Martinrea International Q3 2026 Earnings Call Transcript
Martinrea International (TSX:MRE) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Martinrea International reports improved financial performance in Q3 2026, with adjusted operating income margin at 5.6%, up from the previous year, despite a 5% decline in production sales.
Strategic focus on simplifying the portfolio, strengthening the balance sheet, and redirecting capital towards high-return opportunities in North America and industrial markets like defense.
Significant new business awards worth $160 million in annualized sales from major clients including Ford, Mercedes, and Raytheon, indicating strong growth in both automotive and non-automotive sectors.
The company is exiting underperforming operations in high-risk regions, completing divestitures in China and Brazil to focus on core North American operations.
Management emphasizes ongoing restructuring efforts in Europe to achieve a breakeven result by 2026, with further improvements expected in 2027.
Martinrea International expects to end 2026 with a net debt to EBITDA ratio below 1.5 and reaffirms its full-year guidance, predicting strong operational execution and free cash flow generation.
Full Transcript
OPERATOR
Good evening, ladies and gentlemen. Welcome to the Martinrea International Third 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)
Good evening, everyone. Thank you for joining today. We always look forward to talking to our shareholders, updating you on our business and 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 this evening 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 third quarter ended September 30, 2026. I refer you to our usual disclaimer in our press release and our filed documents. On this call I will discuss operations, outline some key highlights for the quarter and talk about the strategic initiatives we are working on, including True North Kaizen and broader opportunities in defense.
Fred will provide an overview of our operating segments and highlight some new business wins and growth opportunities. Peter will discuss the Q3 results and 2026 outlook, and I will conclude with some comments on trade, geopolitics and capital allocation. Our Q3 results demonstrate that operational improvements and cost discipline are offsetting lower industry volumes and cost pressures. At the same time, we are simplifying the portfolio, strengthening the balance sheet and directing capital toward higher-return opportunities in North America, industrial markets and defense. To kick things off, here’s Pat.
Pat D’Eramo (Chief Executive Officer)
Thanks, Rob. Good evening, everyone. On the last call I laid out some key priorities as part of our three-year strategy. As a reminder, these include growing our business, both automotive and non-automotive, focusing on margins and free cash flow, 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, and lastly, ensuring our investments are successful. We are seeing meaningful growth in both our core automotive business and our non-automotive end markets—the highest activity we’ve seen in years. As a matter of fact, in automotive we are growing with both our North American customers as well as our European and Asian OEMs. We are seeing opportunities from program extensions and takeover work from financially troubled or underperforming suppliers, as well as from OEMs localizing or onshoring production to North America.
Outside of automotive, we’re off to a great start with True North Kaizen, and we are experiencing strong growth in our industrial business. For True North, we announced last quarter that we won a contract with Raytheon worth $7 million to help improve throughput on the Tomahawk cruise missile. We’re happy to note that that purchase order has increased by another $5 million, driven by the strong results of our work to date. We are assisting Raytheon to increase throughput of these missiles by working alongside their team, applying our proven lean principles, processes and tools to enhance manufacturing performance.
The collaboration will streamline manufacturing flow, line design and production processes to improve efficiency, shorten lead times and help scale production to meet requirements of the U.S. Department of Defense. We have had a lot of success helping Raytheon improve efficiency in this short period of time, clearly demonstrating our strength in how we approach operations. This success is expected to lead to more business opportunities for True North.
This is a higher-margin business that has significant room for growth and doesn’t require capital investment. We believe that over time the relationships we forge through True North could lead to opportunities to participate as a Tier One for the defense primes. This could include organic business opportunities for our plants as well as an acquisition of a supplier company operating in the defense supply chain. To facilitate this, we’ve put a formal structure in place: True North Aerospace and Defense USA, a wholly owned Delaware corporation.
In industrial, we are seeing a high level of business awards with sales expected to more than double over the next couple of years. This growth is being driven by expanding sales with our existing non-automotive customer base as well as diversifying into new sectors including power generation and storage for data centers and defense. This is a testament to our ability to leverage our experience and skill in manufacturing and apply them to new opportunities in higher-growth verticals.
We’re only scratching the surface, and we’re excited at what lies ahead. We’re pursuing this growth in a prudent and profitable manner with a focus on margins and returns. We are managing costs, driving operational excellence through the Martinrea Operating System while scaling machine-learning installations throughout our plant network. I mentioned on the last call that we will be intensifying plant-specific performance targets and consolidating or exiting underperforming operations. With that in mind, we made several notable divestitures in the Rest of the World segment. Peter will elaborate on those divestitures in his remarks. We are also planning a significant restructuring activity in Europe, which Fred will speak to in his remarks. These actions will not only help to improve margins but will also allow us to redirect capital to higher-return opportunities in our core North American segment.
This should enable us to improve free cash flow. It is also consistent with our strategy of limiting our exposure and investment in higher-risk regions. Turning to the quarter, we were pleased with our Q3 results, which were better than our third quarter of last year. We improved in adjusted operating income and adjusted EBITDA, both on an absolute and a percentage-of-sales basis. Overall, we continue to improve our operations, which are offsetting current industry dynamics, enabling us to generate good operating margins. Based on our performance year to date, we remain on track to meet our full-year 2026 outlook.
Peter will elaborate on our financial results and the outlook later on the call. With that, I’d like to end by thanking the Martinrea team for all their hard work and ongoing commitment to make this business better every day. Now here’s Fred.
Fred Di Tosto (President)
Thanks, Pat. Good evening, everyone. As our third quarter results demonstrate, we continue to perform. We’re doing well, managing what’s in our control and pursuing growth opportunities in a prudent and profitable manner with an uncompromising focus on return on investment. Turning to our segments, starting with North America, Q3 adjusted operating income margin came in at 7.1%, 20 basis points higher than the 6.9% margin of Q3 of last year on production sales that were down about 5%, demonstrating effective cost control and strong operational execution. We continue to consistently perform at a high level in North America, our main growth engine where we generate more than three quarters of our business.
Europe recorded a positive operating income, $1.2 million in Q3, which compared to approximately breakeven in Q3 of last year and a $7.5 million operating loss in Q2 of this year. While this represents a nice improvement quarter to quarter, we have a lot of work to do to restore the segment to an acceptable level of profitability, which we believe should be closer to the mid–single-digit adjusted operating income margin range. The circumstances in Europe overall reflect a volume environment that remains well below expectations.
That’s the reality, and we know we can’t simply hide behind it and hope for better days ahead. We must take decisive action. As we’ve indicated before, we need to maintain a presence in Europe to support our customers globally and to win business with German OEMs in both Europe and North America. As such, we are not contemplating an exit from the region. That said, we’re in the business to make money and generate returns that exceed the cost of capital.
That isn’t the case in Europe today, and that needs to change. It’s become apparent to us that bigger changes are needed than what we were previously contemplating. We are therefore planning deep restructuring activity for Europe. Our immediate objective remains a breakeven result for Europe in 2026, which we expect to achieve subject to obtaining expected volume-related recoveries from our customers, which we expect to complete before the end of the year.
From there, the restructuring measures under development are intended to establish a more competitive cost base and support a meaningful improvement in 2027. These actions are expected to include workforce reductions, centralization of certain administrative activities, vertical integration opportunities and a review of underperforming operations. With these measures, we are anticipating financial results in Europe to be better in 2027 and beyond.
Moving on, we saw an adjusted operating loss of approximately $1 million in our Rest of the World segment, reflecting the flow-through impact of lower production sales as well as the lost contribution from some recently completed divestitures. These divestitures include an 85% equity stake in our fluids plant in China, which closed in Q2, and 100% of our aluminum plant in Brazil, which closed during the third quarter. We also reached an agreement to sell a 95% equity stake in our aluminum plant in China, which was our last remaining plant in the region.
This transaction closed subsequent to the quarter. Peter will walk through these and other divestitures, including timing of cash proceeds and financial impact, in his remarks. With these divestitures, we have mostly exited the operations in the regions that comprise our Rest of the World segment, except for a minor operation in South Africa and minority interest positions we are retaining on the divested operations to ensure a smooth transition to the purchasers of these assets and to support our customers.
Now on to new business. I am pleased to announce that we have been awarded new business worth $160 million in annualized sales at mature volumes, consisting of approximately $95 million in various structural components in our Lightweight Structures Commercial Group with Ford, Mercedes and BMW; just under $10 million in our Propulsion and Systems Commercial Group with Stellantis; and approximately $55 million in our Flexible Manufacturing Group with Caterpillar, John Deere, Volvo Trucks, General Dynamics and General Motors.
This includes an award from Caterpillar with $50 million in annualized sales for energy storage units used in data centers starting early next year, and a smaller contract with General Dynamics to supply components for armored vehicles. We believe that both these markets represent good opportunities for us to apply our capabilities and drive growth in the business. We are really excited about the prospects here, and these new business awards are evidence we can play a meaningful part in these markets.
New business awards over the last 12 months total approximately $565 million in annualized sales at mature volumes, representing our highest level of award activity in several years. The awards span automotive, industrial, data center and defense applications, providing greater customer and end-market diversification. Quoting activity remains strong, although the timing and conversion of future awards will depend on customer decisions and market conditions.
I’ll end it there. Thanks for your time. I’ll now turn it over to Peter to discuss our financial results and outlook in more detail. Thanks, Brad, and good evening, everyone. On our last call I framed our results through the two lenses we use to evaluate how we run our business: how well we are operating and how effectively we are deploying capital. Each is a leading indicator of the value creation arc that we are on, and I’ll update you on both.
Operationally, the quarter played out largely as we expected, with our financial results up year over year and in line with the expected quarterly results profile that we spoke about on the last call. Adjusted operating income margin was 5.6%, 10 basis points higher than quarter three of last year, on production sales that were down about 5%. Our lean initiatives and commercial recoveries are offsetting lower volumes, particularly on EV programs, and elevated aluminum costs as we continue to progress towards our 2026 outlook.
On capital deployment, this was a defining quarter. On the last call we said we would limit our investment in regions where we lack scale or a competitive advantage. We have now acted on that. Since the beginning of the year, we have completed four transactions. In June we closed the sale of an 85% equity stake in our fluids plant in China for roughly $1 million. In August we sold our aluminum plant in Brazil for approximately $12 million. On a present value basis, about $5 million will be collected this year and the balance over the next three years.
The purchaser also assumed the historical Brazilian tax assessment contingency of approximately $38 million, disclosed in our year-end financial statements. On October 15th we closed the sale of a 95% equity stake in our aluminum plant in China, our last remaining manufacturing facility in the country, for approximately $50 million, subject to post-close working capital adjustments. Also on October 15th we sold our Shelbyville, Kentucky facility, which was idled after the Ford Escape program ended, for approximately $43 million, roughly three times its carrying value. $5.7 million was collected at closing and the balance is an interest-bearing note maturing in 2029. Putting it all together, these asset dispositions will generate approximately $107 million of consideration net of transaction costs, about $60 million of which we expect to collect this calendar year and the remainder being paid out over the next three years.
A word on the accounting, because it helps to explain the gap between reported and adjusted results. This quarter we recorded a loss of about $9 million on the disposal of foreign operations, primarily Brazil. That loss is primarily comprised of the recycling of cumulative currency translation losses that had built up in equity over the years. It is non-cash and it does not change total equity, and we have excluded it from the adjusted results. The cash proceeds will immediately be applied to reduce our debt.
Together with fourth quarter free cash flow, we expect to exit the year below our 1.5x leverage target while continuing to buy back stock at appropriate times under our normal course issuer bid. Overall, these transactions reallocate capital away from higher-risk jurisdictions toward growing our core North American base, which we believe offers higher-returning opportunities. Rob will say more about capital allocation in his remarks. Looking at the quarter three results in more detail, adjusted operating income of $66.7 million was up 2.6%. Production sales were down about 5%, largely reflecting the end of the Ford Escape program, partially offset by $15.8 million in sales from the Martinrea International Tulsa acquisition we made in quarter four of last year. Adjusted operating income margin came in at 5.6%, 10 basis points higher than the 5.5% margin we generated in quarter three of last year, as lower SG&A and continued operating improvements offset the flow-through of lower production sales.
It’s also important to note that tooling sales were relatively high compared to both quarter two and quarter three of last year. Assuming a similar level of tooling sales to quarter three last year, which were $31.6 million, our quarter three adjusted operating margin would have been approximately 5.9%, roughly 40 basis points higher year over year and consistent with our quarter 2 2026 performance, demonstrating that our underlying trajectory is intact.
We also continued to absorb higher aluminum costs. We began to see some recoveries in the quarter, and we expect the balance to come through as spot prices stabilize. Timing will be dependent on how the situation in Iran evolves. Adjusted EBITDA of $144.9 million was up 3.2% year over year, with margin 50 basis points higher, driven by the same factors I just described. Moving on, free cash flow before principal lease payments under IFRS 16 came in at $58.5 million, up from $44.5 million in quarter three of last year. Including principal lease payments, free cash flow of $42.9 million compared to $30.5 million in quarter three 2025. The improved year-over-year performance is largely a reflection of higher EBITDA and better working capital flows, partially offset by higher capex.
On the last call I said that the receivables build would reverse. Receivables were a $26 million source of cash this quarter. Overall, free cash flow is in line with our 2026 guidance range. Quarter three adjusted earnings per share came in at $0.52, equal to quarter three of last year. Reported EPS was $0.38, with the difference primarily the non-cash disposal on the sale of the Brazilian aluminum plant plus $2.4 million of restructuring costs. At the adjusted EPS level, a higher normalized effective tax rate of 29.6% versus 21.6% of a year ago, reflecting changes in the geographic mix of income and tax benefits in certain jurisdictions, was offset by lower SG&A and R&D and a $2.6 million reduction in finance expenses, as well as a share count that is about 4% lower than a year ago.
Turning to the balance sheet, net debt excluding IFRS 16 lease liabilities decreased by approximately $31 million over quarter two to $770 million, reflecting the free cash flow generation in the quarter. We did this while repurchasing approximately 941,000 shares under our normal course issuer bid for $9.3 million. Our net debt to adjusted EBITDA ratio ended the quarter at 1.56, which is down from 1.63 in quarter two. We expect net debt to fall below $700 million by the end of the year.
It’s clear that we have a strong balance sheet. We are reaffirming our 2026 outlook, which calls for total sales of $4.5 to $4.9 billion, an adjusted operating income margin of 5.5% to 6%, and free cash flow of $125 to $175 million, with approximately $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. The divestitures have an approximate $35 million impact on our 2026 full-year sales outlook.
Year to date, our adjusted operating income margin is 5.7%, within the range. The fourth quarter tends to carry some variability from tooling timing, customer seasonal holiday shutdowns, and commercial settlements. But 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 on all metrics. Our focus remains consistent execution and free cash flow generation through cycles based upon the elements of the business that are within our control, and that’s what we delivered in quarter three.
In the years since we have come out of the pandemic and related supply shortage challenges, we have grown the business, expanded margins, generated record free cash flow, and returned meaningful capital to our shareholders through share buybacks and dividends. We also simplified our footprint by exiting China and Brazil and monetized an idled asset in Shelbyville. We look forward to continuing on this value creation arc. With that, I now turn you back over to Rob.
Rob Wildeboer (Executive Chairman)
Thanks, Peter. At the start of every call, I often make the remark, we want you to see how we see the world. And so let me make just a few remarks on the world we live in and on capital allocation. In terms of geopolitics, the world is complex with many challenges but many opportunities. We believe as one of our core principles that challenges make us better. And they do. We also believe that with changes and uncertainty, there are opportunities for the nimble, the strategic and the talented. This world, no matter what is changing, needs people who make things well. It needs a strong industrial base. There’s a phrase I like that when the water is murky, that’s where you find the fish.
The geopolitical environment is contributing to greater regionalization of supply chains, increased domestic manufacturing investment, and a stronger focus on supply chain security. These trends reinforce our strategy of concentrating capital in markets where we have scale, strong customer relationships and sustainable competitive advantages. At the forefront of our thinking these days are the challenges of tariffs and trade policy. Will we have tariffs? How will they affect us? Where will we end up after the midterms in the US? Will we reach a better resolution or worse? Will we have a no tariff or low tariff America or not? In auto parts and assembly, what are the costs and benefits? These are real issues. The tariff cloud still hangs over us. In Canada, in auto assembly and to a much lesser extent, auto parts, these issues will not go away overnight or permanently, but we are dealing with them.
USMCA-compliant auto parts generally benefit from preferential tariff treatment, as you know, which helps limit our direct exposure. Although we continue to monitor potential indirect effects on customer volumes, commodity costs and supply chains, and where there are tariffs, we generally pass them on to limit exposure. Based on the policies currently in place and the configuration of our North American footprint, we believe the direct tariff impact remains manageable and I believe will continue to be.
We are also dealing with technology, with AI and deep learning generally in society, but also in how we make things, how we get more efficient and lower cost and improve competitiveness. How do we deal with or take advantage of neat new things such as graphene or aluminum-air batteries? Where do we invest our money? So in terms of capital allocation. How do we do that and how do we do that in the context of geopolitical, tariff and technological opportunities?
Here is our capital allocation framework and we believe it works well. To be successful in business, you have to invest in your business long term. Sustainability means you have to make money and be profitable. We are and buffer some bad quarters in 2020 in the pandemic and in 2008 and nine with the global financial crisis. We have been profitable on an adjusted operating income basis every quarter since inception. While over half of our major competitors have gone bankrupt at some point, our investment focus has resulted in us buying companies.
Sometimes we did that a lot in the earlier years or investing in the operations to make them better and more competitive for the long term, which we’ve been doing a lot lately. For example, in the past several months we installed a 3000-ton press in Salao and a 3500-ton press in Ridgetown, following big press builds in other places such as Hopkinsville, Kentucky. World-class leading-edge press lines that will run for decades. As good as any in the world. That’s investing in your business for the future. As Pat and Fred commented on in their remarks, we are quoting and winning a lot of business these days which will help sustain and grow our future.
Where have we been investing the most? In areas where we believe we are geopolitically advantaged. North America, Canada, the United States, Mexico. We do believe in a strong North America and our very strong position as a leading manufacturer here. At the same time for our Brazil and China operations, we concluded that the long-term risk-return profile of these operations was no longer as attractive as the opportunities available elsewhere in our portfolio.
We therefore chose to monetize the assets and redirect capital toward markets where we see stronger returns and strategic advantages. I stress that our people there, our workers, we love them, great people. We made arrangements that helped secure their future. We do maintain a small minority interest in our operations in China with partners that have been good to deal with. We also invest in technology, R&D and strategic investments, not just internally, but as a third-party strategic investor. We have a value investment. We bring operational expertise to the table. We get something special out of the relationship with graphene and NanoXplore, for example. We believe in the future of graphene — it’s going to go. And we have benefited from the relationship with some of our products using graphene and we are researching other ways to use it.
We have investments in aluminum-air battery technology and an AI company and some others also. And we are investing internally in some great technologies. You should visit our oilfield facility and we invite you to do so. The capabilities here nicely demonstrate how we are applying automation, machine learning and advanced manufacturing technology to improve plant performance. We call it Factory Engine. Our Prime Minister, our Premier and many of our leading politicians have visited the facility on multiple occasions.
They see the future of Canadian manufacturing. The geopolitical realities I outlined have led to increased investment in defence all over the world, but particularly in the US and Canada. As Pat noted, we are seeing great opportunities in defence and winning work. We are seeing the same thing with Canadian procurement initiatives. Our governments know the importance of a better supply chain and frankly the supply chains for military procurement are not presently being good. So they are looking to the auto supply base.
We will invest there where appropriate and this is a growth area. We believe you heard about our industrial growth. This is a big opportunity also. We will invest in that. We do anticipate that we may win quite a bit of new work as we did in 2019. If profitable, we will invest in it. Recall that in 2019 our revenue run rate was under 4 billion. We added about a billion in sales or so since then, most of it organically. 2026 has been a high quote year so far and let’s see what the next several months bring.
As you know, we want and need a strong balance sheet in this industry. It’s cyclical and it’s capital intensive in many areas. We have maintained that over the past several years. We’ve paid down debt that increased during the COVID period, in part because of the headwinds caused by the pandemic, in part because of industry overinvestment in EVs and in part because of investing in growth. The cash brought in by our dispositions has gone into our bank reducing our debt further.
This lowers our cost of debt and gives us debt capacity to take advantage of opportunities. A strong balance sheet is also a strength when quoting work from customers. As we have said, we have won some takeover business from other suppliers, some of which have financial challenges. And we return capital to shareholders in a balanced way with dividends and orderly share repurchases. This year we have been buying back shares. Some would say not fast enough, some would say too fast, but steady we have been.
Over the last year we have been buying back shares at a rate of about 1% of our outstanding shares every quarter. Over time that becomes a very significant number. Every quarter each of our shareholders gets to own a little more of our company without having to pay anything. Before we open the call for questions, I want to thank our people for the continued commitment and our shareholders and other stakeholders for their support. We are operating in a complex environment, but we are executing well, strengthening the business and positioning Martinrea International for sustainable, profitable growth. We’ll now be pleased to take your questions.
OPERATOR
Thank you, ladies and gentlemen. We will now begin the question-and-answer session. If you have a question, please press star one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two. If you’re using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Michael Glenn of Raymond James.
Your line is already open.
Michael Glenn (Analyst at Raymond James)
Hey, thanks for taking the question and it’s really good to see all the progress and work you guys are doing. I’m sure it’s not easy and it’s going to, I’m sure, result in positive things in 27. My first question is on the Q4. Just what’s the implied guide that you guys are giving? Like there’s quite a bit of ranges on the Q4. I can appreciate your reiterating the guidance, but I’m just wondering if we compare, say, Q4 to what we saw in Q3, should we expect anything meaningfully different? Like are there production slowdowns, sales likely down sequentially? I’m just trying to get a sense of what Q4 is shaping up to look like.
Fred Di Tosto (President)
Sure, Michael. So typically we don’t give precise quarterly guidance, but I can tell you that, consistent with my prior comments, the fourth quarter fits with the, call it, the mountain shape or the cadence I’ve been talking about. So quarter one a little bit low, then peaks in the middle of the year, comes back down seasonally for us in quarter four, consistent with some of our peer group who recently announced as well. Although you might see the year-over-year comps looking good in the marketplace, you know that last year was abnormally low with the aluminum supplier fire in North America.
So we don’t believe it’ll be that low as far as last year is concerned. On a quarter-over-quarter basis, what we’re kind of seeing right now in terms of the top line, there’s a lot of puts and takes, as I mentioned in my comments, in terms of customers that are announcing some shutdowns, doing some changeovers. One of our big programs, they’re doing a model-year changeover. So the releases are quite volatile, if you will, here and there. So it’s a little too early to call range. But the implied guidance range right now is somewhere in the 1.1 to 1.4 sales range for the quarter, if that helps you out.
So there’s going to be a little bit of volatility here as we end up the year, I think consistent with what some of our peers have said as well.
Michael Glenn (Analyst at Raymond James)
Okay, thanks. And just like trying to get a little bit more insight into what we might see in terms of Europe next year. Should we be starting to factor in some — is the expectation here that we’ll start to see sales decline as it goes through this restructuring? And like should we start to anticipate we’ll see some restructuring charges that could be quite large flow through the P&L?
Pat D’Eramo (Chief Executive Officer)
Yeah, maybe I’ll take that. I think from a top-line perspective, I think we’ve taken the hit to some extent. I mean volumes have been down in Europe and I think the view right now is that they’re not going to come back anytime soon and the market there is changing for various reasons. So we made the decision that it’s time to do something about it, be proactive, adjust the cost structure there. But it’s not necessarily anticipating lower sales. It’s just reacting to the current situation.
And on the restructuring activity, I think we’re active in that process right now. Obviously it’s quite complicated in Germany in particular with unions and negotiations and so forth. We’re making some good progress there and we’re planning right now to complete the bulk of the restructuring from a, call it a workforce reduction perspective before the end of the year, but some maybe into next year. So I would assume that going into next year our run rate will be better than where we are right now.
Michael Glenn (Analyst at Raymond James)
Okay. And just on the cash, the asset sales, are you able to indicate are you going to see a cash inflow of about 60 million in Q4? Is that the indication?
Peter Cirulos (Chief Financial Officer)
Yes, Michael, about 60 million in quarter four will be used to pay down the debt. We already have it, so that’s a good position. You can say it with confidence.
Michael Glenn (Analyst at Raymond James)
Cash in the bank is great. Okay. Okay, thanks. I’ll get back in queue.
OPERATOR
Thank you. Thank you, Michael. The next question comes from Collin Tsai of CIBC. Your line is already open.
Collin Tsai (Analyst at CIBC)
Hey, good evening everyone. Thanks for taking my questions. You talked about hoping to get your operating margins in Europe back up to the mid-single digits. Is your expectation that the restructuring that you’re undertaking at this point is going to be sufficient to get you there or would you still need a little bit of help from a volume standpoint?
Pat D’Eramo (Chief Executive Officer)
From the restructuring perspective, it is a big step towards that. So that’s obviously a key component of it. But I will note also there’s some other elements that we highlighted in our comments. I mean, one I’ll highlight now is vertical integration. So there’s some opportunities there to insource some work and so forth that will help our margin profile in Europe. So the restructuring is the biggest piece of it. But there’s other elements that will follow.
Tyler
Yeah, to add to that a little bit, we’ll have next-generation programs, as we’re winning a lot of business now, coming up in our European segment as well, the latter half of next year and the beginning of 2028.
Collin Tsai (Analyst at CIBC)
Okay, great. That’s very helpful. And you talked about putting more capital behind some of these industrial markets that you’re seeing good growth in. I guess just at a high level, how are you approaching those investment decisions, especially for some of these verticals like power and batteries that are a little bit newer for you? And I guess given the strong growth you’re seeing in industrial and in North America in general, could we see capex kind of creep up above what D&A is over the next few years here?
Pat D’Eramo (Chief Executive Officer)
I think in our industrial business in particular, capital tends to be lower. It’s not a high-capital business like stamping or casting. But there is a lot of new business opportunities. I mean, the quotes have been flowing in more than I’ve ever seen in my time here. And we’ve won more business in this space than we have again the whole time I’ve been here, just in the past year. So we see a lot of opportunity. Power generation is certainly a big part of that.
The story goes, the ability for the customers to find a supplier that has the capability is a struggle for them. And they came across us, toured some of the work we were doing and almost immediately gave us the work. And we’re already well underway. So we see a lot of potential there. Just on the auto side, we are quoting a ton of business. So if we win a bunch of that, we’re going to have to apply capital to it as I talked about in my remarks. But it’s got to meet our hurdle rates.
Collin Tsai (Analyst at CIBC)
Okay, great. And then, yeah, maybe just following up on the industrial piece, I was just wondering if you could provide a little bit more detail on that $50 million award from Caterpillar. I mean, what is it that you’re actually going to be producing here? And I guess what capabilities do you already have that allowed you to win that business, even though it’s a bit of a newer area for Martinrea.
Tyler
So it’s essentially a muffler. And I don’t mean like a muffler on the back of a car kind of muffler. It’s more of a housing, an insulated housing that goes over diesel power generators and so forth to keep sound down. And they’re assembled by many pieces using brake presses and those types of things which are standard equipment in industrial. We happen to be in the right position to have it. We have capacity and we’d already been building earlier, I think it was late last year, earlier this year we were already building some similar units for a smaller customer that did similar work.
And so basically it’s stuff we already do. It’s just a much higher volume given the popularity of data centers being constructed. And these are large units, like 18 ft long, 18 ft high.
Collin Tsai (Analyst at CIBC)
Okay, that’s really helpful, Tyler. Thanks for those comments and all the best.
Tyler
Thank you.
OPERATOR
The next question comes from Brian Morrison of TD Cowen. Your line is already open.
Brian Morrison (Analyst at TD Cowen)
Thanks very much. Congratulations on the progress you made. This is one of the more interesting releases I’ve seen from a capital structure perspective. Peter, I hate to make you repeat this, but can you just go through the composition of the asset sales again that totaled 107 million from China through Kentucky, please?
Peter Cirulos (Chief Financial Officer)
Yeah, sure. So, Brian, first one we had in the second quarter was Anting, right? So that was one of our fluids plants that makes fluid products in China. So that was announced there. Those proceeds were about a million, right? So that was the first one, the very small one. Then in the third quarter was Brazil. In Brazil, the total deal was about 15 million CAD. So that split up over time. Then subsequent to the quarter, Yuyao, China. So that was our aluminum producing facility there.
That is approximately 50 million CAD of proceeds upon sale. So we got to work through the CTA and so forth as we go here in the fourth quarter. But those are the proceeds on sale. The final gain or loss will be calculated here as we get through the working cap adjustments with the buyer. Then Shelbyville. Shelbyville is a total proceed of about 40, 40, 40–42 million CAD. Four million of that US dollars was received upon signing on October 15th. And then the rest will be over the course of a couple of years in a facility we’ve set up with the buyer.
Brian Morrison (Analyst at TD Cowen)
Okay, so are there any cash taxes or cash tax implications on these asset sales? I know you’ve said you’ve received $60 million to date already.
Peter Cirulos (Chief Financial Officer)
Yeah, there’ll be some impact. We haven’t gone through it entirely yet with the tax. It won’t be a substantial portion.
Rob Wildeboer (Executive Chairman)
Let me just give you some—sorry. Let me just give you some color for those in the audience on why. So Anting was a fluids facility. At one point, many years ago, it was important to be in China for worldwide programs for customers such as Ford or General Motors. The usefulness of that and the need to be on a worldwide platform is no longer there. And so the facility didn’t have a future in that context. It’s been a very good facility for us. We’ve done very well in the program, good people, but at the end of the day, didn’t have a future.
And that was the logic behind it. With respect to Brazil, similar situation. A lot of issues in Brazil. You only have to read the papers to see them. And a number of customers had left. So in the context of that, also with the tax overhang, we were running it relatively flat for a long period of time, taking a lot of resources, including personal resources. And we made the determination that if we could find the right buyer that could take care of our customers and our people, we would do it.
And we did. We would have done this three years ago if we found the right buyer. Now we have the right buyer that’s in the business, very good to deal with. Yuyao and aluminum, similar thing. As you can see, the volumes of product in China and sales in China are way down. It’s tough to be a supplier. It’s tougher to be a supplier in China today than it was some years ago. Found the right buyer, we found the right terms, and we’ve placed the facility in good hands.
And with Shelbyville, we had a close to a million square foot asset that was empty because the customer that had virtually all the business in there stopped the program. So we have a big empty building and, at the end of the day, could have held it for real estate speculation purposes or whatever, but we found a buyer that hit our price range and paid a good amount. And so we’ve redeployed the cash. And that’s the logic behind it.
Brian Morrison (Analyst at TD Cowen)
Yeah, I hear you, and I appreciate that. I guess my next question is, what’s the cash cost with the restructuring of European operations, like how much could this total ballpark.
Peter Cirulos (Chief Financial Officer)
We’re still going through that level of detail at the moment, so we’re not ready to kind of throw a number out there. But, you know, there’ll be obviously a cost associated with it. But we could provide some more color as we kind of get—
Brian Morrison (Analyst at TD Cowen)
How about I phrase it another way: you said that the net debt is going to be below $700 million at year-end. Does that include cash costs associated with Europe?
Peter Cirulos (Chief Financial Officer)
I think the cash costs will ultimately—I mean, the activity will be done from a workforce reduction perspective by the end of the year, but the cash will likely hit next year.
Brian Morrison (Analyst at TD Cowen)
Does it offset the proceeds or is it way below that?
Peter Cirulos (Chief Financial Officer)
It’ll be below that, yeah. As I mentioned in the commentary, we would expect that this year we would exit the year better than 1.5—
Brian Morrison (Analyst at TD Cowen)
Below 700 million, didn’t you? Of net debt? Okay. Okay. So if I look at that and I look at your midpoint of your EBITDA, then you’re literally at, like, 1.15 turns of leverage or 1.2 turns of leverage. That leaves, like, $200 million of surplus capital. Rob, I appreciate what you’re saying on your capital allocation. I mean, invest in the business all you want. I get it. And monetize assets and get better returns. You’re at less than three times EBITDA. You could go to 5, 1.5 turns of leverage and buy back, like, 25, 30% of your stock.
I’m not telling you to do that.
Rob Wildeboer (Executive Chairman)
I know you’re not. Yeah.
Brian Morrison (Analyst at TD Cowen)
There’s substantial opportunity here. Like, this is a capital structure dream you’ve got in front of you here.
Rob Wildeboer (Executive Chairman)
That’s what we’ve been working for. We’ll be doing purchasing in the fourth quarter. So when we say under 1.5, it’s not necessarily going to be 1.15. Anyway, we appreciate the input. Yeah. So, look, I like our capital structure. We like our capital structure. We’re pretty disciplined about it. There are a lot of opportunities that we are pursuing. So just in the automotive business, you know, talking about what we’re seeing. Industrial, which is significant, or defense, which is significant, we’re probably close to quoting today as much as we have any day since 2019. As much as. As much as. Maybe more.
Maybe more. And so, you know, you work very hard to develop your reputation as a good supplier, quality supplier, deliver on time. The customer doesn’t have to worry about your balance sheet or your financial solvency or anything like that. Then all of a sudden, I mean, we don’t even control this. But all of a sudden, you’re getting a lot of people saying, I want you to do this, I want you to do that, I want you to do that. And you don’t say no. You take a look and you try and get the best one.
But we’re winning. We have the opportunity to win a lot of business. In 2019, we won a billion dollars of annualized business in one year, which was our best year ever. And I’m not saying we’re doing that necessarily because we’re pricing quoting, but you want to be able to handle what you can do to build out your business. To use another qualitative example, there’s been a lot of work talking about reshoring to North America, and that’s reshoring in the United States, if you listen to the United States. But it’s also beneficial for Canada and Mexico. We can service assembly plants in the northern United States very easily from Canada. So we’re seeing a lot of that. And when you have, you know, I don’t disagree with all of the President’s policies on tariffs, but insofar as they result in reshoring in North America, there are tremendous opportunities to get parts of that work.
And that’s new work, incremental work. Because the overall production levels in the United States and North America are tending to go up. You’re seeing that in the overall. So if you go from 15 million production to 16 million production, even over a number of some of them for those million vehicles, which is a lot, and we’re a supplier that has a very good relationship on our metallics and aluminum and fluids business. Plus we’re seeing the other stuff.
So you want to, you know, you can’t just on this is how it looks right now. That capital could very well be used to get us well over 5 billion towards 6 billion in revenues in a relatively short period of time.
Pat D’Eramo (Chief Executive Officer)
I mean, we have hurdle rates in all our businesses, whether they be industrial, defense or our typical auto business. And like Rob said, if the opportunity is there and we can hit our hurdle rates and we’ve got capital to deploy and grow, then that’s our base business. That’s what we do first. I don’t know if that answered your question, but we’re going to act like we’ve typically acted, which has been, you know, overall responsible. We’ve set out a plan years ago to get out of areas that we didn’t have an advantage which we’ve now done so it gives us a lot more room to play in our local, I’ll say the strongest of our markets, which is in North America.
Rob Wildeboer (Executive Chairman)
Thank you. Good discussion.
OPERATOR
Your next question comes from Tammy Chen of BMO Capital Markets. Your line is already open.
Tammy Chen (Analyst at BMO Capital Markets)
Hi, good evening, Rob. I wanted to come back to the Shelbyville asset. Given that there is more discussions and thinking by the OEMs to reshore here and there where they can into the U.S., how did Martinrea International think about the opportunity to try to find replacement business for that facility rather than sell it? Was it just like a location was an issue versus proximity to other OEMs?
Rob Wildeboer (Executive Chairman)
It’s a big friggin plant and to fill a 900,000 square foot plant is difficult. Make no mistake, if the opportunity was there right in our faces, then we would have considered it. But in the context of it’s not a bad location. Kentucky’s a good location where we have a huge plant that we’ve expanded a lot in Hopkinsville in Kentucky. It was just if we have work in different places we will. Fred’s right, I should say, but you know, there’s a reason it’s a big place to fill and, you know, in the context of winning work, if we’re winning it in southern United States or winning it in Canada, it’s just a better place to be.
The reality is that you have three large assembly plants near there. Toyota, whose supply base is pretty firm in that area, two Ford plants which are both large, but the one that we did business with, the next product they’re putting in there is a much lower volume and the opportunities did not have the capability to keep a plant that large in business.
Fred Di Tosto (President)
Tammy, that was a one-customer plant for us at the time of closure. Right. So it takes a little bit of time and stars need to align where you maybe have two or three customers of smaller size to fill that footprint and that just didn’t happen. With that said, I mean we are seeing a lot of opportunity in the United States. We do have vast footprint, we do have some open floor space in different places, but we’re also open to setting up new facilities where it makes more sense closer to where the business is. So it’s not necessarily holding us back from growing in the U.S. We saw an opportunity to monetize the asset, but we can redeploy to another location if it may make sense. We have present plans to open another facility in the Southeast relative to Kasum.
Tammy Chen (Analyst at BMO Capital Markets)
I see. Okay, got it. That was definitely most of my questions have been answered. Thank you.
OPERATOR
Ladies and gentlemen, as a reminder, if you have a question, please press Star one. Your next question comes from Michael Glenn of Raymond James. Your line is already open.
Michael Glenn (Analyst at Raymond James)
Hey, just coming back. So in the opening remarks, I believe you spoke about the acquisition of a supplier company in the defense segment. I’m just wondering if you’re signaling something kind of specific that you might be looking at right now.
Rob Wildeboer (Executive Chairman)
No, we don’t have a. We have not done that at this point. I will tell you that with our work with Raytheon, you know, our desire to supply, you know, the primes instead of OEMs, they call them primes, but it’s the same thing. We don’t want to get into the OEM business or the prime business, but there are a lot of opportunities in their supply base, given the volumes that they are seeing going forward. CAGR in the defense business is something like 15, 20%, I believe, versus 2% in auto.
And the type of work that the suppliers do and the same tools we use to apply what we do every day apply to the defense business as well. So we see opportunities to get into it. And so, yeah, we’ll keep our eye out for an opportunity. In the meantime, we’ll continue to help. At Raytheon, we see that growing to some extent. And not only that, but there’s other interests from other defense companies looking for automotive-style thinking and manufacturing capability.
So I do see it as a growth space for sure.
Michael Glenn (Analyst at Raymond James)
And can you just dig in a little bit to Raytheon, obviously, they’re a massive company, and they’ve enrolled Martinrea to help them with certain processes. So what did. Just help me understand exactly what you’re showing or what we’re doing.
Rob Wildeboer (Executive Chairman)
Yeah. All right. So, you know, because you’ve listened to us for a number of years, we brag a lot about how good we are at our operations. And really, the only way for you to judge that is to compare us to others. And, you know, I spent 24 years as an OEM building cars and have been in hundreds, literally hundreds of suppliers. And I can tell you, in the supply base, in auto, we’re as good or better than anybody I’ve seen out there when it comes to operating our floor.
And so we had an opportunity when we bought the Tulsa plant. It was a Japanese company that came to us for help because they knew we were good operators. And we started to help them. And they said, geez, this is bigger than what we thought it would be. Would you guys like to buy it from us. And so we bought it as you know, and then we got to thinking, geez, we’re pretty good at this, maybe we ought to see if other companies would be interested. Well, obviously we’re not going to get a lot of business from companies competitors in this space.
But there are a lot of people who manufacture out there, defense just being one of them. Defense is in a sweet spot right now because their volume demand, like I said, is going up so high. And so they suddenly are in a position where in the past they would get a one-year contract to say, okay, here’s how many missiles you’re going to sell or build and sell. And then next year we’ll decide how many you’re going to get, which was in the same range but never was a lot higher.
So the investment from the defense companies in general was pretty low because their volumes were always pretty standard. They didn’t need to invest. Well, suddenly the demand goes through the roof and now there’s all kinds of need to invest. But as you guys have heard from us before, you invest, make sure you get everything you can out of what you have. And since we’ve got that capability through a number of relationships, we talked to them, they were looking for some help to increase their production at their current capital investment was already there and we’ve been able to do that with them because we have a lot of experience and our intent is to teach them. The whole thing is about teaching them how to do it. And then sometime in the future they’ll be doing this on their own. The good news is from where we’re sitting is their entire supply base is very similar and the whole industry is very similar.
So we see tremendous opportunities to grow this business beyond what we’re doing with them right now. But it’s basically, I don’t like the word consulting. It’s not really a consulting business in terms of what other companies do. When they come in to help. We get down on the ground next to them, shoulder to shoulder, teach them how to problem solve, work with them on the problems. We get our hands dirty with them. It’s not like we sit in a room say here’s what you need to do with a PowerPoint.
It’s we go to work and when we show our progress to their management, it’s on pieces of paper hanging on the wall where they’ve been doing the real work and out on the floor. So it’s a much different approach and it’s been very successful so far. And we think that business model of helping people who want to improve or increase volumes. We’re in a really good spot and we plan to capitalize on it.
Michael Glenn (Analyst at Raymond James)
Okay, so this is really putting Martinrea people into the Raytheon facility. Working directly. Side by side.
Rob Wildeboer (Executive Chairman)
Yeah, side by side, we created a company, as I mentioned, True North Enterprises, or True North Aerospace and Defense. And earlier we had created the company True North Kaizen and all wholly owned U.S. companies. And True North Kaizen is the one that has all this business. And their job is to go in and help people with their throughput, teaching them our methodology of lean manufacturing. And our goal, this is important, is our goal is to teach them and move on, not to hang around with them for five years. If we do that, we haven’t been successful.
Just on the supplier side. We basically said, look, if we’re going in and helping and learning, if we see something like a troubled supplier or a supplier that is of interest to acquire and run and be one of your suppliers, do you have anything against that? The answer is no. I mean, obviously, we’re building up our skill set. The interesting thing is we’re learning a lot about the defense business while being paid to do so. That’s not a bad thing.
These are a lot of really smart, smart people. Very impressive in their depth of knowledge, but they’ve never had to hit these kind of volumes before. So it’s new to them to some extent, and it’s something we know how to do. So it’s a good, you know, a good collaboration and relationship.
Michael Glenn (Analyst at Raymond James)
Thank you.
OPERATOR
There are no further questions at this time. I would hand over the call to Rob Wildeboer for closing remarks. Please go ahead. Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. And you may now disconnect.
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