Q3 2024 Martinrea International Inc Earnings Call
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David Brown, Air.
and Robert Wildeboer.
Speaker Change: Thank you. Thank you. This conference is being recorded. This conference is being recorded. More for less experienced people.
Speaker Change: There are exceptions. An example being Toyota, where I worked for many years. Yes, they made purchases, and they let go of temporary employees when they absolutely had to. But the rest, they worked on.
Speaker Change: And when the volumes go down, Toyota has historically been ready to capitalize on the opportunity because they have their people to be able to produce. All you have to do is look at the numbers.
Speaker Change: Of course, this is not the only advantage of Toyota, but it is a great advantage, and it demonstrates the organization's commitment, and speaks to its focus on long-term success, as opposed to short-term results. Low volumes provide the opportunity to make operational improvements.
which will benefit the company when volumes improve.
Speaker Change: We do not compare ourselves to Toyota. They are at the OEM level and we are at tier 1, which involves many different OEM clients.
Speaker Change: But in this light, we will take better advantage of the period of declining EV volume.
Speaker Change: Of course, we will make the maneuvering power more flexible throughout the company and we will adjust the scope based on our expectation that EVs will continue to experience lower volumes for some time. But we will also use the lower volumes as an opportunity to install new innovative machine learning technologies that will give Martin Rae a competitive advantage.
Speaker Change: This unique technology will promote efficiency gains on multiple fronts, including security, speed, and quality. It will ultimately reduce the cost of key expenses, including labor, consumables, energy, to name a few.
Speaker Change: In the same way, we hope to see significant gains in terms of progress in our two main assets of sampling and casting.
Speaker Change: Using our in-house resources, we will enable Martin Rea to achieve significant gains in the coming years at a cost that would otherwise be higher and take more time to reach. But currently, we can cut a few years off what would otherwise take 5 to 6 years to achieve.
Speaker Change: This new technology is consistent with our Martin Raer operating system and our mindset of continuous improvement.
Speaker Change: Our commitment to Lean will help increase the speed of adoption of this innovative machine learning technology across our operations.
Speaker Change: We have recently strengthened our advanced manufacturing team. The advanced manufacturing team is responsible for the equality of our new machine learning technology, as well as other innovative technologies, many of which have been incubated in our plants across our global operations.
Speaker Change: We are investing in the future of our company, with great people and cutting-edge technologies.
Speaker Change: With that, I would like to thank the entire Martin Raid team for their commitment and their consistency in showing up on occasion. Take care of these great opportunities.
Misfortunes, Fred.
Speaker Change: Thank you, Pat. Good evening everyone. Looking at our operations, we continue to execute them well. Our mineral operations system, otherwise known as MOS, continues to bear fruit across the operations, with more opportunities ahead of us.
Speaker Change: Finally, we are very happy to see how we manage what is within our control and capitalize on cost-saving opportunities across all our plants worldwide.
Speaker Change: Furthermore, we continue to make good progress in our commercial negotiations, obtaining compensations for electricity weaknesses and electricity programs, as well as inflationary costs.
Speaker Change: These efforts help to reduce the impact of current low production sales.
Speaker Change: In North America, the Q3 performance is generally consistent from quarter to quarter and from month to month, with the impact of production sales and remote operations revenues offset by a higher level of commercial investments, as well as productivity and efficiency improvements.
Speaker Change: As Pat has already mentioned, we are experiencing increasing production weaknesses for O&M clients, notably Stellantis, one of our major clients, but also others, as they adjust inventory before the end of the year, more than they would usually do in terms of seasonality.
Speaker Change: We have already been affected by OEM production shutdowns, often with little to no precautions, which, as you know, makes it difficult to adjust costs properly.
Speaker Change: The impact is felt across all types of powertrains, which means that it is not just an electricity issue, as we anticipated in our Q2 warning call.
Speaker Change: Our operating income in Europe decreased in the third quarter, reflecting lower product sales and a lower level of commercial product sales, which decreased quarter over quarter and year over year. Like North America, we are facing an incredible increase in operating volume in Europe that is building up in the fourth quarter.
Speaker Change: In the same way, global operations were essentially at the time of the end of the third quarter, reflecting low production sellers and a less variable sales mix.
Speaker Change: As you know, the rest of the world segment accounts for a relatively small part of our total company.
Speaker Change: In general, as already mentioned, we are happy with the way we execute operations.
Speaker Change: including the international engines, formerly known as Navistar, BMW, and Nissan.
Speaker Change: and also 5 million in our propulsion systems group, the Audio.
Speaker Change: I would now like to change the plan. I would like to take a few minutes to talk about our global leadership conference that we recently held in Huntsville, Ontario, a few hours north of Toronto.
Speaker Change: The GLC brought together more than 150 of our senior leaders from across the organization for three days to discuss the company's strategic direction and priorities for the future. It was a great event.
Speaker Change: We have leaders in attendance from every region that we have a presence in, including Canada, the U.S., Mexico, Brazil, Germany, Spain, Slovakia, China and Japan.
Speaker Change: The leaders left the conference energized and excited about our future, with a clear direction on the priorities for the year 2020-2025 and beyond.
Speaker Change: When we covered a large number of topics at the conference, there was a clear emphasis on innovation, as well as on the MOS approach, or light management approach.
Speaker Change: We spent a lot of time talking about the plan for the future. Pat talked in detail about how we are planning machine learning at the organizational level.
Speaker Change: It is an important initiative to lead to innovation, but not the only one.
Speaker Change: We also talked about other innovations taking place in our internal research and development efforts, as well as our MARINERA innovation development initiative, or what we commonly call the MIND.
Speaker Change: They also conducted discussions, separation sessions, and their testimonies on how our leaders implement WHO initiatives throughout the company to strengthen our competitive position.
Speaker Change: Many good ideas come from the Breakout exercise, and we are now working on a number of ideas.
Speaker Change: In general, we see many opportunities to improve the marginal profile of the WHO over time.
Peter: With that said, I want to thank our people for their commitment to the long-term success of the company. We truly appreciate your contribution. Thank you. Now, here is Peter.
Thank you, Fred.
Peter: Looking at the results quarter by quarter, we generated and adjusted an EBITDA of 154 million in the third quarter, below 166 million in quarter 2, and an adjusted operating income of 65.9 million, below the 81.6 million we had generated in quarter 2, on production sales that were down by 8%.
Peter: Sales of tools have increased by more than 80% quarter after quarter, considering availability by quarter, which is not uncommon.
Peter: At present, tool sales continue to increase slightly beyond half the levels of a year ago, being moderated from a high level in 2023, in line with our expectations.
Peter: The adjusted operating tax margin reached 5.3%. This reflects a decremental margin of 16% on quarter-over-quarter production sales, which is actually very good considering the production volume picture that Fred and Pat talked about earlier.
Peter: There is also an impact on higher tool sales, which generally carry low margins.
Peter: Immediately, the free cash flow before IFRS 2016 credit laws reached 57 million. This is a strong result and higher than the 51.7 million we generated in quarter 2, positively impacted by non-cash flows and lease taxes.
Peter: Net income per share would have reached 44 cents, if it weren't for an inevitably high impact rate during the quarantine, driven by the rapid depreciation of the Mexican peso against the US dollar, which is the functional currency for our Mexican operations. A solid result.
Peter: The increase in taxes is mainly a function of a specific tax treatment of foreign euro fluctuations, which exists only under IFRS accounting rules, and does not impact cash taxes or cash earnings.
Peter: This resulted in our report of an EPS of 19 cents for the third quarter.
Peter: As you probably know, we have large operations in Mexico, with our Mexican sales accounting for just under 40% of our consolidated sales so far in 2024.
Speaker Change: In situations where the local and functional currencies differ, IFRS accounting rules require us to re-evaluate the monetary value of our assets and liabilities from the local currency to the functional currency at the reporting date.
Speaker Change: As mentioned, this treatment exists only under the IFRS account. So our colleagues who report in US GAAP, for example, are not affected by this issue.
Speaker Change: It is also very important to note that these foreign exchange movements of this IFRS requirement are non-cash in nature and tend to balance out over time.
Speaker Change: The pace and magnitude of the change we have seen in the Mexican Peso have resulted in a non-cash impact outside during the quarantine, which has been recorded as an increase in tax expense, which, again, will probably return at some point in life, to half of the tax increase.
Speaker Change: This, along with other foreign exchange-related products, resulted in an effective tax rate of about 70% for the third quarter.
Speaker Change: We believe that this is a better indication of what a normalized tax rate might look like for the third quarter, excluding short-term distortions caused by this IFRS accounting requirement and fluctuations in tax exchange.
Speaker Change: Given the current and constantly increasing business expenses, the tax is probably high in quarter 4.
Speaker Change: Of course, the ultimate impact on EPS in the fourth quarter and beyond will depend on what happens with the exchange price.
Speaker Change: But once again, it is the counting noise that creates non-cash fluctuations in our impact rate, which, in turn, affects the calculation of EPS by increasing the arrival tax expense, thereby decreasing net income on a counting-only basis.
Speaker Change: No cash impact. I refer you to our Quarter 3 MD&A for further clarification.
Speaker Change: Looking at our performance annually, the operating income of the third quarter of 65.9 million decreased from 83 million in the third quarter of the year, on production sales of about 7%, representing a very good decremental margin of 21%.
Speaker Change: Our savings margin of 5.3% was about 70 basis points per year. However, our adjusted quarterly EBITDA margin was 12.5% compared to 11.9% last year.
Speaker Change: The difference between the adjusted tax margin and the operator tax margin reflects higher depreciation and amortization expenses, largely driven by recent investments in tax platforms, coupled with a lower than expected increase in respective production volumes.
Speaker Change: In summary, the business is generating a healthy level of EBITDA.
Speaker Change: I refer you to our MD&A for more information on the year-over-year differences.
Speaker Change: Let's return now to our balance sheet. The net debt, once again, excludes the IFRS 16 lease liabilities.
Speaker Change: decreased by about 32 million from quarter to quarter to 820 million.
Speaker Change: This reflects the free repayment profile for the neighborhood, as expected, and approximately 9.5 million euros were spent on the repurchase of about 826,000 partners for cancellation through our normal issuance request.
Speaker Change: We mentioned on previous calls that the allocation of capital will be balanced between share buybacks and debt reduction.
Speaker Change: Both are important priorities for us, and we have demonstrated disciplined execution on both fronts in the third quarter.
Speaker Change: Our net debt at the equity of the arrival of arbitration ended at 1.46, down from 1.49 at the end of the fourth quarter.
Speaker Change: Our screening ratio is 1.5, or better, so we are there, and we are comfortable at or above this level, as it allows us to execute our capital allocation priorities while maintaining a strong balance plan.
Speaker Change: We think this is a cautious approach, especially given the uncertainty we are beginning to see on the volume front. Robert will comment more on this in his remarks.
Speaker Change: Returning to our outlook for the year 2024, we are pleased to remind that we are well on track to achieve or maintain our free cash flow targets for the year 2024.
Speaker Change: or 50 to 100 million euros, and perhaps even more, which is a strong result in light of the volumes handled during the second half of the year.
Speaker Change: This strong free cash performance is partly derived from CAPEX. You will note that our outlet for the year 2024 requires a CAPEX of 340 million, and we expect to come in below that.
Speaker Change: What is important to note is that this largely represents a real reduction of the planned capitalist economy, rather than a surge of money into the nearby neighborhoods. We are indeed managing our money by considering the current volume environment, including the slow acceleration of electricity platforms.
As it relates to the Adjusted Operating Income Margin Outlook,
Speaker Change: When we saw OEM production plans begin to moderate a few months earlier, at that time, the projected volumes on electricity platforms were mainly lower, along with some seasonality, with sales in the second part of the year being lower than the first part, which is the norm in our industry from a historical perspective.
We talked about that during the last meeting.
Speaker Change: Despite this gentleness, we were still on the path to meet our outlook on the adjusted operating tax margin for the year 2024.
Speaker Change: And at the end of the third quarter, we were still on track to achieve our goals, with an adjusted operating margin so far of 5.9%, comfortably within our guidance range, as Pat mentioned earlier.
Speaker Change: However, the reduction in production volume and the correction of the OEM loan that Pat and Fred mentioned will continue to affect production sales in the fourth quarter, and as such, we will likely end up with sales at the end of 2024 of around 5 to 5.3 billion.
Speaker Change: or maybe a little below that level, depending on how things unfold during the rest of the quarter.
Speaker Change: As Fred said, we are currently not getting much announcement from the OEM about the production offers for the quarter, which makes it tricky to adjust the costs.
Speaker Change: It is also important to note that if the typical industry seasonality had played out this year, where Q4 volumes tend to be higher than those of Q3, we would have comfortably met our guidance on the adjusted operating tax margin for the year 2024, and we would likely have reached the high end of our range at normal tax margins.
Speaker Change: Our perspective on the reduced and adjusted economic margin is related to an industry volume issue in Q4. Therefore, we are not alone in facing this storm.
Speaker Change: As Pat mentioned, volumes are expected to improve once OEMs improve borrowing levels. Interest rates, which are decreasing between Canada and the United States, with cuts expected, could also lead to higher sales once housing prices drop.
Speaker Change: In terms of the long term, we remain enthusiastic about the prospects of our company. As Fred mentioned, we have a huge opportunity to expand our MLS initiatives and improve the organization's productivity to enhance our margin profile, return on invested capital, and free cash flow.
Speaker Change: With that said, I want to thank our people for their hard work and perseverance in these interesting times in our industry.
And now I turn you back over to Rob.
Thank you, Peter.
Our industry is a global industry.
Speaker Change: and impacted by geopolitics, the economy, and significant events like the results of the American elections.
Speaker Change: Our industrial challenges today are partly based on some of these realities and policies.
Speaker Change: For example, the volume challenges we see in the background of the year 2024, discussed by my colleagues, are largely the results of EV mandate policies and other policy choices, such as inflation and higher interest rates.
Speaker Change: Before discussing the election result, I would like to remind you of the geopolitical issues of China concerning our industry.
Speaker Change: For me, there is a great consensus, in Washington, but also in Canada and Mexico to a certain extent, that our industry must strengthen, or reinforce, the main parts of our industry, and manufacturing in general. We see it and experience it.
Speaker Change: Suffice it to say that Martin Ray is a beneficiary of nearshoring, especially given our very strong North American footprint, but our significant presence throughout the region.
Speaker Change: We also have a significant presence in various locations across Europe, even though our company is much smaller than our North American footprint.
Speaker Change: So, when we see tariffs against products coming from China announced in the United States and Canada, in our area, it doesn't hurt us, and it can help us.
Our products are local content.
Speaker Change: These questions exist regardless of who controls the House or the Congress.
Speaker Change: So, many have asked us about the impact of the U.S. elections.
Speaker Change: with the speculation of the renegotiation of the USMCA, the tariffs against China and maybe all the others, the EV mandates and so on.
Note that we have been here before in a sense.
Speaker Change: As Santayana said, those who forget the past are condemned to repeat it. Well, we will not forget it.
Speaker Change: I will start with this comment. In 2016, the day Donald Trump was elected President of the United States, we released our Q3 figures, record results.
Our partnerships have decreased by about 15%.
Speaker Change: The market reacted to the threat of the election of the President at Nafta Tariff.
Speaker Change: Over the past four years, we have worked through trade issues, and we have signed the USMCA, which has been proclaimed the best trade agreement in history.
Speaker Change: have seen higher tariffs and have increased our business and our profits.
Speaker Change: In the time of the pandemic, our tax price has more than doubled.
Speaker Change: During the pandemic, our interest rate decreased, but eventually returned to its pre-pandemic levels at the end of 2020.
This presidency was good for our industry and our company.
Speaker Change: Since that time, we have seen mandates on electricity, high inflation rates, high interest rates, and an industry that has faced many challenges and fluctuating values.
including at the present time, at the arrival of the year 2024.
Speaker Change: Part of that has to do with government policy and geopolitics. It's not the market. We think there's demand there. People need vehicles, a lot of them. The average age of a vehicle is as high as it's ever been.
So, last week, we had an election.
Speaker Change: Interestingly, the day after the American election, our tax price increased. The tax price for most of our colleagues and clients also increased.
Speaker Change: So, looking ahead, we believe there are positives for our industry.
particularly in North America.
Speaker Change: We hope that the economy in the United States is strong, which is very important for us, because most of the vehicles manufactured here are sold in the United States.
We hope that the USMCA will be renegotiated.
Speaker Change: The negotiation process may not be pretty, but the focus will be on higher local content, not lower.
Speaker Change: For the moment, the USMCA remains in place with all three countries. It's good for us and for North American suppliers.
Speaker Change: We believe that tariffs and trade policy will be focused against China, as is the case today.
Speaker Change: But the Chinese partners of OEM and PartsMakers will be targeted in terms of building subsidiary plants in North America.
Speaker Change: We believe that a regulatory environment that does not mandate a certain percentage of sales or production by requiring OEMs to manufacture vehicles that customers do not want to buy is better for us. Let the consumer decide what they want to purchase.
Speaker Change: Of course, there are no guarantees, as politics, trade policy, and the economy are often a target.
Speaker Change: But we are positive. We went there, we did it, and it worked well for us.
Speaker Change: We see good years ahead, once we have gone through some of the challenges that Pat, Fred, and Peter mentioned, in terms of electricity generation and higher inventories.
Finally, a small note regarding the allocation of money.
Speaker Change: Our approach is described in a recently updated investor note on our website.
Speaker Change: In Q3, we generated approximately 132 million dollars in operating funding.
Speaker Change: The expenditures are approximately 81 million dollars, and we continue to invest in support of new business sales and additional equipment needs.
Speaker Change: Then, we paid our daily dividend to our partners, about 3.7 million dollars.
for about 15 million euros per year.
Speaker Change: As Peter mentioned, we have purchased approximately 826,000 partnerships for cancellation in the form of regular taxes.
Speaker Change: The total cost of the money spent was about 9.5 million dollars.
Speaker Change: We want to continue buying silver at these levels, and we will balance it with our goal of paying more money.
Speaker Change: Our net debt was reduced by 32 million dollars in the quarter.
Speaker Change: We have purchased 6.5 million common shares, or 8% of our outstanding shares, and we have reduced our net debt from a ratio of 1.9% to 1.46%.
Speaker Change: I noted that our net debt to 50% reduction ratio was 3.3 times in Q1 2022. So we have made good progress on reducing net debt and on repayments.
Speaker Change: I also want to note that this gives us some dry powder to make key investments and acquisitions where appropriate.
Speaker Change: In this sense, we are pleased to announce that, following the third quarantine, we have reached an agreement to purchase assets from a European seller of size 2.
Speaker Change: This company is a long-term partner of Martin Rand, and we have agreed to buy the company in about 2 to 2.5 years.
who is in charge of the estate planning of the hotel.
Speaker Change: We have negotiated the transaction over the past few months, looking at a variety of alternative structures and timing, and we have reached an acceptable agreement.
Speaker Change: We have signed a long-term plea and acquisition agreement to buy the business.
Speaker Change: I consider it a part of our capitalist allocation, the purchase of a strategic seller to increase our capabilities and ensure more jobs.
Speaker Change: It's a very good arrangement for both of us and our partner.
Speaker Change: In conclusion, we invest in our company, keep our balance sheets strong, and return capital to investors through dividends and income.
Speaker Change: In terms of money allocation, we consider anything that makes Martin Rand better, but not at the expense of our strong financial status.
Speaker Change: We believe that the generation of free and consistent jobs is the path to higher value.
Speaker Change: Finally, a big thank you to our people. Thank you for your dedication every day. Our people do very good work. Their dedication and ingenuity underestimate our numbers.
Speaker Change: Now it's time for questions. We see we have shareholders, analysts, employees, and even some competitors on the phone. So we may have to be a little careful with our answers, but we'll answer what we can.
Thank you all for calling.
– Subtitling by Société Radio-Canada
Speaker Change: Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1.
Speaker Change: You can cancel your question at any time by pressing button 2. Please press button 1 at this time. If you have a question, there will be a brief pause while the participants register. We thank you for your patience.
Speaker Change: The first question comes from David Ocampo of Cormac Security, please go ahead.
Good evening, ladies and gentlemen.
David Ocampo: I appreciate the comment on the margin frontier regarding Q4. It seems that you have made good progress in your commercial negotiations during the year. I am curious, now that you have this behind you, how should we think about margin improvements in the future for the year 2025?
Speaker Change: from the first and second forty of 2025. I hope that, in a similar rank to the one we have here, that we experienced in the first part of this year,
Speaker Change: That's what we expect. As you heard, quarter 4 is a bit lower than what we had anticipated at the end of our call in quarter 2.
Speaker Change: It is likely that there are decremental margins that are a bit lower, I would say higher, I suppose, higher decremental margins than what we reported here today, going from Q2 to Q3. But you hope that going into next year, they would start to normalize as volumes come in.
Speaker Change: Next year should be better than the second half of this year.
It's good.
Speaker Change: Pat, you have always secured your business every five years, and when you review what you have earned this year, have you been able to put safeguards against minimum volumes or inflation pressures, by making all the negotiations you had to do with your clients over the past year or two?
Speaker Change: I hope I understand the question correctly. Can you repeat it once more?
Speaker Change: Were you able to include guarantees against minimum volumes or inflation products in the new contracts you signed?
Speaker Change: The capital paid upfront is much higher than at the back. The recovery is faster.
Speaker Change: This contract may be a bit more standard than the one we think is a bit riskier or in a certain class of cars that may or may not sell as well. They are not all the same, but in general, there is more protection on the EV side.
Speaker Change: what would normally be on the island of Ile-de-France. I think we have always learned a lot over the past few years about handling these trade negotiations, and not just the entire purchasing base. And we obviously put all this to the test when we went to the market and electricity won the business, etc.
Speaker Change: As mentioned, we will be selected where there are higher risks. We will focus on some of these points and try to get more protection in the contracts. For some cases, this may not be the case, depending on the product and what the OBCDL looks like.
Speaker Change: that we can put in the contract at a higher price if it falls below a certain volume level on the downside. I think it's a good question, because we have to accept that there are uncertain times and that there must be changes in the way these contracts are structured.
Speaker Change: Generally, we are very happy with the way we have managed a good part of the EV.
by supporting the electric vehicle trade.
Speaker Change: in the levels of the pandemic, but still well below the 15% that you reached pre-COVID. If you look exclusively at your ICE business lines, are you at this 15%? So all the weaknesses that we see in the ROIC recording of the EV?
Speaker Change: That's a good question. I don't know if they want to answer. I would say that we have been consistent. The real issue here...
Speaker Change: it is the production of electricity that does not correspond to what customers or governments expect. And when that happens, you do not get what you would normally get if you were working at full capacity.
Speaker Change: Our ice programs are operating at a higher level of capacity, so I would say at least directionally.
Speaker Change: The answer would be yes. I think it's fair to say that we perform better on ICE platforms than on EV platforms. The other thing that catches us, despite the EV volumes decreasing, is that we see programs expanding.
Speaker Change: This allows us to have advantages and to correct some of our material spaces created during the pandemic. We could see more benefits from this period, depending on the increase in EV volumes.
Speaker Change: OK, that's perfect. I appreciate the comments and all my questions. Thank you.
Speaker Change: Thank you. Thank you, David. Thank you. Please press button 1 at this time if you have any questions.
Speaker Change: The next question is from Michael Glenn, from Rimm & James, please.
Speaker Change: Good evening. Rob, I'm curious. When I listen to you, you talk about North America versus Europe.
Speaker Change: It seems that the arrangement of North America over the next few years is much more favorable than what one might think for Europe. And the goal of Europe's economy seems to be...
more negative than what you read.
Speaker Change: I am curious, why allocate more M&A money to Europe versus North America?
I believe there are no other questions.
It's a specific technology that I want to hear about.
Speaker Change: I don't know where it is used and such things from this point of view, but it is the producer, the seller, that we are going to integrate. He makes a unique product, it does very well on the market, so the fact that he is far away is not critical.
Speaker Change: But they are very good at what they do. I would say that the superior quality, the distribution, in general, is very good. And it is a product with which our customers are very happy.
Speaker Change: It's strategic. There are other advantages, we will talk more about it in the future. I don't want to go into these details. It should be noted that this is not a big transaction for us. It's relatively small. The buyers are not only selling in Europe, it's also a source of purchase in the rest of the world.
Speaker Change: It's not just a point of prohibition, and it's a good starting point.
Discussion on.
Speaker Change: and the mandates of the USMCA and the EV and things like that.
Speaker Change: I will make the comment I made, we will work through this.
Speaker Change: I think you will see, obviously, that the EV mandates will disappear in the United States. At least, the elected president has said so. And since the election, he has certainly continued to say it. I think that if the EV mandates disappear in the United States, we will see that Canada will follow.
Subtitles created by the Amara.org community
Speaker Change: The Minister of Finance, the Member of Parliament for Freeland, the Prime Minister of Freeland said it the other day.
Speaker Change: I think that Europe has similar problems, particularly in Germany, where the government has been brought down in relation to some of the policies that we have in place.
Speaker Change: As my colleagues indicated, the ice vehicles are still selling, and as we sort through different things, people need our products and ultimately will be okay. We think over the next five years.
Speaker Change: We are talking about North America because 75% of our product, but about 20% of our revenue is in Europe, and we believe that Europe is about to increase over the next five years.
Speaker Change: You could argue it is an investment in our North American operations, as the majority of the products are sold in the United States. 95% of the products go to the United States.
Speaker Change: I would say, Michael, that this is a special case, as we have said. Generally, the European region is not our first priority in terms of M&A activity.
Speaker Change: There is a lot of information available. Oh, a lot of information available. Without going into too much detail, there are jurisdictions in Europe that are very competitive, and I would say this is one of them.
Speaker Change: And just as I was leaving the conference, I received a call from one of your colleagues.
their comment indicated that there was...
Speaker Change: There is a huge amount of retirement or employment opportunities available across a number of distressed owners. Does this match what you are seeing in the market currently?
Speaker Change: Yes, we see that, but it is not always the case for suppliers. Sometimes, suppliers buy matches weapon to weapon with a customer, and the customer starts to watch them. It's a combination of things.
But it's sure that it's over there.
Speaker Change: It's very dynamic, and it comes back to the discussion about commercial contracts and so on, but the entire supply base addresses similar issues in terms of armed struggle with the clients.
Speaker Change: and that kind of thing. And it's certainly something that is consistent. There may be things about reimbursement, but at a certain level, it's just the dynamics of the industry. At the same time, there is a lot of distress in the industry.
Speaker Change: People who did not work hard to protect their contracts were financially hurt. And at the same time, a number of people were hurt.
Speaker Change: who are almost elevated in the EV space with capital, are sitting there with half-empty plants, many half-empty plants, and needless to say they still have financial obligations and so on.
and to its capacity.
Speaker Change: and its aggressiveness can help clients in the right places. We will see the result.
Speaker Change: That's what I think. So, Robert, you allowed me. The answer is yes.
Speaker Change: And I'm just going to... Don't forget one thing I want to remind people. You know, in the last ten years,
23 years old.
Speaker Change: When the industry faces challenges, we find opportunities. We have found opportunities. We did it.
In the 2000s, we did it after 2008.
Speaker Change: We have done it, you know, even over the last five years, with smaller things, care work.
Speaker Change: and the purchase of silver by Metalsa in 2020, it was also a somewhat depressive silver purchase.
Speaker Change: Can you tell us about Mexico in particular? I believe Doug Ford came out this morning saying it might be about improving the agreement between the United States and Canada.
Speaker Change: if Mexico does not move forward with consistent policies. Can you talk to us about the importance of Mexico at the moment in the purchasing base and if it would be confusing if actions were taken on Mexico?
Well, yes sir, thank you.
There is no question that...
Speaker Change: What Doug says is, I think, correct. I did not put words in his mouth, but...
Speaker Change: But in essence, the discussion, and it comes from the Trump campaign, but Robert Lighthizer was clear about this. He was the trade negotiator for the United States. We worked with him. We also worked with...
Speaker Change: Christia Freeland and her team in Canada, and the Mexicans too. We had a great presence, and we were involved in all of this. And it was very clear that, listen,
Speaker Change: We are either with the United States on fundamental issues of trade, particularly with China, or we consider ourselves to be outside the camp.
and of stone, in fact, in our plant.
Speaker Change: And we believe that we must align with the United States from an economic point of view.
Speaker Change: in North America in order to support and improve the USMCA. So, Canada got on board. Of course, Mexico has a brand new government. The president was inaugurated a month ago.
Speaker Change: and they are in the process of solving these problems. And of course, we have a new president of the United States as of a week ago.
or president-elect in the United States.
Speaker Change: They also go through these questions. We support the fact that Mexico must be consistent in its approach to the Chinese OEM and suppliers, with the United States and with Canada, because Canada and the United States are basically aligned.
and like someone who has a lot of...
Speaker Change: There are a lot of plants in Mexico, and we have a lot of discussions with them too, and I think they are favorable to follow this. There will be rhetoric and so on, but in my opinion, with a Mexican mask or a Mexican sombrero, it is certainly in Mexico's interest to align with the United States on this issue.
Speaker Change: It's very important for their industry. Their most important industry, by the way, is the automobile industry. And they want to take care of their people. They need to be informed.
OK, thank you.
Thank you. Thank you, Michael.
Speaker Change: Thank you. There are no other questions recorded at this time. So, Mr. Wildeboer, I will send you the recording. Oops, someone has recorded themselves. Oh, my God. So, we received it.
Excellent. Brian Morrison from TD, please go ahead.
Yes, sorry, I feel like I'm late. Can you explain to me...
Speaker Change: on the tax and how it works with the depreciation of the Mexican peso and what you think your affected tax is currently. I looked several years earlier, and it's a tax rate of less than 20% and you point to an affected tax rate of 31%.
Speaker Change: Right. So, Brian, thank you for the question. It's a complex matter. So, let's try to simplify here a little bit. It's very complex. So, when the peso depreciates, right, as it has rapidly here, especially between the second and the third quarter, there's an increase in our tax expense.
Speaker Change: So when the tax expense is increased, that lowers our net income.
Speaker Change: which affect the income per share. In terms of appreciation, we would have a decrease in this tax cost, improving our net income and, subsequently, the EPS.
Speaker Change: The movement of foreign exchange of Pesos, I think it's the subject of proof, but if you look at the current rise, it's from 20.4 to 20.45, so it's quite high.
Speaker Change: With, let's say, geopolitics in Mexico, the uncertainty around their judicial system is probably high, but as we mentioned, it is very difficult to forecast accurately. That said,
Speaker Change: based on the movement of a 1.3% of the USD to the 1.4% increase in the current exchange price.
Speaker Change: Ok, and then as we look forward to next year? Straight line and 30% of the way to this point in the timeline?
Speaker Change: Yes, I think that in the future, it's more, let's say, a realistic rate, reflecting our company and our operations. Yes, Brian. Okay, I don't want to talk about the tax. Brian, just a note, these flows are non-cash and tend to diminish over time, don't they?
Speaker Change: What I like to characterize as counting noise is that there is no substance.
I understand, thank you. I don't want to talk about taxes.
Speaker Change: Can you elaborate on this? I don't know if you did it during the script, but you certainly pressed it at the end. What is this acquisition you made in terms of content and in terms of the magnitude of the acquisition? How big is it?
Speaker Change: It's a small acquisition. It is now a tier 2, so we are integrating it vertically.
It's...
Speaker Change #100: It's a unique, high-quality product, and it feels good to have it as part of our team.
Speaker Change #101: It's part of our product offering inside. It's a two-year process to complete the purchase. Yes, it's important to know that this thing is outside. It doesn't stop for 2 to 2.5 years. It's for state planning purposes on the seller's side.
Speaker Change #101: But it is, from our point of view, the use of capital allocation. So, in the context we are talking about, we invest in our business first. So, we have secured a vendor, we have also allocated a certain amount to CapEx, we have paid our dividend, we have made a lot of purchases, we have paid accounts.
Speaker Change #102: The other important point is that it is a very competitive region in Europe. We therefore have advantages in this regard, but we will talk about it later.
Speaker Change #103: And my last question, if I understood correctly, you said that in the first half of 2025, you hope your margin will be similar to the first half of 2024, is that true?
Speaker Change #104: Yeah, we said better than the second half. Better than the second half.
I imagine that you will succeed.
Speaker Change #105: OK. So, looking at the year 2025, we should think about some kind of anniversary similar to what we experienced this year.
If you look at our year-to-date,
Speaker Change #106: Do you have margins at this time? Do we enter at 25 or 25? Something similar? It depends on the scale of the volumes. Yes, we'll see how the year ends. We will have that.
of the year 2020-2024.
Speaker Change #106: As expected, I was saying that in March it was not going to be as good from a revenue or market perspective as the first half of the year.
Speaker Change #107: And it is proven to be correct. We think we will see a rebound next year, from the second half of this year, and we will be more specific about our direction plan.
Marks.
Speaker Change #108: And is it simply a function of volume or do you also have a lot of efficiency and perhaps commercial repairs? What are the drivers of that?
Volume was the main driver.
Speaker Change #108: We talked about our MLS activities, so it's a taxpayer too.
Speaker Change #109: So we are looking at opportunities to reduce their costs and so on, and even to ensure that there are no failures. And commercially, the activity can... I was talking about the negative effect. The detrimental, that's what it's called. It's a combination of all these things. And there may be opportunities for support next year as well.
Speaker Change #110: There is another company that received a call recently.
I understand. Thank you very much, John.
Thank you.
Speaker Change #111: So, there are no other questions recorded at this time, Mr. Wildeboer. I return the session to you.
Speaker Change #111: Thank you very much for the testimony and the questions. If you have any other questions or if you wish to discuss other topics concerning Mark Moriarty, do not hesitate to contact Neil or any of us at the press address. Thank you and have a good evening.
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