Linamar Corp

Good afternoon, ladies and gentlemen, and welcome to the Linamar Q3 2024 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 Tuesday, November 12, 2024. I would now like to turn the conference over to Linda Hassan-Fratz, Executive Chair. Please go ahead.

Thanks so much. Good afternoon, everyone, and welcome to our third quarter conference call. Before I begin, I'll draw your attention to the disclaimer that is currently being broadcast. Joining me this afternoon, as usual, are members of our executive team, Jim Jarrell, our CEO, Dale Schnatter, our CFO, who both of whom will be addressing the call formally. Also available for questions are Mark Stoddard, Kevin Halligan, as well as some members of our corporate IR marketing, finance, and legal team. I'm going to start us off with some highlights and strategic updates, but I'll say first that you're going to notice a new format for our slides tonight. We've been doing some work over the last six months around streamlining shareholder communications and improving shareholder engagement. To that end, I'd like to thank those of you who have participated in our outreach program to gain insights on the needs of our shareholders. It was extremely valuable. Today, you're going to see some of the fruit of that work. We have significantly streamlined and shortened the formal presentation in an effort to get only key messages and information regarding the court's results, and then we're going to proceed to questions. I'm going to start us off with a quick reminder of the key value drivers that make Lindemar Fetch a great investment, and I think this quarter was a great example of all of them. First of all, Lindemar has a long track record of consistent, sustainable results driving out of our diverse business. We've grown top and bottom line at Lindemar 80% over the last 15 years, with almost every one of those growth years being double-digit growth, both top and bottom line. How do we do that? We have a diversified synergistic business model that balances our mobility and industrial businesses, which are highly complementary and run on somewhat different cycles, which does allow us to be always driving growth, almost every single year for the last 15. The second key point is our flexibility to mitigate risk. Our equipment is programmable, flexible equipment that can be used on a large variety of types of products. In fact, more than 85% of our equipment is flexible and can be easily reprogrammed for different jobs. We've purposely chosen to focus on products in our mobility business, regardless of what type of propulsion vehicle it might be used in, that utilize similar processing and therefore use the same equipment. We have parts for internal combustion vehicle programs that are manufactured using the exact same types of processes and equipment as parts we make for battery electric or hydroelectric vehicle programs. We have a strong portfolio of products for every type of vehicle propulsion and propulsion agnostic systems, giving us maximum flexibility to pivot whichever direction that the market grows. Flexible equipment suitable for a wide variety of parts in every type of vehicle propulsion and vehicle for propulsion agnostic systems as well. It's how we can control our capex, as you have seen this quarter. Third, we've always run a pretty conservative balance sheet. We target keeping net debt to EBITDA under 1.5 times. This allows us maximum flexibility to invest when opportunities come up, whether that be acquisitions or new programs we're investing in. A conservative balance sheet also mitigates risk in the event of a slower economic cycle, And I'm very pleased to see us hitting that one-time EBITDA of this quarter. And finally, we're focused on growth to drive our ETF and share price reports, but also returning cash to shareholders through our dividend program, as well as common share repurchases. More on that capital allocation framework in a moment. Okay, turning to highlights for the quarter, I would identify these as our most relevant accomplishments. First of all, we had another excellent quarter in terms of financial performance, with sales and earnings both up over last year and down market. Both our mobility and industrial segments saw double-digit operating earnings growth, in fact. Second, I think the star of the show this quarter is our excellent level of pre-cash flow, putting us well on our way to an outstanding level of pre-cash flow for the full year. Third, we saw great market share growth in both segments, so key to offsetting down markets. McDonald's Combine Draper market share growth was outstanding, well exceeding a declining market. And our mobility business also saw double-digit content-per-vehicle growth in our most important market of North America. And finally, we're announcing a new capital allocation strategy framework, which also triggers initiating an NCID, to return cash to shareholders as we have done this quarter. Turning to the numbers, we saw sales hit $2.64 billion, up 8.3% over last year. Sales were up 24% in our industrial business, largely on maxed-on market share growth, and our Borgo acquisition, well offsetting significant market declines on the ag side. Sales were up more modestly in the mobility segment at 2% with our structured growth acquisition, see contemporary vehicle growth and launches offsetting some pretty big declines in the market. North America was down 5% and Europe down 6% on the mobility side, both really important markets for us. Net earnings were $144.6 million or 5.5% of sales. That is up 6.1% over last year. EPS was $2.35, up 6.3% over 2023. I would summarize our overall bottom line results this quarter as being most impacted by our strong sales and earnings growth at Matjon. Of course, our 2023 and 2024 acquisitions, cost improvements in a variety of areas, as well as launching business in the mobility segment, which was offset by the steep market declines in both mobility and the access market. Cash flow, as noted, was very strong at $270 million, an excellent increase over levels seen over the past couple of years. We are actively reallocating capital from programs with less volume or restricted launches and trimming our capital bill as a result. That's that flexible equipment at work. We expect to continue to generate significant free cash flow in Q4 for a strong and positive result for the year. I mentioned a moment ago we've created a new capital allocation framework, which you can see illustrated here. This framework is also a direct result of the shareholder engagement work done this year already that I already noted. We heard a clear message that our shareholders are both looking for clarity around capital allocation and specifically are looking to share repurchases when our share price is undervalued. The following are our priorities when it comes to what to do with free cash flow we are generating. Our top priority is to maintain that strong, prudent balance sheet, one of our key value drivers at Linamar. Next priority is growth and investment in both organic and inorganic growth and innovation opportunities. Investing in growth is how we create top and bottom line growth at Linamar, which is critical to driving shareholder value. Beyond these two priorities, we will use excess liquidity towards three areas. First, an NCID when the share price undervaluation is clear. Secondly, to grow our dividend payments as we have historically done on a regular basis. And finally, towards continued debt reduction. To that end, given we have done an excellent job this year of reducing debt levels to get our net debt to EBITDA back into the one-time range, we've decided to initiate a normal course issuer bid. The program has been approved by the TSX and will give us the ability to repurchase up to 4 million shares, which is 10% of our public vote. With that, I'll turn it over to our CEO, Jim Gerald, to review industry and operations updates in more detail. Over to you, Jim.

Great. Thanks, Linda. I'll start with an overview of each key industry we operate in and then our own sales performance related to them. First, I look at the access or AWP market, which is coming down off its post-pandemic historical high in 23. On a full-year basis, you can see the market is predicted to be down this year in the low to mid-single digits in core markets of North America and Europe, and down more significantly in the Asia-Pacific regions. Though non-residential construction, the primary driver of the access market remains robust. The push out of major infrastructure and mega projects in the U.S. has many of the equipment rental companies delaying or pulling back on CapEx spending after a robust period of re-fleeting that happened during 2023. What's encouraging, however, is that this is viewed as a temporary pause with modest market growth returning in 2025, protracted cycle. Though this is certainly impacting demand at Skyjack, you can see that we are still outperforming the market. Skyjack's total sales units nine months year-to-date on a global basis are down 5.9%, while the industry as a whole is down 12%. So Skyjack is growing share in a very tough environment. Looking at SkyJet's business operations, we're seeing a stabilization of operating patterns following our global manufacturing expansion efforts. Mexico production is achieving improved schedule attainment and previous outsourced fabrications and assemblies are now coming in-house. This will result in improved cost, quality control, and logistic efficiency. Our China factory is now fulfilling all scissor product demands for the whole Asian region and we will look to localize food production there in the next 12 to 18 months. Again, that's our in-market for the market strategy. On the product innovation side, our newest compact scissor, the Micro, continues to add customer-focused features and is up for a Best New Product award at the upcoming AWP Industry Conference, which we're very proud of. Next, we'll turn to the ag industry volumes. Large ag represented by combine and high-power factory retails Deliveries are expected to decline in the 15% to 20% range across the board. On a global basis, full-year 2024 industry volumes are forecast to decline 17%. The ag market is also coming off historical highs. It's off peak cycle levels of volume in 2023. Against this backdrop, however, our three core brands of MacDon, Salford, and Borgo are outperforming the general market trends year-to-date. Together, Maxon, Solfergo, and Borgo are seeing their overall unit sales volumes increase 6.1% over 2023 levels. What I would call strong performance of the group in a very challenging market is a testament to our short-line OEM product strategy. It illustrates that farmers are still willing to invest in equipment that offers a technology or productivity advantage for their businesses. 2024 sales levels have been carried by a strong order of books despite the industry overall downturn. Next year, however, expect a more meaningful impact as the market headwinds related to lower cross-commodity pricing levels and elevated equipment dealer inventory persist, and the industry continues its cycle. Within the ag group, from a strategy and operations standpoint, there is a great deal of activity and progress. The integration across the three core brands assets to gain efficiencies and increase market reach on both the new product and after-sales support. On the technology development side, we have several new and exciting offerings coming to the market to ensure we maintain our market-leading position. First is Intelligent Control. part of our overall tech stack, which is a wireless interface software for enhanced implement to OEM tractor controls. Next, Borgo unveiled its new 7-Flex family apparel and code reels last week at its Steelers convention in Phoenix. This 3545 model comes in widths of up to 100 feet, which offers maximum field productivity without compromising on-road transfer abilities due to its 7-Flex folding design. And lastly, Salter's portfolio the release of the newest chassis mount spinner spreader. Field application coverage width goes up to 120 feet, offering productivity advantages to both producers and commercial operators. Across our entire Linnemar Ag Group, there's a high level of commitment to investment in leading technologies that deliver higher ROI to our customers. And next, an update on our mobility segment. First, I'll walk through the experts As you can see on the left, for full year 2024, North America, Asia-Pacific, and globally overall, markets are slight, flat to down, versus 23. For Europe, the market decline is a bit more pronounced, down 5%. Currently, the expert forecast for calendar year 25 is mostly flat across the board, with only modest year-over-year changes when compared to 24%. For Linnemar in the quarter, our content per vehicle on a global basis reached $80. That is nearly a 6% increase quarter over quarter when compared to 23 in a market that saw a 4.4 industry production decrease overall. The growth in the global market share compared to last year is driving mainly out of North America where we saw higher volumes from launching programs as well as incremental sales from the 23 Linnemar structures. In the mobility segment, from an operations standpoint, I'm very pleased with how the integrations of the Linnemar Structures Group I just mentioned have come together. The Durashidle facilities are completely integrated, and the Mobex operations will be finalized by year end. We're particularly proud of what the Linnemar team was able to achieve with Mobex within just one year. We acquired a business with a great portfolio, but was distressed both financially and operationally. Today, any customer concerns over delivery or quality issues have been resolved, and conversations have turned to pursuit of new business. In terms of new business opportunities overall, no surprise, but the transitional period of ICE to EV is creating some pause in the marketplace. EV launches are delayed and resulting in current platforms being extended out. In Europe, I'll note that the industry overall is facing several challenges, including decreased OEM volume, distress in the supply chain, and a need for more permanent restructuring. As we've been in the past, Linmar is well-positioned for this and remains on call to help our customers with business takeover opportunities that can be a win-win for both of us. Next, I'll turn it over to Dale, our CFO, for more financial review.

Thank you, Jim. Good afternoon, everyone. Linda covered at a high level the excellent financial performance in the quarter for both sales and earnings growing over last year when our markets were down. Therefore, I'll jump directly into the business segment reviews starting with the industrial segment. Industrial sales increased by 24.3%, 164.7 million to 841.3 million in Q3. The sales increase for the quarter was primarily due to the strong agricultural sales driven by market share growth in the MacDon drapers, despite a market that was significantly down. The additional sales from the Borgo acquisition, the favourable change in the Netflix rates since last year, and these were partially offset by lower demand on access equipment. Normalised industrial operating earnings for Q3 increased by 18.3 million or 15% over last year to $142.2 million. The primary drivers impacting industrial earnings were the increased contribution from the increased MECON volumes, the increased contribution from the acquisition of Barbell, and the favorable changes in FX rates, which were partially offset by the impact of the lower market demand for access equipment. In terms of mobility, sales increased by $36.6 million, or 2.1% over Q3 last year to $1.8 billion. The sales increase in the third quarter was driven by the additional sales from our 2023 LITOMAR structures acquisition, the increased volumes on launching programs, and the favorable changes in FX rates since Q3 2023. These are partially offset by lower volumes on certain mature programs, and on certain other programs that are naturally winding down to end of life. Q3 normalized operating earnings for mobility were up 12.6% over last year to $88.4 million. In the quarter, mobility earnings were impacted by the increased contribution from the higher volumes and launching program. The added contribution related to the 2023 structures acquisition and the favorable FX rate since last year. These are partially offset by the lower volumes on the mature programs and ending programs. Q3 was another quarter of mobility margins nationally compared to the same period last year in 2023, despite the market declines in each of the regions that we operate in. Starting with our overall tax position, which came in at $824.4 million on September 30th, an increase of $171.1 million compared to December 23. The third quarter generated $370.4 million in cash from operating activities, which was used primarily to fund the Q3 CapEx and debt repayment. Turning to leverage net debt, the EBITDA did increase to 1.07 times in the quarter from a year ago, mainly due to the three acquisitions that we completed in the last 12 months. but down from the high of 1.24 times after the acquisition of Borgo. Based on the current estimates as of today, we're expecting 2024 to maintain our strong balance sheet, and we're confident that leverage will decline to one times or under in the next six months. The amount of available credit on our credit facilities was $602.4 million at the end of the quarter. As a result, our available liquidity at the end of Q3 remains strong at 1.4 billion. As a result, we currently believe we have sufficient liquidity to satisfy our financial obligations during the rest of this year. Looking towards the next quarter, industrial segments will see sales decline and OE decline in the double digits when compared to Q4 2023. Sales are declining on market on down markets expected in both ag and access equipment, which is more than offsetting the added sales from the acquisition of Borgo this year. OE is down double digits as a result of the decremental impact from the change in sales, in addition to a product mix, which is currently predicted to be unfavorable in Q4. Mobility segment will also see sales decline with a double digit decline in OE, The sales decline is being driven by the sharp declines in OEM production schedules from the OEM's plans to extend shutdown and plans to reduce vehicle inventories this year. The OE will be down double digits from our contribution impact on the production cuts from the OEMs. Unfortunately, in the short term, we cannot adjust our fixed costs to help mitigate the negative contribution on the revenue declines. As a result, the expectation on the consolidated results for Q4 is to have a decline in sales and a double-digit decline in OE. For your reference, depending on product mix, LEMR will typically see detrimental impacts to be in the range of 27% to 33% on sales declines at the operating earnings level. Even with the reductions in the markets, free cash flow remains strong in the fourth quarter. Despite the tough market conditions in Q4, the full year 2024 will still see sales and earnings growth in both segments and therefore at a consolidated level as well. Industrial will see double-digit sales growth regardless of the market issues. We will still see growth in OE for the full year as well. Similarly, mobility will have sales growth for 2024, but OE growth will outpace the sales growth as OE will grow at double digits. As expected, Lenmar will still see strong free cash flow generation for the full year as a result of the strong cash generation in Q3, which will continue into Q4. Turning to next year, industrial will see significant market declines in eggs and access markets will be up modestly, which will drive an overall net decline in both sales and OE over 24 levels, but margins will still remain in our normal range of 14% to 18% for this segment. For mobility, industrial forecasters are predicting continued market softness in 2025. Notwithstanding the market softness, sales will continue to grow, and OE will grow faster at a double-digit rate. We will see launching programs adding between $500 and $700 million that will help mitigate the market declines. As a result, we are still expecting to see market expansion, which will push mobility back into its normal range of 7% to 10%. Overall, for 2025, sales will be flat, but EPS will grow in double digits. Free cash flow generation will remain strong, which will ensure our balance sheet will also remain strong. Thank you, and I'd now like to open it 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 prompt. 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 before pressing any keys. Your first question comes from the line of Tammy Chen from BMO Capital Markets. Your line is now open.

Hi, good afternoon. Thanks for the question. I want to start with the mobility segment here. So I understand the OEM production schedules are quite volatile right now. I just want to better understand this sequential decremental margin. It is higher than I would have thought. You've had very strong margin expansion in the first half of this year and kind of looking like Q4, your auto margin is not much better than last year Q4. So can you just talk a bit about that? Like I would have thought, you know, OEM recoveries and whatnot would have structurally increased your mobility margin a bit, even with the volatile production schedules.

Yeah, I mean, I think the biggest issue is exactly what Dale was describing. I mean, we're seeing some pretty big cuts. to volumes and you just can't react that quickly when it comes to adjusting fixed costs and overheads. So, you know, this is something we've sort of long guided to that if you see a rapid drop in sales, you can expect that 25% of that is going to fall to the bottom line. So if sales drop 10%, you can expect 25% reduction in your net earnings and in the 30% to 33% range at the OE level. And that's just a straight reflection. It's just an easy calculation of what are all your fixed costs, whether it be overheads or amortization or other areas of fixed costs that are obviously going to stay the same and only your variable costs are going to reduce. So it's a pretty standard formula we've actually used for years. to describe what happens when sales comes down quickly. Obviously, with time, that readjusts, right? Because you reallocate capital, so your amortization normalizes. You make adjustments on the overhead side if the situation is protracted, or you shift people around someplace else. So, you know, it's completely different when sales are coming down than when they're going up.

And how do we think about the reiterated guidance for mobility margin next year moving back to the normal range? Are we assuming that provided the production schedules do not change materially for next year, that you'll get there? Or is it that you've got just this visibility on the types of programs that are maturing next year, you can see that that is the margin that will get you to the normal range. It's just, it's a larger jump right into next year. So I just wanted to understand the bridge.

Yeah, I mean, yes, our current expectation is based on what we're currently seeing for market volumes next year. So that obviously could change if volumes are higher or, for that matter, lower. But our current expectation is to see earnings growth in the mobility segment, despite more modest top-line growth. And that's really driving at it. solid operational efficiencies that we're seeing play out in our mobility business. We saw it already this quarter and will in Q4 around labor costs, material costs, utility costs, you know, all improving thanks to the efforts of our global team. And, of course, you know, rising volumes on launches, notwithstanding that they're lower than what we thought they were going to be, it does still make an improvement.

Yeah, I think overall we see the market and mobility probably flat to a little bit up next year, Tammy. So we sort of know where the waterline is, right? So now we can sort of gear ourselves around that, which of course means we can cost reduce, which we're actively engaged in. Certainly the flexibility of the capital that we can redeploy is another key issue. and really look at the right sizing up to that level in the mobility side. So I think all those, you know, play out for improved earnings next year.

Got it. And switching to industrial for a second here, I'm just wondering how – I think you just concluded, or you might still be in it, the critical I-5 period. Can you comment on how that's been going – Is it in line with expectations, software? And it sounded like as you talked about the ag business next year, I got the sense that your degree of outperformance versus the industry, like should we think that that narrows versus how well you've done year to date versus the industry?

Yeah, I think, you know, the ag business for the rest of the year is certainly, you know, showing some negative trend in that next year. some of the OEM customers, C&H, Ag, Deere, their outlook is really a bit uncertain. They don't want to comment on it. But I would say we typically are outpacing the market. You saw in my slides earlier, the market slides were 6.1% up and the market 17% down. That's on unit sales. So I think we will definitely outpace the market and that's just driving you know, dealer expansion and the synergies that we're making. And the pre-buys that are going on right now are to sort of our expectations, and that's something we really watch in the next, you know, 30 days through the end of November, I guess. We're further along than I thought, so the next 15 days. Okay.

Can I squeeze one more in? I'm curious, why do you believe the access industry is a temporary pause? What are you seeing there that makes you confident it's not a more pronounced downturn? Thank you.

Yeah. Yeah, I guess, I mean, when we started 2024, I think there was a real high level of optimism, right, in regards to, you know, companies, rental companies, you know, look for improving on their fleet age. So, you know, I think the interest rates and things like that, the mega projects really you know, the delays on the interest rates coming down further and the mega-projects getting delayed really created a little bit more of a delay in the rental company take rates, right? And so we think that, you know, with some of the changes going on, there'll be a little bit of an uptick next year.

I think there's also hope that with the election behind us helping to settle some uncertainties and, you know, see some optimism, surfacing in the U.S., as well as interest rates coming down, that we're going to see some of those megaprojects getting back on track and driving some moderate market growth next year.

Yeah, I think also the volumes are still good, right? I mean, it's just not hitting the expectations that everybody thought based off interest rates, megaprojects. And for us ourselves, I mean, we've seen some cancellations, but more so postponements. which means that they're just getting ready to buy. So those signals feel positive. So again, our view, I think, for next year is a little bit of an uptick from where we're sitting today.

Thank you.

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

Hey, good evening. I just want to circle back to MacDon. I'm just trying to understand the sales cycle for MacDon. It sounds like the business had a really strong Q3, but we've been reading about these excess combine inventories for a few quarters right now. So does MacDon sales lag the combine cycle? I'm just trying to understand what's happening there, if that's kind of how we should think about how the business moves.

No, Michael. You know, in the past, if you look at combine sales in the headers, it's kind of a one-to-one ratio. But really what we've been seeing is, you know, there's concern, you know, where we've been seeing farm income, you know, coming down, but it's still, you know, overall at a fairly healthy pace. But there's some concerns with farmers. So they're not looking at buying the big-ticket items, right? They're not looking at spending the $800,000 for a new combine. But they're definitely, where they see productivity improvements and a return on their investment, they're willing to buy, you know, new headers. And that's what we've been seeing with MacDon. You know, just, again, the superior product that they have, you know, better yield, able to run the product faster. dynamic that we've been seeing in this situation.

I think the other thing is, you know, we watch aggressively the dealer inventories, right? And we can monitor sort of the pre-sales with inventory levels and then commodity pricing as well. And then listen, obviously, to the OEMs. I mean, they're typically the ones that give you the lead on where things will be going.

And I think in terms of cyclicality on our ag business, I mean, it's interesting how, you know, as we've acquired the various businesses, it's actually helped to kind of even things out to some extent for ag sales. Like for Maxon, Q2 is typically, you know, quite a strong quarter this year. Notably, they did have quite a strong Q3. For Salford, you know, strongest quarter is Q1. And Borgo is Q2. Q1 dials back in Q2 and then a good Q3. So in the end, Q1, Q2, and Q3 end up not terribly dissimilar, but I will say that Q4 is the seasonal low point for all businesses, unfortunately, so it does definitely come off in Q4.

Okay, and for MacDon as well, the orders that you're shipping now, would that really be for orders placed like 9 to 12 months ago?

Yes, some of them would be from 9 to 12 months ago for sure.

Okay, and then you mentioned dealer inventories. How do dealer inventories for ag products? your ag product right now sit relative to historical? Is it higher than you would typically like to see it?

Yeah, Michael, I would say that kind of across the three businesses, maybe Salford's product line is a little bit kind of elevated. But, again, with MacDon and probably the same with Forgo is that I would say that they're shipping more closely to more of a normal inventory, maybe even shipping below – But from the dealer's standpoint that we have to watch, it's their overall inventory levels. And that includes all of the brands that they carry, including their mainline brands and how they hold that against their overall credit lines for what they have to foreplan. That's the thing that we kind of watch.

Okay. And then just one more for me. Can you just... provide an update on the Welland facility. Is that now complete? Is all the equipment in just looking to see the timeline associated with Welland and what we should expect to see out of that plant over the coming year?

I mean, the equipment is not all in. I mean, we're in discussions with our customer on where the activity will be long-term and, you know, commercial agreements.

Okay. Will Welland contribute to sales next year?

Unlikely. I mean, as we've discussed before, the product for Welland is an electrified vehicle, so it shouldn't be surprising that the program's future has been impacted. So, you know, as Jim talked about, we're working through the issues with our customers around delays and what may or may not end up happening around the program. You know, and also, as we've talked about before, when it comes to some of these, you know, more risky EV programs, we're definitely taking a risk-sharing approach with our customers. So, you know, we need to work through the issue, but I can tell you that we don't expect to see a large negative financial impact from the facility, you know, as a result of what's happening around that launch.

Got it. Thank you.

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

Hi. Thanks for taking my question. Apologies if you spoke to this earlier, but can you just speak to the results of the Ag Division in Q3 if you were to strip out Borgo and just not looking at kind of the incremental sales bump you got there?

Yeah, I mean, obviously, Borgo, you know, it was a key factor in driving the performance. But at the same time, MacDon had a very strong quarter as well. So they had solid growth over five years. So they were driving some great growth in the segment as well.

Okay, great. And then maybe just on the 2025 outlook for industrial, the modest decline, Versus, I believe, previously, I mean, between Skyjack and Ag, it was either modest growth or flat. So is the change in guidance being driven by – is that being driven really by Ag or moderating expectations from Skyjack as well?

I mean, Skyjack, we're thinking, has a little bit of an uptick, and Ag, we're predicting a little bit of down.

Okay, thanks. And then just a last one from Meek. on the consolidated guidance for the EPS growth, is that assuming a full execution of the NCIB? That's not considered. Okay. Thank you. I'll jump back in the queue.

Your next question comes from the line of Jonathan Goldman from Scotiabank. Your line is now open.

Hi. Good evening. Thanks for taking my questions. The first one, and I know this is a broad question, so you can do whatever you want with it, but do you have any high-level thoughts on how potential tariffs might impact your business or the auto supply chain generally?

Yeah. I mean, obviously, tariffs have a negative impact on the supply chain. I mean, the supply chain in North America is highly integrated. You know, things cross the border on average seven times before they land in a vehicle. So if we're going to slap tariffs on, you know, each border crossing, that's going to create a lot of cost when it comes to vehicles. So, you know, I think that the results of the election last week is clear that Americans are looking for a focus on the economy, on inflation, and on jobs. And adding tariffs might help on the job front, but it's going to have a huge negative impact on inflation. And Americans can't afford higher costs than they're already seeing. So in my opinion, it's up to all of us to make a case to the new administration that North American cooperation and collaboration to optimize our access and strengths in all three countries will make us more globally competitive. And when you think about the fact that 80% of vehicle markets are actually outside of North America, wouldn't we all be better off focusing on that market than trying to add costs and reduce efficiencies within North America?

My view on this, Jonathan, would be that I think the focus is going to be on Asia, specifically China in regards to tariffs. And I think that's where most folks are headed around the world. So I think that from our side, where we think most of the impact would be.

And Jonathan, during the negotiations of the original USMCA, you know, the Detroit 3 leadership brought that up to the administration in regards to what Linda said about parts traveling across the border numerous times, and, you know, there was a lot, you know, to put more back into the United States, but the administration understood, and I think, you know, that's still fresh in their minds in regards to how integrated the supply bases here in North America and how difficult it would be for the Detroit three to have it all in the United States.

Those are really interesting points. Thanks for that. And then I guess my second one, how are you thinking about balancing capital allocation priorities next year? And I guess specifically what circumstances would cause you to lean to exercising more of the NCIB?

Yeah, I mean, we laid out the capital allocation framework pretty clearly, right? So balance sheet is top priority. Growth is the next priority. And then comes NCID and dividends. So, you know, obviously we think that there's room for an NCID because we've just initiated one. At the same time, there's a lot of opportunities out there. Notwithstanding the negative news of markets softening, I think one of the most important things for you guys to walk away with today is the knowledge that there's huge distress in the supply base, which is going to create significant takeover opportunities for us. In fact, we're actively quoting hundreds of millions of dollars of work right now from suppliers that are distressed and actively winning that business. So, you know, I see that as huge upside for us as well in terms of growth. And growth is always going to be the priority. I mean, if we've got an opportunity to grow, whether it be new business or potentially an acquisition, that is going to be the priority for us for sure.

Okay, that makes sense. Thanks for taking my question.

As a reminder, if you have any questions, please press star one on your telephone keypad. Your next question comes from the line of Brian Morrison from TD Cohen. Your line is now open.

Oh, thanks very much. I just have a couple of follow-up questions. And first to comment, the presentation, it's a welcome change. It's a much improved presentation. My first question has to do with the margin decrements for Q4. If I recall correctly, I think they're typically on average around 20%. And just wondering, is the reason you're giving 27 to 33 because of the seasonality of the business in Q4?

I would say, Brian, if you go back, and I know you've been around a while as well, we have always talked about a two-and-a-half times increment, that if sales are down 10%, expect earnings to be down 25%. So, you know, we have typically talked about that. 25% at the net level, which for sure is going to be, you know, closer to 30 or so at the operating earning level. So I think that it is pretty consistent with what we typically guide it to for rapid declines in sales.

Okay. I appreciate that. And then I guess a little bit more, you know, people are going to focus on the NCID. Clearly Q4 results aren't going to hit the ball out of the park here. And I'm wondering if you can comment how active you'll be, and if you won't comment, can you maybe give us a target leverage number that you're aiming towards by the end of the year?

For the NCID?

Yeah, will you be active with the NCID?

Yeah, 100%. I mean, we've got it approved, and three days from now we can start buying, and we're going to.

Okay. And do you have a target leverage number you can share with us? I mean, obviously you throw off a tremendous amount of free cash flow every year.

Yeah, I mean, as I mentioned at the outset, our goal is to see net debt see the dot in the one to one and a half times range. So, you know, we're definitely in that zone right now, which is great. And it was a rapid delivering from our purchase of Borgo. So that's where we like to sit.

Perfect. Thank you very much.

There are no further questions at this time. I will now turn it back to Linda Hassan-Fratz for closing remarks. Please continue.

Okay, great. Thank you so much. So, I'm going to conclude the same way we started the call with summarizing our key accomplishments for this quarter. First, excellent financial performance, double-digit OV growth in both segments. Second, excellent pre-cash flow. In the quarter, excellent market share growth in both segments and a new capital allocation strategy framework and NCID initiated. So, great quarter overall. 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.