Linamar Corporation

Good afternoon, ladies and gentlemen, and welcome to Linda Moore Fourth Quarter 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 anyone has any difficulties during the conference, please press star zero for operator assistance at any time. I would now like to turn the conference call over to Linda Moore Executive Chair Linda Hasselbrecht. Please go ahead.

Thanks so much. Good afternoon, everyone, and welcome to our fourth quarter and year-end 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 Schneider, our CFO, both of whom will be addressing the call formally. And also available for questions are Mark Stoddard, Kevin Hallahan, and some members of our corporate IR marketing, finance, and legal team. Okay, let's get started with some highlights of the quarter and Lindemar's strategies. So first, a quick reminder of the key value drivers that make Lindemar such a great investment. and how we realized on that in 2024. First, Windermere has a long track record of consistent, sustainable results driving out of our diverse businesses. 2024 marks the 10th time in the last 15 years that we have grown our bottom line in double digits. And that, I think, is consistent, sustainable results. Second key point is around flexibility to mitigate risk. This couldn't be more important. At this juncture, our equipment is programmable, flexible equipment. It can be used on a large variety of types of products. In fact, 84% of our equipment is flexible and can be easily programmed for further jobs. We have further purposefully chosen to focus on products in our mobility business regardless of what type of propulsion vehicle it might be used on that utilize similar processing and therefore the same equipment. this flexibility has really paid off in the last 12 months of dynamic markets shifting around in terms of types of propulsion. Third, we've always run a prudent conservative balance sheet. We target keeping net debt to EBITDA under 1.5 and 2024, close at a very healthy 0.79 net debt to normalize EBITDA, which is an excellent position to be in in this timeframe. of significant distress in the automotive market in particular. We will be the winner of takeover work in this environment because we are strong and healthy financially, and that is what our customers are looking for. And finally, we're focused on growth to drive our EPS and share price, of course, but also returning cash to shareholders through both our dividend program as well as our common share repurchases which we have risen with our very active NCID program, where we've already purchased 1.4 million shares back. Okay, turning to highlights for the quarter, I would identify these as our most relevant accomplishments. First, we had a really excellent quarter in terms of free cash flow, capping off the year, delivering nearly 800 million in free cash flow, which is outstanding. Second, we delivered another year of double-digit earnings growth as well as margin expansion in a down market for all three of our businesses, which is excellent. Third, we had a fantastic quarter in new business wins for our mobility business that really rocketed our launch book back up to nearly $3.5 billion today. This includes $150 million in takeover work won last year, which actually now is hitting $180 million, and we think will only continue to grow. And finally, as noted, we supported a weaker share price in this challenging environment with our buyback. Now, turning the numbers, we saw sales hit $2.4 billion, down slightly over last year, on markets down significantly more. Sales were up 5% in our industrial business, largely with our Borgo acquisition, as well as market share growth in key markets, well offsetting significant market declines in both the ag and access markets. Sales were down 6% the entire year in the mobility segment, a market significantly down in both Europe and North America. North America was down 3.6%, Europe down 7%, both important markets for us. Normalized net earnings were 111.8 million or 4.7% of sales, a little down from last year on those softer sales. EPS, therefore, 182, down 8% over a year ago. I would summarize our overall bottom line results this quarter as being most impacted by several things. First, of course, the 2023 and 2024 acquisitions, cost improvements in a whole variety of areas, launching business, in the mobility segment, a steady sales and earnings performance at MACDON in a very tough market, offset by those steep declines in markets mobility in Europe and North America and the global access market. Free cash flow is noted, very strong. It was 491 million for the quarter, an excellent increase over levels seen over the last couple of years. And we are actively reallocating capital from programs with less volume or restricted launches and trimming our capital bill as a result, and you're really seeing the results of that in cash flow. Now, I'd be remiss not to acknowledge the significant impairment we took in the quarter, almost all related to a write-down of goodwill in Europe. In the fourth quarter of each year, we are required to perform an annual impairment test of our goodwill. The overall market deterioration in Europe has unfortunately resulted in a discounted cash flow calculation that required us to write down the goodwill on some acquisitions made, in fact, many years ago. The impairment is non-cash, of course, doesn't impact us in any way. Our focus really now is on our immediate action plan to help our European operations offset these market declines and find new opportunities to grow the business. And Jim's going to outline that for you shortly. The good news is we have strong teams. We've got a strong balance sheet behind us that is going to enable us to do that. A lot of distressed suppliers in Europe at the moment in particular, and we are actively pursuing and winning takeover business from them to put into underutilized operations. As noted, our total takeover business wins now 180 million. We're holding another 150 million of opportunities at the moment as well, and I'm confident those opportunities will only grow as unfortunately the situation in Europe takes a toll on some of our less financially stable competitors in the region. We also accounted in the quarter for a series of adjustments for various programs for the electrified vehicle market, certain other reduced volume or prematurely ending programs, which basically netted out to a small gain of $2.4 million. This was related to a variety of positive and negative impacts from customer settlements, severance, and asset write-down. Our results for the full year 2024 were outstanding. We saw sales of $10.6 billion, up 8.7% over prior year, and outstanding double-digit growth of nearly 12% for both normalized net earnings and earnings per share, which reached $604.4 million in 1981 respectively. Margins hit 5.7% up from prior year, and as noted earlier, cash flow nearly $800 million. The remarkable thing is these record results were achieved when markets in all three of our businesses were down, and in some cases, down in double digits. Market share growth and a dedication to continuous improvement, productivity, and cost reduction are the secret to that result. Finally, the elephant in the room is the imposition this week of tariffs on Canada and Mexico and the potential for additional tariffs on metals next week and how that is impacting our business and our strategic thinking. So as all of you are, I'm sure aware on March 4th, President Trump imposed 25% tariffs on all the products the US imports from Canada and Mexico, two of its largest trading partners and the ones the US has, ironically, the most balanced trading relationship amongst their top 10 trading partners. It's notable that the US trade deficit with China, with EU, with Vietnam, Taiwan, Japan, South Korea, all exceeds the trade deficit of Canada with the U.S., some vastly, some by a factor of two to five times that deficit with Canada. Nevertheless, tariffs were imposed and potentially relieved only today. In addition, we may see 25% tariffs on steel and aluminum on March 12th. It's unclear if that will include processed steel and aluminum and to what level of value add These tariffs would be additive to the tariffs imposed this week. We are proceeding on the assumption that our finished and semi-finished metal-based products would not be subject to those duties. So more importantly, what's the impact? Let's start with our mobility business. The automotive industry is highly integrated across our three countries of Canada, Mexico, and the U.S. And our customers, the automakers, are the importers of record for substantially all of our parts, meaning our customers will have to pay the 25% tariff, not Linnemar. The cost of these tariffs, notably if steel and aluminum tariffs are layered on top, would be enormous. The cost for our customers would be in the billions and is ultimately likely to shut the industry down if the waiver doesn't come through and stay put in place. As of today, customers are continuing to pull product made in our Canadian and Mexican plants. per existing production orders. So we are waiting to see what happens next. For our industrial businesses, Skagit, Macton, Sulphur, Borgo, we have been working for months to put inventory of product into the U.S. to allow us to sell to customers in the region tariff-free for a period of time. So for the time being, production in all of our businesses is continuing for our 2025 plan. Of course, we have an immediate action plan underway to deal with this situation. We're communicating with customers, with employees, with shareholders. We're scenario planning on cost implications for impacted purchased products and identifying alternatives where possible. We're also identifying new products and markets to pivot to in order to continue to grow and to sell. We're developing tactical strategies to mitigate risk, such as reducing As noted, relocating some of that industrial segment inventory to the U.S. so that we could continue to deliver for a period of time. We're also staying focused on long-term fundamentals when making important strategic decisions and trying to look past the noise to focus on that long-term. Equally important, I think, is what we're not doing. We are not contemplating closing facilities in tariff-affected countries and shifting production to the U.S. Tariffs, as we have seen played out literally in the last 24 hours, can be implemented one day and removed the next day. They are a short-term tactic. We make important decisions such as where to manufacture based on long-term fundamentals like availability of talent and bench strength and supply chain availability and cost in a region, not something as short-term as a tariff. We continue to remain committed to our Canadian footprint as our Canadian plants are our most productive globally. have our deepest sense of talent, enjoy strong cost and efficiency synergies, and are highly competitive on a global scale. In fact, as recently announced, we're in the midst of spending $1 billion on our Canadian operations to launch work in these facilities and continue to quote a significant book of business for our plants in Canada. We are also investing and launching business in the U.S. We are also doing so in Mexico, in Europe, and in Asia as we continue to focus on growing our global enterprise. With that, I'm going to turn it over to our CEO, Jim Gerald, to review industry and operations updates in a little more detail.

Great. Thank you, Linda. As pointed out, we are currently operating with a very dynamic market backdrop. At Linamar, we remain laser-focused on the things we can control and are driving our core objective as always to, as you see here, grow our revenue. grow our profit, and grow our team. We know two things are true, that from uncertainty can come great opportunity, and tough times don't last, but tough teams do. The other way we've been describing it today, this could be a business person's nightmare, but an entrepreneur's dream. I think you know Linamar is a very entrepreneurial company that drives in these times. So with that, let's move forward to provide some more commentary to each of our key markets and how Linamar is performing within them. Starting with the access or AWP market, globally the overall industry was down nearly 12% for the year 2024. 2023 was a peak year for the global market with the year-over-year comparison of 2024 ending off essentially flat in North America and up slightly in Europe. Asia Pacific and the rest of the world regions finished down nearly 30% in line with where they consistently trended all throughout the year. Through this, Skydeck was able to fare better than the global market overall with share gains in both scissors, telehandlers, and AWP overall for the year, which is fantastic to see. We maintain a healthy backlog in dollars and units with daily order intake averaging where we have been during the last couple of quarters. Our customer base continues to grow, and an interesting fact, in North America alone, we have just shy of 300 customers in quarter four. Looking at Skydeck's international business operations, market development continues to be a theme and focus area. In China, we've recently increased our development and testing resources to better allow us to offer tailored product offerings better suited to the local market. We have two new product launches planned for this region in 2025 alone. Across both Asia and Europe, we continue the rollout of our eDrive scissors and electric booms to very positive market acceptance. Next, we'll turn to the agriculture industry volumes. Large ag represented by combine and high horsepower tractor retail deliveries in our core market of North America as well as Europe finished the year down approximately 15%, in line with our previous expectations. On a global basis, full year 2024 industry volumes were down 17% from the 2023 market cycle peak. Again, our three core brands of MacDon, Salford, and Borgo stayed ahead of the market, ending the year ahead by 1%. Again, those are some great results when the global market was down 17%. Across the board, whether it's draper headers or wind rowers, tillage equipment, or air seeders, we've seen a steady trend upwards in the market share across all key product lines. For 2025 calendar, we are now adding industry guidance to our outlook. The North American market is expected to see another double digit decline year over year, while other regional markets are expected to remain mostly flat. The continued North American industry decline in large ag is typical for a multi-year cycle, while inventories clear through the channels and commodity prices stabilize. The good news is that 2025 is being viewed as the trough. of this cycle with the growth returning next year. Sentiment has improved, input costs and interest rates have stabilized. We'll continue to keep an eye on how these latest tariffs Linda talked about impact the demand on both sides of the border. How Linamar's group of ag equipment companies can stand out in a difficult market is through its technology and innovation advantage. The brands of both MacDon and Salford recently were recognized with a combined total of five, five 2025 AE50 Outstanding Innovation Awards. MacDon was awarded honors for its FD261 Flex Draper Header, its FC Flex Corn Header, and the R1 Front Disc Header. Salford won for its AB640 Air Boom and its Row Crop Precision Cultivator. short-line oem technology that delivers a productivity advantage wins in the ag market all the time it's a key strategic focus across all of our brands and we remain deeply committed to it for our core mobility segment the industry finished mostly flat when compared to 2023 global light vehicle production was down 1.1 percent in north america more pronounced in Europe at nearly 4%, while largely flat in the rest of the world. Currently, industry experts forecast for calendar year 2025 is a decline of 2.2% in North America, a further 3% decline in Europe and Asia, and the rest of the world remaining mostly flat. For Linnemar in the year as a whole in 2024, our content for vehicle on a global basis reached 84.11%, up overall nearly 12% in an essentially flat market. Again, similarly to the commentary from Q3, the growth in global market share compared to 2023 is driving mainly out of North America, where we saw higher volumes from launching programs as well as incremental sales for the 2023 Linnemar Structures Group acquisitions. We spoke in the past on EV transitions and underperforming programs as EV adoption rates are not where the industry expected them to be at this point. To highlight this fact, we saw a change in global EV volumes in 2024, predicted to reach over 15 million light vehicles this year, but axles ended up 13.2, 2 million less than expected. The projection for the year 2031 from that same forecast compared to the current day projections seen penetration at 10.3 million less than originally predicted. This means EV launch programs are seeing either delays, a slow ramp, or outright cancellation. The industry faces this EV challenge as well as several economic verticals, particularly in Europe where they've seen decreased OEM volumes, distress in the supply base, and a need for more permanent restructuring. Linda highlighted some impairments we had in the quarter related to both these topics. in Europe. We have fast-tracked our cost-cutting lean and commercial playbook to align with the latest realities in the market. The uncertainty highlights how our ability to remain flexible and pivot can be an advantage in an unstable market. We can adapt better than the others while our OEM customers chart what they now call a multi-energy or dual-track propulsion strategy. For Linamar, we can turn these macro headwinds into opportunities. The most obvious is that ICE programs are extending out and will run over a much longer time horizon. We also see opportunity to pick up takeover work from distressed suppliers. This is essentially the case in Europe. Between 24 and the first two months of 2025, we've already booked nearly 180 million of business and believe that there's a huge amount of potential there as well. Flexibility, strong financial balance sheet and our track record of execution positions us very well to capitalize on these opportunities. Lastly, I'll point out to a fantastic mobility innovation from our driveline R&D team at McLaren Engineering. Our driveline disconnect technology is industry leading and now will be included in a third North American OEM application. The design solution is able to disconnect from the drive change of the vehicle and optimize vehicle range by reducing parasitic losses when only two-wheel drive mode is needed. Our first disconnect technology is in production in North America, and we have the second OEM program launching within the next 12 months. With this third major new business win that we obtained in the fourth quarter, we add another $100 million to our launch backlog, a great example of how Linamar innovation can win in the market. With that, I'll turn it over to Dale.