Martinrea International Inc. Reports Record Third Quarter Earnings, Strong Margin Improvement and Announces Dividend

TORONTO, ONTARIO–(Marketwired – Nov. 14, 2017) – Martinrea International Inc. (TSX:MRE), a leader in the development and production of quality metal parts, assemblies and modules and fluid management systems and complex aluminum products focused primarily on the automotive sector, announced today the release of its financial results for the third quarter ended September 30, 2017 and a quarterly dividend.

HIGHLIGHTS

  • Twelfth consecutive quarter with record year-over-year adjusted earnings; best third quarterly earnings to date
  • Production sales of $800 million
  • Record third quarter adjusted net income of $36.3 million, or $0.42 per share
  • Record third quarter adjusted EBITDA of $92.4 million
  • Quarterly adjusted operating income (6.2%) and adjusted EBITDA (11.0%) margins increase substantially year-over-year
  • Continued strong margin growth anticipated over next three years
  • Net debt decreases; balance sheet continues to strengthen
  • Dividend of $0.03 per share announced

OVERVIEW

Pat D'Eramo, Martinrea President and Chief Executive Officer, stated: “Martinrea continued to perform well in the third quarter. Our Martinrea 2.0 strategy is achieving results and our focus on operational excellence, cost reduction, good launches, and improving our product offerings to customers is taking hold. Our margin improvement plan continues to be on track and our leverage ratio continues to improve. Our objectives for the year are clearly being achieved, regardless of market conditions. This is now our twelfth quarter in a row with record year-over-year adjusted earnings and we expect that progress to continue in the fourth quarter. We expect fourth quarter sales, excluding tooling sales, of $790 million to $830 million, and adjusted net earnings per share in the range of $0.45 to $0.49 per share, which would be our best fourth quarter ever from a financial perspective. I am also pleased to announce $70 million of annualized new business wins in the quarter, since our last call, including $20 million of aluminum structural components with Jaguar Land Rover, including a new battery housing, starting in 2020; $20 million of aluminum structural work for BMW starting in 2020; $20 million of steel metal forming work on GM's large SUV platform starting in 2020; and $10 million of fluids management systems work for FCA on the Dodge Ram platform starting in 2018. These new business wins are a testimony to our competitiveness and our ability to lower our cost. In addition, our quoting today is robust, particularly in our aluminum business, and we are excited about opportunities we see in the pipeline. We expect to announce significant incremental work in the coming quarters.”

Fred Di Tosto, Martinrea's Chief Financial Officer, stated: “Sales for the third quarter, excluding tooling sales of approximately $39 million, were $800 million, slightly lower than previously announced sales guidance as a result of losing two weeks of sales on the GM Equinox program due to the strike at CAMI, which ended in mid-October. In the quarter, our adjusted net earnings per share, on a basic and diluted basis, was $0.42 per share, at the midpoint of our quarterly guidance and a record third quarter. Earnings were negatively affected by the CAMI strike, which shut down production in two of our plants. Third quarter adjusted operating income and adjusted EBITDA margins improved significantly year-over-year. We continue to expect operating margins to be over 6% for 2017; based on our Q4 guidance we are essentially there. Our net debt to adjusted EBITDA ratio ended the quarter at 1.59x, a nice improvement from the end of the previous quarter and this time last year, as we continue to move towards our target ratio of 1.5x by the end of 2017. Overall, we had a very solid quarter from a financial perspective, once again. Our financial position is strong, our balance sheet is solid, and both are improving.”

Rob Wildeboer, Executive Chairman, stated: “We continue to drive our One Company culture and Martinrea 2.0 strategy as we continuously improve our business. Our Vision, Mission and Ten Guiding Principles are living things and are at the core of our improving financials. The future looks great, and we are now anticipating that our margin improvement over the next three years will accelerate from the past three years. We have been saying publicly that our operating margins will continue to increase subsequent to 2017, reaching 8% by fiscal 2020. Based on our updated budgets just reviewed and approved by our board of directors, which take into consideration current FX rates and industry production estimates, and our anticipated book of business, we now believe we can reach that threshold a year early, by fiscal 2019, and that operating margins can be 9% or more by fiscal 2020, a greater than 50% improvement from where we are today. Next year we expect to see double digit growth in adjusted net earnings, and another record year. All this in a relatively flat automotive sales environment, and a real testament to the performance of our team, which is driving our success. As for sales, we anticipate they will be flattish next year, given anticipated timing of new launches and a full year impact of the module assembly sales in our Ingersoll plant moving to a Value Added model, but believe sales will start to increase in 2019 and grow to over $4 billion in 2020, based on our budgets.”

RESULTS OF OPERATIONS

Results of operations may include certain unusual and other items which have been separately disclosed, where appropriate, in order to provide a clear assessment of the underlying Company results. In addition to IFRS measures, management uses non-IFRS measures in the Company's disclosures that it believes provide the most appropriate basis on which to evaluate the Company's results.

All amounts in this press release are in Canadian dollars, unless otherwise stated; and all tabular amounts are in thousands of Canadian dollars, except earnings per share and number of shares.

Additional information about the Company, including the Company's Management Discussion and Analysis of Operating Results and Financial Position for the third quarter ended September 30, 2017 (“MD&A”), the Company's interim condensed consolidated financial statements for the third quarter ended September 30, 2017 (the “interim consolidated financial statements) and the Company's Annual Information Form for the year ended December 31, 2016, can be found at www.sedar.com.

OVERALL RESULTS

The following tables set out certain highlights of the Company's performance for the three and nine months ended September 30, 2017 and 2016. Refer to the Company's interim consolidated financial statements for the three and nine months ended September 30, 2017 for a detailed account of the Company's performance for the periods presented in the tables below.

Three months ended September 30, 2017 Three months ended September 30, 2016 $ Change % Change
Sales $ 838,535 $ 914,725 (76,190 ) (8.3 %)
Gross Margin 113,418 99,698 13,720 13.8 %
Operating Income 50,106 43,394 6,712 15.5 %
Net Income for the period 36,022 28,827 7,195 25.0 %
Net Income Attributable to Equity Holders of the Company $ 36,229 $ 29,098 7,131 24.5 %
Net Earnings per Share – Basic and Diluted $ 0.42 $ 0.34 0.08 23.5 %
Non-IFRS Measures*
Adjusted Operating Income $ 51,873 $ 43,394 8,479 19.5 %
% of sales 6.2 % 4.7 %
Adjusted EBITDA 92,409 80,614 11,795 14.6 %
% of sales 11.0 % 8.8 %
Adjusted Net Income Attributable to Equity Holders of the Company 36,263 29,098 7,165 24.6 %
Adjusted Net Earnings per Share – Basic and Diluted $ 0.42 $ 0.34 0.08 23.5 %
Nine months ended September 30, 2017 Nine months ended September 30, 2016 $ Change % Change
Sales $ 2,811,857 $ 2,978,000 (166,143 ) (5.6 %)
Gross Margin 360,559 327,738 32,821 10.0 %
Operating Income 179,097 113,468 65,629 57.8 %
Net Income for the period 126,900 61,331 65,569 106.9 %
Net Income Attributable to Equity Holders of the Company $ 127,177 $ 61,627 65,550 106.4 %
Net Earnings per Share – Basic and Diluted $ 1.47 $ 0.71 0.76 107.1 %
Non-IFRS Measures*
Adjusted Operating Income $ 175,166 $ 151,731 23,435 15.4 %
% of sales 6.2 % 5.1 %
Adjusted EBITDA 295,663 264,285 31,378 11.9 %
% of sales 10.5 % 8.9 %
Adjusted Net Income Attributable to Equity Holders of the Company 122,340 99,332 23,008 23.2 %
Adjusted Net Earnings per Share – Basic and Diluted $ 1.41 $ 1.15 0.26 22.6 %

*Non-IFRS Measures

The Company prepares its financial statements in accordance with International Financial Reporting Standards (“IFRS”). However, the Company considers certain non-IFRS financial measures as useful additional information in measuring the financial performance and condition of the Company. These measures, which the Company believes are widely used by investors, securities analysts and other interested parties in evaluating the Company's performance, do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to financial measures determined in accordance with IFRS. Non-IFRS measures include “Adjusted Net Income”, “Adjusted Net Earnings per Share (on a basic and diluted basis)”, “Adjusted Operating Income” and “Adjusted EBITDA”.

The following tables provide a reconciliation of IFRS “Net Income Attributable to Equity Holders of the Company” to Non-IFRS “Adjusted Net Income Attributable to Equity Holders of the Company”, “Adjusted Operating Income” and “Adjusted EBITDA”:

Three months ended September 30, 2017 Three months ended September 30, 2016
Net Income Attributable to Equity Holders of the Company $ 36,229 $ 29,098
Unusual and Other Items (after-tax)* 34
Adjusted Net Income Attributable to Equity Holders of the Company $ 36,263 $ 29,098
Nine months ended September 30, 2017 Nine months ended September 30, 2016
Net Income Attributable to Equity Holders of the Company $ 127,177 $ 61,627
Unusual and Other Items (after-tax)* (4,837 ) 37,705
Adjusted Net Income Attributable to Equity Holders of the Company $ 122,340 $ 99,332
*Unusual and other items for the three and nine months ended September 30, 2017 and 2016 are explained in the “Adjustments to Net Income” section of this press release
Three months ended September 30, 2017 Three months ended September 30, 2016
Net Income Attributable to Equity Holders of the Company $ 36,229 $ 29,098
Non-controlling interest (207 ) (271 )
Income tax expense 10,348 9,319
Other finance income – excluding Unusual and Other Items* (340 ) (770 )
Finance expense 5,451 6,018
Unusual and Other Items (before-tax)* 392
Adjusted Operating Income $ 51,873 $ 43,394
Depreciation of property, plant and equipment 36,873 33,500
Amortization of intangible assets 3,897 3,673
Loss/(gain) on disposal of property, plant and equipment (234 ) 47
Adjusted EBITDA $ 92,409 $ 80,614
Nine months ended September 30, 2017 Nine months ended September 30, 2016
Net Income Attributable to Equity Holders of the Company $ 127,177 $ 61,627
Non-controlling interest (277 ) (296 )
Income tax expense 37,863 31,455
Other finance expense (income) – excluding Unusual and Other Items* (1,083 ) 2,570
Finance expense 16,792 18,112
Unusual and Other Items (before-tax)* (5,306 ) 38,263
Adjusted Operating Income $ 175,166 $ 151,731
Depreciation of property, plant and equipment 109,401 100,723
Amortization of intangible assets 11,623 11,755
Loss/(gain) on disposal of property, plant and equipment (527 ) 76
Adjusted EBITDA $ 295,663 $ 264,285
*Unusual and other items for the three and nine months ended September 30, 2017 and 2016 are explained in the “Adjustments to Net Income” section of this press release

The year-over-year changes in significant accounts and financial highlights are discussed in detail in the sections below. Certain comparative information has been reclassified where relevant to conform to the current financial statement presentation adopted in 2017.

SALES
Three months ended September 30, 2017 to three months ended September 30, 2016 comparison
Three months ended September 30, 2017 Three months ended September 30, 2016 $ Change % Change
North America $ 646,895 $ 737,127 (90,232 ) (12.2 %)
Europe 165,140 152,080 13,060 8.6 %
Rest of the World 30,319 27,721 2,598 9.4 %
Eliminations (3,819 ) (2,203 ) (1,616 ) (73.4 %)
Total Sales $ 838,535 $ 914,725 (76,190 ) (8.3 %)

The Company's consolidated sales for the third quarter of 2017 decreased by $76.2 million or 8.3% to $838.5 million as compared to $914.7 million for the third quarter of 2016. The total decrease in sales was driven by a decrease in the North America operating segment, partially offset by year-over-year increases in sales in Europe and the Rest of the World.

Sales for the third quarter of 2017 in the Company's North America operating segment decreased by $90.2 million or 12.2% to $646.9 million from $737.1 million for the third quarter of 2016. The decrease was due to the impact of foreign exchange on the translation of U.S. denominated production sales, which had a negative impact on overall sales for the third quarter of 2017 of approximately $4.9 million as compared to the third quarter of 2016; and lower year-over-year OEM production volumes on certain light-vehicle platforms including the Ford Fusion, Chevrolet Malibu, and other platforms late in their life cycle, and programs that ended production during or subsequent to the third quarter of 2016 such as the previous version of the GM Equinox/Terrain. These negative factors were partially offset by a $2.2 million increase in tooling sales, which are typically dependent on the timing of tooling construction and final acceptance by the customer; higher year-over-year production volumes on certain light vehicle platforms such as the Ford Escape; and the launch of new programs during or subsequent to the third quarter of 2016 including the GM Bolt and next generation GM Equinox/Terrain, third quarter production volumes of which were impacted by an employee strike at GM's assembly plant in Ingersoll, Ontario.

Sales for the third quarter of 2017 in the Company's Europe operating segment increased by $13.0 million or 8.6% to $165.1 million from $152.1 million for the third quarter of 2016. The increase can be attributed to a $3.4 million positive foreign exchange impact from the translation of Euro denominated production sales as compared to the third quarter of 2016, and higher overall production volumes in the Company's Martinrea Honsel German operations including the ramp up of the new V8 AMG engine block for Daimler. These positive factors were partially offset by a $1.6 million decrease in tooling sales.

Sales for the third quarter of 2017 in the Company's Rest of the World operating segment increased by $2.6 million or 9.4% to $30.3 million from $27.7 million in the third quarter of 2016. The increase was due to higher year-over-year production sales in the Company's operating facility in Brazil; partially offset by a $0.3 million negative foreign exchange impact from the translation of foreign denominated production sales as compared to the third quarter of 2016 and a $0.2 million decrease in tooling sales.

Overall tooling sales increased by $0.4 million to $38.6 million for the third quarter of 2017 from $38.2 million for the third quarter of 2016.

Nine months ended September 30, 2017 to nine months ended September 30, 2016 comparison
Nine months ended September 30, 2017 Nine months ended September 30, 2016 $ Change % Change
North America $ 2,238,933 $ 2,417,956 (179,023 ) (7.4 %)
Europe 493,080 484,313 8,767 1.8 %
Rest of the World 90,163 84,826 5,337 6.3 %
Eliminations (10,319 ) (9,095 ) (1,224 ) (13.5 )
Total Sales $ 2,811,857 $ 2,978,000 (166,143 ) (5.6 %)

The Company's consolidated sales for the nine months ended September 30, 2017 decreased by $166.1 million or 5.6% to $2,811.9 million as compared to $2,978.0 million for the nine months ended September 30, 2016. The total decrease in sales was driven by a decrease in the Company's North America operating segment, partially offset by year-over-year increases in sales in Europe and the Rest of the World.

Sales for the nine months ended September 30, 2017 in the Company's North America operating segment decreased by $179.0 million or 7.4% to $2,238.9 million from $2,418.0 million for the nine months ended September 30, 2016. The decrease was due to the impact of foreign exchange on the translation of U.S. denominated production sales, which had a negative impact on overall sales for the nine months ended September 30, 2017 of approximately $14.7 million as compared to the comparative period of 2016; and lower year-over-year OEM production volumes on certain light-vehicle platforms including the Chrysler 200, customer production of which ended at the end of 2016, Ford Fusion, Chevrolet Malibu, and other platforms late in their product life cycle, and programs that ended production during or subsequent to the nine months ended September 30, 2016 such as the previous version of the GM Equinox/Terrain. These negative factors were partially offset by a year-over-year increase in tooling sales of $3.9 million; an increase in production volumes on the Chrysler V6 Pentastar engine block program which was down during the first quarter of 2016 for re-tooling; higher year-over-year volumes on certain light vehicle platforms such as the Ford Escape, GM Pick-up truck/SUV platform and other GM programs previously impacted by unplanned OEM shutdowns during the second quarter of 2016 because of an earthquake in Japan which disrupted the supply chain; and the launch of new programs during or subsequent to the nine months ended September 30, 2016 including the GM Bolt and next generation GM Equinox/Terrain, third quarter production volumes of which were impacted by an employee strike at GM's assembly plant in Ingersoll, Ontario.

Sales for the nine months ended September 30, 2017 in the Company's Europe operating segment increased by $8.8 million or 1.8% to $493.1 million from $484.3 million for the nine months ended September 30, 2016. The increase can be attributed to higher production volumes in the Company's Martinrea Honsel German operations including the ramp up of the new V8 AMG engine block for Daimler, and a $1.6 million increase in tooling sales; partially offset by the impact of foreign exchange on the translation of Euro denominated production sales, which had a negative impact on overall sales for the nine months ended September 30, 2017 of approximately $9.0 million as compared to the comparative period of 2016.

Sales for the nine months ended September 30, 2017 in the Company's Rest of the World operating segment increased by $5.4 million or 6.3% to $90.2 million from $84.8 million for the nine months ended September 30, 2016. The increase was mainly due to a year-over-year increase in production sales in the Company's operations in China due in large part to a year-over-year increase in production volumes on one of its key platforms which was down for seven weeks during the second quarter of 2016 as a result of an unplanned OEM shutdown; higher year-over-year production sales in the Company's operating facility in Brazil; and a $0.6 million positive foreign exchange impact from the translation of foreign denominated production sales as compared to the nine months ended September 30, 2016. These positive factors were partially offset by a $9.1 million decrease in tooling sales.

Overall tooling sales decreased by $3.6 million to $142.1 million for the nine months ended September 30, 2017 from $145.7 million for the nine months ended September 30, 2016.

GROSS MARGIN
Three months ended September 30, 2017 to three months ended September 30, 2016 comparison
Three months ended September 30, 2017 Three months ended September 30, 2016 $ Change % Change
Gross margin $ 113,418 $ 99,698 13,720 13.8 %
% of sales 13.5 % 10.9 %

The gross margin percentage for the third quarter of 2017 of 13.5% increased as a percentage of sales by 2.6% as compared to the gross margin percentage for the third quarter of 2016 of 10.9%. The increase in gross margin as a percentage of sales was generally due to:

  • productivity and efficiency improvements at certain operating facilities; and
  • general sales mix including new and replacement programs that launched, and old programs that ended production, during or subsequent to the third quarter of 2016.

These positive factors were partially offset by operational inefficiencies and other costs at certain other facilities including upfront costs incurred in the Company's China operations in preparation of upcoming new programs.

Nine months ended September 30, 2017 to nine months ended September 30, 2016 comparison
Nine months ended September 30, 2017 Nine months ended September 30, 2016 $ Change % Change
Gross margin $ 360,559 $ 327,738 32,821 10.0 %
% of sales 12.8 % 11.0 %

The gross margin percentage for the nine months ended September 30, 2017 of 12.8% increased as a percentage of sales by 1.8% as compared to the gross margin percentage for the nine months ended September 30, 2016 of 11.0%. The increase in gross margin as a percentage of sales was generally due to:

  • productivity and efficiency improvements at certain operating facilities;
  • general sales mix including new and replacement programs that launched, and old programs that ended production, during or subsequent to the nine months ended September 30, 2016; and
  • a slight decrease in tooling sales which typically earn low or no margins for the Company.

These positive factors were partially offset by operational inefficiencies and other costs at certain other facilities including upfront costs incurred in the Company's China operations in preparation of upcoming new programs.

ADJUSTMENTS TO NET INCOME

(ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY)

Adjusted Net Income excludes certain unusual and other items, as set out in the following tables and described in the notes thereto. Management uses Adjusted Net Income as a measurement of operating performance of the Company and believes that, in conjunction with IFRS measures, it provides useful information about the financial performance and condition of the Company.

TABLE A
Three months ended September 30, 2017 to three months ended September 30, 2016 comparison
For the three months ended For the three months ended
September 30, 2017 September 30, 2016 (a)-(b)
(a) (b) Change
NET INCOME (A) $36,229 $29,098 $7,131
Add Back – Unusual and Other Items:
Executive separation agreement (1) 1,767 1,767
Unrealized gain on derivative instruments (2) (1,375 ) (1,375 )
TOTAL UNUSUAL AND OTHER ITEMS BEFORE TAX 392 $392
Tax impact of above items (358 ) (358 )
TOTAL UNUSUAL AND OTHER ITEMS – AFTER TAX (B) 34 $34
ADJUSTED NET INCOME (A + B) $36,263 $29,098 $7,165
Number of Shares Outstanding – Basic ('000) 86,512 86,385
Adjusted Basic Net Earnings Per Share $0.42 $0.34
Number of Shares Outstanding – Diluted ('000) 86,794 86,507
Adjusted Diluted Net Earnings Per Share $0.42 $0.34
TABLE B
Nine months ended September 30, 2017 to nine months ended September 30, 2016 comparison
For the nine months ended For the nine months ended
September 30, 2017 September 30, 2016 (a)-(b)
(a) (b) Change
NET INCOME (A) $127,177 $61,627 $65,550
Add Back – Unusual and Other Items:
Executive separation agreement (1) 1,767 1,767
Unrealized gain on derivative instruments (2) (1,375 ) (1,375 )
Gain on sale of land and building (3) (5,698 ) (5,698 )
Impairment of assets (4) 34,579 (34,579 )
Restructuring costs (5) 3,684 (3,684 )
TOTAL UNUSUAL AND OTHER ITEMS BEFORE TAX ($5,306 ) $38,263 ($43,569 )
Tax impact of above items (6) 469 (558 ) 1,027
TOTAL UNUSUAL AND OTHER ITEMS – AFTER TAX (B) ($4,837 ) $37,705 ($42,542 )
ADJUSTED NET INCOME (A + B) $122,340 $99,332 $23,008
Number of Shares Outstanding – Basic ('000) 86,505 86,385
Adjusted Basic Net Earnings Per Share $1.41 $1.15
Number of Shares Outstanding – Diluted ('000) 86,739 86,570
Adjusted Diluted Net Earnings Per Share $1.41 $1.15

(1) Executive separation agreement

During the third quarter of 2017, David Rashid ceased to be an Executive Vice President of Operations of the Company. The costs added back for Adjusted Net Income purposes represents Mr. Rashid's termination benefits (included in SG&A expense) as set out in his employment contract payable over a twelve-month period.

(2) Unrealized gain on derivative instruments

In the third quarter, the Company acquired 5.5 million common shares in NanoXplore Inc. (“NanoXplore”), a publicly listed company on the TSX Venture Exchange trading under the ticker symbol GRA, for a total of $2.5 millio

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About the Author: Carrie Brunner

Carrie Brunner grew up in a small town in northern New Brunswick. She studied chemistry in college, graduated, and married her husband one month later. They were then blessed with two baby boys within the first four years of marriage. Having babies gave their family a desire to return to the old paths – to nourish their family with traditional, homegrown foods; rid their home of toxic chemicals and petroleum products; and give their boys a chance to know a simple, sustainable way of life. They are currently building a homestead from scratch on two little acres in central Texas. There’s a lot to be done to become somewhat self-sufficient, but they are debt-free and get to spend their days living this simple, good life together with their five young children. Carrie writes mostly on provincial stories.
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