Linamar Corporation

Good afternoon, ladies and gentlemen, and welcome to the Linnemore Q1 2025 earnings call 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, May 7th, 2025. I would like to turn the conference over to Linda Hassan-Fretz, Executive Chair. Please go ahead.

Thanks so much. Good afternoon, everyone, and welcome to our first quarter conference call. Before I begin, I'll draw your attention to the disclaimer currently being broadcast. Joining me this afternoon, as usual, are Jim Jarrell, our President and CEO, and Dale Schneider, our CFO, both of whom will be addressing the call formally. Also available for questions are Mark Stoddard and Kevin Hallahan and other members of our corporate IRR marketing, finance, and legal team. Okay, I'll start off with some highlights of this quarter. I think a good place to start is a quick reminder of the key value drivers that make Linamar such a great investment and how they played out this quarter. First, Linamar has a long track record of consistent, sustainable results driving out of our diverse business. Q1 was certainly another good example with earnings and margin growth both delivered in a time frame when most companies are not achieving that. The second key point is our flexibility to mitigate risk. Never more important than in an uncertain time such as we're experiencing. Our equipment is programmable, flexible equipment. It can be used on a large variety of types of products. We're able to take equipment out of existing lines And, again, especially important in this time frame of market volumes being down, and we allocate them into launching business to help keep our capex spending lower without impacting our ability to grow. And you saw that, again, this quarter with capex spending below normal levels that we would normally have. We can also use that flexible equipment to our advantage at the moment to help us win takeover business. Third, we have always run a prudent, conservative balance sheet. We target keeping net debt to EBITDA under 1.5 times. Q1, again, saw net debt to EBITDA right around that 1.04 mark, an excellent level to be at, given great opportunities in the market today. Lastly, we're trading faster shareholders as a key factor. value creation driver at Linnemar as well. You saw that also play out this quarter, both with continued repurchase of shares as well as an increase announced to our dividend. Okay, turning to highlights for the quarter, I would identify these as our most relevant accomplishments. First, we saw normalized earnings growth overall and in both segments despite down markets in both segments. That earnings growth is driving out of excellent cost reductions and improved operational efficiencies driven by our global teams, but in fact took our normalized operating earnings margin to our target level of 10% in the quarter. That earnings growth also drives out of market share growth in both segments, which is critical in times of market declines to provide some offset to those traditional volumes declining. Finally, we saw continued positive free cash flow, unusual in the first quarter of the year, which is helping to keep that balance sheet strong, liquidity high, and keeping us well positioned for action in an opportunistic landscape. Turning to some of the numbers, we saw sales hit $2.5 billion. That's down 7% over last year in markets that were down significantly more, as Jim is going to outline for you in a moment. Sales were down 15% in our industrial business, largely on lower skyjack sales in a market that was dramatically down. Sales were down more modestly in the mobility segment at 5% down with launching business really helping to offset very soft markets. North America was down 6% and Europe down 7%, both important markets for us in our mobility segment. Normalized net earnings, on the other hand, were up 5% on strong operational performance, reaching $167.2 million, or 6.6% of sales. Normalized EPS was $2.76, up 6.6% over Q1 last year. It's great to see this earnings growth and margin improvement in a challenging environment. I would summarize our results this quarter as being most impacted by First, those operational improvements and cost reductions in both segments already mentioned. Launching business in our mobility segment. Some effects tailwind, more so on the industrial side. Steady sales and earnings have backed on in a test market, offset by those steep declines in the mobility market volumes, as noted in Europe and North America, and steep declines in the access market volumes as well. Cash flow was positive at 76.4 million. We continue to actively reallocate capital from programs with less volume where software launches and trimming our capital bill as a result. We expect to continue to generate significant free cash flow in 2025 for another strongly positive result for the year. Finally, let's have a look at an update on the Terra side. Despite the myriad of tariffs put in place over the last couple of months, Lindemar continues to have minimal bottom line impact. We have some impact in a few areas, but not at a material level, as you can see here detailed by each type of tariff that's active at the moment. In general, our products are a USMCA compliant for virtually everything we ship into the US. meaning no tariffs for us on our industrial products where we're the importer of records, or for our customers on the mobility side where they are the importer of records. I do worry, however, about the growing impact of tariffs on our automaker customers. However, as they continue to build up, whether they be metal tariffs, vehicle tariffs, parts tariffs, for the offshore purchases, it is all starting to build up. The costs for our customers are in the billions. And I do worry about concern to impact the vehicle pricing and therefore demand. Now, on the positive side, we are seeing customers looking at on-shoring parts and systems that they are currently buying offshore from Asia or from Europe. We're building up a significant list of new business opportunities that are in the quotation process for our North American plants. The U.S. is still respecting the USMCA agreement, meaning these parts can be supplied from the U.S., from Canada, or Mexico, tariff-free at the moment, as long as they stay USMCA-compliant. Where the job goes will depend on where we have capacity, experience, and teams available to take on the work, as well, of course, as such were prevalent. We believe that our governments in North America will prioritize a USMCA 2.0 renegotiation to cement in place what I think of as Fortress North America in terms of tariff-free trade, with some amendments, of course, and I believe that will be positive for our business in North America. 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. Please, Jim.

Thanks, Linda, and good afternoon, everyone. As I said last quarter, and what you see on the screen remains a key theme that is keeping our team here at Linnemar grounded in 2025. despite a lot of noise in the external market. So no matter what is happening outside our walls, we must find ways to grow the revenue, grow profit, and grow our team. We've been using these three filters for everything that comes across our desk. And if an issue does not meet one of these, at least we ask ourselves, why do we do it? And just before I begin my segment in market by market commentary, I wanted to highlight a few keys to how we approach continuous improvement in Linamar and how we are driving earnings, particularly in this past quarter. As Linda highlighted, Q1 sales were down due to tough markets, yet Linamar's normalized net earnings per share was up 6.6 margins, while at the consolidated level, improved nearly 75 basis points. We achieved this in what was otherwise a tough quarter due to a few things. One, the stepping stool of success philosophy. The Linnemar stepping stool is our performance management system, balanced scorecard, and assessed the KPI that drives leadership. Cat or cost attack teams is our process for continuous and relentless pursuit of identifying and eliminating waste across the company globally. Three, launch performance is an issue that can make or break a new program during a ramp-up. I would say that LIDLMAR has an industry-leading launch system and launch track record. Even so, earlier this year, we deep-dived lessons learned on a number of launches and continue to hone our global process. The early results from our update are yielding incremental improvement. Every manufacturing company has issues, period. It's how you ensure you can navigate and stay on time, on budget, with excellent quality. And that's another point. Fanatical discipline, world-class quality and delivery to our customers. And number five, lastly, our flexible CNC manufacturing strategy enables us to pivot when market volumes don't live up to the planned program expectations. Lumpy EV market adoption had a refocus of multi-energy solutions by our customers. capacities in our line to new required demand levels. Again, flexibility is a Linamar advantage. Linda already mentioned the dynamics around trade and tariffs we are dealing with. I'll hold off commenting until the Q&A after Dale has walked through our in-depth results. But what I will say is that Linamar team is hard at work to mitigate any increased costs wherever we can, and that we are finding ways to deploy our entrepreneurial culture to create opportunities with the realignment of the supply chains. Now moving on to look at the access or AWP market. Globally, the overall industry was down 34% in the first quarter of 2025 compared to last year. Market declines were felt in both North America and Asia Pacific, with Europe being flat. U.S. non-residential construction is up roughly 4% through the first two months of the year. The Dodge Momentum Index is also up. So there are positive trends to the underlying demand, but AWP volumes have been challenged. Recent industry consolidation in the rental company sector, tariffs, and overall economic headwinds are hampering current AWP demand. We're speaking with our customers to see how much of that demand was just a slower start to the year and who was just simply pushed out to a future quarter. Q2 and Q3 are typically the strong seasonal quarters in the business. Our backlog and booking rates have trended up in the past few weeks, and so we're seeing more positive signals from our customers. Bottom line, again, for Q1, we think it's great to see Skydeck outperform the market and fare better than the overall industry. In AWP, from a new product introduction standpoint, there's exciting news to share here in both scissors and in booms. First, our 19-foot micro scissor launched last year has received an international award for power access due in part to our new e-drive system and for its overall efficiency. Next, our boom line will soon add a hybrid-powered option The rental market is calling for a more quiet, clean, and sustainable access equipment. Our new hybrid rooms deliver with facility of conventional ice power, but now made it to a zero-emissions battery electric mode. The new hybrid rooms join our recently launched fully electric boom lineup, offering rental houses and contractors more options to suit the specific needs of any given job site. As always at Skydeck, we remain committed to delivering world-class products focused around user safety through new and innovative products that provide our customers the best total cost of ownership and certainly a compelling ROI. Next, we'll turn to the agriculture industry volumes. As we mentioned on our last earnings call, our core North American large ag market was in a multi-year down cycle. We noted that commodity prices needed to stabilize and inventory flow-through are required ahead of the next industry upcycle. And that's how 2025 is playing out today. In our primary North American market, industry volumes are down again and double-jizzed for a second year. Through the first three months of 2025, combine retails were, in fact, down 46%. High horsepower tractors were down 19%. Again, by driving market share growth, Linnemar's three core agriculture equipment brands, Macton, Salford, and Borgo, were able to outtake the market. Unit sales through the first three months of the year are down only 8% in aggregate against a weak industry backdrop, some fantastic results by our Linnemar Agricultural Group. As we look ahead for the full year expectation, industry large ag is expected to finish 21%. 2025 down roughly 30% in North America, 5% in Europe, and down 12% globally overall. As we enter 2025, there was a broad expectation that it was going to be the trough in a typical ag market multi-year down cycle, but we'll be watching carefully as farm income remains low and new equipment demand is impacted by a wait-and-see approach by farmers. Many mainline OEMs are focused on moving inventory through the distribution channels this year, and there's some indication that there could be government support coming via incentives for U.S. farmers. There are positive signs for the future as the sector prepares for the next market upcycle, but we'll continue to monitor these trends very closely. Moving on to the mobility segment, the first quarter saw industry vehicle production volumes fall by 5.6 in North America, 6.7 in Europe, with Asia specifically actually gaining over 7%. Industry experts have built in the negative impacts from tariffs into their annual forecast for both 2025 and 2026. We're hopeful those forecasts will now improve slightly. following the transitionary period guidelines laid out by the U.S. administration just late last week. Of course, the devil is in the details, and there's a level of speculation and base assumptions made on tariff impact overall. But for now, the view is full year 25 is expecting an industry decline of 9.3% in North America, a further 3.1% drop in Europe, with Asia mostly flat. Looking specifically at Q1 for Linnemar Mobility, we improved content for VSL North America to 300 and Asia to $11.76. Europe, however, saw a reduction mainly due to lower production volumes, really around EV platforms that the company has content on. All told, global CPV for the first quarter was 84.25, down slightly from the same quarter last year, although right in line where we tracked through overall 2024. So although we can't control macro environment where the volume trade or EV adoption, we can control how we perform for our customers. And I'm excited to share that Linamar has once again received General Motors Supplier of the Year Award. I recently attended the GM ceremony to accept this award that marked the ninth, yes, it's underlined right in my page, the ninth year in a row that Linamar has won this honor. The Linamar team strives to achieve deep customer connections, and we truly value the relationships that we've built over time based on a reputation, a partnership, and executing on those commitments. It's that industry reputation that opens the door to new opportunities during challenging times. I'll highlight a few of the most recent successes in terms of takeover work we've added to new business wins. On our last call, I mentioned we had booked nearly 180 million of new work in the form of takeover contracts from struggling or distressed suppliers. That number has continued to grow with now close to 200 million in annualized sales that we were adding to our launch book. Here you can see a few examples of new programs we've picked up in the last six to eight months, including traditional engine, transmission, mobility work, but also propulsion, agnostic, structural, and chassis content as well. Linnemar's flexible manufacturing strategy, balanced sheet strength, and capacity to invest make us a trusted partner for OEMs when they're experiencing underperformance and see the risk within their current supply base. The Linnemar team has built reputation for executing a timely and welcome solution for the OEMs. With that, I'm going to turn it over to our CFO, Dale, for a more in-depth financial review.