Linamar Corporation

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.