Martinrea International Q2 2026 Earnings Report

Martinrea International EPS Results

• Actual EPS: C$0.61
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Martinrea International Revenue Results

• Actual Revenue: $1.20 billion
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Martinrea International Announcement Details

• Quarter: Q2 2026
• Date: 8/4/2026
• Time: After Market Closes
• Conference Call Date: Tuesday, August 4, 2026
• Conference Call Time: 5:30PM ET

Martinrea International (TSE:MRE) Inc is a Canadian producer of steel and aluminium parts and fluid management systems. Its products are used primarily in the automotive sector by the majority of vehicle manufacturers. Martinrea manufactures aluminum engine blocks, specialized products, suspensions, chassis modules and components, and fluid management systems for fuel, power steering and brake fluids. The company also provides metal forming and welding solutions. The largest end market for Martinrea's products is in North America.

Martinrea International Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: 2026 guidance was reaffirmed, calling for CAD 4.5–4.9 billion in sales, a 5.5%–6% adjusted operating margin, and CAD 125–175 million in free cash flow. Management said first-half performance keeps the company on track despite a relatively flat market.
• Positive Sentiment: Martinrea reported CAD 110 million of new business awards in the quarter, bringing awards over the past 12 months to CAD 440 million. Growth is concentrated in North America and includes programs with Ford, Scout, Volvo, BMW, Rolls-Royce, Isuzu, John Deere, and a CAD 5 million Raytheon consulting contract.
• Negative Sentiment: Europe remained a major drag, posting a CAD 7.5 million operating loss versus a CAD 1.8 million profit a year earlier as production sales fell 8%, largely due to weak electric-vehicle volumes, excess overhead, and lower commercial settlements. Management expects improvement in the second half and is targeting full-year 2026 break-even.
• Negative Sentiment: Q2 adjusted operating margin declined to 5.9% from 6.8% a year earlier, while adjusted EPS fell to CAD 0.61 from CAD 0.66. The company attributed the deterioration primarily to the end of the Ford Escape program, lower European volumes, unfavorable foreign exchange, and temporary aluminum-cost pressure.
• Positive Sentiment: Net debt declined to CAD 801 million, with leverage at 1.63x adjusted EBITDA, while Martinrea repurchased approximately 919,000 shares for CAD 10 million. The company also agreed to sell 85% of its China fluids operation and is evaluating additional asset sales that could generate roughly CAD 50–100 million.

Presentation

[Operator]

Good evening, ladies and gentlemen. Welcome to the second quarter 2026 results conference call. I would now like to turn the meeting over to Mr. Rob Wildeboer. Please go ahead.

[Rob Wildeboer, Executive Chairman at Martinrea]

Hi, everyone. Thank you for joining today. We always look forward to talking to our shareholders, updating you on our business, answering your questions. We also note that we have other stakeholders, including many of our 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 are Pat D'Eramo, Martinrea's CEO, our president, Fred Di Tosto, and our CFO, Peter Cirulis. Today, we will be discussing Martinrea's results for the second quarter end of June 30, 2026. I refer you to our usual disclaimer in our press release and our file documents. On this call, Pat will touch on some key priorities for the business over the next few years, discuss operations, and outline some key highlights for the quarter.

[Rob Wildeboer, Executive Chairman at Martinrea]

Fred will provide an overview of our operating segments and highlight some new business wins and growth opportunities. Peter will discuss the Q2 results and 2026 outlook. I will conclude with some brief comments on trade, geopolitics, and capital allocation. To kick things off, here's Pat.

[Pat D'Eramo, CEO at Martinrea]

Thanks, Rob. Good evening, everyone. I want to start by providing an update on how we see our business unfolding over the next few years. We have a three-year strategy that we update annually, where we lay out key priorities. These include focusing on margins and free cash flow, growing our core automotive business, partnering in regions that have more risk or where we don't have 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 and AI machine learning installations across the plant network will be key in driving margin expansion.

[Pat D'Eramo, CEO at Martinrea]

As we enter 2027, we will 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%-7% by 2028, and these are the levers we will pull to get there. By 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 will maintain our capital discipline in line with our previously communicated framework of CapEx, roughly in the line with depreciation and amortization. Improved capital efficiency should flow naturally through better operating performance, resulting in even stronger free cash flow. Moving on, we foresee good growth in our core automotive business based on recent new business wins and strong performance at our customers.

[Pat D'Eramo, CEO at Martinrea]

We are seeing a high level of quoting activity where we can be selective while growing at a faster pace than the overall market. Fred will elaborate on recent new business wins in his remarks. As always, we have a relentless focus on quality, which is a big part of what's helping us win new business. We are being recognized for this as evidenced by more than 30 awards we won from customers and industry organizations last year alone. In areas including quality, delivery, sustainability, workplace excellence, communications, and industry leadership. We have won awards from multiple customers, including the most notable General Motors Supplier of the Year award, along with Ford, Toyota, just to name a few. As we've indicated on prior calls, sales growth will be focused on North America, but we will look to maintain our book of business, fill open capacity, and expand margins in Europe.

[Pat D'Eramo, CEO at Martinrea]

We will limit our exposure in other markets that comprise our rest of world segment. Aligned with this strategy, we reached an agreement to sell 85% interest in our fluids plant in China, partnering with a local Chinese supplier, and we're looking at other potential dispositions of non-core assets. Turning to non-automotive markets, we continue to see growth in our industrial business with both our core customer base as well as new customers and new market verticals such as power generation and defense. We also recently entered the school bus market through our acquisition of Lyseon North America, which we now call Martinrea Tulsa, and see strong growth prospects in this business. In addition, we have a meaningful book of heavy truck business. We spoke on the last call about TrueNorth Kaizen, our lean consultancy business that we recently launched.

[Pat D'Eramo, CEO at Martinrea]

We've already won a few contracts in defense and aerospace, including one worth CAD 5 million from Raytheon, to work with them on improving manufacturing throughput on some key defense products. Thus far, in a short period of time, we've had a lot of success helping them, clearly demonstrating our strength in how we approach operations. This success is expected to lead to more business opportunities for TrueNorth Kaizen. We expect to sign more contracts at TrueNorth, which could expand the business by as much as 4x by the end of 2026. The business has significant room for growth, and we believe that over time, the relationships we forge through TrueNorth could lead to opportunities to participate more directly in the defense manufacturing business.

[Pat D'Eramo, CEO at Martinrea]

Importantly, TrueNorth is a higher-margin business and was profitable in its first quarter of operation. Similarly, our MiNDCAN software subsidiary continues to see steady growth with an expectation to be profitable in 2027. This is great progress for a new software startup. As you can see, we are diversifying the business into markets with attractive growth prospects using existing skill sets, capabilities, and equipment, and for very little to no incremental capital investment. That dovetails nicely into our final pillar, which is to ensure investments are successful. The strategy here is to invest in new technologies and capabilities that can be a differentiator for our business and support those investments with resources, including human capital. The strategy also involves monetizing certain investments that have completed their incubation period and are self-sustaining. Now let's shift to the quarter. I'll be brief, and Peter can fill in the details.

[Pat D'Eramo, CEO at Martinrea]

We're pleased with our Q2 performance, considering the impact we had from lower volumes, including lost sales from the Ford Escape program, which ended at the end of last year, negative foreign exchange, and higher aluminum costs, which is expected to reverse at some point. As we have articulated before, aluminum costs are a pass-through to our customers, though the pass-through occurs at about a 90-day lag. Given the spike we saw in the aluminum prices because of the Iran conflict, we had to absorb some extra cost in Q2. We expect to recover the amounts in the coming quarters as prices normalize, with the timing dependent on how the Iran conflict plays out. The good news is volumes were up quarter-over-quarter, and we were able to offset cost pressures, including aluminum costs, through operating improvements and commercial recoveries.

[Pat D'Eramo, CEO at Martinrea]

This allowed us to also improve margins quarter-over-quarter. Overall, based on our performance in the first half of the year, and considering the various puts and takes, we're confident that we will meet our 2026 outlook. We're on track. Peter will elaborate on our financial results and our outlook. With that, I'd like to thank the Martinrea team for all their hard work and ongoing commitment to make this business better every day. With that, here's Fred.

[Fred Di Tosto, President at Martinrea]

Thanks, Pat. Good evening, everyone. We continue to execute well both operationally and financially, while navigating through industry dynamics pertaining to trade, tariffs, electric vehicle volumes, and the Iran conflict. We are doing well managing what's in our control and pursuing growth opportunities in a prudent manner, as Pat outlined. Turning to our segments, starting with North America, Q2 adjusted operating income margin came in at 8.3%, 20 basis points lower than the 8.5% margin in Q2 of last year on production sales that were 1.2% lower. We've continued to consistently perform at a high level in North America, the main growth engine in our business, where over 75% of our business resides with a solid margin profile. A good place to be.

[Fred Di Tosto, President at Martinrea]

Europe recorded a CAD 7.5 million operating loss in the quarter, which compared to a CAD 1.8 million operating profit in the Q2 of 2025 on production sales that were down about 8% year-over-year. The weaker year-over-year performance was a function of decremental margins on the lower production sales, higher aluminum prices, which is expected to reverse at some point, as Pat pointed out, and a lower level of commercial settlements. Clearly, this is not where we want to be in Europe. We have actions in place that should improve European performance in the second half with a path toward break even for the full year of 2026, including anticipated commercial recoveries related to the significant shortfall in electric vehicle volumes. From there, we are planning for and expect 2027 to be better in Europe year-over-year.

[Fred Di Tosto, President at Martinrea]

As we've said on prior calls, our results in Europe reflect a volume environment that remains well below expectations. The European volume environment has been challenging across the auto supply base. Our disciplined approach, maintaining a presence for customer support while avoiding aggressive growth, is the right strategy for this cycle. Over time, we believe Europe can return to a mid-single-digit margin profile as volumes recover, particularly given the operating improvements and restructuring actions we have taken. While the reality of our performance in Europe is not lost on us, our approach remains disciplined and deliberate. Our strategy is to maintain a presence and fill open capacity rather than pursue aggressive growth. We think it's important to be there to support our customers globally and to win business with German OEMs in both Europe and North America.

[Fred Di Tosto, President at Martinrea]

This is demonstrated through some considerable new business we were recently awarded from BMW in North America, which wouldn't have been possible without a manufacturing presence and capabilities in Europe. Adjusted operating income in our Rest of the World segment was approximately break even, compared to CAD 1.4 million in Q2 of 2025, reflecting decremental margins on lower production sales. As I have stated before, this segment is small, representing less than 3% of our consolidated sales, and results can vary quarter-to-quarter. Our strategy in this region is to maintain only the footprint required to support our global business. As Pat noted, we sold a majority stake in our fluids plant in China during the quarter, further reducing our presence in the region, and we are exploring other potential divestitures.

[Fred Di Tosto, President at Martinrea]

I'm very pleased to announce that we have been awarded new business worth CAD 110 million in analyzed sales and mature volumes, consisting of CAD 55 million in various structural components in our Lightweight Structures commercial group with Ford and Scout Motors, CAD 40 million in our Propulsion Systems commercial group for Volvo, BMW, Rolls-Royce, and Scout Motors, CAD 10 million in our Flexible Manufacturing group with Isuzu and John Deere, and the CAD 5 million consulting contract with Raytheon through TrueNorth Kaizen that Pat mentioned earlier. New business awards during the last 12 months total CAD 440 million. Quoting activity remains robust, and we continue to be awarded program extensions and takeover work from financially troubled or underperforming suppliers. We're also seeing opportunities from OEMs localizing or onshoring production to North America, some of which we have already benefited from. I'll end it there.

[Fred Di Tosto, President at Martinrea]

Thank you for your time, and I'll turn it over to Peter to discuss our financial results and outlook in more detail.

[Peter Cirulis, CFO at Martinrea]

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 in running the business, how well we are operating, and our effectiveness in deploying capital. Each is a leading indicator of the value creation arc that we are on. Regarding operations, Q2 adjusted operating income margin was 40 basis points higher than last quarter, despite the temporary aluminum cost headwinds. Our operating performance continues to demonstrate the strength of our lean and continuous improvement mindset. The improvements we are making through the scaling of our AI machine learning and other initiatives, as well as the positive flow-through impact from higher production volumes, should provide meaningful operating leverage as we advance towards our 2028 targets. Our capital allocation priorities remain unchanged.

[Peter Cirulis, CFO at Martinrea]

Invest in the business, maintain a strong balance sheet, and return capital to shareholders through dividends and share buybacks at appropriate times. On the balance sheet, net debt ended the quarter CAD 801 million, down from CAD 819 million in quarter one. Our net debt to adjusted EBITDA ratio was 1.63, roughly the same as last quarter and broadly in line with our target of 1.5x. We did this while repurchasing approximately 919,000 shares for CAD 10 million, consistent with the amount we spent last quarter. This is a disciplined approach. We continue to balance share repurchases against maintaining balance sheet flexibility, funding organic growth, and pursuing strategic acquisitions. Looking closer at the results, adjusted operating income margin came in at 5.9%. This is a decline from the 6.8% margin we generated in quarter two of last year, which was a high watermark for us. Let me be clear.

[Peter Cirulis, CFO at Martinrea]

The year-over-year margin decline is driven largely by temporary factors. The aluminum cost spike from the Iran conflict, which we expect to recover with a 90-day lag, and the production from the Ford Escape program and negative FX on our Mexican labor cost base. Strip those out and our underlying margin trajectory is improving, as evidenced by the 40 basis point sequential improvement from quarter one. Reported free cash flow before principal lease payments under IFRS 16 was CAD 52.8 million. After principal lease payments, free cash flow was CAD 36.9 million. Free cash flow came in somewhat lower than expected given the timing of certain trade and other receivables, which we expect to collect by the end of the year. Overall, we remain on track to meet our 2026 free cash flow outlook.

[Peter Cirulis, CFO at Martinrea]

We are generating a healthy level of free cash flow from the business, and we expect this to continue. I'll have more to say on our 2026 outlook in a few moments. Year-over-year reported earnings per share increased to CAD 0.61 compared to last year's reported Q2 EPS of CAD 0.52, primarily because restructuring charges were lower, finance expense declined, and the effective tax rate was lower. From an operating perspective, however, adjusted EPS of CAD 0.61 decreased compared to CAD 0.66 in Q2 2025 as a result of the aforementioned lower sales and compressed margin, which is primarily attributed to the Ford Escape program ending, as well as the decremental margin impact of lower production volumes, mainly Europe.

[Peter Cirulis, CFO at Martinrea]

Moving on, we are reaffirming our 2026 outlook, which calls for total sales of CAD 4.5 billion-CAD 4.9 billion, an adjusted operating income margin of 5.5%-6%, and a free cash flow of CAD 125 million-CAD 175 million with approximately CAD 300 million in CapEx. The outlook is indicative of strong operational execution in a relatively flat market. Recall that our guidance assumes a modest decline in sales compared to 2025, reflecting the end of the Ford Escape program and lower tooling sales. Based upon our performance year to date and what we currently see in front of us, we believe our full year 2026 results will fall within the range of our guidance. Our focus remains consistent execution and free cash flow generation through cycles based upon the elements of the business that are within our control. Q2 is one data point in a multi-year transformation.

[Peter Cirulis, CFO at Martinrea]

Since 2023, we have expanded margins, generated record free cash flow, restructured Europe toward break even, won more than CAD 1 billion in cumulative new business, are deploying machine learning at scale, and have returned capital to shareholders through share buybacks. By 2028, we are targeting CAD 5.3 billion-CAD 5.5 billion in sales at a 6.5%-7% adjusted operating income margin with an improved return on invested capital profile. That is the arc. With that, I now turn you back over to Rob.

[Rob Wildeboer, Executive Chairman at Martinrea]

Thanks, Peter. I'll make a few takeaway comments on where we are at with USMCA and trade and geopolitical issues, as well as capital allocation. As you've heard, there are many great things happening in our company. We had a good start to 2026, despite much noise on geopolitics and trade

[Rob Wildeboer, Executive Chairman at Martinrea]

Regarding the USMCA and trade discussions, while there's always a lot of noise, it seems pretty clear to me that we will be very likely not seeing any tariffs on North American-made auto parts. Scott Bessent himself told me tariffs on auto parts is a very bad idea. He's right. This is good for us, but this is a consensus view in Washington, Mexico, and Canada. I also foresee no tariffs ultimately on Canadian-made autos. That is what we are negotiating for, and that's what the entire industry wants. Meanwhile, as to timing, who knows? We did not expect a deal on USMCA by July 1st, and that should not be a surprise to anyone. Let me repeat an observation I made on the last call. Over 97% of our sales are made to assembly plants that are not in Canada.

[Rob Wildeboer, Executive Chairman at Martinrea]

That is less than 3% of our revenues worldwide are made from sales of our products to Canadian assembly plants. Most of what we make in Canada is shipped to U.S. assembly plants already, tariff-free. Our U.S. footprint is much bigger than Canada. It's clear to me that our North American auto parts sales are likely not materially impacted, even if, for example, Canada faces a tariff on assembly or USMCA discussions don't go well between Canada and the United States. I do believe there's huge consensus in our industry, OEMs and suppliers alike, for a tariff-free North American auto industry, autos, and parts makers. See, for example, the industry submissions to the administration and Congress, and I think we'll get there. Even if we don't, we'll be fine. In terms of the USMCA and other negotiations, we are heavily involved in the consultations.

[Rob Wildeboer, Executive Chairman at Martinrea]

Like all of you, we would like to see clarity and a good result, but we are patient, and we will deal with it. I believe that the U.S. tariffs on other jurisdictions on parts and vehicles, in whatever form they take, will, over time, encourage more manufacturing in North America. Again, good news for suppliers and Martinrea, and we have seen some of this already. The tariff issues are really part of the overall geopolitical environment we face and are impacted by it. For example, the various conflicts in the Middle East and Ukraine, as well as broader areas, are clearly a primary focus of our largest trading partner. The USMCA is not the, or even a, top priority item for the U.S. at this time, in my view.

[Rob Wildeboer, Executive Chairman at Martinrea]

That's not to say it isn't important, but the fact is, the tariff issues are much more in the news here than in the U.S., and that's just the way it is. At the same time, I believe the geopolitics of the U.S. and China ultimately favor a fortress North America approach. This industry supports it, even if for this industry only, and I think it is in the best interest of the U.S. to have a good deal with Canada and Mexico. In my view, both Canada and Mexico should hold out for that. Let's turn briefly to capital allocation. Our framework is shown on this slide. We've consistently followed it over the years. First, to be profitable and sustainable for the long term, you have to invest in your business. Over the past decade, we have grown organically with some tuck-in acquisition activity.

[Rob Wildeboer, Executive Chairman at Martinrea]

Some of our recent growth includes takeover work, as Fred noted. As a result, we are extremely well perceived as a supplier in our industry. As Pat noted, we are better operators today than we were in the early days. We have not made any large acquisitions, but have invested in our footprint, and frankly, brought up to high standard a number of plants we acquired over the years. As our history shows, we've been very good at buying distressed assets and fixing them up. We have also invested in R&D and made some strategic investments. We're not venture capitalists. We invest in relationships that make us more competitive and that bring us something. Graphene being one example, additive manufacturing using Equispheres's powder being another. We bring them something, too. Maybe a customer relationship, expertise in scaling up, or customer access.

[Rob Wildeboer, Executive Chairman at Martinrea]

Remember, we were a startup at one time and still have a highly entrepreneurial culture. Our focus on improving operations and the use of leading-edge technology in our business has brought us opportunities through consulting, which are already bearing fruit. These investments have led to better operational performance and are paying off. Second, we maintain a strong balance sheet. This is paramount and something we will never compromise on. It's important to our customers. It enables us to win takeover business from other suppliers and take advantage of opportunities when they come along. You want to be able to be nimble, as we are. We have seen many competitors lose the value of their equity over the years by being over-leveraged. As we've stated, we've won significant new business and our strong balance sheet has been a key enabler of this.

[Rob Wildeboer, Executive Chairman at Martinrea]

Third, we return capital to shareholders. As noted, we bought back some shares in the quarter. We renewed our NCIB. We've now bought back about 20% of our company in the past decade or so and over 2.5% this year to date. We paid a consistent dividend for years. This chart is interesting as it shows how we deployed our free cash flow over the past three years and illustrates what has been a balanced and prudent approach. In the three years from 2023 to 2025, we generated close to CAD 600 million in free cash flow. With this, we reduced our net debt by over CAD 200 million, strengthening our balance sheet in some trying times, as you know. We repurchased approximately CAD 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.

[Rob Wildeboer, Executive Chairman at Martinrea]

We also paid CAD 45 million in dividends over this time. That's a balanced approach. Our shareholders vary in their views on how to spend the cash, as I'm sure you can appreciate, but we talk to them and listen to them. Where are we today? We continue to invest in the business. Peter talked about capital expenditures, and you have our outlook for this year and our 2028 targets. We must invest to grow in a prudent and profitable manner. We intend to maintain leverage at our target of 1.5x net debt to EBITDA or better, and we'll buy back some shares. In terms of capital allocation, we have divested our fluids plant in China, as Pat noted, and we're involved in discussions on other potential asset dispositions that would generate cash to fund our business and other capital priorities. It's time for questions.

[Rob Wildeboer, Executive Chairman at Martinrea]

We have shareholders, analysts, employees, even some competitors on the phone, hello. We may need to be a little bit careful with our comments, but we'll answer what we can. Thank you all for calling in.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star followed by the number two. With that, our first question comes from the line of Ty Collin with CIBC. Please go ahead.

[Ty Collin, Analyst at CIBC]

Hey, good evening, everyone. Thanks for taking my questions. Appreciate all the commentary on the call so far. I guess to start, just wondering if you could share any sort of high level expectations around cadence for sales and margins in Q3 and Q4 and any sort of timing factors or unusual items to take note of.

[Peter Cirulis, CFO at Martinrea]

Okay, good. Hey, thanks, Collin. Good to hear from you again. Yeah, I'll refer back to what I had said the last couple of calls. The shape of the guidance, if you will, for this year is kind of like I've said before, a mountain shape. We started off with a 5%, 5.5% quarter one, a good quarter two, quarter three should be similar, I would say, to last year. Then a little bit of a more sluggish quarter four, similar to last year. I wouldn't say that quarter four is similar to last year, only that the shape is low in quarter one, low in quarter four, and the best quarters of the year for us would be the second and the third quarter.

[Ty Collin, Analyst at CIBC]

Okay, got it. Appreciate that. You called out a couple of factors within your Q2 margin performance, aluminum on the negative side, commercial settlements being favorable. I'm just wondering if you could help us kind of quantify those impacts to your Q2 results and what your expectations are specifically around both of those pieces in the coming quarters.

[Peter Cirulis, CFO at Martinrea]

Sure. As far as the aluminum is concerned, right? On a year-over-year basis, it was substantial, if you will. It was about 40 basis points, because of the Iran conflict, which obviously wasn't contemplated at the time of guidance at all. It's about 40 basis points on a year-over-year basis. As we move forward through the remainder of the quarters, you should expect that it will get slightly better in quarter three, but not completely reverse itself on the lag since the peak, let's say, that we experienced was around CAD 3,800 per tonne. It's come down now to the low CAD 3,000s, but not to where it started out the year, what we had planned for, if you will.

[Peter Cirulis, CFO at Martinrea]

That reversal probably wouldn't take place until starting in quarter four, maybe bleed into next year, just obviously dependent upon the trajectory of the Iran conflict.

[Ty Collin, Analyst at CIBC]

Okay, the commercial settlements, any sense of how meaningful that was in Q2?

[Peter Cirulis, CFO at Martinrea]

Yeah. We talked about as well in quarter four last year, quarter one this year, that we were expecting a significant commercial settlement with one of our customers in North America. That did happen. However, it didn't take place in terms of, let's say, the timing or the lump sum. Let's say format, because it can take multiple formats. When you move forward here, that's behind us, moving forward, we still are working on several other commercial settlements, primarily in the European segment.

[Ty Collin, Analyst at CIBC]

Okay, that's great. If I could sneak in one more maybe for Rob, just around USMCA and specifically the proposed 50% U.S. content requirement that's been put forward. I would take it, based on your comments, that your view is that this maybe isn't likely to get implemented, but that has been a longstanding ask for the U.S. If something like that were to get implemented, is there a possibility that that could disproportionately impact Mexican vehicle assembly and maybe have some sort of outsized impact on your footprint there?

[Rob Wildeboer, Executive Chairman at Martinrea]

Yeah, a couple of comments. The comment was raised in Mexico. Mexico told the U.S. to pound salt on that one. The 50% requirement is actually kind of there right now in the context of in order to qualify for rules of origin, you've got to have a labor value content of U.S. $16 per hour absent benefits, which is basically an anti-Mexico provision, right? If you recall back in 2018, that was the original ask by Lighthizer. Canada and Mexico said, "No, we're not going to do that," and they kind of backdoored it in the context of the labor provision. You've kind of got that there anyway. I think in the context of whatever your overall rules of origin, the 50% application goes toward the calculation of the overall rules of origin, which are in flux as well.

[Rob Wildeboer, Executive Chairman at Martinrea]

The interesting thing is that we aren't that far away from effectively that level anyway. It's how you play it. In the context of the discussions from both the Canadian side and the Mexican side, as well as basically every market player in the U.S., OEMs and supply folks, is that's a problematic proposition and it shouldn't take place. I think we're going to basically be okay there.

[Ty Collin, Analyst at CIBC]

Okay, great. Thanks for the comment. All the best.

[Rob Wildeboer, Executive Chairman at Martinrea]

Yeah. Thanks very much for the questions. Very good questions.

[Operator]

Your next question comes from the line of Brian Morrison with TD Cowen. Please go ahead.

[Brian Morrison, Analyst at TD Cowen]

Good evening. Peter, can you maybe just start with the aluminum commentary you just had? I understand that there's the lag, the 60, 90 days, but I would have thought with aluminum prices having come down substantially post the end of June, that it would have been a benefit in Q3. Can you just walk me through what your budget amount was and how the recoveries work?

[Peter Cirulis, CFO at Martinrea]

Yeah. The budgeted amounts were slightly less than 3,000 a ton. When they're approaching 3,100 right now or so, right? We're still not where we had planned it to be. They've come down recently, but they're not where they, let's say, where we'd expect them to be relative to the planning of our financials.

[Brian Morrison, Analyst at TD Cowen]

Sorry, at about CAD 3,500 or CAD 3,600 a ton in the last quarter, I thought you would have recovered that differential from the OEMs in Q3. No?

[Rob Wildeboer, Executive Chairman at Martinrea]

I think it's.

[Peter Cirulis, CFO at Martinrea]

No, let's put it this way. It's more on the 90-day lag than on the 60, right? When we reprice at the 90-day mark, on the average, it's always on an average now, that'll start to come back. It depends on the timing of when the prices go down. Obviously, when we buy at the higher price, that also has an impact based upon the volumes at the time. There's going to be the impact of what you buy, when you buy it, based upon the volumes of the releases, and then the averaging of what that is relative to the lag on the contract. The lag language on the contract.

[Brian Morrison, Analyst at TD Cowen]

Okay. Thank you.

[Rob Wildeboer, Executive Chairman at Martinrea]

If you go into Q4 at the better run rate, yeah.

[Peter Cirulis, CFO at Martinrea]

Yeah. Quarter four. You should see a bigger impact. Like I said with Ty's question, I would think we would have some improvement, but it won't be completely, let's say, negated. I think the kind of the scenarios we're running based upon the amount of material that we purchase, based upon the releases, would be some of that comes back. Let's say half of that deviation comes back, but not the entire amount won't come back.

[Rob Wildeboer, Executive Chairman at Martinrea]

Maybe the way to say it is the second half of the year is going to be its trend line's moving in the right direction for the second half.

[Peter Cirulis, CFO at Martinrea]

The material index is trending in the right direction. Correct.

[Rob Wildeboer, Executive Chairman at Martinrea]

Yeah.

[Brian Morrison, Analyst at TD Cowen]

Okay.

[Rob Wildeboer, Executive Chairman at Martinrea]

As long as we don't have another war.

[Brian Morrison, Analyst at TD Cowen]

Understood. You've been a little bit more open with respect to forthcoming non-core assets. Specifically, you mentioned China. I assume that real estate might be in there as well. Can you maybe just frame the potential magnitude of some of these divestitures that you're alluding to?

[Rob Wildeboer, Executive Chairman at Martinrea]

We talked about the sale of Anting. That's not a big-ticket item. We have a few things in the hopper that we'll consider. Obviously, you got to get the right pricing, but I would say, looking at my colleagues, CAD 50 million-CAD 100 million, maybe.

[Fred Di Tosto, President at Martinrea]

Yeah. Ultimately, if some of these things materialize, you can be in that vicinity, I would think.

[Rob Wildeboer, Executive Chairman at Martinrea]

Yeah.

[Brian Morrison, Analyst at TD Cowen]

As people.

[Fred Di Tosto, President at Martinrea]

A number of those deals will have to materialize.

[Rob Wildeboer, Executive Chairman at Martinrea]

Yeah.

[Brian Morrison, Analyst at TD Cowen]

Is that 2026 events or later?

[Rob Wildeboer, Executive Chairman at Martinrea]

Could be 2026 or early 2027.

[Brian Morrison, Analyst at TD Cowen]

Okay. Maybe Pat or Fred, maybe you could just elaborate on the drivers to break even the second half in Europe outside of the improved commercial recoveries.

[Fred Di Tosto, President at Martinrea]

There's really two, well, three elements, I would say. We got some operational improvements that we're planning on in the back half of the year. Those are going to continue. We talked about the aluminum cost reversal. We're anticipating that that'll be a benefit in the back half of the year, largely, I would say, in Q4. On the commercial front, we are working actively on closing some open items with some core customers there in relation to the EV volume shortfall. We anticipate that we'll have those done by the end of the year as well. Those items will all essentially benefit the European segment.

[Brian Morrison, Analyst at TD Cowen]

Okay. Thanks. Sorry, one last question. I guess this is an unfair question. Your free cash flow yield, hitting your numbers, you're at 15%. You're trading below 3x EBITDA, you have non-core assets. Are you at all concerned that you could be a target for M&A?

[Rob Wildeboer, Executive Chairman at Martinrea]

No. I'll just make a very general comment in a sense. This is a business where, if private equity is involved, you've got to get consent to the management team and the people, or you lose important assets. The other thing I would say is with respect to strategics, the customer has a big say. We found this obviously in acquiring assets over the years. Customers like to ensure that they have two or three good suppliers in the bucket, so to speak. Do not look very favorably with strategic acquisitions of people in the same line of business. I'll be very open. People said for 25 years, maybe Magna buys you or something like that. I don't think that's a snowball's chance in hell of happening because the customers have said, "You're effectively competitors.

[Rob Wildeboer, Executive Chairman at Martinrea]

Why would I want to essentially hurt myself with that?" That's kind of the nature of the business. At the same time, one can always speculate. We think we're undervalued. We think that there's a USMCA cloud over Canada, in particular, that you don't really see in the United States. We cross the border into the United States, everyone's trying to help our industry and our company and everything else. I think, unfortunately, we have the USMCA uncertainty. If you got rid of that uncertainty and a few other things, I think people would be making investment decisions. I think you'd torque up in value. M&A takeover bid target stuff kind of goes away.

[Pat D'Eramo, CEO at Martinrea]

Thank you for that, Rob.

[Rob Wildeboer, Executive Chairman at Martinrea]

Thank you.

[Operator]

Once again, if you would like to ask a question, simply press star one on your telephone keypad. Your next question comes from the line of Michael Glen with Raymond James. Please go ahead.

[Michael Glen, Analyst at Raymond James]

Hey. Just going to follow up on the Europe conversation. You guys talked about a return to mid-single-digit margins in Europe. When I look back historically, you had those margins, say, in 2019 and 2018. You were on a quite a bit lower revenue base in Europe at the time. Production revenue was CAD 620 million or CAD 650 million, and now you're run rating like CAD 950 million in Europe, and you're below breakeven. Can you just help me understand exactly that incremental, let's call it CAD 300 million. Is that just mispriced work, or what's really overhanging the margin over in Europe right now?

[Fred Di Tosto, President at Martinrea]

Well, I think there's a pretty simple answer to it. At the end of the day, we invested in a number of EV programs. A lot of them were in Europe, the volumes have not materialized. We've been burdened with more depreciation and more overhead, the volumes aren't supporting it. Had the volumes were there today, I think the margin would be definitely positive. Would they be at maybe mid-single? Maybe not that high, but they'd definitely be positive right now. It's a big volume story that over time we'll have to rectify.

[Rob Wildeboer, Executive Chairman at Martinrea]

We added Bergneustadt after, that's where a lot of the revenue-

[Pat D'Eramo, CEO at Martinrea]

A lot of EV is in Bergneustadt as well.

[Rob Wildeboer, Executive Chairman at Martinrea]

Yeah.

[Pat D'Eramo, CEO at Martinrea]

It's pretty much the whole European story has been that way.

[Rob Wildeboer, Executive Chairman at Martinrea]

Yeah. Pretty consistent across the board.

[Michael Glen, Analyst at Raymond James]

Is there a big carrying value on the balance sheet then associated with these EV programs? If the volumes aren't taking place to your expectation, shouldn't you be taking write-offs associated with the value of those assets on the balance sheet?

[Fred Di Tosto, President at Martinrea]

Yeah, we have. If you look at the last couple of years, we have taken some EV-related write-downs. The accounting rules, they allow you to write them down to a level of recoverability, right? It's not like you're writing them down to zero and then booking profits later. That's just not the way it works.

[Michael Glen, Analyst at Raymond James]

Okay. Then for yourself, I know you're active on the buyback, and you're talking about Maybe first, just on the asset dispositions that you're talking about in the CAD 50 million-CAD 100 million. That would be rest of world, specifically something over in China, that's what was being referred to, or could it be other segments?

[Rob Wildeboer, Executive Chairman at Martinrea]

We're in discussions in different places, the rest of the world and local. We've got some capacity that we can potentially adjust. Like I said, we're in discussions. Nothing of material significance in any of those circumstances, you put it together and we're looking to fine-tune our footprint.

[Pat D'Eramo, CEO at Martinrea]

I think if you look at it in terms of EVs, which not just in Europe but worldwide, you create holes because of the lack of production and the right move. We don't see that changing anytime soon. The right move is to try to figure out how do you fill those holes, whether it be take over business or whether it be consolidation in certain spots. There's some opportunities out there that we're studying very closely.

[Rob Wildeboer, Executive Chairman at Martinrea]

Some of those issues where you have capacity, you might want to hold on something because of what you're quoting in different fields.

[Pat D'Eramo, CEO at Martinrea]

That's right.

[Rob Wildeboer, Executive Chairman at Martinrea]

I think we spent a lot of time on this call talking about, everyone's talking about defense. We need the right PO, of course, for that, but we have capacity to grow in non-automotive, whether it's defense, whether it's trucks, whether it's buses. In that context, you look at where your footprint is, and that kind of drives the decision. While our salespeople and our people in our business units are full board seeing opportunities all over the place, including takeover work. Something that you might be saying, "I'm not sure I need to be there," that could change very quickly. That's why we're fudging the discussion a little bit. Reality changes pretty quickly in this business.

[Pat D'Eramo, CEO at Martinrea]

Rob makes a good point on the relative to the RFQs. The volume of RFQs we're seeing now, which we anticipated a couple of years ago, is really quite high. Pre-COVID type levels, back 2017, 2018, comparisons in my view. A lot of that's switching back to ICE, switching to hybrids. A lot more engine opportunities. Three years ago, there wasn't an engine quote to be had out there, and now every single OEM is back in the process of introducing new engines, which that was one of our core real strengths in our aluminum business. We foresee a very fruitful future when it comes to some of this.

[Rob Wildeboer, Executive Chairman at Martinrea]

Let's do a hypothetical example. There's a big package of work available that is over CAD 100 million on an annual basis. We can put it in a particular location, but we have to assess the CapEx. Let's say the CapEx is CAD 100 million, and the margin isn't that high. That's something that we would probably walk away from or quote not to win, right? At the same time, if you have something that the capital is significantly less or the margin is higher or whatever, then you make a different determination. We have said there is a lot of work for quote, both original stuff and a lot of takeover business, and a lot of what we've won has been takeover business from other folks in that context.

[Rob Wildeboer, Executive Chairman at Martinrea]

I think that we're in the one sense, despite a lot of the uncertainty from the USMCA and people are making investment decisions, especially in North America and so forth, at the same time, there's a lot of quoting capability, a lot of opportunity there. As you can see, I mean, we're winning a significant amount of business, but we're quoting a lot more and making those types of determinations based on the cost benefit of a particular program.

[Michael Glen, Analyst at Raymond James]

Okay. Just my final question, with the balance sheet and the initiatives that you're talking about, are you still looking at M&A deals yourself, or is it something that has been completely deprioritized at this point?

[Rob Wildeboer, Executive Chairman at Martinrea]

I think you always look. We're 25 years old. We probably looked at 1,000 M&A deals. You take the latest one we did was Tulsa. That was actually a consulting deal that turned into an acquisition. Kind of an M&A deal. We look at the opportunities in the context of everything. We never say we're never looking. If nothing else, when things are potentially available or for sale, then you do look because it provides a lot of information often where there might be opportunities in order to go hard at something or see where other people might not be going. I would say we're always looking, but don't expect us to overpay for anything.

[Pat D'Eramo, CEO at Martinrea]

I think the other thing on top of that is Martinrea has always done a pretty good job of acquiring and fixing businesses, but our capability to fix now is, in my view, unparalleled in our industry. So much so that we've started this consulting business and have been hired by aerospace to help with throughput and have been quite successful at it so far and see quite a bit of growth. Having that same type of resource and capability in-house in our ability to fix things has become very secondhand. We're very good at it.

[Michael Glen, Analyst at Raymond James]

Okay. Thanks for taking the questions.

[Rob Wildeboer, Executive Chairman at Martinrea]

Thank you.

[Peter Cirulis, CFO at Martinrea]

Thank you, Michael.

[Pat D'Eramo, CEO at Martinrea]

Thank you.

[Operator]

I'm showing no further questions at this time. I would like to turn it back to Mr. Rob Wildeboer for closing remarks.

[Rob Wildeboer, Executive Chairman at Martinrea]

Well, thank you everyone for your time and attention. You know how to get a hold of us. We're always happy to talk to our investors and everyone have a good night.

[Pat D'Eramo, CEO at Martinrea]

Good night all.

[Peter Cirulis, CFO at Martinrea]

Thank you.

[Operator]

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.

Participants

Analysts

• Rob Wildeboer, Executive Chairman at Martinrea
• Pat D'Eramo, CEO at Martinrea
• Fred Di Tosto, President at Martinrea
• Peter Cirulis, CFO at Martinrea
• Ty Collin, Analyst at CIBC
• Brian Morrison, Analyst at TD Cowen
• Michael Glen, Analyst at Raymond James