Martinrea International Inc. (MRE) Earnings Call Transcript

Good evening, everyone. Thank you for joining our conference call on the results for the third quarter of 2025. At this point, I'll hand things over to Mr. Rob Wildeboer. The floor is yours.

Good evening, everyone, and thanks for being with us today. We always enjoy the chance to speak with our shareholders, bring you up to date on the business, and take your questions. We're also mindful that other stakeholders are listening, including a great many of our employees, and our comments are meant for them too, since we share our results and commentary across our network. Joining me this evening are Pat D'Eramo, Martinrea's CEO, along with our President, Fred Di Tosto, and our CFO, Peter Cirulis. Today we'll be going over Martinrea's results for the third quarter, which ended September 30, 2025. I'd point you to our standard disclaimer, our press release, and the documents we've filed. On this call, I'll offer a few brief remarks at the end on trade and tariffs, geopolitics, and capital allocation. Pat will walk through some key highlights from the quarter and comment on the business and a few industry matters. Fred will cover operations, Peter will then go through some financial highlights, and after that we'll open it up for Q&A. With that, here's Pat.

Good evening, everyone. We feel good about how the third quarter went, on both the operational and the financial side. Adjusted operating income margin rose compared with a year earlier, thanks to our ongoing push on operating improvements and to commercial recoveries we negotiated with customers — mostly tied to volume shortfalls on EV programs. We delivered positive results despite today's conditions around tariffs and despite the production interruption caused by a cybersecurity attack at Jaguar Land Rover, one of our key customers. Without those issues, results would have been even stronger. The good news is that production at Jaguar Land Rover has restarted and is ramping up, and we expect a return to normal by Q1. On tariffs, we are in advanced stages of negotiating relief with our customers. In the end, we expect to recover the vast majority of our tariff exposure. We anticipate wrapping up these negotiations before the end of the year. We were having a good year, as our Q3 year-to-date results show, as we keep driving operating efficiency improvements on the shop floor along with other cost savings, including our SG&A reduction program. We expect operating margins to keep improving year over year in 2026. Note that we have been impacted to a degree by supply chain disruptions from the Novelis fire and the Nexperia semiconductor chip issue.

That's mirrored in the guidance we've given. Peter is going to walk through the third quarter results and the 2025 outlook in a moment. Turning to another topic, we anticipate additional production moving into North America across the coming few years, whether through reshoring or friendshoring. With the U.S. administration's drive to localize plus the USMCA, our view is that Canada, the U.S., and Mexico will all come out ahead in the end. As you're aware, over three quarters of our production sales come from North America, so we're devoting considerable time to examining our footprint across the region and to continuously finding ways to unlock additional capacity through ongoing operational improvement and better use of floor space, as we get ready for work flowing into North America. Fred will cover this as well when he talks about a recent acquisition we completed in the U.S. On the people side, we're doing plenty to get ready for and steer clear of labor shortages, especially in the skilled areas, and we're ahead of the curve on that front. At Martinrea, our emphasis is on developing people internally and promoting from inside. We aim for 80% of promotions to come from within and 20% from outside. Our semi-skill positions are one illustration of how we do things differently. It's a pre-apprentice program that gives direct labor team members a chance to build up their skills, which frees up time for higher skilled trades workers to concentrate on more advanced problem-solving and plant improvements.

That creates pathways for promotion and advancement, and it also gives women a way into roles that aren't traditional. Women account for 50% of the workforce, but fewer than 25% of them go into manufacturing. The Automotive Women's Alliance Foundation has taken note of these efforts, and they recently chose Martinrea for its 2025 Change Champion Award. That award goes to a company that has made a significant contribution to the acceptance and advancement of women in the automotive industry. These efforts reach high school graduates too. Around 60% of high school graduates go on to higher education, like university, and other programs as well. The other 40% are seeking a good job and they tend to want advancement opportunities too, and we're giving them a path to pursue that. This is only one of several labor-related strategies we use. We're very proud of this activity, which feeds our strong culture at Martinrea. Over the longer term, as more manufacturing shifts to North America, we'll keep investing in our people while improving our productivity through initiatives that include automation and machine learning. I'd like to close by thanking the Martinrea team for their hard work and continued enthusiasm. With that, I'll hand it over to Fred.

Thanks, Pat. Good evening, everyone. We keep performing strongly on both the operational and financial fronts. To put it plainly, we are handling the factors within our control very effectively. The right team is in place, and I want to express appreciation to our people for their commitment and hard work in producing these results. Moving to our segment, beginning with North America, adjusted operating income margin was 6.9%, which remains a healthy level. Absolute results held steady compared with a year ago, since the effect of somewhat lower production sales was largely offset by an improved margin, reflecting reduced tooling sales, operational gains, and higher favorable commercial settlements. In Europe, adjusted operating income was roughly break-even during the third quarter. Although margins stay under their potential because of low volumes in certain programs, and especially EVs, results have improved considerably versus early this year and late last year. Profitability in our rest of the world segment was positive in Q3, finishing the quarter with an adjusted operating income margin of 5.4%. As you know, this segment is a small one for us, representing under 3% of our consolidated sales. Shifts in volumes and a limited number of programs, along with the timing of commercial settlements, can cause profits in this segment to swing from quarter to quarter.

Like we said on earlier calls, our approach has kept only a small presence in this segment, and that remains the case. Next, I'm happy to report that we've won new business valued at $30 million in annualized sales and mature volumes. That figure includes $15 million in structural components within our lightweight structures commercial group from General Motors and Toyota, $12 million in our propulsion systems group with Stellantis and Ford, and $3 million in our flexible manufacturing group from Volvo Trucks and Central Power for energy storage products. Awards for new business across the last four quarters came to $170 million in total. Quoting activity is still strong, and we've lately secured work on a number of program extensions with various customers worth roughly $1 billion in annualized sales. It's worth noting that although extensions represent replacement work, they back our sales outlook and in the end assist our margin profile, since we can typically reprice the business to fully incorporate the inflationary costs we've had to absorb over the last few years. Extensions likewise need less capital for the same amount of volume relative to new programs, which backs our free cash flow. We also keep seeing several takeover business opportunities, and where prudent, we will seek to capitalize on them.

We just completed one of those opportunities recently, with Lyseon North America. Lyseon runs a single plant in Tulsa, Oklahoma, and its main business is making metal parts and assemblies for school buses. It was a distressed situation, and we're stepping in to support our customer, International Truck, formerly Navistar. We paid a nominal price. Some investment in the business will be required, but we expect it to be accretive within a reasonable amount of time. This acquisition adds work for a great customer where we are underpenetrated, and we see a lot of opportunity to grow the international over time, in buses as well as commercial vehicles. Beyond that, it lets us broaden our product offering and diversify further in non-automotive end markets, where we see some good opportunities for our business. This transaction also expands our footprint in the U.S. Keep in mind our growing U.S. footprint, built up over two decades, is now more than twice the size of our Canadian footprint. We'll keep growing where we see opportunity. We're excited to welcome the Lyseon team to Martinrea and look forward to growing our business with them over the long term.

Having said that, Peter, the floor is yours.

Thanks, Fred. If we look at the year-over-year results, adjusted operating income was $65 million, which is about the same as the third quarter of last year on consistent production sales. Adjusted operating income margin was 5.5%, an increase of 20 basis points compared with a year ago. That margin gain came from lower tooling sales, operational improvements, and lower depreciation, partly offset by higher SG&A expense, which reflects higher mark-to-market stock-based compensation expense due to the rise in our share price during the third quarter. If the share price had stayed constant from quarter to quarter, adjusted operating income margin would have been 40 basis points higher, or 5.9%, which reflects a very strong performance across all accounts. Free cash flow before IFRS 16 lease payments was $44.5 million, compared with $57 million in the third quarter of last year, largely reflecting less cash generated from non-cash working capital. The main reason is the disruption caused by the JLR cyber attack that Pat mentioned, which delayed collection of certain receivables from JLR. This is a timing issue, and those receivables have since been collected in the early part of the fourth quarter. Including lease payments under IFRS 16 accounting, free cash flow was $30.5 million, compared with $43.9 million in the third quarter of 2024.

We're still on course to hit our full year 2025 free cash flow outlook of $125 million-$175 million, and that's grounded in our solid performance so far this year plus the usual seasonal pattern, in which the fourth quarter tends to be the strongest for free cash flow, since we generally pull a fairly big chunk of cash out of working capital. Given how things are shaping up right now, we anticipate landing nearer the top end of our free cash flow outlook range. Next, adjusted net earnings per share was $0.52, compared with $0.19 in the third quarter of 2024. As a reminder, in quarter three of last year, EPS took a hit from an abnormally high tax rate of 70.2%. On top of that, it's worth pointing out that adjusted EPS would have shown even more improvement had we not dealt with the JLR production disruptions caused by the cyber attack. Now turning to our balance sheet, net debt excluding IFRS 16 lease liabilities fell by roughly $24 million versus quarter two, to $768 million, which mirrors the free cash flow generation during the quarter. Lower debt translates into lower interest costs, and that's a helpful tailwind. Our net debt to Adjusted EBITDA ratio finished the quarter at 1.5, in line with quarter two and at our target of 1.5 or lower.

We believe this is a favorable position, since it lets us carry out our capital allocation priorities while keeping a strong balance sheet. So far this year, we've paid down roughly $51 million of debt and cut our financing costs by about $9 million, and we expect additional improvement in quarter four thanks to lower interest rates and less debt. As you can read in the automotive news outlets, certain segments of the automotive supply base are under stress. That gives us takeover opportunities right now, such as Lyseon, as Fred mentioned, and it also reminds customers that suppliers in sound financial shape don't expose them to undue credit risk. Our balance sheet is strong. We are reaffirming our 2025 outlook, which anticipates total sales of $4.8 billion-$5.1 billion, an adjusted operating income margin of 5.3%-5.8%, and free cash flow of $125 million-$175 million. Given our solid performance so far this year, we are on track to achieve that outlook. As we said on the previous call, we anticipated production sales would be lower in the second half of the year than in the first half, reflecting the usual seasonal pattern in our industry, with the summer and holiday shutdown periods falling in the third and fourth quarters.

We likewise anticipate reduced EV volumes, since a portion of demand was probably brought forward before the U.S. electric vehicle tax credit lapsed on September 30th. Heavy truck volumes are showing some softness as well. Every parts supplier involved in those segments feels these effects. On a brighter side, North American vehicle sales have held up well, despite month-to-month swings caused by incentive timing and the expiration of EV tax credits, which led to some purchases being pulled ahead. The underlying demand for vehicles is still strong. Turning to matters more specific to us, JLR volumes should rise from one quarter to the next in quarter four, as the company ramps back up after its cyber attack-related shutdown. We are additionally in negotiations with customers regarding certain EV-related commercial settlements, and those could land in either the fourth quarter or the first half of next year, contingent on how customer discussions progress over the coming weeks. Regardless, we will stay prudent and devote the time needed to secure the right deals. Looking further ahead, we perceive considerable opportunity for our business. As Fred mentioned, we are receiving a growing number of inquiries from customers who want us to consider taking over business from suppliers under distress.

We also think that as global trade gets rebalanced, a meaningful amount of volume will be reshored to the U.S., and that will ultimately be a benefit to suppliers in North America. Our customers are asking about our readiness plans for shifting volumes or moving next-generation programs into the U.S., and with our North American-centric footprint, we are well-positioned to accommodate them. As Pat mentioned, we are having a good year, and we expect our operating margin performance to keep improving on a year-over-year basis in 2026. I want to thank our people for their hard work and perseverance during these dynamic times. I'll now turn it back over to Rob.

Thanks, Peter. I want to offer a few remarks about the wider trade and tariff landscape from a geopolitical standpoint. I've laid out what I see as a five-part plan for the auto sector—OEMs and suppliers across North America—and I've stated that this is the destination I believe we ought to reach, one that would serve the North American auto industry and supply base best while aligning with the U.S. goal of a stronger domestic industry. The five points are as follows. First, duty-free trade in vehicles and parts among the U.S., Canada, and Mexico. Fortress North America. The finest location on earth for building autos, centered on the strengths and markets of the U.S., Mexico, and Canada. Second, more North American content and more vehicles built in North America, achieved through tougher rules of origin requirements or a stricter reading of those rules. The U.S. has been pushing for this when it comes to interpreting the existing USMCA. Canada and Mexico have resisted, as have automakers, yet this is a sound path, and it will benefit every auto supplier based in North America, wherever across the continent they are situated. Research has demonstrated that tighter content rules under the USMCA have boosted output and employment in the U.S. and in North America. Third, stiffer penalties when rules of origin are not complied with.

Rather than a 2.5% penalty, which a lot of people just accept, it should be bigger and punitive—something like 25%. Fourth, steps to draw assembly into North America. Make building here worthwhile if you're selling here. That could involve carrots, like investment and tax incentives, or possible sticks, like quotas or tariffs. Keep in mind that North Americans purchase $19 million to $20 million new vehicles annually, yet imports make up nearly $5 million. Picture an additional $2 million to $3 million vehicles manufactured in North America. Everyone benefits, including the supply base, with North American content rules. We take the carrot approach to spur EV investments in Canada. Although EV adoption has stagnated, there's an effective method to encourage investment. The U.S. agreements with the EU, Japan, and South Korea for a 15% tariff pushed this along to some degree. Fifth, I think tariffs on China make sense, but beyond that, North America shouldn't back direct Chinese investment in parts or auto companies here. The reality is that every Chinese parts supplier and OEM is, in effect, an arm of the state and subsidized by it, and their investments don't create new investment—they crowd out investment from market-oriented firms.

If all of that comes together, we end up with a genuinely strong North American market. Much of it could unfold fast, and from where I sit the U.S. stands to gain the most. My sense is that we are stumbling in that direction. Canada and Mexico, I think, need to keep pressing for zero tariffs on autos built within their borders — ultimately through a USMCA renewal, or by some other route. Looking ahead, I have faith in North America. A robust North America serves America's own interests best. It benefits every one of us, and I expect both the U.S. and North America to prosper across the next decade. The clouds and the overhang are not going to stick around. One more thing I want to raise concerns certain OEM moves — deciding not to go ahead with production of some previously announced programs, halting output of some programs, or relocating existing or planned programs. I won't discuss the individual announcements; I'll speak in general terms. To start, several EV programs announced earlier have been trimmed back or scrapped. Plainly, that lowers EV production volumes, yet there is considerable program extension on ICE vehicles, and hybrid vehicle output has risen.

Those extensions work in our favor. Keep in mind that since we've long been, and remain, largely agnostic on propulsion, our exposure is limited and there's meaningful upside in what I'd describe as a return to reality—building vehicles that customers actually want and will purchase. Next, if a program we're part of gets moved, that poses less danger to us, since by and large we have the capacity to build the bulk of our output at sites across various countries. Our facilities are spread all over North America. Third, although we began in Canada, remember that the vast majority of our sales are international. Under 15% of total sales, for instance, come from Canada. Even within that, roughly 75% of what we produce today feeds U.S. assembly plants. A portion of our Michigan output also supplies Canadian assembly plants. We're strongly positioned to handle some of these shifts. People who invest in our company are getting a genuinely international business with an excellent North American footprint. Lastly, let me end with a few quick remarks about capital allocation. We keep taking a balanced tack when allocating capital—that means investing in the business, preserving a strong balance sheet, and giving capital back to shareholders at the right moments.

Over the last few months, we put money into our operations and completed the Lyseon acquisition. On top of that, after the quarter closed, we bought $5.6 million of NanoXplore shares through a bought deal private placement financing that generated roughly $26 million in gross proceeds for the company. Our participation was on a pro-rata basis so that our ownership stake stays where it is. We believe graphene and Nano have a bright future ahead, especially in light of the supply agreement recently signed with Chevron Phillips for graphene to be used in drilling fluids. As far as I know, that represents the biggest graphene contract ever signed. We view this as just the start. NanoXplore is well positioned for growth tied to graphene. You'll remember that we halted our buyback program earlier this year because the outlook was uncertain, largely because of tariffs. Some of those clouds now appear to be lifting, even though storm clouds keep reappearing regularly. We continue to see a tariff exemption for USMCA-compliant auto parts. Because of that, we could restart some share purchases as soon as this quarter, though our approach will probably be gradual. As Peter mentioned and demonstrated, carrying less debt is beneficial as well. Keep in mind that our net debt now stands at its lowest level since 2020.

We’re ready to take questions now. On the line we’ve got shareholders, analysts, employees, and even a few competitors, so we might have to choose our words somewhat carefully, but we’ll answer as much as we can. Thanks to everyone for joining the call.

Ladies and gentlemen, the question and answer session is starting now. Should you wish to ask something, press star and then the number one on your touch-tone phone. A prompt will sound to confirm that your hand has been raised. To drop out of the polling process, press star followed by the number two. Those of you on a speakerphone should lift the handset before pressing any keys. Our first question is from Michael Glennon of Raymond James. Please go ahead.

Hey there, good evening. First off, I’d like to begin with Europe, and I’m just trying to get a sense of what’s realistic when it comes to operating margin assumptions for that segment. Should we be expecting some catch-up in Q4, whether from recoveries or customer settlements? Any perspective you could offer on what a realistic margin profile would look like would be helpful.

Absolutely, Michael. On a longer-term basis, I would characterize the outlook for Europe as improving. As you’re aware, we carried out our restructuring last year and then, to a significant degree, during this year. The savings from that restructuring will begin to take effect here, since it has essentially been finished here as of the middle of the summer. We would anticipate those results beginning to show. Now, naturally, that could be offset by, once again, the timing of some of these commercial matters that we work through together with our customers. That remains to be determined as we proceed through the next couple of quarters.

When I look back at earlier years, Europe produced some fairly uneven EBIT contributions over the last three years, as I recall. Should we expect a significant increase from Europe in Q4?

Sure, I'd put it this way: simply being located in a high-cost region generally means we wouldn't experience a dramatic leap toward very large margins, though margins will improve. Again, that hinges on how uneven these commercial settlements with several customers in the region turn out, mainly because of the EV difficulties. Compared with other parts of Europe, a substantial share of our revenue, I'd say, rests on some of the EV programs. I'd keep expecting a degree of unevenness in that portion of our business.

Michael, in our opening remarks we pointed to a few commercial efforts or talks that are happening at this moment, and we’ll need to see how those develop over the coming weeks. They might close in the fourth. They might close in the first half of next year. It all hinges on when we can get them done. I think you should expect lumpiness for a little while here as these commercial efforts and talks begin to take shape.

I'd say there's another point here: we won't accept anything less than the correct figure. That matters a great deal throughout this whole process — nobody is going to corner us against a quarter or anything of that sort. What we'll do is confirm the figure is the correct one, whether that lands this quarter or the following one. We aren't counting on it during this quarter.

Our emphasis is really on outcomes rather than on when things happen.

Taking a broader view, when it comes to those customer recoveries and settlements showing up across everyone's numbers during the last few years, nobody has really put a figure on how big those contributions are or how much they add to margin. As we look at 2026 compared with 2025, how should we frame the levels of these recoveries and settlements? Are you anticipating any shifts in how OEMs behave or in the way they view these amounts? What factors should we be keeping in mind as we head into 2026?

Yes, so on the whole, I think you should anticipate that throughout the sector — Martinrea included — these commercial settlements are going to remain a component of the business we're running, particularly with all the stops and starts around EV programs. That accounts for a significant share of it. Within what I'd describe as our negotiations over tariff compensation, that factor is also figuring into things for some customers. They're folding it into certain of those discussions. My expectation is that this will keep going for the foreseeable future. I'd characterize it as likely somewhat lower than what we saw perhaps in the recent past, but going forward it will still represent part of our business, no question.

All right, thank you. I'll rejoin the queue.

The following question is from Ty Collin at CIBC. Go right ahead.

Good evening, everyone, and thanks for taking my question. To begin with, could you help us put some numbers around—or otherwise give us a sense of—how the Novelis, Nexperia, and JLR issues affected things in the Q3 quarter? And how should we think about the impact each of those will have on Q4?

All right, Ty, sure. Regarding Q3 versus Q4, those headlines about Novelis and Nexperia aren't hitting our third quarter, though they're having a mild effect on the fourth. As a matter of fact, a JOEM told us just today, "Hey, we've got some disruptions here. We'll be shut down for a week." It seems like these things are popping up every couple of days over the last few weeks with respect to Novelis and Nexperia, though you could make the case that Nexperia has settled down somewhat. There are, let's say, some indirect effects for our customers — the ones we serve. We're involved in several of those programs that are affected going forward. When it comes to JLR, that's mainly a Q3 matter, or it was one. They were down for nearly a month, and now they'll begin ramping back up. They won't reach what had been expected, let's say, before Q3, but they're coming back up to speed plant by plant. We'd anticipate that being behind us as we move into Q1. We won't get into quantifying those figures specifically, simply because we wouldn't want to go through the profile that exists with that customer.

There are unknowns we aren't even aware of.

Sure.

Sure.

Understood. All right, that is quite useful. Then, moving to the guidance, I have one question. Is there any particular reason you chose not to lift, or at minimum tighten, the operating margin outlook? The bottom end of that range, or in fact even the midpoint, suggests a notably low margin rate for Q4. I lack a solid basis for expecting that to actually occur. Still, perhaps you could simply walk us through a few of the puts and takes on the margin side in Q4 beyond what has already been covered.

Sure, Ty. The way we approached it was mainly through the puts and takes, as you mentioned. Many of the external factors we're dealing with are the same ones other customers in our sector face, correct? From a seasonal standpoint, volumes in quarter three compared with quarter four will decline seasonally. You're hearing plenty about all the EVs, so that's impacting us too. A number of the programs we're on keep shrinking here in quarter four compared with quarter three, largely because of some of that pre-buy we saw. As you're aware, part of our business relates to commercial vehicles, through some of the transmission products we sell. That segment overall, as you know and have likely heard on other earnings calls, is somewhat sluggish as well. You've got that happening, but then as a course offset, we have our performance. We noted some benefit from the depreciation that we saw from the write-down. Also, we have these commercial negotiations we discussed earlier here today, right? Several of them are underway. We'd prefer not to say too much about negotiations underway here, but there's a strong likelihood we'll land in the middle of the range to the upper half of that range, though we just decided to keep the statement at guidance.

That falls inside the 5.3% to 5.8% band we laid out.