Linamar Corporation

Good afternoon, ladies and gentlemen, and welcome to Linnemar Q4 2023 earnings conference call. At this time, all lines are in 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, March 6, 2024. I would now like to turn the conference over to Lina So Linda Hatton-Fratz, Executive Chair and CEO of Linamar, please go ahead.

Thanks so much, and good afternoon, everyone. Welcome to our fourth quarter conference call. Joining me this afternoon are members of our senior team, Jim Jarrell, Mark Stotter, Dale Schneider, Elliot Berger, and Kevin Hallahan, as well as the members of our corporate IR marketing, finance, and legal team. Before I begin, I'll draw your attention to the disclaimer currently being broadcast. I'll start off with a high-level review of the quarter. Q4 was an excellent quarter and a solid finish to an outstanding year. Financially, we saw record results for the year and double-digit top and bottom line growth for both the quarter and the year. Strategically, we had some great progress in the quarter with our Mobex acquisition closed and our Borgo acquisition announced. Both are solid, profitable businesses which are immediately adding to earnings and both boost proprietary technology we're excited to bring to market and grow. Markets showed good growth last year with more modest growth expected for 2024. Market growth last year was amplified by record market share in our mobility business and excellent market share growth in our largest, most important product families in our industrial businesses. And on the innovation and new business side, we saw another strong quarter, with our strongest quarter of the year on new business and a balance of technology and propulsion areas and new innovations launching in each business. So let's get a closer look at each of these areas, starting with the financial results. Sales for the year hit a new record of $9.73 billion, up 23% last year on solid launches, market share growth, our two mobility group acquisitions, as well as better pricing. Normalized EPS for the year was up 40% to $8.78, which is outstanding, and margins expanded to 5.6%. For the quarter, we also saw double-digit top and bottom line growth, with sales up 19% to $2.45 billion, and normalized EPS up 23% to $1.98%. I think it was particularly notable to see the upward trend in the mobility segment, with earnings and margins growing again after a challenging two quarters. Some of the key factors impacting results in the quarter were, first, an unusually strong quarter for the industrial segment, which normally sees a much bigger dialback in Q4. Normally, we would see Q4 sales drop 30% or more in comparison to Q3. Whereas in 2023, we only saw a 10% reduction. OE can drop 40% or more Q4 to Q3, whereas this year we saw only an 18% decline to the third quarter. MacDon in particular had a very strong fourth quarter, the strongest in their history, in fact, which is largely what was moving the dial in that segment. Other key factors included launching business in the mobility segment, where total launches for 2023 represented incremental sales of $700 million. Also, key factors included our two mobility group acquisitions, as well as better pricing to offset higher costs, which was all partially offset by higher SG&A and fixed costs that are supporting that growth. And again, unfavorable changes in FX rates since last year for The mobility segment, which was, again, a meaningful factor in comparison to prior year in terms of both earnings and margins, mainly related to another significant appreciation of the paid bills. Although mobility segment earnings saw a solid 7% growth over prior year, if we were to do the analysis on a constant currency basis to last year, the growth would have been in the double digits and we would have seen margin growth prior year as well. It's great to see the continued positive trend in our financial results over the long term. We are back over pre-COVID earnings level as a full year to 2023, and we are on track for a new record level of earnings performance in 2024. Turning to balance sheet, we see a similarly positive performance. Our balance sheet has remained consistently strong despite higher acquisition activity and a resumption of more normal cash spending after a couple of light spending years during COVID. Net debt is sitting at 1.12 billion at the end of Q4, which is 0.85 times EBITDA. Our balance sheet has remained consistently strong and conservative for years. Our goal is to stay under 1.5 times EBITDA on net debt with only brief excursions above such for various strategic opportunities such as an acquisition, and only then if we have a great line of sight to rapidly de-lever under 1.5. We do expect leverage to increase to the 1.5 level in Q1 due to the Borgo acquisition, but it is our expectation to be back under one-time CBTA within 12 to 18 months. We saw positive free cash flow in the quarter of $83.1 million to complete the year in a net positive position. This is our 11th consecutive year of generating positive free cash flow. 2024, we'll see a more significant level of positive free cash flow driving out of higher earnings and lower CapEx levels. CapEx has continued to run at an elevated level to the significant constraints that we put on spending during COVID. CapEx has a percentage of sales with 7.8% right in line with a normal range of 6% to 8%. to drive double-digit growth. Turning to strategy and operations, it has certainly been a busy quarter. As noted, we closed one acquisition, our Mobex casting and machining business, and we announced another, our Borgo seeding business, complementing our existing short-line agricultural equipment product portfolio perfectly. I'd like to take a minute to remind you of the powerful synergistic diversification model that Linamar has developed. We have two key businesses, as you know, mobility and industrial. The mobility business is very large and global with excellent technology systems and a deep talent pool. There are significant growth opportunities for this business, which is capital intensive. The industrial business is more regional with a stronger presence in North America and less purchasing power than our mobility segment. That said, they have low CapEx requirements, making them a good generator of cash. They also do an excellent job of managing their various brands of Skyjack, McDonald's, Sulfur, and now Borgo, and have excellent global growth potential. So here's how it works. The mobility group helps improve the performance of the industrial group by supplying talent, system expertise, and a global network to enable global growth, and importantly, significant purchasing power to improve profit and cash flow. The industrial group then provides much-needed cash for investment to the mobility segment, as well as knowledge around effective brand management. It's a unique model, but it works exceptionally well to help us drive strong and consistent profitable growth positive free cash flow, all the while maintaining a strong balance sheet. Now, you don't need to take my word for it that this model drives consistent, sustainable results. You only need to look at our track record. Year in and year out, with very few exceptions, we're delivering top and bottom line growth, the strong majority of those years in double digits, as well as free cash flow and double digit returns on capital. Return on capital has actually been in double digits 93% of the last 14 years. Every single year but one, that exception being 2020, the peak year of the pandemic. We've generated free cash flow 11 out of the last 14 years and every single year for the last 11 years and expect to again in 2024. That's more than $4.2 billion of free cash flow over the last 14 years. Our latest acquisition, Borgo, is a great next step in that diversification strategy. Borgo is a technology leader in seeding systems with patented technology that places the seeds in the seedbed and fertilizer for soil nutrition adjacent to such to optimize seed performance and field yield. The business generates about $450 million in sales annually and generating an OE level in line with our other industrial businesses. The acquisition, which closed on February 1st, will be immediately accretive to earnings. Orgo completes the picture in terms of our agricultural strategy, complementing our other agricultural businesses perfectly. We now have products that complete the full span of agricultural equipment, from field preparation to seeding and planting, crop nutrition, harvest, and post-harvest. I feel like Borgo really checked the boxes for our growth strategy in the ag sector. It's another successful short-line OEM that does not compete head-to-head with the big guns in the industry. It is differentiated through technology and has excellent brand recognition and close customer connections. We are very excited to welcome the Borgo team to the Linnemar family. Turning to markets and market share, I would say we have had a very successful quarter and year once again. In the mobility business, we saw 9.5% growth in light vehicle market volumes in 2023, with an expectation of modest growth in North America this year and a slacker outlook globally. We saw solid content for vehicle growth in North America, both from launches and acquisitions, and reached record levels of full-year content per vehicle in North America and Europe. Markets are flat this year globally, but up in North America. However, our strong launch book is driving double-digit sales growth for us in the mobility business. The active market saw high single-digit growth in 2023 with more modest growth forecast for 2024 regionally in Europe and Asia and the rest of the world. and a flat global forecast for the market. We increased global market share in key products such as our Sousa Lifts, our largest product family at SkyJax. Despite flat markets, our strong order book is supporting double-digit sales growth at SkyJax this year. The agricultural market saw flat markets last year with a flat-to-down outlook this year. We saw excellent market share growth for key products here as well, notably our core combine draper headers, which is the largest product family at NACDA. Despite flat markets, our strong order book is supporting double digit sales growth in our ag business this year. You can see here summarized market data for 2024, which again is looking at more modest growth of flat performance in general and some areas of decline. On the mobility side, we're looking for flat production on days inventory at more normalized levels. The big shift this year in this business is the dial back on battery electric vehicles in favor of more traditional internal combustion and hybrid electric models. Windermere's flexible strategy of securing business in every type of propulsion and utilizing flexible equipment that can shift from one product to another is very helpful in this more volatile production environment. More on that in a minute. On the access side, supply chains have allowed order backlogs to moderate, but they remain at historically elevated levels. Industry experts are predicting modest growth in the access market in Europe and Asia this year, but flat expectations globally. North America is expecting modest growth in some products, such as the boom products, which is a key growth area for us. Our backlog at SkyJax is strong and ahead of historical norms. With stable markets and predicted market share growth, we feel confident we can again grow SkyJax sales in double digits this year. We're, of course, keeping a close eye on potentially shifting market conditions in the event of an economic slowdown. On the agricultural side, industry expectations are for large ag products to be down, but flat markets for the combine draperhead of markets this year in North America with declines in other parts of the world. The windrower market will also see fairly flat markets globally this year. Nevertheless, the order book remains strong for MacDon. Orders for combine drapers, our largest product family, are well ahead of orders at this point last year. Our current forecast is for mid to high single-digit growth for MacDon this year on the top line. Tillage and crop fertilization equipment more aligned to the high horsepower tractor market is also seeing collapse down markets this year on a global basis. Nevertheless, Salford is also seeing solid orders and has had a strong start to the year on shipments, notably in core tillage products. We are also forecasting mid to high single-digit growth for Salford this year. Finally, the order book for our new Borgo business is consistent with historical levels and looking for a stable year in terms of performance. As a reminder, this business runs at about $450 million in annual revenue, and we acquired it as of February 1st of this year. Overall, with the inclusion of Bordeaux in our ag business, we expect double-digit sales growth in 2024 compared to last year. We saw another year of solid market share growth in our mobility business, with global concept of vehicle up over last year. Both Europe and North America saw content per vehicle growth on launching business to new record levels for the year. We're also growing market share in key product segments and regions within our industrial segment businesses. Here you can see that MacDon's global Draper header market share is on a solid upward trend, reflecting the continued adoption of the MacDon Flex Draper technology over legacy Augur headers on a global basis. And Skyjack's share of the North American boom market continues to progress as well. Many of the same features and advantages that Skyjack's well-known scissors offer are carried over into the design of our boom product lines. The product reliability, ease of maintenance, and total cost of ownership are hallmarks of Skyjack, and it's showing in our market share results. Turning to innovation and new business, we've seen another strong quarter in wins for the mobility business. The wins are a great balance of product for hybrid electric vehicles, internal combustion, and battery electric vehicles in alignment with our strategy to maintain strong content potential and sales exposure to each. In our active business, our eDrive program rollout continues to positive market reaction, and in the ag business, all of our businesses are launching new innovations. Q4 was our strongest quarter of the year for new business winds, topping off a very strong year overall for our mobility business. As noted, we saw winds in a good blend of technologies, propulsion agnostic, as well as power trains for all of battery electric, hybrid electric, and internal combustion vehicles. Some interesting winds in the quarter were for more propulsion agnostic structural components and great winds on the hybrid side, as well as differential assemblies. With respect to our launch book, we are now seeing ramping volumes on launching programs which are predicted to reach 35 to 45% of mature levels this year, generating incremental sales of $700 to $900 million. Sales of these launching programs last year were $682 million. These programs will peak at nearly $3.7 billion in sales. Nearly $250 million of programs moved from launch to production last quarter, more than offset by business winds in the quarter. You can see here the split of Lindemar's business once we get out to the 2028 timeframe as a result of those launches, with a great blend of propulsion agnostic, which is basically anything for the driveline body and chassis system, EV powertrain, and ICE powertrain driving out of this good mix of business winds. I think this is a good position to be in to weather potentially shifting market adoption of different technologies. Have a solid chunk of propulsion agnostic business and a good blend of powertrain for different forms of propulsion. As time goes on, the proportion that is EV powertrain will naturally grow as these vehicles become more prominent. In 2028, there will still be plenty of ICE vehicles being produced, hence the heavier ICE powertrain focus in sales at that time. That will shrink over the ensuing five years to become more and more hybrid and battery electric and ultimately fuel cell electric powertrain concentration in alignment with the market. Flexibility and a wide range of platform coverage is the name of the game during the next decade as the mobility market transitions. In fact, flexibility is really the key to managing any major transition of technology. No technology adoption will be a straight line. There's always going to be ups and downs, just as we're seeing now on the EV side with the dial back in the market. At Lindemar, we've always believed that our level of flexibility should directly correlate to levels of uncertainty. There will be uncertainty with respect to timing and volumes of different vehicle platforms over the coming years. That means we must be as flexible as possible. We've done that in a few really important ways. First, We've created a product portfolio with equal potential for any type of vehicle propulsion. Next, we've tried to ensure we have content across a wide variety of platforms to optimize sales potential based on market demand. And finally, we've maximized the use of flexible equipment wherever possible to shift capacities between programs based on market demand. We can, in many cases, use the very same equipment for components we're making for electric vehicles, as those that we use to make ICE vehicle components and vice versa. This flexibility is key to ensuring we minimize underutilization of assets. Also key are the commercial terms we agree to with customers. We must be more commercially astute in terms of contracts, commitments, and expectations than suppliers have typically been in the past with their OEM customers. Be assured that we're doing all of this in order to successfully navigate the coming transition years in the mobility industry. And of course, our growing industrial business continues to help insulate us as well from being too exposed to any one industry. On the innovation side in mobility, we recently exhibited at the EuroGust Advanced Casting Show in Germany, where we had the chance to really showcase our extensive structural and chassis and propulsion agnostic capabilities and innovations, from digit casting to structural and chassis components to battery trades. The technology was very well received at the show. Turning to innovations on the industrial side, I'd like to first highlight Skyjack's continued rollout of its new eDrive electric scissors. The system eliminates the traditional hydraulic drive units and replaces them with direct drive electric drive motors, offering an eco-friendly product with significantly reduced possibilities of hydraulic leads, ideal for use in indoor settings. As we've outlined in the past, electrification across SkyVac's fleet will be an R&D focus in the coming years. SkyVac now has a total of 10 models that utilize the new e-drive system. Next, we see a new product introduction at MacDon. The new FC Series Flex Corn Header was introduced this past December. Recall that corn headers were a legacy Lindemar product designed and manufactured in our European facility prior to our MacDon acquisition. The MacDon team has now been able to take the corn header product to the next level by integrating the same flex and ground following capability that MacDon's Flex Draper Header has become famous for. This new FC series demonstrates our ability to continuously innovate in the harvesting segment. And at Salford, the application portfolio continues to expand with the introduction of its newest chassis-mounted spinner spreader. The spreader leverages technology and knowledge from current full-type designs and can distribute both fertilizer and lime up to 120 feet accurately at variable rates for enhanced crop nutrition. The new models offer a solution to both commercial applicators as well as growers and can be installed on the OEM chassis platform of choice. And lastly, you can get a sense for the kind of advanced seeding technology Volco is bringing to the agricultural market. The recently announced XP Duo metering system is an exciting feature that can deliver seeds to either one or two row units, greatly reducing the complexity and cost of a planter. XC Duo is targeted to farmers who operate in regions where they primarily feed small grains, but also plant some row crops. They can now use a single piece of forego equipment in the 3820 Paralink cultured drill and frame-mounted seeders to not only feed wheat or canola, but also plant row crops like corn and soybeans. This is something that traditionally required both a feeder drill and a corn planter, and And now it can be accomplished with just one implement, a truly innovative solution from Bogo and an example of why their technology leadership is such a great addition to Lundemar's agricultural portfolio. Okay, let's turn to a summary of our outlook. As I have already noted, we expect to see double digit top line growth in both our agricultural business and SkyJax, and therefore the industrial segment as a whole in 2024. We're also expecting to see double-digit top-line growth in our mobility segment for 2024 based on launches at $700 to $900 million and current market production expectations. Growth in both segments will lead to double-digit top-line growth for Linnemar overall this year. Net margins will expand again in 2024 on growing sales, driving mainly out of margin expansion in the mobility business. The industrial segment will continue to perform in its normal 14% to 18% range, remaining in the top half of that range as we saw in 2023. This will mean strong double-digit growth in mobility segment operating earnings this year and another year of double-digit operating earnings growth in the industrial segment as well, which, of course, will drive double-digit EPS growth for us overall as well. CapEx will be down in dollars from a very robust 2023 level of spending and at the low end of our normal 6% to 8% of sales spending. We expect strongly positive pre-tax flow this year, leaving us in an excellent position from which to drive further growth. Looking specifically at Q1, you should expect double-digit top and bottom line growth in comparison to prior year with operating earning margins up versus prior year as well as sequentially. The mobility segment will see double-digit operating earnings growth to prior year and sequentially, thanks to a full quarter for our mobility group acquisitions, normal seasonal upticks in North America and Europe, launching business, and continued expected improvements in cost and recoveries. I'll note that the EV dialback known today has been considered in this guidance, but is, of course, a fluid situation that we are keeping an eye on. The industrial segment will see double-digit OE growth to prior year and mid-to-high single-digit growth to Q4, thanks to two months of forego coupled with some modest growth in our other businesses after that exceptionally strong Q4, modest growth to Q4, I mean. So with that, I'm going to turn it over to our CFO, Dale Schneider, to lead us through a more in-depth financial review.

Thank you, Linda, and good afternoon, everyone. As Linda noted, Q4 was an exceptional quarter as we achieved double-digit sales and earnings growth. The building margins expanded and grew from Q3 levels as expected. Q4 was also another positive quarter for cash generation, with strong liquidity coming in at $1.3 billion. For the quarter, sales increased 19.1% to $2.5 billion. Earnings are normalized for FX gains or losses related to the revaluation of the balance sheet and potentially other items that may have occurred. In the quarter, earnings were normalized for FX losses due to the revaluation of the balance sheet, which impacted DPS by 29 cents per share. Normalized operating earnings for the quarter were $191.9 million. This compares to $140.9 million in Q4 last year, an increase of $51 million, or 36.2%. Normalized net earnings increased $22.7 million, or 22.8% in the quarter, to $122.2 million. Fully diluted normalized EPS increased by $0.37, or 23%, to reach $1.98. Including in earnings for the quarter was a foreign exchange loss of $24.8 million, which resulted from a $22.3 million loss related to the revaluation of operating balances and a $2.5 million loss due to the revaluation of financing balances. As I mentioned, the net FX impact on the quarter on EPS was $0.29. From a business segment perspective, the Q4 FX loss of $22.3 million related to re-evaluation of operating balances was the result of a $14.7 million loss in industrial and a $7.6 million loss in mobility. Further looking at the segments, industrial sales increased by 19.8% or $100.3 million to reach $607.4 million in Q4. The sales increase for the quarter was due to the substantial increase in agricultural sales driven by global market share growth on drapers, which is our primary product family in the ag market. A considerable increase in access equipment sales, driven also by global market share growth on our main product of scissors. And finally, we had a positive impact on changes of FX rates since last year. Normalized industrial operating earnings in Q4 increased 45 million, or 81.1% over last year to reach 100.5 million. Primary drivers impacting industrial earnings were the increased contribution from the significant increase in agricultural volumes and the increased contribution from the strong increases in excess equipment volumes. These were partially offset by increased SD&A costs that were supporting the growth in the segment. Turning to mobility, sales increased by $293.6 million or 18.9% over before last year to $1.8 billion. The sales increase in the fourth quarter was primarily driven by the additional sales from our Lindemar Structures acquisitions in 2023, the increasing volumes on launching in certain mature programs, the positive impact from changes in FX rates from last year, and cost recoveries achieved from our customers, which these are partially offset by lower volumes on certain programs that are winding down to end of life. Q4 normalized operating earnings for mobility were up over last year at $91.4 million. In the quarter, mobility earnings were impacted by the increased contribution from the higher volumes on both launching and mature programs. The sales related to the acquisitions in 2023, which were partially offset by lower volumes on ending programs, the increased SG&A costs that are supporting the segment's growth, and an unfavorable impact at the OE level from changes in FX rates since last year. Returning to the overall liminal results, the company's gross margin was $320.2 million, an increase of $71.4 million compared to last year, and this was due to the same factors that drove the segment's results. Cost of goods sold and amortization expense for the fourth quarter increased to $135.8 million compared to Q4 last year, mainly due to the Linnemar Structures acquisitions in addition to the launching program. COGS amortization as a present sales bill remained flat at 5.5%. Selling general administration costs increased in the quarter to $131.5 million from $110.1 million last year. This increase is primarily the result of the increased management sales costs supporting the overall growth. in addition to the incremental SG&A costs from the Linnemar Structures acquisitions. Finance expenses increased $13.3 million since last year, primarily due to the private placement notes issued in June 2023 to fund the Linnemar Structures acquisitions and additional interest expense due to the Bank of Canada and the US Fed rates that increased since last year. These were partially offset though by decreased average bank debt levels since Q4 last year. The consolidated effective interest rate for Q4 was 4.6%. Effective tax rates for the fourth quarter increased to 28% compared to last year. This is due to a decreased benefit from the utilization of unrecorded deferred assets compared to last year, a less favorable mix of foreign tax rates, which were partially offset by a decrease in non-deductible expenses compared to last year. The 2023 full year effective tax rate, excluding the net withholding tax in Q1 and Q2 related to the dividends received from our China operations was 25.6% and was within our expected range of 24 to 26%. For 2024, the full year effective tax rate is expected to be in the same range of 24 year 23 rate. Lenormar's cash position was $653.3 million as of December 31st, a decrease of $207.2 million compared to last year. The fourth quarter generated $276.4 million in cash from operating activities being used primarily to fund the Q4 CapEx and the Q4 acquisition of Mobex. As a result, net debt to EBITDA increased slightly to 0.85 times in the quarter from a year ago, mainly due to the acquisitions in 2023. Based on our current estimates, we're expecting 2024 to maintain our strong balance sheet and leverage is expected to remain low. The amount available credit on our credit facilities was $668.4 million at the end of the quarter. Our available liquidity at the end of Q4 remained strong at the $1.3 billion. As a result, we currently believe we have sufficient liquidity to satisfy our financial obligations throughout 2024. To recap, sales and earnings for the quarter was a story of improving markets and increasing market share in both segments, which drove double-digit sales growth and EPS growth. The adjusted segment grew market share and sales significantly. Mobility results were solid with double-digit sales growth over last year in addition to expanding margins since Q3 as we planned. Additionally, Q4 had solid free cash flow generation, and we will still be able to maintain our strong liquidity at $1.3 billion despite the acquisition. It was a great quarter for sales growth, earnings performance, and cash generation. That concludes my commentary, and I'd now like to open it up for questions.