Linamar Corp

Good afternoon, ladies and gentlemen, and welcome to the Lina Moore Second Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, the 9th of August, 2023. I would now like to turn the conference over to Linda Hasenfritz, Executive Chair and CAO. Please go ahead.

Thanks very much. And good afternoon, everyone, and welcome to our second quarter conference call. Joining me this afternoon are some members of my executive team, Jim Gerald, Dale Schneider, Elliot Berger, Mark Stoddard, and some members of our corporate IR, marketing, finance, HR, and legal team. Before I begin, I will draw your attention to the disclaimer currently being broadcast. I'll start off with a review of sales, earnings, and content. Sales for the quarter were $2.55 billion, up 29% to last year on recovering markets and supply chains, as well as market share growth. Normalized net earnings for the quarter were $160.8 million and normalized EPS $2.61. EPS is up 55% over last year on stronger sales and launching business. Our industrial segment had another excellent quarter, with sales and OEs significantly up at both MacDon and Skyjack on stronger markets and market share growth in targeted products. MacDon had a particularly strong quarter, and easing of supply chain issues helped our teams get products out the door. Our Salford acquisition also played an important role in both sales and earnings growth. Pricing increases and a favorable exchange rate helped offset higher costs that this segment has been experiencing. The mobility business had a strong quarter on the top line thanks to stronger markets in all global centers and strong launch performance. Higher costs continue to drag on results, notably energy and freight costs in Europe, although customer pricing relief is helping to offset part of the cost. The segment did see some improvement in earnings compared to Q1 as we expected. We do expect to see continued improvements sequentially in Q3 of this year for this segment, despite normal seasonal slowdowns as cost improvements continue and we see further pickup in Asia, as well as the impact of our Jura Shiloh battery enclosure business acquisition. It's great to see the continued trend upwards in terms of normalized net earning margins that we've been seeing since the recent low point in the fourth quarter of 2021. This quarter has been another excellent example of Linnemar's diversification strategy, again, paying dividends and driving consistent, sustainable earnings growth for us. We saw another quarter of market share growth in our mobility business with global content and vehicle up over last year. Both Europe and Asia Pacific saw content for vehicle growth on launching business with North America flat. Commercial and industrial sales were up 50%, with solid growth at both Skyjack and Macdon on market growth and market share growth in key targeted products. Macdon had a particularly strong quarter. Salford also played a key role in growing sales and OE in this area. CapEx continues to run at a more normal level than seen in recent years to support global launches and growth. CapEx has a percent of sales with 8% in line with a level of spending of 6% to 8% that would support our targeted double-digit growth level. We do expect CapEx to be significantly up this year over last year and at the high end of our normal range. Next year, CapEx will grow again, still staying at the high end of our 6% to 8% range. Free cash flow was $56.1 million in the quarter on strong earnings despite heavier CapEx. We have $1.8 billion of liquidity available to us, noting we will use an estimated $325 million U.S. for the Durashallow acquisition. Our net debt position has remained strong at just $493 million, thanks to continued positive free cash flow. Leverage remains very strong and remarkably consistent at just 0.42 times net debt to EBITDA. Our strong balance sheet and liquidity means we have the ability to continue to pursue acquisition opportunities as they arise in a dynamic market and drive even more growth. I'll turn now to a market outlook. Market demand is continuing to look good, with growth in most regions and businesses expected for this year and next year. Supply chain issues do continue to constrain industry's ability to deliver on the demand, but it does feel less volatile. Turning to the specific markets, industry experts are predicting growing light vehicle volumes globally this year to $15.5 million this 17.4 million and 48.7 million vehicles in North America, Europe, and Asia, respectively. That represents 8%, 10%, and 3% growth. 2024 will see Europe flat and further growth of 1.5% to 2.5% in Asia and North America. Industry experts are predicting on-highway medium heavy-duty truck volumes to grow moderately in Europe this year but more strongly in North America. and double-digit growth in Asia after a tough couple of years. Next year, we're going to see continued growth in Asia, but flat to down markets in Europe and North America. Industry experts predict double-digit growth in the assets market globally this year, with North America and Europe expecting high single-digit and Asia low double-digit growth. Next year, we'll see further growth of another 5% to 10%. Lastly, the agricultural industry, It's predicting growth in the combine draper header market this year in mid-single digits in North America, but reasonably flat in other parts of the world. The wind rural market will also see single-digit growth globally this year, driving mainly out of Europe and Australia. There is a causative outlook for market growth in both tillage and crop nutrition equipment this year as well. Looking at the access market in more detail, you can see first strong double-digit growth in all of North America, Asia, and Europe in the second quarter. All three regions are expecting solid growth this year and more moderate growth in 2024, as already noted. Rental company demand for equipment is strong as companies continue to look to counter fleet aging experience during COVID-19. Equipment utilization in North America is well ahead of 2022 throughout the first half of the year, in line with or exceeding peaks that we saw in 2019. Utilization levels in Europe are well above 2022 levels as well, and also exceeding 2019 peaks. Our backlog at Skyjack is solid, and with some relief on the supply chain side, we are increasingly enabled to deliver on such. With market and market share growth, we feel confident we can again grow Skyjack in double digits this year and next year. We're, of course, keeping a close eye on potentially shifting market conditions in the event of an economic slowdown. In the agricultural business, Q2 combined retails in North America were up 25% over prior year and high horsepower tractors up 13%. As noted, we expect to see market growth primarily in North America for both segments. Inventory at equipment retailers remains below historical levels, driving demand. Dealer sentiment remains positive, but with a cautious outlook. We have a significant backlog at MACDON, which is up over prior year. Supply chain issues, though still a challenge, are improving and helping the team get products out the door. Our current forecast is for double-digit growth this year again for MACDON, with continued growth in 2024. Salford is seeing a strong backlog in all products as well. In conjunction with the market growth referenced, also mainly in North America, Salford is also predicting double-digit growth in 2023 with continued growth in 2024. Looking at the mobility side, you can see vehicle inventory levels in North America have slipped back a little to 34 days, so well below historic levels. Refilling the pipeline with vehicles will still be a major priority for the automakers and will take some time to get done. In looking at production levels compared to what was forecast at our last conference call, you can see a slightly stronger Q2 in all regions, ending at 22 million vehicles, which was up 16% from last year, which was 19 million. Q3 is forecast to be 20.8 million units, down a little from prior year, but up a little from what we had forecast to you back in April. The full year, as noted, is predicting overall growth at 5% over 2022. Looking at launches for the mobility business, you'll be pleased to know we have another strong quarter in new business wins. a very strong quarter for WINS in the electrified and propulsion agnostic space, which is really dramatically shifting the landscape of our mobility business. We've had a solid first half of the year in terms of business WINS for both battery electric and hybrid electric vehicles. Year-to-date WINS are 58% for electrified vehicle and propulsion agnostic work out of our total new business WINS. Nearly 60% of our mobility sales as soon as 2027 are now for electrified vehicles or are propulsion agnostic, and this figure is growing every quarter. Our strategy is to continue to grow this percentage to minimize the concentration of our business at risk as internal combustion engine vehicles ramp down over the next decade. Overall, our numbers are as follows. We are seeing ramping volumes on launching programs, which are predicted to reach 30% to 40% of mature levels this year, generating incremental sales of $700 million to $800 million. We'll see further growth of another incremental $800 million to $900 million next year. These programs will peak at nearly $4.5 billion in sales. Only about $5 million of program moved from launch to production last quarter, which was more than offset by business wins in the quarter. Launching business in conjunction with growing markets will result in double-digit sales growth for the mobility segment this year and next year. So let's turn to a summary of that top-line outlook and also look at the bottom-line margins and next quarter in a little more detail, as illustrated on this slide. With strong markets and market share growth, we're expecting to see double-digit growth on the top line in 2023 and 2024 for Linnemar overall. This derives from double-digit growth in both our industrial and mobility businesses. Net margins will expand in 2023 on growing sales. We expect significant growth in margins in the industrial segment, where margins will expand back into their normal range. Mobility margins will contract for the year, noting stronger margins are expected in the back half than we saw in the first half of 2023. This will mean significant double-digit earnings growth in the industrial segment, coupled with reasonably flat OE performance in the mobility segment, which will combine to drive significant double-digit growth in earnings per share in 2023. In 2024, we expect continued expansion in overall margins, driving out of expansion in margins in both segments. This will mean double-digit growth in earnings in both segments and another year of double-digit EPS growth in 2024. We will also see continued positive free cash flow this year and next year, leaving us in an excellent position from which to drive further growth. Looking specifically at Q3... You should expect OE up from prior year, but seasonally down from Q2 of 2023. The mobility segment will see OE up sequentially over Q2 of this year, despite normal seasonal slowdowns in North America and Europe, thanks to our new battery enclosure plants, as well as improvements in Asia and in terms of cost overall and pricing, but flat at best performance to Q3 of last year. The industrial segment will see OE down sequentially versus a Q2-23 outperform due both to seasonality of the business and a stronger-than-normal Q2 this year for MacDot, but up in double digits compared to last year. Moving on to an operational update, we're very excited to announce the acquisition in the quarter of three battery enclosure facilities from Dura Shiloh. The acquisition adds complementary technology to our existing capabilities around cast and aluminum welded battery enclosures with a multi-material battery enclosure design including high-speed steel, composite materials, and a unique bonding process. The three facilities in aggregate are generating approximately $330 million in sales. Purchase price is estimated at $325 million U.S. Operating earnings levels are a little under our normal target range of 7% to 10% of sales for our mobility business, but we anticipate to see them reach that level within 18 months. The financial results will be consolidated into our existing mobility segment results. The transaction closed last week, and integration efforts are underway. We've already had a chance to spend some time with the teams and are impressed by their capabilities and the efficiency of their operations. We welcome the teams to the Linnemar family. These three facilities will join our new bigger casting facility that we announced last quarter, our existing Mills River high-pressure die-cast facility, and an existing Linnemar battery enclosure facility to form our newly created fully EV and propulsion agnostic group, which is the Lindemar Structures Group. We are very excited about this new global group at Lindemar, which is growing rapidly and will play a pivotal role in the future of our mobility business. With just the facilities and business one to date, this group is already poised to be approximately $1 billion in sales and has additional significant opportunities under pursuit. Moving on to new business winds, on the mobility side, I will highlight a few far more interesting winds this quarter. First, I'd like to highlight more than $110 million worth of winds in a variety of driveline components that are going to be used in battery electric vehicles. Production of these components is going to start later this year in facilities in all of North America, Europe, and China. Secondly, we had a very strong quarter for commercial vehicle wins, with more than $30 million of wins for transmission and driveline components for commercial vehicles. These will launch next year at plants in Canada, Spain, and France. It's great to see our commercial vehicle business starting to gain some traction again. It's a highly opportunistic market undergoing enormous technological change, which will create many opportunities for us. Lastly, I'd like to highlight a significant structural win for a European-based OEM, adding to our growing portfolio of propulsion-agnostic structural components. This will be used in the next-generation battery electric vehicle and will launch in 2024 in the UK. Turning to an innovation update, I'm happy to share that Skyjack is continuing to update its fleet with more purely electrified products. The E-Series scissor lifts with AC electric drive have been launched into production. This follows on the heels of our SJ-16 and SJ-20 mass lift launches last year. The electric direct drive powers the wheels directly and removes hydraulic actuation from the drivetrain, exceeding customer expectation when operating in certain indoor work environments. The pure electric system features improved run time per charge and lower operating costs, which means better return on investment for our fleet rental customers. And from the mobility side, we once again are thrilled to highlight the battery enclosure systems we add to our portfolio from the acquisition of the three Durashilo manufacturing sites. This battery enclosures product line enables us to offer our customers modular designs in multi-material structures with integrated cooling channels using either welded or bonded assembly techniques. This product line is built on modern, state-of-the-art equipment utilizing a highly optimized single-piece flow manufacturing process. This is an exciting addition to our electrified vehicle content offering. Finally, we continue to execute on our global digitization journey with more and more connected machines, data connections, and robots being commissioned in our global plants every day. With that, I'm going to turn it over to our CFO, Dale Schneider, to lead you through a more in-depth financial review.

Over to you, Dale. Thank you, Linda. Good afternoon, everyone. As Linda noted, Q2 was an exceptional quarter for sales and earnings growth despite the continuation of supply chain issues impacting sales and other cost issues that are further impacting net earnings. Of course, net of any customer recoveries achieved in that quarter. Q2 was another positive quarter for cash generation with strong liquidity reaching $1.8 billion. For the quarter, sales increased 28.8% to $2.6 billion. Earnings are normalized for FX gains or losses related to revaluation of the balance sheet and potentially other items that may have occurred. In the quarter, earnings were normalized for FX losses related to revaluation of the balance sheet, which impacted EPS by 20 cents per share. Net earnings were further normalized in Q2 as a result of the net withholding taxes paid related to the repatriation of cash from our Chinese operations, removing this net loss impacted EPS by $0.22 per share. The total of these two issues impacted EPS by $0.42 per share, and as a result, normalized EPS for the quarter was $2.61. Normalized operating earnings for the quarter were $230.8 million. This compares to $149.2 million due to 2022, an increase of $81.6 million, or 54.7%. Net earnings, normalized net earnings increased 51.5 million or 47.1% in the quarter to 160.8 million. Fully diluted normalized EPS increased by 93 cents or 55.4% to reach $2.61. Included in earnings for the quarter was a foreign exchange loss of 16.6 million which was a result of the $16.7 million loss related to the revaluation of our operating balances and $100,000 gain due to the revaluation of our finance expenses. As I mentioned, the net FX loss impacted EPS for the quarter by 20 cents. From a business segment perspective, the Q2 FX loss of 16.7 related to the revaluation of operating balances as a result of $11.8 million loss in industrial and a $4.9 million loss in mobility. Further, looking at the segments, industrial sales increased by 54%, or $272.7 million, to reach $777.3 million in the quarter. The sales increase for the quarter was due to the higher agricultural sales driven by growth in both the global markets and our market share growth in our core product. Higher access equipment sales driven by growth in the global markets and also with market share growth in our European boom products. The acquisition of Salford last year also added additional sales this year. Higher sales price achieved to help relieve some of the current supply chain costs also impacted sales. And finally, we had a positive impact from the changes in FX rates since last year. Normalized industrial operating earnings for Q2 increased 102.2 million or 206.9% over last year to 151.6 million. Primary drivers impacting industrial earnings were the increase in contribution from the strong agricultural equipment volumes, the increased contribution from the higher access equipment volumes, the positive impact from changes in FX rates since last year, and the increased margins from the sulfur acquisitions. These were partially offset by increased SG&A costs that are supporting this growth. Turning to mobility, sales increased by 298.5 million or 20.2% over Q2 last year to 1.8 billion. The sales increase in the second quarter was driven by increased volumes on launching programs, the positive impact from changes in FX rates since last year, and cost coverage that we were able to achieve in the quarter. C2 normalized operating earnings for mobility were down over last year at 79.2 million. In the quarter, mobility earnings were impacted by the increased labor, materials, freight, and utility cost net of any customer recoveries. The increased SG&A costs that are supported in the growth, and these are largely offset by increased contribution on the higher launch volumes. Returning to the overall Lenmar results, the gross margin was $361.9 million, an increase of $112 million compared to last year, due to the same factors that drove the segment results that I just discussed. Cost of goods sold, amortization expense for the second quarter increased slightly to $116.6 million compared to Q2 last year. COG amortization as a percent of sales, though, decreased to 4.6%. Selling general and administration costs increased in the quarter to $131.2 million from $100.7 million last year. The increase is primarily the result of increased management and sales costs supporting the growth, incremental SG&A costs from our acquisition of Salford last year, and increased costs of travel that is also supporting the growth. Finance expenses increased $10.5 million from last year. mainly due to the additional interest expense from the Bank of Canada and U.S. Fed rate hike since last year, the increased debt due to the 2022 acquisitions and share-by-back programs that were completed last year, and to a lesser extent, the new private placement notes issued in June 2023, which were partially offset by increased interest earned by the interest rate hike from last year. Consolidated effective interest rate for Q2 2023 was 4.3%. The effective tax rate for the second quarter increased to 32.1% compared to last year, mainly due to the non-deductible expenses in the quarter and the net withholding tax on the repatriation of funds from China. For Q2, the effective tax rate would have been 25.3% if the repatriation of the cash from our Chinese operations did not occur. We are expecting the 2023 full-year tax rate excluding the net withholding tax in Q1 and Q2, to be in the range of 24% to 26% and higher than 2022 full-year rate. Minimized cash position was $1.4 billion on June 30th, an increase of $515.3 million compared to December 2022, mainly due to the private placement issue in June 2023, which was partially used to fund the closing of the acquisition of the battery of closure plans last week. The second quarter also generated $260.9 million in cash from operating activities being used primarily to fund CapEx and debt repayments. As a result, net debt to EBITDA remained flat at 0.42 times in the quarter from last year. Based on our current estimates, we're expecting 2023 to maintain our strong balance sheet and leverage is expected to remain low. The amount of available credit on our credit facilities was $465.8 million at the end of the quarter. Our available liquidity at the end of Q2 also remained strong at $1.8 billion. As a result, we currently believe we have sufficient liquidity to satisfy our financial obligations throughout the year. To recap, sales and earnings for the quarter was a story of improving markets and increasing market share in both segments. which drove overall sales up almost 30% and normalized EPS was up 55%. Supply chain shortages that have been hampering OEM production requirements have continued to see improvements, adding additional mobility sales. The supply-related cost increases continue to impact both segments' earnings. Menomar has continued the discussions with our customers for price increases and cost recoveries, and those negotiations are ongoing. Despite these challenges in the quarter, we are still able to maintain our strong liquidity at $1.8 billion. That concludes my commentary. I'd now like to open up for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. Your first question comes from the line of Tammy Chen from BMO Capital Markets. Your line is now open.

Thanks for the question. I wanted to start in the mobility segment. So just looking at what you did last quarter in Q1 versus this quarter, and I'm sorry, I don't really see a sequential improvement. It's at best flat sequentially. And I think you were saying in Q1, you were expecting some sequential improvement. So could you just talk a bit more about specifically what happened in Q2? I think your peers have largely reported stronger results in this quarter. Industry production was stronger. I think in your press release, you had called out some lost volumes on certain programs. Did that contribute to a lower margin than expected?

Yeah, I mean, I would say mobility earnings were a little softer than we expected last quarter, but they are up from Q1. I mean, I guess maybe we have different definitions of up, but we are higher in terms of our earnings in Q1 in the mobility segment than we were last quarter. So we are sequentially up. I will say Europe and Asia Pacific, although nicely up from last year, were a little slower than we had expected last quarter. So that impacted a little bit our, you know, what we were expecting. You know, mix was an issue as well, but nothing really popping out that I think was very unusual. Earnings are up. We expected them to be up. We expect them to be up a little bit more, but they're still nevertheless up. And we do expect to see a continuation of growth in the mobility segment sequentially again in the third quarter of this year, despite what would normally be a seasonal slowdown in the quarter. And that's thanks to a couple things, more improvements in Asia Pacific, which is starting to get a little bit more traction, continued improvement on costs. and pricing and, of course, our new battery trade plants as well.

Okay. And so what about factors such as the Mills River business? And also, when it comes to, you know, the eDrive, for example, I'm not sure to what extent you're in launch mode for those, but could you talk a bit about the margins on that side and how they're sort of panning out initially here?

Yeah, I mean, Mills River continues to make improvements month over month, so they are proceeding according to plan. So, I mean, we're obviously not at targeted levels yet, but we are seeing improvements, so I'm glad to see that. And with respect to margins on launching business, I mean, when business is newly launching, it never, you know, it never, you know, has a positive margin, but it does obviously reach a level of what we would call mature profitability within a year or two of launch. And I would say that that launch curve is not different in an electrified vehicle program than it would be in any other type of program. How quickly you get to profitability is highly tied to how quickly the volume ramps up. So a super slow... ramp is probably going to take a little longer and a quick ramp is going to be quicker. So it's really not about the type of work and more about the launch crew.

Yeah, I just add, again, underscore the volumes on the EV. I mean, certainly they're different and the The outlook changes more rapidly than traditional programs because you start off and if there's not a take rate in the marketplace, they get ratcheted back. So we are certainly seeing that in the EV sector. And then with Mills River, I would say certainly Linda's comments are accurate. We've made tremendous progress on the company. And, you know, we're making plans with new product lines going in there, and we're probably a few months ahead of where we had anticipated.

And sorry, lastly, just on that comment on EVs, if the take rate is not expected or they get ratcheted back, you're seeing that right now. So, I mean, essentially what happens, are there offsets you could do – I don't know if there's pricing you could go back to the OEMs to discuss if the volume or the take rate isn't what was initially expected.

100%. We would definitely talk to each customer specifically about the program. You know, certainly we wouldn't disclose any specific contract issues, but we do have those set up with specific customers globally depending on the product line. But, yeah, I mean, if you have a shortfall on volumes, you do sit down and talk. Just like a commercial economic hardship issue, and I think both Dale and Linda highlighted that clearly, we are in discussions and negotiations very specifically in mobility on many economic hardship issues that have come at us, you know, this year as well. And typically the back half of the year is where you get that type of relief, you know, where you see the cost of the first, you know, first couple quarters and then through all the details.

Okay, thank you.

Your next question comes from the line of Christa Friesen from CIBC. Your line is now open.

Hi, thanks for taking the question and congrats on a great quarter. I was just wondering if you could maybe talk a little bit about the battery enclosure acquisition and and how you expect that to impact margins through the back half of the year.

Yeah, so just recapping some of the figures, then the business is generating about $330 million U.S. of revenue. Operating earnings level, it is a profitable business, but it is running a little under our normal target range of 7% to 10%, so it is a little substandard. but we do expect to be able to get ourselves into that level within the next year and a half, 18 months. So it is going to be positively impacting the back half of the year. And as noted, it closed last week. So really it will be two months' worth for the third quarter.

Okay, great.

And then – sorry, go ahead.

Okay. I think the other thing that is worthy to note is the opportunities that have now come forward with this acquisition around enclosures. Of course, we've got enclosure facilities inside Linnemar, but the size of this and the exposure into the marketplace offers a lot of opportunities, and we have a huge amount of go-gets right now on these enclosures.

Right. Okay, perfect. And then I was wondering if you can just speak to just more broadly the operating environment and how that improved through the quarter. It sounds like things are better than maybe we had all expected them to be at this point when we were looking at it earlier this year, just kind of what the call-off situation is like and what the OEMs are saying.

Do you mean in terms of what volumes we're seeing and are we seeing unexpected shutdowns from our customers?

Yes, yes, exactly.

Yeah, I would agree that I think there's certainly more stability now than we would have seen last year, for instance. So I think more predictability around what's happening with volumes. We're not seeing as much in the way of the unexpected shutdown.

Yeah, less supply chain disruptions. And I would say that for sure is in the mobility sector. And I think Dale highlighted it as well as Linda in the industrial sector as well. We're seeing a lot less supply chain disruptions, which equals less OEM volume changes that happen, right? So that's a positive.

Thanks. And maybe just one more question, just on the labor front. I'm sure you can't comment on if you're hearing anything from the OEMs. But just what you're seeing in terms of labor, obviously, costs are up. Are you expecting that to continue to increase through the back of this year? Or just what are you thinking there?

Yeah, I mean, I think that labor wage inflation is, of course, 100% tied to labor availability. So what will happen in terms of wage costs is going to be tied to how much demand there is and how much availability of people. And that's really depending on where we are in the world. So here in Canada, I feel like we're seeing a little bit better labor availability. We're starting to see definitely more folks showing up for jobs. job fairs, and it feels definitely easier to find folks here than it did last year. So, you know, that's a positive sign from a wage inflation perspective. I would say in the U.S., it's still a lot tighter labor market, so you're probably going to feel more wage inflation pressure there.

Yeah, interesting as well. In Europe, it's tighter now for labor. And then I would even say Mexico is tighter for labor too, which is something we had not really seen over the last couple of years.

Thanks. I really appreciate your comments and congrats on a good quarter.

Thanks so much.

Your next question comes from the line of Michael Glenn from Raymond James. Your line is now open.

Hey, good evening. So Maybe as a starting point, when I look at the 24 guidance in industrial, you're calling out kind of double-digit type growth in Skyjack, growth in agriculture. I mean, you're up quite a bit this year on top line in both of those businesses. Significant double-digit growth in ag, double-digit in Skyjack. How – like when you're seeing what's happening in the market, like it just feels like those are very high hurdle rates for 24 and just trying to get some insight into what you're seeing in the market that's leading to that type of guidance.

Yeah, I mean, we're basing that on current order levels. You know, some of these businesses have much better visibility on the order book than others. Macdon, as an example, tends to book out you know, almost their full year ahead of time. So we've got a pretty clear picture of where they're going to be over the next 12 months. Our other businesses don't have that same level of visibility, but do, you know, do also book out, you know, a fair wave. So, you know, we base these estimates on order books, backlogs, what we're hearing from dealers and, you know, from our folks out there and our sense for where the market is going. So the current expectation is for Skyjack to see double-digit growth next year. And the agricultural businesses are both expecting continued growth as well. So, I mean, that's our outlook at the moment. Of course, You know, that can change if things start to change dramatically on the economic front, but that's their current outlook.

And keep in mind with Skyjack, too, we've increased capacity, you know, significantly in Asia as well as in North America, right, added more capacity. So that is very helpful as well.

And on that, just on that Skyjack, can you remind us, what you've added in terms of capacity for Skyjack, the locations, and the products. And I don't know if you've disclosed this at all, but if you're able to indicate what that could potentially add overall from a capacity perspective at Skyjack as well.

I don't think we've disclosed the overall, but, you know, we're in China, in Tianjin for Skyjack. Product lines right there are scissors today. Expectation is to add booms in China and then down in Mexico's telehandler and booms.

And both of those plants are ramping right now?

Yes, they're both ramping.

And are you able to say at all how far along they might be in terms of the ramp?

Yeah, I think we're in Asia just sort of out of the gate starting, so that's going to be 12 to 18 months for a full ramp. And then in Mexico, again, we're just ramping on a couple of the product lines, and all of those product lines should be ramped over in about six to ten months in Mexico.

Okay. Okay. And then on mobility, if I'm thinking of the Linamar X Durashilow acquisition, so basically the business we had in Q1 and Q2, what improves exactly in the back half of the year from a margin perspective? I'm just trying to get a better sense of what changes in Q3, Q4. that helps provide some lift to the legacy pre-Dura Shiloh business.

Yes. I mean, obviously the growth in Q3 compared to Q2 is partially due to the acquisition, but it's not all due to it. So we are expecting sequential earnings growth for the segment on the, let's call it organic side as well of our existing business. Really, dropping out of a couple of things, improved improvements on the cost side, continued improvements on the cost side, which we've been seeing over the last 12 months. Continued improvements on the pricing front, again, as Jim noted, commercials. discussions underway and continued improvements in Asia Pacific, which had a rough start to the year. I mean, Q1 in particular, but it did kind of hang over into Q2 as well. So we are expecting Asia to be performing a little bit better. So those things are also acting to help offset what is a normal seasonal slowdown in North America and Europe.

Okay. And just another one, are you taking any steps right now in your North American business? How are you planning around this potential for what could be a sizable UAW strike through the back half of Q3? Okay.

Yeah, I mean, our global vice president of HR is working with our groups here for sensitivity analysis on that, and we're preparing around that for if something happens. We don't have any more information than you would have on the risk factor that will happen, but certainly we're taking great caution to know if we need to, you know, if we get into that mode and it shuts down, we're going to have to react quickly. And so we would sort of take a template out from what we did earlier in the past, in 2008, or when GM had a strike many, many years ago, we would sort of take the playbook out.

Yeah, I mean, I would say that situations like that are actually ones that Lindemar is particularly good at handling. We're very responsive, we're a very nimble organization, and we act quickly. So, in the event of an extended situation, we would work very quickly to try to mitigate risks and reduce the impact.

Okay. Thanks for taking the questions.

As a reminder, if you have a question, please press star followed by the number one on your touchstone phone. Your next question comes from the line of Brian Morrison from PD Securities. Your line is now open.

Okay, thanks very much. Good quarter. I want to go back to the mobility side of things. So I'm not sure I completely understand what caused the guidance revision on the margin. The sales are there. So is this inflationary impact on costs such as labor? Is it, you know, the launch costs, the launches aren't going as well as possible? And is this revision, is it just for the Q2 results? Or is this revision also that H2 is going to be a bit lower than your expectation?

You mean in my guidance for being flat for the year? Is that your – is that the question?

Well, that is it, but I'm more focused on the operating margin going from modest contraction to contraction.

Oh, I see. So, I mean, you know, as noted, Q2 was a little softer than we had expected because, again, you both – Europe and Asia Pacific – Although they were up from last year quite a bit, we're a little slower than we had actually anticipated. So Q2 will impact the overall year. And you're right, we're guiding a little more conservatively for the segment, given that softer Q2 and a more conservative outlook for the back half of the year in Europe in particular. But, I mean, of course, there's potential for that pricing release to help offset. But, you know, we think it's better to have a conservative outlook for the time being. And we are expecting to see second-half growth over prior year for the mobility segment.

Okay. So I guess if I fast-forward to 2024 – Why are we back to 7% margins in 2024? I know it's unchanged guidance for that, but, like, what are the key headwinds here? Is it still inflation? Is it launch costs? Why aren't we getting back to 7% in 2024?

Yeah, I mean, it's, you know, just continued improvement is certainly going to lead us to an expansion into inflation. On the margin side, we could very well be back into the normal margin range next year, depending on how things play out. I'm not excluding it. I am saying that I'm planning on expanding margins next year. I'm certainly not excluding getting into the 7 to 10, but Again, I think it's prudent to be conservative at this juncture.

I think there's a lot of fluid. We've got a lot of launches that we spoke earlier on the EV side, so volume, a lot of economic partnership issues, Brian, that are being dealt with, and there's still a lot of cost increases coming that we don't have a total handle on because they're coming up all the time, right? So I think, again... those to me would be the key things that would be, you know, holding us back.

Okay.

I guess last question on Skyjack. I appreciate what you said about China and Mexico. I guess the other three facilities, I guess Guelph and the two in Guelph and one in Europe, how many shifts are you currently operating? What capacity are you running there? And could you take on additional shifts or is it just too tight in labor?

The labor is – we're at capacity really in Guelph. I mean, and in Oroch. I mean, they're running multiple, you know, three shifts for sure, probably six days a week at times, seven days a week. So we can't really get much more out of that. And, of course, you know, the supply side too at times we still get a bit of disruption, better for sure. But certainly we're pretty well maxed out in Guelph.

Okay. Thank you very much.

There are no further questions at this time. I will now turn the call back to Linda for closing remarks.

Thanks very much. Well, to conclude this evening, I'd like to, again, leave you with three key messages. First of all, we are thrilled to deliver another fantastic quarter of earnings growth of 55%. driving off of our industrial segment earnings tripling. Lots of focus on mobility, but don't forget, industrial is hitting it out of the park and driving double-digit earnings growth for us this year. Second, we are excited about our new completely EV and propulsion agnostic-focused Lindemar Structures Group, which is really changing the landscape of our mobility business. And finally, we're excited to welcome our newly acquired battery enclosure plants to the Linnemartine. They're making a meaningful mark in terms of our market share in electrified vehicles and expanding our technology scope. Thanks very much, everybody, and have a great evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.