're not committing to buying back shares at this point, but we're not ruling it out either. We believe there is great value in the shares, but there is great value in keeping debt lower also. At the same time, we are prioritizing strength in our balance sheet and debt repayment, which lowers interest costs. It's seldom a bad thing to reduce debt. 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 careful with our comments, but we will answer what we can. And thank you all for calling in.

Thank you. We'll 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 two. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Michael Glenn from Raymond James. Please go ahead.

Hey, good evening. So I just really wanted to get some additional commentary on the back half margin guide. I can understand you are talking about some seasonally slower production levels. But even this quarter, in the face of sales being down in North America, you still manage to get some pretty attractive margins. I'm just trying to understand how the front half really changes against the back half of the year, or how the back half changes against the front half.

Yeah, sure, Michael. Right, so... You mentioned the seasonal adjustment, so that's true. So first half versus second half in our two biggest markets, according to the latest IHS, first half will be 8% higher in North America and 10% higher in Europe. So that will be a big impact in the – call it muting the second half numbers as far as results are concerned. But I do think we will have a healthy, strong half, at least – You know, stronger visibility here through the third quarter, a little bit opaque in the fourth, but that's consistent with the way we built our guidance back in the February-January timeframe when IHS also had a lower second half than they did in the first half and technically a lower fourth quarter than in the third quarter. There are some one-time effects in the second quarter that won't repeat themselves on a favorable basis in the second half. Mainly, there's some contractual price reductions that we have built into our forecast for the second half to a couple particular customers, and those are contractual price decreases based upon volume hurdles that they've met.

Okay. And maybe just To understand North America a little bit better, can you identify what facilities you are seeing the biggest benefits from in terms of these productivity and efficiency improvements? And if there's anything specific you can highlight there that's playing into that.

You know, we don't really bifurcate our facilities so much, but I can say that, you know, this – journey we've been on in lean manufacturing, we said it would take 10 years before we really start to see results. In the last couple of years, and in particular this year, some of the things that some of our plants are doing is really, really advanced. And Fred and I visited a number of our plants the last three weeks, and even we were surprised at just how advanced some of them are getting. I think it's just a matter of doing the things we said we were going to do relative to lean. And then that's coupled with, at least in a few plants, what I talked about relative to the machine learning. We are going to see some advances from that. It'll take, you know, the next couple of years. But, I mean, just operation with discipline, the quality level – the launch capability for the most part. You know, we still have bumps and bruises here and again, but just generally speaking, we're performing very well in our operations. And I would say it's pretty much globally. I can't say this plant or that plant. There's a few that struggle, and there's a few that are more advanced than the rest, but the far majority are performing really well.

Yeah, 56 is almost something. Michael, we – We bring a lot of people on tours at our all-field facility here in Toronto where you can see some of these technologies. We've shown it to shareholders. We actually have been visited by two prime ministers this year, and it seems to be a good place to show the type of thing that we're doing. We invite anyone on this call to do that and to see it. And, of course, you can appreciate we can't go or we won't go on a plant-by-plant basis, just that we won't go on a customer-program-by-customer-program basis or anything or our transcript would be listened to very carefully by every one of our customers. We don't think it's in the best interest of our shareholders to tell that.

And just one more for me. So would you expect to receive any commercial recoveries in Europe in the back half of the year? It doesn't look like there's been much so far this year. Should we expect an uptick in the back half?

I think, Michael, as we mentioned before, the commercial activity is somewhat out of our control in terms of the timing. So while we negotiate, I would say, frequently and consistently throughout the quarter, these negotiations ebb and flow in terms of timing. So you should expect that there would be some commercial issues resolved in the second half for Europe. Yes.

I think in a general sense, and the other guys can correct me if I'm wrong, but Over time, we're going to see fewer commercial recoveries for the simple reason that the industry is normalizing, right? So a lot of those are related to some of the EV things and that type of thing. Chip shortage has obviously started a lot of that. But, you know, we actually prefer more of a return to normalcy because when you're doing commercial recoveries, it's because there's a reason that you're negotiating for a commercial recovery, which means something didn't perform well. maybe the volumes or something like that. So, you know, we think actually the industry is normalizing a lot more. We're seeing more normalcy in terms of EV rollout rules and all that type of stuff. And I think that there's been a significant adjustment period, but we're getting through it. And we would actually like to get to a more normalized stage.

And we're seeing that in our activity. It started in March. subside slowly, not gone away completely. And we expect it to be at a lower level as we head into next year. And the other thing I'll note is, as we get into the next cycle of ED programs, we're starting to see RFQs on that front. And what we're seeing is customers have been somewhat more realistic in terms of their volume expectations. So I don't anticipate that this type of activity will be baked into how we interact with our customers. As Rob noted, we'd like to get back to some normalcy at some point, so.

Okay, thanks for taking the questions.

Thanks, have a great night. Thank you. The next question is from Brian Morrison from TD Cowan. Please go ahead. Oh, good evening.

I want to follow up a little bit on Michael's questions there. So, very good quarter. Your North American OM, 8.5%. I think if I look back, we haven't seen that in five years. It was 2020, I think was the last time. So, is there any pull forward in volume to avoid tariffs or any timing impact from outside commercial recoveries in that margin? And are tariffs not a headwind in the quarter? Like 8.5% is a very big number in North America.

So thank you. So as far as the pull ahead, Yeah, we would expect that there was some pull ahead. I mean, what we're seeing or hearing from some of our customers is that in the second half that the tariff impact will likely impact them, and we would see some, let's say, opposite effect to a buy ahead or pull ahead. So I do believe there was some of that in the second quarter, especially here in North America, primarily on some of the vehicles that are, let's say, built in Mexico, for example, maybe then shipped up to the United States. As far as your second question, headwinds, headwinds going in the second quarter, as I mentioned before, in North America would be some of the contractual pricing we have built in based upon milestones that they've met. Second half, sorry, second half that we've built in. As far as the good margin, I think it goes hand in hand with our MOS activities already, as Pat mentioned. And then, of course, there were some commercial activity that took place in North America as well as we just talked about.

The other thing I'd say is in the second half, there's some things we just don't know. We don't know how strong the U.S. economy is going to be. We don't know where the tariffs are going to end up. There's a lot of... It ended up a lot better than some of us thought. Some people commented they would be. And we're seeing the potential for lower interest rates and so forth. The one thing that I would point out is inventories are quite low. As you look at the overall thing, there are some things that people worry about, but at the same time, you look at some of the facts. Sales have been pretty decent. Inventories are low. The tariff bite has not been nearly as as bad as the tariff bark. And to a certain extent, you know, we may see, you know, next year, you know, be fairly solid depending on the performance of the North American economy. And so in that sense, we'll see where the releases go. We'll have more clarity on the fourth quarter, obviously, as we move closer to it and how the next year comes up. But there's a little bit of fog there. And I think a lot of people are speculating. I also think there's a fair bit of caution in the IHSs of the world because they were over-aggressive for a number of years. And there are some that would say they may be overly conservative right now, waiting to see what happens before they start increasing numbers.

So I agree with almost all of those comments, Rob. We're jumping back and forth a little bit. So I want to talk about the second half in a moment. But in terms of the Q2, so there was some pull forward, but was there any commercial recoveries and were tariffs a headwind in the quarter?

There was tariff headwind in the quarter. We've shown, yeah, there was a tariff headwind in the quarter, so it was manageable, and we would expect that headwind to continue, but again, we expect that we would recover the large extent of that before the end of the year.

Okay, so that brings me to the second half, and I understand your comments with respect to, you know, a little bit of opaqueness and visibility, but then you talk about the inventories as well. So, Should you not have some sort of recoveries, be it commercial or tariff, and then the process improvement? I really like what you're saying about AI to partially offset the decrements in seasonality. I'm just wondering, is your margin outlook similar to your free cash flow likely towards the mid to high point of the range? Because it seems a bit conservative in the back half at a low 5% neighborhood in H2.

Sure. So as far as the margin profile, we don't build in entirely the tariff recoveries, right, because those are at the moment being negotiated. So if there are tariff recoveries, let's say most likely at the tail end of the quarter, or I should say at the end of the year, then that could provide some upside. But we're not, you know, like I said before, we're negotiating those currently. So, we don't put those into our forecast or our guidance outlook. Our guidance outlook, we're maintaining. We set that in the beginning of the year at a volume of roughly 15.3 per IHS, and we're at 14.7 now. So, I think that holding the guidance in this environment is a solid outlook at this point.

For sure. Just last question, point of clarification. You reiterate these $50 million in target synergies, and I think that should all fall to the bottom line is what I think you've said previously. Largely in 2026, is that still the case? Because when I look at 2026, and I realize it's a long way out, but it looks like you have these targeted operating efficiencies, you have AI process improvements, you should have new contract pricing, margin increments on volumes, assuming that's positive. But does this $50 million fall to the bottom line, and are those the key drivers that I look forward from a high level?

Yeah, I think that those are the majority of the key drivers. We do expect that to hit the bottom line in the middle of next year. On track right now, I'm pleased with our progress. We're roughly halfway there at this point. And as we plan, as you know, natural disasters, budgeting season takes place in most companies around this time. So in the late fall, we'll have a better line of sight to how we finish up to that 50 million target.

We had said that was an 18-month target, which puts us into about a year from now when we start to see the majority of the benefits. I mean, some we'll see ahead of that, obviously. But if you wanted to say when we'll see the full advantage, it'd really be more of a 27 for a full year effect.

And then I think the aspect of when programs get refreshed and renewed, I mean, that'll take a lot of time. That won't be all next year. Maybe some next year in probably 27, even potentially into 28 in order to build in all these new economics. So that's a bit of a journey, I would say.

Yeah, it's all very good. Thank you kindly for the answers. Thank you.

Thank you. The next question is from Tammy Chung from BMO Capital Markets. Please go ahead.

Hi, thanks for the question. Just lastly, sorry, I could be the dead horse, but on the margin, I guess for me, I'm thinking more next year. So you're talking about all these operational efficiency improvements, ESG&A, a lot of machine learning and AI and all that. So Are you thinking or should we be thinking about full year next year on that, like especially in North America? We should still be seeing on that continued margin expansion next year versus this year? Is that how you're expecting it? Is that how we should think about it?

The way I would think about it, Tammy, is, you know, we're expecting a flat year-on-year on a sales profile basis, more or less. I think we've got one program that has end of production that we need to wrestle with. So we're doing that now. But for the most part, I would say a flat profile.

I think it's important, too, what Fred talked about a little while ago is as we launch new programs, we'll make the material recovery we haven't been able to make, and that doesn't all happen next year. And that's one of the gaps in our current situation. It's gotten better, but we've still got some work to do.

Just a thought as we look at marketing, we always compare. We try and strive to be better, but I think it's a useful exercise to compare our margins compared to our peer group in terms of what we're doing and that type of stuff. And we take a look at it from time to time. I won't name any names, but ultimately, you've got to measure performance on the basis of how people are doing compared to the peer group and in their industry. And I think we compare favorably, and I think maybe let's take a look at that.

So when you say flat profile, I heard sales. Are you also characterizing margin that way too next year?

I think it's a little bit too early to say that right now, Tammy. What we've got right now is a budgeting process that will give us more visibility there. But with the indication of a flat sales and the information that we've given you today on some of our activities, you know, we would – you know, would like to see a margin expansion, but it's too early to make that call yet based upon the budgeting process.

That we'll be working on.

And we'll put out a forecast as we do every year in the early part of next year.

Right. Okay. Got it. And my other question is I wanted to better understand now that there are some more discussions with your customers about production, reshoring, relocation, all of that. I'm wondering how, like, what are the implications of that with respect to, like, incremental capex that you may have to deploy into the U.S.? And also, like, what would happen with your facilities in Canada and Mexico? Like, is the discussion from the OEMs that they want you to also have your facilities going forward in the U.S. or you could continue to ship from your Canadian and Mexican base to their U.S. plants that they're investing more in. Thanks.

I think it's going to be a little bit of all that because it depends on where the work comes from and if it's new work to us or current work being relocated. So if an Asian company brings over more volume that we're not currently providing for in Asia, but have an opportunity to provide for it in North America, that would be new work and we would put it logistically, whatever makes sense to wherever they locate it. So if it was a Honda or Toyota in Canada, we would put the work in Canada as an example. But if they're moving the work within North America, That actually works pretty well for us because of our footprint. And so, you know, General Motors' announcement that they made some months ago or weeks ago, I can't remember when it was now, but we're starting to see more clarity on that. And from where we sit, it's obviously going to be impactful, but it's not going to be something where we have to go out and build new plants for because we have footprints available in every one of the locations that they are moving to. So I don't see it as a detriment. I see it in the case of General Motors. It could actually balance our production somewhat. It could also create opportunities for Canadian facilities. That's right. I think it's going to definitely create opportunities for Canadian facilities. And then in the case of, again, Asian or Europeans bringing more vehicles over here, which they're saying they're going to do, unless they have the tooling already available, it's a year or two out. but it definitely will offer opportunities for new work, which is what Rob was referring to earlier. So I think, again, some of this movement is going to be really good for us over the next few years.

And we're already seeing activity on that front from Asian OEMs, but also even German OEMs, you know, RFQ stages looking at localizing production and bringing product onshore here. So it's happening.

The good news is, too, is most of these OEMs have open capacity in their plants. So they don't have to build new plants either. They may have to tool up, but they have ready sites where they can bring in work on top of what's already there. And that's not in all cases, but it's in most cases. So it could happen in the next year or two, which would be a big benefit.

So, you know... In the context of the tariff discussion, as my colleagues have just said, like the U.S. wants to bring more production into the United States. That's good for us because we're a supplier. They want higher North American content or tighter rules for North American content, which is good for North American-based suppliers. We ship tariff-free. They want a higher penalty for not meeting those content rules, which is good for us. They've imposed – a tariff on Europe and Japan and Korea, which makes it less likely that vehicles are going to be made in those jurisdictions and shipped to North America, which is good for us. And they've tightened the rules on China, which is good for us. The issue that we have to deal with is the OEM tariffs in terms of Canada and Mexico. understand that the 25% tariff on OEMs in Canada is reduced by Canadian or by U.S. content, which on average is 50% or more. So the tariff rates as they exist today are 12.5%. I think they're going to go to zero. I think Canada is going to negotiate that. But already we're the least tariffed jurisdiction in terms of the United States. So as we look at all this stuff, it's messy, and I'll tell you it's frustrating for a lot, but At the end of the day, we're lurching towards a good situation for the North American supplier that has the footprint where the OEMs make the stuff. And that's what we got, and we can be flexible in a bunch of different stuff. There's going to be some changes, some costs to that, et cetera. But overall, we think the benefits outweigh the costs over the long term. And I'm actually quite supportive of the American view overall to have more vehicles made in North America. I think Canada could be part of that solution. Mexico could be part of that solution.

I appreciate the comprehensive answer. Thank you. That's it for me.

Have a great night. Thank you. As a reminder, you may press star 1 if you have a question. The next question is from Michael from MMCAT. Please go ahead.

Good evening, guys. Thanks for taking my call.

No problem. Good evening. Good evening. Nice to hear from you again. Yeah. Used to be all the analysts.

Yeah. Now I'm on the other side. First, just on the tariffs, the U.S. has said they gave Mexico a 90-day negotiating period. Do you think that particularly auto tariffs, but all tariffs overall, are going to be negotiated with Mexico first before Canada or vice versa?

I think it's an open discussion. We're very close to the tariff discussions on auto, at least both in Canada and Mexico, but also in the United States. The former Secretary of the Economy who negotiated the USMCA for Mexico, Ildefonso Guajardo, is now on our board. So, we've got pretty good insight in terms of the Mexican situation. I'm not sure that 90-day period is necessarily indicative of earlier tariff discussions or not. I think it's a delay. We'll see how that is. I know that, as you read in the press, and I think Canadians are negotiating a lot, their view is no deal is better than a bad deal. And I think that, you know, we'll see where we go. On the auto side, each country has some some arrows in their quiver to trade off. Canada's obviously got different than perhaps Mexico, but I think they're negotiating on a comprehensive basis. But both countries, Canada and Mexico, believe it's very important to get the right result in automotive tariffs.

Okay, we'll see how it goes. Next question, just on your valuation overall. I mean, it's the biggest discount I can ever remember seeing, particularly versus peers and U.S. peers. And obviously, a Canadian company, an auto, maybe that's a factor. But I look at your MD&A, and Canada's around 10% of sales. The U.S. is the second largest division. Maybe you're not an American company, but you're more of a global company. And yet, you trade at a massive discount to U.S. companies. And I just wonder, like, a lot of the U.S. peers have had, you know, pretty sharp share price appreciation this year. Valuations are, you know, five, six times EBITDA. You know, maybe you don't want to rush on things, but would the company consider redomiciling in the U.S., you know, to get a better valuation?

I think redomiciling has tax implications and everything else. It's a disposition for everyone, I believe. But I'm not a tax person. I don't have to check that. I think that, you know, a couple of points. First one, the point about discount on valuation, 100% agree, we're cheap. That's why we bought back close to 20% of our company. We didn't do it in the middle of COVID, but we started before COVID and we've done it since. We think that, you know, this is a sector that's not particularly loved very much in Canada right now. We do have quite a number of U.S. shareholders, though, that have invested in us. And I think sometimes these things are cyclical. So if I'm a shareholder investor in Canada, I can't speak for everyone, but every day I turn the paper open and we're talking about auto tariffs and all kinds of bad things happening. That's not really true for suppliers, but I think we've got to get through it. The second thing I'd say is I think valuations change over time. We all remember when our multiple is probably higher than a number of our beers. It goes in cycles. I do think that, you know, the Canadian investor may want to look at companies like ourselves and Winnemar, which would argue themselves that they're valued very low also because their auto side is, you know, valued probably not dissimilar from ours. They have an industrial side that brings it up. And at the end of the day, for the Canadian investor to get a play to a worldwide company or a North American company in an industry that is going to be around for a very long time, and where we're a leader in what we do in terms of the products we make, in terms of the way we apply technology, and in terms of our valuation, this isn't a bad window on the auto industry. So I think that a number of investors that have invested in us have expressed that view. We'll take a look at it. In terms of listing in the United States as well as Canada, very often you do that with some sort of event or you're doing financing or something, but just, you know, signing a listing application probably doesn't do much. But I do think, you know, we're very aware of the value, and we'll look at different things in terms of going forward. But I do agree with you that, you know, the discount makes our shares very cheap, which is why we bought a lot back in the last couple of years and paused because in the middle of tariff turmoil. You know, I think that we want to make sure that the things we want to straighten out. If they do straighten out, we'll be blind by actual stock.

That's good to hear. That's good to hear. I agree that a dual listing doesn't do much. But what I would hate to see is private equity buy the company out and then take it public in the U.S. a year from now at a 200% premium. But hopefully the share price does that and so on.

Well, it's our job. If anyone wants to buy us out, they're going to pay a big price. So, we're shareholders, too. Don't worry about that.

All right. Just one last question on your investment in Nano Explorer. I mean, the stock's done well lately. There seems to be a lot of excitement about graphene again, maybe because China might have more restrictions in selling their more graphene. Just what, you know, what your thoughts are on that investment, you know, Could be a big inflection. Maybe we're still a year away for that, you know, their operations, but just your thoughts there, and that's it for me.

Well, I'm on the board. I'm vice chair of Nano, so I won't talk to Nano apart from their public record as far as that goes. I would agree with you that, I mean, we believe that graphene has got a wonderful future, right? We have used it in a product. that has been a leading-edge product in terms of our fuel lines and brake lines. And the thing is, we just don't use a ton of graphene. But we believe in it, and it's affecting us. And quite frankly, part of our profitability in our fluids business is based on having a great product with graphene. We do think that there's other potential applications for it. I agree with you. that the focus on, I mean, this is like a critical mineral, basically, even though it's a formulation, by the US military and people in North America, I think that bodes well for the future of a product like that. And we're happy to see that being recognized. At the same time now, it's got to sell more graphene and graphene products. And I think that, you know, We're moving closer to that as far as that goes. It takes a while to get it going, but I do think it's a product of the future, and we're pretty bullish about it.

Great. Thanks for your time.

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

Hey, just one follow-up. So with the CapEx, like three years in a row on purchase of PP&E, you're below $300 million. Is this kind of a new runway that we should consider? Could it be higher in some of the coming years? Just trying to get a handle on where CapEx could be.

Sure. At the moment, we're comfortable at 300, right? I think it also depends a lot, Michael, on the cadence of our launches going forward. So although we do see extensions, which should be less capital intensive, those, as Fred mentioned, are not happening all at once. They're happening over the next couple of years. So it's not a certainty that the capital will be lower than that, but we try to target you know, our depreciation with our capital. So I would think that 300 is a, you know, a decent number for the moment. But again, it could go up or down depending on how extensions move going forward with our launches.

Okay. Thank you. Thank you, Your Honor, for the questions. At this time, I would like to turn the meeting back over to Mr. Will DeBoer.

Well, thank you, everyone. Thanks for spending part of your evening with us. If any of you have any further questions, feel free to contact any of us at the number in the press release. And as noted, if anyone does want a tour of our all-field facility and to get a sense of some of the things that we're doing that Pat talked about and why we're so bullish about it, feel free to do that. We'd love to meet you face-to-face.

Have a great night. Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.