Linamar Corporation

Good afternoon, ladies and gentlemen, and welcome to the Lina Mark U2 2024 earnings 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 Thursday, August 8, 2024. I would now like to turn the conference over to Ms. Linda Hassan-Fat, Executive Chair of Linamar, please go ahead.

Thanks so much. Good afternoon, everyone, and welcome to our second quarter conference call. Joining me this afternoon are members of our senior team, Jim Jarrell, Mark Stoddard, Dale Schneider, Elliot Berger, and Kevin Hallihan, and some members of our corporate IR marketing, finance, and legal team. Before I begin, I will draw your attention to the disclaimer currently being broadcast. So I'll start off with the most exciting news of the quarter, and that is the promotion of Jim Jarrell, our longtime president, to the additional title of CEO, a much-deserved recognition of his fantastic dedication and exceptional skill as a business leader. Having achieved our long-term goal of reaching 10 billion in annualized sales, Lindemar is poised to embark on a new era of value creation and growth bolstered by these strategic leadership changes. Jim has been with Linda Marsh since 1991, and he's occupied progressively more senior positions, starting in sales and operations and being named Chief Operating Officer in 1999 and President in 2004. Jim, along with many of our amazing global team out there, played a central role in the achievement of our $10 billion goal and a successful global expansion program here at Linda Marsh. As CEO and President, Jim will have primary responsibility for all operational and financial aspects of the business, as well as corporate development initiatives and innovation. Working closely with me, Jim will also play an important role in developing strategy with a particular focus around setting short to medium term priorities. In my capacity as Executive Chair, I'll continue to be responsible for setting the strategic direction of our company with a particular focus on long-term strategy, and I will continue to lead our distinctive cost attack team program at now 75 global manufacturing sites to advance continuous improvement, mentorship, and talent development. I will also continue to lead Linnemar's engagement with investors and government partners with, of course, increased involvement from Jim. This appointment recognizes Jim's many contributions and his fantastic track record of success over more than three decades at Linamar. He has earned the trust and respect of our customers, our employees, business partners, and investors, and has the full support and confidence of my family and the Linamar board. Jim has been transitioning into the CEO role over the last five years, taking on ever increasing levels of responsibility and accountability. This is a philosophy that Lindemar's founder, my father, Frank Hasenfratz, regularly used to develop leaders here at Lindemar to set them up for success, and it's a tradition that continues to this day. I remember my father telling me many times not to vault someone into the job of general manager all at once if possible. Give them one line as the supervisor, then add another and another until they're running the whole plant. It's a formula based on success, and it's exactly what we've done with this succession at our highest level. And there's no one who would be prouder to see Jim named as CEO of Linamar today than my father. He personally mentored Jim throughout his career and considered him an exceptional executive of unparalleled capabilities, and the board and I couldn't agree more. With that, I'm going to turn to a high-level review of the quarter. Q2 was another excellent quarter, putting us well on our way to a record year again at Linamar. Financially, we once again have delivered double-digit top and bottom line growth for the quarter. And importantly, we have seen excellent market share growth in every one of our businesses with content per vehicle growth in every region. Continued market share growth globally for our core scissor products at Skyjack and continued market share globally for our core combine draper headers at MacDonne. Turning to a closer look at our financial results, we saw sales reach $2.85 billion, up 12% from prior year. Normalized EPS reached $3.06, up 17% from prior year. We've again seen great margin expansion compared to prior year, with normalized net margins now hitting 6.6%, which is fantastic. Notably, our mobility segment is continuing to see excellent performance, with earnings growth of 59% and margins hitting 6.4%, an excellent improvement to the 4.5% seen last year. This slide, I think, really illustrates the excellent progress that we've made in those mobility earnings and margins and the execution of our goal around that. This will clearly be taking us to a much improved year in 2024 over 2023. On a trailing 12-month basis, you can see we're hitting record levels at both sales and earnings performance, clearly setting us on track for a record year at Linnemar on both counts this year. Some of the key factors that impacted our results this quarter are our 2023 and 2024 acquisitions, of course, in both segments. Also, cost and pricing improvements in a variety of areas. We saw market share growth from launching business and platforms running strong In the mobility segment, we saw solid market share growth in both our access and agricultural businesses, which was partially offset by some overall market softness. Growing market share is absolutely critical in times of softer markets. If markets are flat or declining, market share growth minimizes the impact of declines and provides opportunity for growth. On the balance sheet side, we saw another strong quarter driven by our continued careful cash management program. Leverage is in excellent shape and improving, as Dale will illustrate shortly. We saw free cash flow move back to the positive, as expected this quarter, with $67 million in cash generated. We continue to expect a strong year of free cash flow, both this year and next. CapEx dialed back again from hives that were seen last year. We spent $174 million in the quarter, or 6.1% of sales, right at the low end of our normal range, of 6 to 8% to drive double digit growth. Compact spending at the low end of that range is a good expectation for this year and for next year. Turning to a market update, markets are now looking down pretty much across the board this year with some growth resuming, however, in 2025. On the mobility side, industry experts are predicting modestly declining global light vehicle volumes this year to 15.8 million, 17.1 million, and 50.7 million vehicles in North America, Europe, and Asia, respectively. This represents flat performance in North America, but almost 5% declines in Europe and nearly 2% declines in the Asia Pacific. Next year, we expect to see flat to moderate market growth in each region for an overall year, modestly up in volume on a global basis. The big story this year is the mobility business continues to see that dial back on battery electric vehicles in favor of more traditional internal combustion and hybrid electric vehicle models. We don't see any signs of this trend reversing and are actively working to reallocate capital and discuss risk mitigation strategies with our customers. Of course, there will be an impact, which we have considered in our outlook, but don't forget, if our customers aren't building EVs, they are likely building more internal combustion engine vehicles, and we have plenty of content there still as well. Our strategy, as you know, has always been keep equivalent potential and ideally equivalent sales program content in every type of vehicle, and we've done a pretty good job of ensuring we're spread around a lot of different programs. Our strategy is also to use flexible equipment wherever possible to allow us to shift capacity from EV to ICE and back again, which is quite helpful to mitigate that risk. And I'll remind you that 84% of our mobility assets can be reallocated to another program. I think the bottom line is the next decade will be a bit up and down and we just need to stay super flexible and ready to pivot whichever way the market goes and make sure we're careful with the contracts we're signing to handle those fluctuating volumes. On the access side, industry experts are predicting declining markets in the access industry globally this year with mid single digit declines in North America and Europe. and more meaningful declines as you can see in Asia. Our backlog at SkyJag is still strong and remains ahead of historic norms as we work to fill customer orders. But with a shift in market demand, we are now looking at modest top line growth for the business this year. The shift over the last few months in market sentiment is really driving out of delays in some of the mega projects that were driving the non-residential construction growth. next year as you can see experts expect markets may see some growth resume in all the global regions helping skyjack to continue its growth path but again at a more modest top line growth level assuming backlogs revert to normal levels on the agricultural side industry experts are predicting declining markets for combines this year globally the combine header market tracks reasonably close to the combine itself market, although nobody can sustain a little longer given the lower cost value of investment of a header versus the full combine. The wind drill market will see fairly flat markets globally this year. Nevertheless, the order book remains strong for MACDON. Orders for combine drapers, our largest product family, are actually ahead of orders at this point last year. Sulfur products and tillage and crop fertilization equipment more aligned really for the high horsepower tractor market are also seeing down markets this year on a global basis. Our current forecast is for mid single digit growth for MacDon and Salford combined this year. And then of course with the order book for our new Borgo business is consistent with historical levels so you can look for a stable year in terms of performance there. The combination of all that is going to result in double digit growth for our ag business this year. Next year, ag markets will likely be flat to down again. We will have a better sense post the 2024 harvesting season that's currently underway. With continued market share growth globally and cross-selling opportunities, we do expect to offset market declines next year and still produce at a similar sales level in 2025 to what we produced this year. With that, I'm going to turn it over to our new CEO, Jim Gerald, to lead us through a more in-depth operational review. Over to you, Jen.

All right. Thanks, Linda, and thank you for the kind words. I'd like to acknowledge your ongoing leadership. First, as you have seen, Linnemar surpassed the $10 billion revenue goal. It's an outstanding accomplishment that you should be very, very proud of. I'd like to start by saying I'm deeply honored and excited to be taking on the role as CEO. I'm grateful for the trust placed in me to lead Linnemar towards our 2100-year mission. Although a couple titles have changed the game remains the same the same culture same teamwork same strategies same operational excellence same opportunistic entrepreneurial efforts and the same. Relentless pursuit to eliminate waste and the ever shifting landscape of our industries it's the unwavering skill dedication and commitment. of our Linamar team that stands as our greatest asset. This team has consistently proven and will continue to prove that they have what it takes to not only meet the challenges, but to excel. I wanted to start with my overall message, which is we are in a navigational journey filled with lots and lots of promising opportunities. With all the market changes and announcements of late, we believe simply deploying a navigational approach called tacking into the wind, which means making small incremental adjustments over and over again, will ensure we capitalize during this time frame. Be it takeover opportunities from struggling markets, moving flexible capital to increased utilization, growth in other target markets, product expansion, and more international growth are just a few that are in front of us. Linamar is a company that can sail in any condition, and quite frankly, we thrive and perform during these times. For my part, I'm going to give a quarterly update on execution of our strategy, operations, and market conditions from each of the mega markets. So first is our mobility sector, which, of course, our mission statement is to move the world. First, a great look at performance is content per vehicle. Looking at North America's CPV stands at $283, up nearly 19% from Q2-23 in a market environment where industry vehicle production volumes were essentially up only 1.7%. Your content per vehicle was $101, a change of 1.1%. compared to Q2-23, while Europe vehicle production was down nearly 5%. In Asia Pacific, our CPV was $11.03, nearly a 7% increase over last year, when overall industry vehicle production volumes increased only 1.4%. In all three regions, our automotive CPV outpaced that of the underlying vehicle production market, a sign of increasing market share from incremental sales and new program launches. Our global CPV has increased by 12.4% year-over-year, which is excellent to see. Looking at our mobility launches, the main theme central plot is we have $3.1 billion of new work launching. We see ramping volumes that are predicted to reach about 20% to 30% of mature volume levels this year that will add incremental sales of $500 million to $600 million. That figure is down somewhat from our previous update and, to no surprise, reflects some of the new program delays in the market by OEMs, most notably on EV programs. In Q2, we saw just over $100 million shift from launch into regular productions. Based on the latest understanding of OEM customer launch plans, the incremental growth is forecasted to be 700 to 900 million in 2025. As a result of the positives, we are seeing extensions on several current ICE programs continuing on as regular production longer than initially expected. We have maximized the use of flexible equipment wherever possible to shift capacities between programs based on market demand. We can in many cases use the same equipment for components we are making for electric vehicles, for ICE vehicles and vice versa. This flexibility is key that we are ensuring we minimize underutilization of assets. We've showed this before and Linda just mentioned it. Approximately 84% of our assets in our mobility business are flexible and can be relocated to different projects, be it ICE, HEV, BEV, or fuel cell. That kind of flexibility is key to navigating this transition. From a strategy and operations standpoint in mobility, the integration activities from the two major acquisitions we made last year are going very well. From a production standpoint, we have no issues aside from lower than expected demands really in the battery enclosures and stuck with the trend of the whole EV market. Both Mobex and the Dura additions have given us more tools in the toolbox and has created new opportunities with OEMs that we are pursuing. We recorded more than $150 million in new mobility new business wins for propulsion agnostic and powertrain components in the quarter. We're also excited to see more commercial new business wins, which further plays out our diversification focus. With our new business wins, we currently have 188 programs that we are launching globally. Looking ahead to our book of business within mobility through the next five years, you can see the pie graph showing that we have a nice blend of ICE, electrified and propulsion agnostic products in our overall sales mix. We're not overly exposed to any one propulsion type, and as mentioned, we'll continue to use our flexible asset strategy to ship capacity as necessary to mitigate any capital risks. Turning to the industrial segment, starting with Skyjack, of course, our Skyjack mission is to build the world. At Skyjack, our total worldwide market share is up from the addressable markets that we service. whether we're looking at the current quarter, year-to-date 24, or the last 12-month period, which is fantastic to see. Next, we are excited to announce the first product rollout of the eBOOM electrified articulating boom lifts. The 45- and 60-foot zero-emission units have launched in Europe and Australia. Skyjack will continue to introduce both EV and hybrid models over the near term to meet market requirements on a regional basis. Our new global manufacturing footprint is allowing us to build product for the market and the market on a regional basis as needed. At SkyJack, our order book and global backlog is extremely healthy, although down somewhat from last year, the backlog is substantial ahead of historical norms and carries us well into 2025. Another great takeaway from SkyJack is both the increase of customers and average customer sales. Lastly, I'll highlight some very exciting activities we have going on within our Linnemar Agricultural Group. We, of course, this is Feed the World Mission. First, our Linnemar Ag Strategy is well underway. As you recall, we now have portfolio coverage across the entire broad acre crop cycle. We now cover field preparation, seeding, crop protection, and nutrition, pre-harvest, harvest, and post-harvest. You can see these well-known product brands, Borgo, Salford, and MacDon, have leading products and services designed to serve global customers. The Borgo integration is progressing extremely well. The Borgo team is a great fit into the Linamar culture, and we're proud to have such a talented and innovative group of employees contributing to the overall Linamar strategy. We recently announced two great innovations to the market through new product introductions. MacDon has announced the new FD261, a 61-foot flex draper based on the 2-series platform. This is a hole 9 feet wider than our current largest offering, and when paired with the newest Class 9 or 10 combines in the marketplace, offers an unmatched harvesting productivity advantage. MacDon continues to be the leader in draper header, as you can see from the steady trend in global market share. Next, Salford introduced their AB640 90-foot AirBoon. This new crop nutrition implement offers increased productivity with a wide 90-foot base and ability for precision micronutrient fertilizer application. As Linda said, the ag market as a whole is down this year. The leading technology and solid order books at MacDon, Salford, and Borco has enabled the Linamar Ag Group to stay ahead of the market to date. Again, we'll keep a close eye on the market as we progress into 2025. Before I hand it over to Dale, I thought showing you how our customers and dealers perceive Borgo, our newest acquisition, would be helpful. Like MacDon and Salford, they are a leading short-line product company well-respected within the dealer network. In fact, when you look deeper into the dealer survey, you can find that Borgo dominates and delivers what's important to them, be it product quality, parts availability, communication,