Martinrea International Inc. (MRE) Earnings Call Transcript

Good evening, everyone. Thank you for joining our conference call on the second quarter 2026 results. At this point, I'll hand things over to Mr. Rob Wildeboer. He's ready to begin — please go ahead.

Hello, everyone, and thanks for being with us today. We’re always eager to speak with our shareholders—bringing you up to date on the business and taking your questions. We’re also mindful that other stakeholders are listening, among them many of our employees on this call, so our comments are meant for them too as we share our results and commentary across our network. Joining me are Pat D'Eramo, Martinrea's CEO; Fred Di Tosto, our President; and Peter Cirulis, our CFO. The subject today is Martinrea's results for the second quarter ended June 30th, 2026. Please see the usual disclaimer in our press release and in our filed documents. During this call, Pat will speak about a few key priorities for the business over the next few years, cover operations, and lay out some key highlights for the quarter. Fred will give an overview of our operating segments and point to some new business wins and growth opportunities. Peter will go through the Q2 results and the 2026 outlook, and I’ll close with a few brief comments on trade, geopolitics, and capital allocation. To get us started, here's Pat.

Thanks, Rob. Good evening, everyone. I want to begin by giving you an update on how we expect our business to develop over the coming few years. We have a three-year strategy that we refresh each year, in which we set out key priorities. These include: focusing on margins and free cash flow; growing our core automotive business; partnering in regions that carry more risk or where we lack scale or other competitive advantages, and limiting our investment in those regions; growing our non-automotive business; and ensuring our investments are successful. I'll take a moment and elaborate on each of these, starting with margins and free cash flow. We continue our strong focus on operational excellence, driven by our Lean manufacturing principles. This continuous cost reduction in AI machine learning installations across the plant network will be key in driving margin expansion. As we enter 2027, we'll be intensifying our plant-specific performance targets with a view on consolidating or exiting underperforming operations where appropriate. We are targeting an adjusted operating income margin of 6.5% to 7% by 2028, and these are the levers we will pull to get there, while also getting some help from projected better volumes and the move to next-generation programs where we can reprice the business to meet our expected hurdle rates.

We'll keep our capital discipline consistent with the framework we previously communicated, with capex roughly matching depreciation and amortization. Better capital efficiency ought to come naturally from improved operating performance, which should produce even stronger free cash flow. Turning to the next point, we expect solid growth in our core automotive business, supported by recent new business wins and strong performance at our customers. Quoting activity is at a high level, and in that environment we can be selective while expanding at a quicker rate than the market overall. Fred will go into detail about recent new business wins during his remarks. As always, quality gets a relentless focus from us, and that is a major part of what helps us secure new business. We are receiving recognition for this, as shown by over 30 awards from customers and industry organizations in the last year alone, spanning areas such as quality, delivery, sustainability, workplace excellence, communications, and industry leadership. Awards have come to us from multiple customers, including the especially notable General Motors Supplier of the Year award, plus Ford and Toyota, to name just a few. As we noted on earlier calls, sales growth will concentrate on North America, while in Europe we will aim to keep our book of business, fill open capacity, and grow margins.

We're going to cap how much we have in other markets that make up the rest of the world segment. In line with that approach, we agreed to divest an 85% stake in our fluids plant in China, working with a local Chinese supplier, and we are reviewing further possible sales of non-core assets. Moving to non-automotive markets, we keep seeing expansion in our industrial business, with our existing core customers and also new customers across new market verticals, including power generation and defense. We also just recently got into the school bus market by acquiring Lion North America, which is now called Martinrea Tulsa, and we see strong growth prospects there. On top of that, we hold a meaningful book of heavy truck business. On the previous call we discussed True North Kaizen, the Lean consultancy business we recently started. We have already secured a few contracts in defense and aerospace, among them one valued at $5 million US from Raytheon to collaborate with them on boosting manufacturing throughput for some key defense products. So far, over a short stretch of time, we have enjoyed a lot of success in helping them, plainly showing our strength in how we approach operations. That success should lead to more business opportunities for True North Kaizen.

We anticipate signing additional contracts at True North, and that could grow the business by as much as four times before 2026 comes to a close. There is substantial room for expansion in this business, and we think that in time the relationships we build through True North might open up chances to take part more directly in defense manufacturing. It's important to note that True North carries higher margins and turned a profit in its first quarter of operation. In a similar vein, our MiNDCAN software subsidiary keeps posting steady growth, and we expect it to be profitable in 2027. That's excellent progress for a young software startup. As you can see, we're diversifying into markets with appealing growth prospects, drawing on existing skill sets, capabilities, and equipment, and doing so with very little to no incremental capital investment. That fits well with our final pillar, which is making sure investments succeed. Our approach there is to put money into new technologies and capabilities that can set our business apart, and to back those investments with resources, including human capital. The approach also means monetizing certain investments once they've finished their incubation period and can sustain themselves. Now let's turn to the quarter. I'll keep it brief, and Peter can fill in the details.

Looking at our second-quarter results, we feel good about how we performed given the pressure from reduced volumes — that includes sales we lost on the Ford Escape program, which wrapped up at the close of last year — along with unfavorable foreign exchange and increased aluminum costs, which we expect will turn around eventually. As we've said in the past, aluminum costs get passed through to our customers, but that pass-through happens with roughly a 90-day delay. Because of the sharp rise in aluminum prices stemming from the Iran conflict, we ended up absorbing some additional cost during Q2. We anticipate recovering those amounts over the next several quarters as prices return to normal, and the timing will depend on how the Iran conflict unfolds. On the positive side, volumes rose quarter-over-quarter, and we managed to offset cost pressures, aluminum included, thanks to operational enhancements and commercial recoveries. That also let us boost margins quarter-over-quarter. All told, taking into account how we performed in the first half of the year and weighing the various puts and takes, we have confidence that our 2026 outlook will be achieved. We're on track. Peter will go into more detail on our financial results and our outlook. With that, I want to thank the Martinrea team for their hard work and continued dedication to making this business better every day.

With that, I'll hand things over to Fred.

Thanks, Pat, and good evening, everyone. Operationally and financially, we're still executing well as we work through industry dynamics related to trade, tariffs, electric vehicle volumes, and the Iran conflict. As Pat outlined, we're managing what's within our control effectively and pursuing growth opportunities prudently. Moving to our segments, beginning with North America, the Q2 adjusted operating income margin was 8.3%, which is 20 basis points below last year's Q2 margin of 8.5%, with production sales down 1.2%. In North America, the primary growth engine of our business, we keep performing consistently at a high level, and with over 75% of our business located there and a solid margin profile, that's a good place to be. In Europe, we posted a $7.5 million operating loss for the quarter, versus a $1.8 million operating profit in Q2 of 2025, on production sales that declined roughly 8% year-over-year. That weaker year-over-year result reflected decremental margins on the reduced production sales, higher aluminum prices, which as Pat noted should reverse at some point, and a lower level of commercial settlements. This is clearly not where we want to be in Europe.

Even so, we've got measures in place that ought to lift European results during the second half, with a route to break-even for the full year 2026, including expected commercial recoveries tied to the sizable shortfall in electric vehicle volumes. Building on that, we are planning for and anticipate that 2027 will be stronger in Europe on a year-over-year basis. As we've noted on earlier calls, our European results mirror a volume environment that is still far under expectations. Across the auto supply base, the volume environment in Europe has proven difficult. Keeping a presence for customer support while steering clear of aggressive growth is, in our view, the right strategy for this cycle — a disciplined approach. In time, we believe Europe can go back to a mid-single-digit margin profile once volumes recover, especially in light of the operating improvements and restructuring actions we've undertaken. Although we are hardly blind to how our European performance actually stands, our approach stays disciplined and deliberate. Rather than chase aggressive growth, our strategy is to keep a presence and fill open capacity. Being there to support our customers around the world and to win business with the German OEMs in both Europe and North America matters to us. Recent considerable new business awarded to us by BMW in North America demonstrates this — something that would not have been achievable without manufacturing presence and capabilities in Europe.

Moving on, adjusted operating income for our rest of the world segment came in at roughly break-even, versus $1.4 million in Q2 of 2025, which reflects decremental margins on lower production sales. As we've said previously, this segment is small — it accounts for under 3% of consolidated sales — and results can fluctuate from quarter to quarter. Our approach in this region is to keep only the footprint needed to support our global business. As Pat mentioned, during the quarter we sold a majority stake in our fluids plant in China, which further reduces our presence there, and we're looking at other possible divestitures. Turning to some good news, I'm very pleased to report that we've been awarded new business worth $110 million in annualized sales at mature volumes. That breaks down as $55 million in various structural components in our Lightweight Structures Commercial Group with Ford and Volkswagen Scout, $40 million in our Propulsion Systems Commercial Group for Volvo, BMW, Rolls-Royce, and Volkswagen Scout, $10 million in our Flexible Manufacturing Group with Isuzu and John Deere, and the $5 million consulting contract with Raytheon through True North Kaizen that Pat mentioned earlier. New business awards over the last 12 months come to $440 million. Quoting activity is still robust, and we keep winning program extensions and takeover work from suppliers that are financially troubled or underperforming.

Additionally, opportunities are emerging as OEMs shift production into North America through localization or onshoring, and we have already gained from some of these. That's where I'll stop. Thanks for spending time with us; now I'll hand things to Peter, who will go into greater detail on our financial results and outlook.

Thanks, Fred, and good evening, everyone. Before we dig into the financials, I want to frame our second quarter results through the two lenses that we use to evaluate the performance and running of the business: how well we are operating, and our effectiveness in deploying capital. Every one of those is a leading indicator of the value creation arc we're on. On operations, Q2 adjusted operating income margin came in 40 basis points above the prior quarter, even with the temporary aluminum cost headwinds. Our operating performance keeps showing the strength of our Lean and continuous improvement mindset. The gains we're delivering by scaling our AI machine learning and other initiatives, plus the positive flow-through from higher production volumes, ought to give us meaningful operating leverage as we move toward our 2028 targets. Our capital allocation priorities haven't changed: invest in the business, keep a strong balance sheet, and return capital to shareholders via dividends and share buybacks at the right moments. On the balance sheet, net debt finished the quarter at $801 million, down from $819 million in quarter one. Net debt to adjusted EBITDA stood at 1.63, about the same as last quarter and broadly in line with our 1.5x target.

During that same period, we bought back roughly 919,000 shares for $10 million, which matches what we spent in the prior quarter. That reflects a disciplined approach. We keep weighing buybacks against preserving balance sheet flexibility, funding organic growth, and going after strategic acquisitions. Turning to the results in more detail, adjusted operating income margin was 5.9%. That's down from the 6.8% margin we posted in quarter two of last year, which was a high watermark for us. To be clear: the year-over-year margin decline is largely the result of temporary factors: the aluminum cost spike from the Iran conflict, which we expect to recover with a 90-day lag; end of production from the Ford Escape program; and negative FX on our Mexican labor cost base. Excluding those, our underlying margin trajectory is improving, as shown by 40 basis points of sequential improvement from quarter one. Reported free cash flow before principal lease payments under IFRS 16 was $52.8 million. After principal lease payments, free cash flow was $36.9 million. Free cash flow was somewhat lower than expected due to the timing of certain trade and other receivables, which we expect to collect by the end of the year.

All told, we're still on schedule to hit the free cash flow target we set for 2026. The business is producing a solid amount of free cash flow, and we anticipate that will keep going. In a few moments I'll share more about what we expect for 2026. On a year-over-year basis, reported earnings per share rose to 61 cents, up against the 52 cents of reported Q2 EPS we posted a year ago, largely driven by lower restructuring charges, a decrease in finance expense, and a reduced effective tax rate. Looking at it from an operating standpoint, though, adjusted EPS came in at 61 cents, down from 66 cents in quarter two 2025, reflecting the lower sales mentioned earlier and margin compression, which stems mainly from the Ford Escape program coming to an end along with the decremental margin effect of reduced production volumes, chiefly in Europe. Turning to the next item, we are reaffirming the 2026 outlook, which anticipates total sales between $4.5 and $4.9 billion, an adjusted operating income margin in the 5.5% to 6% range, and free cash flow of $125 to $175 million, alongside roughly $300 million in capex. This outlook reflects strong operational execution in a market that is relatively flat. Keep in mind that our guidance builds in a modest sales decline versus 2025, reflecting the conclusion of the Ford Escape program and softer tooling sales.

Looking at how we've performed so far this year and what we can see ahead of us right now, we expect that our results for the full year 2026 will land inside the range of our guidance. Our emphasis stays on steady execution and on generating free cash flow across cycles, grounded in the parts of the business we control. Q2 represents a single data point within a transformation spanning multiple years. Starting in 2023, we have widened margins, produced record free cash flow, restructured Europe toward break-even, booked over a billion dollars in cumulative new business, are putting machine learning to work at scale, and have returned capital to shareholders via share buybacks. By 2028, our target is $5.3 to $5.5 billion in sales at a 6.5% to 7% adjusted operating income margin, alongside an improved return on invested capital profile. That is the arc. With that, I'll now hand you back over to Rob.

Thanks, Peter. I’ll offer a few closing thoughts on where things stand with USMCA, trade, and geopolitical matters, plus capital allocation. As you’ve heard, plenty of excellent developments are underway at our company. We got off to a solid start in 2026, even with a great deal of noise surrounding geopolitics and trade. On USMCA and the trade talks, although there is always plenty of noise, it seems quite evident to me that tariffs on auto parts made in North America very likely will not materialize. Scott Bessent personally told me that putting tariffs on auto parts is a very bad idea. He’s right. That benefits us, but it is also the consensus view in Washington, Mexico, and Canada. I also expect that ultimately there will be no tariffs on autos made in Canada. That is what we are negotiating for, and it is what the entire industry wants. As for timing, meanwhile, who knows? A USMCA deal by July 1st was not something we expected, and nobody should find that surprising. Let me restate an observation I made on the last call. More than 97% of our sales go to assembly plants located outside Canada. Less than 3% of our revenues worldwide come from sales or products to Canadian assembly plants.

A lot of the production we do in Canada already goes to US assembly plants without tariffs. Our presence in the US is considerably larger than in Canada. In my view, our North American auto parts sales probably won't be materially affected even if, say, Canada gets hit with a tariff on assembly or the USMCA talks between Canada and the United States don't turn out well. I genuinely think there's enormous consensus across our industry—OEMs and suppliers alike—behind a tariff-free North American auto industry, autos and parts makers. Look, for instance, at the industry submissions made to the administration and Congress, and I believe we'll get there. And even if we don't, we'll be fine. Regarding the USMCA and other negotiations, we're deeply involved in the consultations. Like everyone here, we'd want clarity and a good outcome, but we're patient, and we'll handle it. My belief is that the US tariffs on other jurisdictions, on parts and vehicles in whatever form they take, will over time encourage additional manufacturing in North America—again, good news for suppliers and Martinrea. We've already witnessed some of this. The tariff issues really form part of the broader geopolitical environment that we face and are affected by it.

Take, for instance, the different conflicts across the Middle East and in Ukraine, plus wider regions—those are plainly a top concern for our biggest trading partner. In my view, the USMCA isn't even among the top priorities for the US right now. I'm not saying it lacks importance, but the reality is that tariff matters get far more coverage here than they do in the US, and that's simply how things are. At the same time, I think the geopolitics between the US and China ultimately support a Fortress North America strategy. The industry backs that, even if it applies to this industry alone, and I believe a solid deal with Canada and Mexico serves the US's best interest. As I see it, both Canada and Mexico ought to hold out for exactly that. Let's now turn quickly to capital allocation. This slide lays out our framework. We have followed it consistently through the years. First, to be profitable and sustainable over the long term, investing in your business is essential. Across the last decade, we've expanded organically along with some tuck-in acquisition activity. A portion of our recent growth involves takeover work, as Fred mentioned.

So because of that, in our sector we're seen as a really strong supplier. Pat mentioned it too — these days we run the business better than we did back in the early days. We haven't done any big acquisitions, though we've put money into our footprint and, honestly, taken a number of plants that we picked up over the years and lifted them to a high standard. Our track record shows we've been quite skilled at acquiring distressed assets and turning them around. We've put money into R&D as well and made some strategic investments. We're not venture capitalists. What we invest in is relationships that sharpen our competitiveness and that give us something — graphene is one example, additive manufacturing with Equispheres powder is another — and we give them something in return as well, perhaps a customer relationship, know-how in scaling up, or access to customers. Keep in mind, we started out as a startup ourselves and we still have a very entrepreneurial culture. Our emphasis on running things better and applying leading-edge technology in the business has opened up consulting opportunities, which are already producing results. Thanks to these investments, operational performance has improved and they're paying off. Second, we keep a strong balance sheet. That matters above all, and it's something we'll never compromise on.

Our customers care about this, and it lets us capture takeover business from other suppliers and seize chances as they arise. This is a business that swings up and down, and you need the ability to be nimble the way we are. Over the years, we've watched plenty of competitors see their equity value erode because they carried too much leverage. As we've said, we landed significant new business, and a strong balance sheet has been a key enabler of that. Third, we return capital to shareholders. As noted, we repurchased some shares during the quarter. We renewed our NCIB. By now we've bought back roughly 20% of our company over the past decade or so, and more than 2.5% this year to date, and we've paid a consistent dividend for years. This chart is interesting because it shows how we deployed our free cash flow over the past three years and illustrates what has been a balanced and prudent approach. From 2023 to 2025, those three years, we generated close to $600 million in free cash flow. With it, we cut our net debt by more than $200 million, strengthening our balance sheet during some trying times, as you know. We repurchased approximately $100 million of our shares, representing over 10% of the company's outstanding shares, which is now approximately 13% with share repurchases we've made year to date.

During this period, dividends totaling $45 million were also distributed by us. That reflects a balanced strategy. As you can surely understand, our shareholders hold differing opinions regarding the use of cash, but dialogue with them is something we maintain, and their input is heard. So where do things stand now? Investment in the business keeps going. Capital expenditures were discussed by Peter, and our outlook for this year plus our 2028 targets are available to you. Growth requires investment done in a prudent and profitable way. Holding leverage at our goal of 1.5 times net debt to EBITDA or better is what we plan to do, and some shares will be repurchased. Regarding capital allocation, our fluids plant in China has been divested, as Pat mentioned, and talks are underway concerning other possible asset sales that would bring in cash to support our business and other capital priorities. Questions can now begin. On the line we have shareholders, analysts, employees, and even a few competitors. Hello! A bit of caution in our remarks may be needed, yet whatever we can answer, we will, and thanks to everyone for joining.

Thanks. Women and men, we're now starting the Q&A portion. If you'd like to pose a question, just hit star and then the number 1 on your phone's keypad. Should you be on a speakerphone, kindly lift your handset prior to hitting those keys. To pull back your question, press star and then the number 2. With all that said, the initial question arrives from Ty Collin at CIBC. The floor is yours.

Good evening, everyone, and thanks for taking my questions. I appreciate all the commentary on the call so far. To start, I'm wondering if you could share any high-level expectations around the cadence for sales and margins in Q3 and Q4, as well as any timing factors or unusual items we should take note of.

Alright, good. Hey, Collin, thanks. Nice to hear from you once more. Yeah, I'll go back to something I mentioned on the past couple of calls. If you look at how the guidance is shaped for this year, it's what I've described before as a mountain shape. We came in at 5%, 5.5% in quarter one, had a solid quarter two, and quarter three ought to look comparable to last year, then quarter four gets a bit slower, much like last year. I wouldn't claim quarter four matches last year — my point is just that the shape runs low in quarter one, low in quarter four, and our strongest quarters of the year are the second and third quarter.

All right, understood, and thanks for that. Next, you mentioned a few items affecting your Q2 margin: aluminum worked against you, while commercial settlements helped. Could you help us put some numbers on how much those two things affected your Q2 results, and what you specifically expect for each of them in the quarters ahead?

Okay, regarding aluminum — on a year-over-year comparison, it was significant, so to speak. Roughly 50 basis points or so — actually, somewhat under that, perhaps around 40 basis points, and that's due to the Iran conflict, which clearly was not factored into guidance at all back then. It comes to roughly 40 basis points year over year. As we progress through the remaining quarters, you should anticipate some modest improvement in quarter three, though it won't fully unwind on the lag from the peak, which, let's say, was approximately $3,800 per ton. It has now fallen to the low $3,000s, but not back to the level at which the year began, what we had planned for, so to speak. That reversal likely wouldn't occur until quarter four gets underway, possibly spilling into next year, obviously depending on how the Iran conflict unfolds.

All right. On those commercial settlements, do you have any view on how significant that turned out to be in Q2?

Right. And we also mentioned during Q4 of last year and Q1 of this year that we anticipated a sizable commercial settlement with a North American customer of ours. That did come through. But it didn't unfold in what you might call the expected timing or as a lump sum, since these things can come in various formats. As we move ahead here, that one is behind us, but going forward we're still pursuing a number of other commercial settlements, mainly within the European segment.

All right, that's excellent. If I might squeeze in one more, perhaps for Rob, concerning USMCA and in particular the proposed 50% US content requirement that has been put forward. From your remarks, I'd infer that your view is this may not be likely to be implemented, though it has been a longstanding ask for the US. Were something of that kind to be implemented, could there be a possibility that it would disproportionately affect Mexican vehicle assembly and perhaps have some sort of outsized impact on your footprint there?

A few observations. That point came up regarding Mexico, and Mexico essentially rejected it outright. The 50% condition is, in a way, already present today: to be eligible under rules of origin, a labor value content of US$16 per hour, excluding benefits, is required — which amounts to a provision aimed against Mexico, correct? If you remember, back in 2018 that was Lighthizer's initial demand. Canada and Mexico responded, "No, we won't agree to that," and it was sort of slipped in through the labor provision. So you effectively have it in place regardless. And then I believe that, whatever your overall rules of origin look like, the 50% applies toward calculating the overall rules of origin, which are themselves shifting. What's notable is that we're not all that distant from that level in practice as it is. It comes down to how you approach it. In the discussions coming from both the Canadian and Mexican sides, and from essentially every market participant in the US — OEMs and suppliers alike — the view is that this is a troublesome proposal and it ought not to happen. I think we'll essentially be fine on that front.

Alright. That’s excellent. I appreciate the feedback. Wishing you all the very best.

Yes. Many thanks for those questions. Those are really solid ones.

Brian Morrison from TD Cowen has the next question in the queue. You have the floor.

Good evening. Peter, would you mind kicking things off with those aluminum remarks you just made? I get that there's a lag—those 60, 90 days. My thinking was that since aluminum prices fell quite a bit after the end of June, Q3 should have gotten a lift from that. Could you take me through what you had budgeted and the way those recoveries actually come through?

Yes. The planned figures came in a bit under $3,000 per ton. At the moment they're getting close to $3,100 or thereabouts, correct? We still haven't reached the level we'd set out in our plan. They have eased lately, though compared with what our financial planning assumed, they aren't sitting where we'd look for them to be.

I apologize, but when you're talking about a price of roughly $3,500 or $3,600 per ton in the prior quarter, I'd have expected that gap to have been recouped from the OEMs during Q3, wouldn't you?

No, let me phrase it this way. The lag is closer to 90 days rather than 60, correct? Once we reprice at the 90-day point on the average — and it's always on an average these days — that will begin to recover. It hinges on when exactly the prices decline. Clearly, purchasing at the elevated price also carries an effect depending on the volumes at that moment. You'll see an impact from what you purchase and the timing of that purchase, driven by the volumes of the releases, and then the averaging of that against the contract's lag, the lag language within the contract.

We are going to be moving forward.

As we head into Q4, we're at an improved run rate, yeah.

Yes. In the fourth quarter, the effect ought to be larger. As I mentioned in response to Tye's question, my expectation is that we'd see a degree of improvement, though it won't be, shall we say, fully offset. Given how much material we buy and how the releases shape things, the scenarios we're modeling suggest a portion returns — perhaps 50% of that variance comes back, yet the full amount will not return.

Perhaps a better way to put it is that the back half of the year will be — the trend lines are heading the right way for the second half.

When it comes to the material index, the direction of travel is favorable. That's right.

Sure.