Linamar Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 9 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Linamar Q1 2023 Earnings Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, May 10, 2023. I would now like to turn the conference over to Linda Hasenbroz, please go ahead.

Speaker 1

Thanks so much. Good afternoon, everyone, and welcome to our Q1 conference call. Joining me this afternoon are members of my executive team, Jim Gerald, Dale Schneider, Elliot Berger, Mark Stoddard and members of our corporate IR, marketing, Finance and Legal team. Before I begin, I'll draw your attention to the disclaimer that is currently being broadcast. I'll start off with a review of sales, earnings and content.

Speaker 1

Sales for the quarter were $2,300,000,000 up 29% to last year on recovering markets and supply chains as well as market share growth. Normalized net earnings for the quarter were $121,700,000 and EPS was $1.98 EPS is up 83% over last year on stronger sales and launching business. Our Industrial segment had an excellent quarter with sales in OE significantly up at both MacDon and Skyjack on stronger markets and market share growth. And easing of supply chain issues helped our teams get product out the door. Our Saltford acquisition also played an important role in both sales and earnings growth.

Speaker 1

Pricing increases helped offset higher costs that this segment has been experiencing. The mobility business had a strong quarter on the top line, thanks to covering markets in North America and Europe and strong launch performance. A slowdown in China related to COVID outbreak had a big impact on both sales and earnings for the quarter. Our Mills River Foundry continues to weigh on Mobility segment earnings now that we own business fully and are reporting results at the OEE level versus it being below the line. Notably, cost improvement plans are proceeding well at Mills River and we are seeing improvement every quarter.

Speaker 1

Higher costs continue to drag on results as well, notably energy costs in Europe, Although customer pricing release is helping to offset part of the cost. On the positive side, we do expect to see an improvement In the Mobility segment earnings in Q2 of this year compared to Q1 of this year as China starts to recover. Europe grows on launching business, energy costs start to improve and Mills River of course continues to improve as well. It's great to see the trend upwards in terms of net earning margins that we have been seeing since the low point back in Q4 of 2021. This quarter has been an excellent example of Linamar's diversification strategy paying dividends.

Speaker 1

Having a diverse business with investments in more than one market means market cycles that often do not overlap. When the mobility market is down, often industrial is up and When the industrial market is down, often mobility is up. This is exactly how we have been able to generate consistent, sustainable earnings growth and free cash flow for our shareholders year after year after year. Since 2010, we have delivered 10 years of normalized net earnings growth With 3 years of contraction peppered in there completely due to COVID, our comp on annual growth rate since 2010 has been 14%. We will be delivering double digit earnings growth this year and next year.

Speaker 1

That will take our track record to 80% at 15 years delivering earnings growth to our Shareholders, that is what consistent sustainable growth is and that is what a diverse strategy brings you. We saw another quarter of solid increase in content per vehicle in North America, again hitting a new record level. Launches are a big part of that, As was our Mills River acquisition and vehicles we have high content on being selectively prioritized for builds by our customers. Commercial and Industrial sales were up 53% with solid growth at both Skyjack and MacDon on market growth And market share growth in key products. Salford also played a key role in growing sales in this area.

Speaker 1

CapEx has trended back up to a normal level supporting global launches and growth as expected. CapEx as a percent of sales was 7.1 Exactly in line with the level of spending of 6% to 8% that will support targeted double digit growth. We do expect CapEx to be significantly up this year over last year and at the high end of our normal range. Next year CapEx will grow somewhat again, but still staying in our 6% to 8% range, basically keeping pace with sales growth. We have a long history at Linamar at investing in new leading edge proven technologies to drive efficiency and top and bottom line growth.

Speaker 1

Return for this investment consistently flows in within 2 to 3 years of the investment. Investments have picked up in the last 18 months as we work to launch a significant backlog of business driven by We expect double digit earnings growth this year and next year. Capital asset turnover will grow this year and next year. Return on assets Will grow this year and next year. Return on capital employed will grow this year and next year.

Speaker 1

Return on equity will grow this year and next year. Securing new business and then making prudent capital investment to support those launches is what drives growth and returns and is the sign of a healthy and growing business. Free cash flow was $19,400,000 in the quarter on strong earnings despite heavier CapEx. We have $1,300,000,000 of liquidity available to us, which is also excellent. Our net debt position has remained strong at just 475,000,000 Thanks to continued positive free cash flow.

Speaker 1

Leverage remains very strong at just 0.43x net debt to EBITDA. Our strong balance sheet and liquidity means we have the ability to continue to pursue acquisition opportunities as they arise in a dynamic market and drive even more growth. Let's turn to a quick update on some of the headwinds that we are facing at the moment around High chain issues, energy costs, logistics costs and labor shortages. You can see overall an increasingly positive scorecard With every area of challenge now seeing at least some improvement, energy prices are normalizing in Europe and contracts are slowly following in line With that, supply chain shortages are starting to improve and creating less disruption to our and our customer production schedules. Commodity prices have come off of high seen over the last 18 months.

Speaker 1

We're starting to see a little more availability in labor markets with recent job fairs at historic levels of attendance in some areas. Ship availability is more consistent, although not yet at a capacity to fill all automotive demand. Much of the capacity installed over the last year were not the node sizes used by automotive. It will be another year to year and a half until sufficient automotive size chip Capacity is available. And good news also on the freight front with Asia to pre COVID levels and Europe trending back down as well.

Speaker 1

We aren't yet fully back to normal levels, but we're making good progress. So overall, a reasonably positive scorecard on the challenge side. I'll turn now to our market outlook. Market demand is continuing to look good with growth in most regions and businesses expected this year and next year. Supply chain issues do continue to constrain industry's ability to deliver on that demand, But it does feel a little less volatile than last year.

Speaker 1

Turning to the specific markets, industry experts are predicting growing light vehicle volumes globally this year to $15,000,000 $16,900,000 $48,200,000 vehicles in North America, Europe and Asia, respectively. This represents 5%, 7% and 2% growth. 2024 will see further growth of 2.5% to 3.5% in each region. Industry experts are predicting on highway medium heavy truck volumes to be flat in North America and Europe this year, but up in Asia after a tough couple of years. Next year, we're going to see moderate growth in North America and Europe of up to 5% and again stronger growth in Asia.

Speaker 1

Industry experts are predicting double digit growth in the access market globally this year with North America and Europe expecting high single digit and Asia low double digit. Next year, we'll see further growth of another 5% to 10%. Lastly, the agricultural industry is predicting growth in the combined draper header market this year in mid single digits in North America, but reasonably flat in other parts of the world. The Windrower market will also see single digit growth globally this year, but driving this Time more out of Europe and Australia. There's a positive outlook for market growth in both Tillage and Crop Nutrition equipment this year as well with similar mid single digit growth expected in North America.

Speaker 1

Looking at the access market in more detail, you can see first Strong double digit growth in both North America and Asia with more moderate growth in Europe in the Q1 of the year. All three regions are expecting solid growth this year and more moderate growth in 2024, as I already mentioned. RevPAR company demand for equipment is strong as companies look to counter fleet aging experienced during COVID. Equipment utilization in North America is ahead of 2022 in the 1st 4 months of the year. Utilization levels in Europe are well above 20 22 levels.

Speaker 1

Our backlog at Skyjack is at a record level in dollars and up from last year, thanks to continued solid market demand. Delivery of orders continues to be impacted by supply chain challenges. However, as we work through these issues, we feel confident we can again grow Skyjack in double digits this year and next year. We are, of course, keeping a close eye on potentially shifting market conditions in the event Of an economic slowdown. In the agricultural business, Q1 combine retails in North America were up A huge 117% over prior year and high horsepower tractors were up 11%.

Speaker 1

The order was Up significantly over last year for MacDon and supply chain issues, so still a challenge, are improving and helping the team get product at the door. As noted, we expect to see market growth primarily in North America for combined headers this year. Our current forecast is for double digit growth This year again for MacDon and the same for 2024. Solpurch is seeing a strong backlog in all Products well up over prior year as well. In conjunction with market growth referenced, also mainly in North America, Salford is also predicting double digit growth in 2023 2024.

Speaker 1

Looking at the mobility side, you can see vehicle inventory levels in North America have settled in around 36 or 37 days over the past few months, but are still well below historic levels. Refilling the pipeline with vehicles will still be a major priority for the automakers and will, of course, take some time to get done. And looking at production levels compared to what was forecast at our last conference call back in March, you can see a Slightly stronger Q1 in both Europe and Asia. Q1 ended at 21,100,000 vehicles, up 6% From last year at $19,900,000 Q2 is forecast to be a lot stronger than Q2 of last year at $21,500,000 which is a 13% increase from prior year. The full year as noted is predicting overall growth at 4% over 2022.

Speaker 1

Looking at launches for the mobility business, you'll be pleased to know that we had Another strong quarter in new business wins and once again a very strong quarter for wins in the electrified and propulsion agnostic space. Electric 5 vehicles continue to provide great opportunities for us and are really dramatically shifting the landscape of our mobility business. We had a really solid start to the year in terms of new business wins for battery electric vehicles, hybrid electric vehicles and propulsion agnostic components. Year to date wins as such are nearly 80%. The majority of our mobility sales as soon as 2027 to minimize the concentration of our business at risk as internal combustion vehicles ramp down over the next decade.

Speaker 1

Overall, our launch book has grown now to nearly $4,200,000,000 We are seeing ramping volumes on launching programs, which are predicted to reach 35% to 45% immature levels this year generating incremental sales of $750,000,000 to $850,000,000 we'll see further growth of another incremental $800,000,000 to $900,000,000 next year. These programs are going to peak, as I just noted, at $4,200,000,000 in sales. We saw a small shift of about $25,000,000 of programs moving from launch to production last quarter, which was more than offset by the business wins that we saw. Launching business in conjunction with growing markets will result in double digit sales growth for the mobility segment this year and Next year. So let's turn to a summary of that top line outlook and then look at the bottom line margins and next quarter in a little more detail.

Speaker 1

So with strong markets and market share growth, we are expecting to see double digit growth on the top line in both 2023 2024 for Linamar overall. That's driving from double digit growth at each of Skyjack, our agricultural businesses and our mobility business. Net margins will expand in 2023 on growing sales And significant growth in margins in the Industrial segment, where margins are going to expand back into their normal range. Mobility margins will modestly contract for the year with stronger margins expected in the back half than the first half of the year. This will mean growth in Mobility segment earnings this year and significant double digit growth in Industrial that continued expansion in margins back into our normal range overall driving out of the expansion in margins that we're expecting in both segments.

Speaker 1

This will mean double digit growth in earnings in both segments next year and another year of double digit EPS growth in 2024. We will also see strong positive free cash flow this year and next year, leaving us in an excellent position from which to drive further growth. Looking specifically at Q2, you should expect sales modestly up from Q1 of this year, but meaningful double digit growth from last year. The Mobility segment will see sales modestly up from Q1 of this year, but well up from prior year. Normalized OE will be up in double digits from Q1 of this year, but will not reach Last year's levels, Q2 last year.

Speaker 1

Sequential growth will happen as China starts to recover, as Europe grows on launching business and energy costs starting to improve and Mills River continues to improve. The Industrial segment will See double digit sales growth seasonally up from Q1 of this year and with more significant growth from last year. We will see double digit normalized OE growth meaningfully from Q1 of this year and more significant growth in comparison to last year. As a result, on the overall earnings side in Q2, you can expect meaningful double digit EPS growth to Q1 of this year and more even more significant EPS growth in comparison to Q2 2022. Moving on to an operational update, I'm very excited to announce the launch of a brand new structural component manufacturing facility for Linamar in Welland, Ontario.

Speaker 1

This facility will be a flagship location for our rapidly growing structural casting business and a showcase for the very latest in high pressure die casting technology. The facility will house state of the art gigacasting equipment Capable of producing very large structural parts critical to efficiently lightweighting and simplifying complex assemblies for electrified vehicles. Gigacasting refers to very large 5000 or 6000 plus ton high pressure die cast machine. This equipment is leading edge. In fact, Lindamar will be the 1st supplier in all of North America or Europe to invest in this type of technology.

Speaker 1

We will be installing 36,100 ton presses with the first press expected to be installed in January of next year and production On our first contract starting about a year after that, construction on the facility will be starting immediately. There is an increasing trend of cast aluminum being used in vehicle architectures, particularly battery electric vehicles. Structural aluminum castings offer an alternative to traditional steel stamping and weldments, creating a less complex And more lightweight solution for OEMs. This is particularly important in a battery electric vehicle due to the inefficiencies created by the extremely heavy and bulky battery pack. We're seeing significant interest from our customers in Linamar bringing this capability to the market.

Speaker 1

As mentioned, to date, this size tonnage from a part supplier only exists in Asia and shipping from Asia for a part this size is just not going to happen. We're excited about this new investment, the market leadership it provides Linamar and the opportunities it will bring us in the vehicles of the future. Moving on to new business wins on the mobility side, I'll highlight a few of our more interesting wins this quarter. First, I want to highlight over $110,000,000 in structural component wins for battery electric vehicles, adding to our growing Portfolio of Propulsion Agnostic Structural Components. Production of these components will start next year in both Spain and the United States.

Speaker 1

Secondly, we had a significant win for a battery enclosure that will be used in a new plug in hybrid pick CapTrack launching in 2024 with an annual volume of around 46,000 units. These parts will be produced at one of our locations in France. Lastly, I would like to highlight an additional $111,000,000 for various components that will be used in both battery electric and hybrid Electric vehicles. We will start producing these later this year at various facilities in North America, in Europe and in Asia. Turning to an innovation update, I'll highlight our new full battery electric vehicle demonstrator truck that we announced last week.

Speaker 1

This was a major R and D effort that our Elan team have been working on to build a vehicle that our customers can test drive showcasing Linamar Electric Propulsion Technologies. The pickup truck is a current generation 2,500 Series truck, which was retrofitted with 2 of our This demonstrated vehicle showcases how Linamar's electrified propulsion capabilities are available not only in pass card sizes and medium duty applications, but also in large utility duty Four wheel drive pickup truck applications. Our engineering and sales teams will be visiting the advanced purchasing and engineering departments of our customers so they can So along with several other latest EV technology offerings from Linamar. As mentioned, we exhibited our utility duty Beam Axle. We So showcase our medium duty beam axle beam sorry, e axle, our e matrix battery pack solutions, our flex form Hydrogen fuel cell storage tank and of course, our structural component capabilities.

Speaker 1

We had a lot of traffic in the booth. They were attracted in by our excellent Technologies and they stay to learn all about them. As we've said before, this is an incredibly exciting time in our industry. A technology transition in the market of this magnitude creates significant opportunities for innovative companies like Linamar. Emily, we continue to execute on our global digitization journey with more and more connected machines, data connections and robots Being commissioned in our global plants every day.

Speaker 1

With that, I'm going to turn it over to our CFO, Dale Schneider to lead us through a more in-depth financial review. Over to you, Dale.

Speaker 2

Thank you, Linda, and good afternoon, everyone. As Linda noted, Q1 was a great quarter for sales and earnings growth despite continuation of the supply chain issues impacting Sales and other cost issues further impacting earnings net of any customer recoveries we received in the quarter. Q1 was another positive quarter for cash generation. As a result, we were able to maintain a strong level of liquidity at 1,300,000,000 For the quarter, sales increased 28.9 percent to $2,300,000,000 Earnings are normalized for any 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 gains related balance sheet, which impacts EPS by $0.07 per share.

Speaker 2

Earnings were further normalized for a net loss Recognized in the quarter as we adjusted the accrual for the earn out related to the acquisition of our Mills River facility as a result of the improvements in the outlook since Q4 of 2022. Removing this net loss impacted EPS by $0.06 per share. Net earnings were further normalized in Q1 as a result of a net withholding Taxes paid in the quarter due to the repatriation of cash from our Chinese operations, removing this net loss impacted EPS by $0.09 per share. The total of these three issues impacted EPS by $0.08 per share and as a result normalized EPS for the quarter was $1.98 Normalized operating earnings for the quarter were 175 $8,000,000 This compares to $106,500,000 in Q1 last year, an increase of $69,300,000 or 65.1 percent. Normalized net earnings increased $50,800,000 or 71.7 percent in the quarter to 121,700,000 Fully diluted normalized EPS increased by $0.90 or 83 percent to 1.98 Included in earnings for the quarter was a foreign exchange gain of $5,800,000 which is a result of a 6,000,000 As I mentioned, the net FX gain impacted the quarter's EPS by 0 point $1,000,000 related to the revaluation of operating balances are as a result of a $7,400,000 gain in industrial and a $1,400,000 loss Further looking at the segments, industrial sales increased by 58.9 percent or 216 $8,000,000 to $585,000,000 in the quarter.

Speaker 2

The sales increase for the quarter was primarily due to the higher agricultural sales driven by both Growth in both the global markets and our global market shares for our products. Additionally, as results of the acquisition of Salford last year, the higher access equipment sales driven by the growth also in the global market Our market share growth for certain products in targeted markets. Higher sales prices also achieved in the quarter How to release on our current supply chain, cost pressures and then the positive impact of changes in FX rates from last year. Normalized industrial operating earnings was in Q1 was $84,100,000 was an increase of 84 $1,000,000 over last year to $97,500,000 Primary drivers impacting the earnings were the increased contribution from the strong agricultural equipment volumes, The increased contribution from the higher access equipment sales, the increased margins from the acquisition of Sulfur and the positive impact from the changes in FX rates since last year. These were partially offset by increased SG and A costs that are supporting growth in the segment.

Speaker 2

Turning to Mobility, sales increased by $297,800,000 21.1 percent over Q1 last year to $1,700,000,000 The sales increase in the Q1 was driven by Increased volumes on both launching and certain other high demand programs, cost recoveries achieved received in the quarter from our customers, the positive impact from changes in FX rates since last year and sales impact of fully consolidating Mills River Now that we have 100 percent ownership of it. These were partially offset by the ongoing COVID-nineteen issues in China that is negatively impacting our OEM production. Q1 normalized earnings for mobility were down over last year at $78,300,000 in the quarter. Mobility earnings were impacted by the increased contribution on the higher launch in certain programs volumes, the positive impact and changes in FX rates since last year. These were more than offset though by the reduction Reduced contribution related to lower OEM volumes in China, the impact of consolidating our Mills River facility, The increased labor in utility, materials, freight costs, net recovery and the increased SG and A costs also supported the growth in the segment.

Speaker 2

Returning to the overall Linamar results, the company's gross margin was 300 point $5,000,000 an increase of $102,300,000 compared to last year and this was due to the same factors that drove the segments. COGS amortization expense for the Q1 increased slightly to $115,400,000 compared to Q1 last year. COGS amortization as a percent of sales did decrease to 5% of sales. SG and A Costs increased in the quarter to $124,700,000 from $91,700,000 last year. The increase is primarily the result of the incremental SG and A costs from the acquisition of Salford in our mill service facility, the increased management Finance expenses increased by $12,700,000 since last year, mainly due to the additional interest as a result of the Bank of Canada and U.

Speaker 2

S. Rate U. S. Federal rate hikes that have happened and also due to the increased debt from the acquisitions last year and the share buybacks from last year. The consolidated effective interest rate for Q1 increased to 3.9%.

Speaker 2

Effective tax rate for the Q1 increased to 28.5 Percent compared to last year due to an increase in non deductible expenses compared to last year, the net withholding tax on the repatriation of funds and the unfavorable mix in foreign tax rates. These are partially offset by the decrease in tax expense now that Mills River is fully owned. We are expecting the 2023 full year tax rate excluding the net withholding tax issue in Q1 to be in the range of 24% to 20 6% and higher than the full year 2022 rate. For Q1, the effective tax rate would have been 24.3% if the repatriation of cash from our Chinese operations did not occur. Linamar's cash position was $890,700,000 on March 31, an increase of $30,200,000 compared to December 2022.

Speaker 2

The Q1 generated $181,700,000 of cash from operating activities, which was used primarily to fund CapEx. As a result, the net debt to EBITDA increased to 0.43 times in the quarter from a year ago, mainly due to the acquisitions and share buybacks from last year. Based on our current estimates, we are expecting the 2023 to maintain our strong balance sheet and leverage is expected to remain low. The amount of available credit in our credit facilities was $425,000,000 at the end of the quarter. Our available liquidity at the end of Q1 remained strong at $1,300,000,000 As a result, we currently believe we have sufficient liquidity to satisfy our financial obligations during 2023.

Speaker 2

To recap, sales and earnings for the quarter was a story of improving markets and increasing market share in both segments. The Supply shortages that have been hampering OEM production required to continue to see improvements in adding additional sales in the segments. The supply related cost increases continue to impact the earnings in both segments and Linamar has continued discussions with the customers to see price increases and cost recoveries. Despite these challenges in the quarter, we still maintain a strong level of liquidity of 1,300,000,000 That concludes my commentary. And I'd now like to open it up for questions.

Operator

Thank you. Ladies and gentlemen, we'll now conduct a question and answer session. Okay. And your first question comes from Michael Glen from Raymond James. Michael, please go ahead.

Speaker 3

Hi, good evening. Maybe just to start, I just want to make sure fully understand the margin outlook for the Mobility segment. So Should we view then 1Q margins and I'm thinking of this on a percentage basis, it is a bit of an interim trough and we're going to Continue to move higher from these levels then?

Speaker 1

Yes, that's correct.

Speaker 3

Okay. And then you still work with that longer term 7% to 10% margin for the mobility segment. Do you think given the business mix and where your launch book is, like is there a timeframe? Do you still That's a realistic target, like can you get back there? I'm just trying to understand that the higher end of that range in particular.

Speaker 1

Yes. I mean, we think that it's still a reasonable range and we should be back there within the next 3 years.

Speaker 3

Okay. And then if I'm thinking of that launch book, the $4,200,000,000 launch book, how would you characterize The breakdown of that launch book between larger, more well established OEMs and then smaller start or newer entrants?

Speaker 4

I would say your split is 75%, 80% would be traditional and then 15%, 20%, 25% newer start up companies.

Speaker 3

Okay. And then just my final questions. I know that one of the feedbacks that was given coming out of the Q4, you had a lot of questions surrounding your normal course Sure, Bidd. Any updated thought process surrounding what you might do there?

Speaker 1

Yes. I mean, of course, it's always on the Table, but as we noted back after the Q1, we have quite heavy CapEx year this year. So I think A prudent approach is appropriate at this juncture, but we do look at The possibility of either a dividend increase or an NCIB every quarter with our Board and of course we will continue to Revisit that.

Speaker 3

Okay. Thank you.

Operator

Your next question comes from Peter Sklar from BMO Capital Markets. Peter, please go ahead.

Speaker 5

Okay, good evening. On the mobility segment, in your guidance, like the full year guidance in terms of the margin went from flat to modest contraction. So I'm just wondering like what's gotten a little bit worse in terms of headwinds since you reported Q4? Or is it just Q1 came in a little bit weaker. So when you average it all out, the margin is going to be down slightly.

Speaker 1

Yes, that's exactly it, Peter. Q1 just a little bit weaker on those weak Asia volumes with even a little more than we thought it would be. So Margins, therefore, a little bit weaker, but notably earnings still growing in the mobility segment, thanks to top line growth.

Speaker 5

Okay. Next is on The Industrial segment, you gave some guidance on how it's going to fall out in Q2 in terms of revenue and earnings. So it sounds like it's going to be really Strong, like even stronger. You're guiding for even stronger than Q1, which was just a stunningly profitable quarter. How are Q3 how do you think Q3 and Q4 are going to play out?

Speaker 5

Because normally like from a seasonal perspective, They're weaker than the 1st two quarters and Q4 is weaker than Q3, but it sounds like you can sell anything you can build. And so how do you think those quarters are going to fall out?

Speaker 1

Yes. I mean, you're right. The Seasonal norm is slowing down in Q3 and Q4 somewhat from Q2. Q2 is normally the strongest Quarter. And I think that's still a good expectation because the seasonality Is also to some extent related to shutdowns and that kind of disruption to the business in This summer and again at Christmas time.

Speaker 1

So it's not just all about demand, but you're absolutely right. I mean demand With the backlog that we have in place, thanks to demand, we've got a really good line of sight For the rest of the year in terms of where we're going on sales.

Speaker 4

Yes. I mean, just the backlog, I think, Peter, Linda mentioned, the backlog is like The best we've ever had, right? And so to me, key things that could restrain that if things change in the summer time frame. And secondly, Supply chain issues are leaving, but they're still there, right? They're still persistent.

Speaker 4

So that sort of Challenges some of those outputs as well later in the year.

Speaker 5

Yes. Like this level of earnings you're generating industrial segment, like were you surprised by that? Or was this in line with your plan? I

Speaker 1

mean, it was in line with the Plan, although obviously supply chain issues have been hard to predict. So it's good to see things Improved a little bit in the Q1 and that was quite helpful obviously at being able to get the product out the door.

Speaker 4

Yes. And mix always plays a big role in this business Right. If you're comparing the different product lines in both the Ag or the infrastructure side that if you're getting pulled on one product, it might be more beneficial, Right. So that plays out as well too.

Speaker 1

And the margin level is right in our target zone, right? So This is a level of margin that we've seen before.

Speaker 5

Right. Okay. And then lastly, I just wanted to ask you about this new well and die cast That you're doing, which sounds like it's a big this is going to be a big project for you. Like as you know, To ramp up aluminum die cast facilities is very lengthy and can often be very problematic. And I know you have some But it sounds like these new like very heavy tonnage die Gas machines you're putting in like they've only been done in China, I think is what you're saying.

Speaker 5

They've never been done in Europe or North America. And so Are you a little bit concerned that because these things these diecast plants are very tricky to ramp up and just wondering how you're going to What you're thinking about managing this?

Speaker 1

Yes. Peter, we're the 1st supplier to install this equipment in North America and Europe. We are not 1st company. So some of our OEM customers, automakers themselves have installed capacity in North America and in Europe. So this is not brand new technology for these regions, but it is new technology For the supply base, which I think is notable in terms of the market leadership that it offers us.

Speaker 1

I think that any new facility, particularly as you've pointed out, a casting facility is going to go through a few years of a ramp up launch phase. And this facility is not going to be any different. I also think that We learned a lot from Mills River and that's going to be really helpful in terms of establishing this plant. And as I say, there's great Talent around in North America that have experienced that launching this type of equipment, which obviously we'll be tapping into.

Speaker 4

Yes. So, Peter, we talked about this for about an hour, which we're really excited to do. But this really falls really good into the strategy of our structural parts And growth. And when you think about what this does with the customer side for saving the complexity of parts, weight and all things, it's really A massive thing. As Linda said, with Mills River, if you go back, we were the sort of the North American partner and not really the casting side of this.

Speaker 4

So, I think we have a strong understanding of what went wrong, what went right down there, which we will apply. Our resources have been resourced up. We've hired in people that have been working on gigacastings in the world. We're working in partnership with the press manufacturer, also with tool manufacturers and the customer ultimately that we are connected with. So we feel really positive about this entrance in it because we think we've covered Obviously, you're right.

Speaker 4

There's going to be certainly some challenges underway, right? So, the other thing that we've started to Get ahead of this as we're putting one of these presses on the floor in our Langanville Structural Engineering Company over in France, obviously, and we're going to develop there first. We're going to learn from that and then apply That same tool that's coming over here, which is like 400 coolant lines, just to be give you some specifics here. So we really think we're doing this right.

Speaker 6

And Peter, that first press in Langville will be delivered at the end of the month.

Speaker 5

Okay. And then just lastly, like your guidance for CapEx this year suggests CapEx is going to be at an elevated level around 700,000,000 is a big part of that increase this Welland facility?

Speaker 1

It didn't increase. Our outlook on CapEx is actually identical to the outlook that we had last quarter. Our guidance hasn't changed at all. We Already had the well in plant in our planning at that time. But to answer is that a chunk of that About CapEx for a year?

Speaker 1

For this year, absolutely, it is a big chunk of it.

Speaker 5

Okay. Thank you for your comments.

Speaker 1

Thanks, Peter.

Operator

Your next question comes from Christa Friesen from CIBC Capital Markets. Christa, please go ahead.

Speaker 7

Could you just provide us with a little bit more color around what's going on in China Right now and have you seen sequential improvement as we've entered Q2?

Speaker 1

Yes. I mean, for sure, we felt a pretty significant impact in the Q1 and we are starting to see the market Pick up a little bit as we come into Q2.

Speaker 4

Yes. I think again, Q1, there was roaming downtimes. I mean, in fact, I think we had 4 day weeks, Mark, right? Like it was 4 day weeks from what our President was telling us of Asia today on that. So A lot of issues circulating and it is starting to come back in sort of Q2.

Speaker 4

It won't be fully back to the levels, But then again, Q3, Q4 getting better, right? So it's Q1, I think, was obviously the worst and then we'll see a better Moderate come back through the rest of the year. So we got to watch and see, but that's sort of the outlook right now.

Speaker 7

Thanks. And then we've seen one OEM earlier this year idle their facilities just to keep inventory relatively tight. Are you hearing that on a consistent basis or are you hearing that from any other OEMs at this point?

Speaker 4

No. I mean, it's sort of sporadic. I mean, we've seen some release cuts on different programs, vehicle architectures, but that's sort of As we go, but no other flat line facility that we've seen or forecasting at this point.

Speaker 6

No. And I think that OEM was Playing a little bit of the game because we've seen other OEMs increase their production to compensate for it to take market share.

Speaker 2

But again,

Speaker 4

I'm still saying

Speaker 7

sorry. Sorry, go ahead.

Speaker 1

I was

Speaker 4

just going to say, yes, there's still several Dealing with supply chain issues too, right? So that also has some impact to a lesser extent, but there is impact that does come on and they got to level set everything To sort of get everybody on the same line then.

Speaker 7

Okay, great. And then just on the industrial side of business, Amazing quarter. Was the strength equal between Ag and Skyjack? Or was there one that was really kind of Leading the charge there.

Speaker 1

Yes. We saw great growth out of both the agricultural business and Skyjack. And don't forget the Ag business is growth at MacDon, but also new sales and earnings coming from sulfur. So That's a third factor in there.

Speaker 7

Great. Thank you. Congrats on the good quarter and I'll jump back in the queue.

Speaker 1

Thank you so much.

Operator

Your next question comes from Brian Morrison from TD Securities. Brian, please go ahead.

Speaker 8

Thanks very much. Many of my questions have been asked. But if I can follow-up on that, is the margin profile within ag, is it still exceeding that of the Skyjack?

Speaker 1

Yes.

Speaker 8

Okay, great. And I understand it's going to mobility. I understand the cadence The operating margin improvement throughout the year, if I can just nitpick on Q1, the decline in the operating margin. Can you just maybe rank like in terms of Asian volumes and inflation, launch costs in Mills River, what was the biggest impact to that decline?

Speaker 1

Yes. I mean, for sure, Asia was a big part of that, like the reduction in sales and earnings Out of Asia, Mills River was significant, the unrecovered Cost increases, we got pricing release that not enough to cover the cost increases. So that It would also be a key element.

Speaker 8

Okay. So energy in Europe, Linda, has come down quite substantially over the past X number of months. I'm wondering going forward, do you have hedges in place or is this a tailwind to you and is that baked into your forecast?

Speaker 1

Yes, I mean, we obviously as the prices have come down on the spot market, That has been helpful to some plants that are running right off the spot. Others have contracts in place that will catch up in terms of The energy cost improvement as those contracts fall off and new ones can get put in place. So watching the commodity only is Impactful for any plants that aren't on longer term contracts or hedges. That's why we're playing a little bit of catch up. So we're still saw some higher costs in the Q1, but that should improve it.

Speaker 1

Yes, and Brian,

Speaker 4

the other side on the Commercial side with the customers, we're all trying to just pass these costs along. So the best way is to have mechanisms set up with customers on some of these Commodities, of course, and also energy, right? So, that's still in works with customers and some acceptance is there, It's not. So, you got to sort of work that through too as we tick those off and get a way to resolve that. I mean, both ways, right?

Speaker 4

If it goes up, we get covered. If it goes down, They get covered, right? So, we just want to try and mitigate some of those in a fair fashion with our customers.

Speaker 8

Okay. Thanks very much. And you certainly illustrate the benefit of diversification there. Congratulations.

Speaker 1

Thanks,

Operator

And we have a follow-up question from Michael Glen from Raymond James. Michael, please go ahead.

Speaker 3

I'm just wondering if you could comment on your balance sheet inventory levels with respect to Skyjack. Should we as we go through the rest of the year, should we think about those inventory levels coming down from the Skyjack side?

Speaker 2

Yes, mainly on the inventory issues, not just at Skyjack, but in the ag side is because of supply chain issues. So we are carrying extra inventory to make sure we don't run our parts, but we're also building inventory to get ready for the Ex selling season. So yes, I would expect the inventory levels will come down in the second half.

Speaker 3

And are you able to indicate Like a dollar figure or anything like what that excess inventory number might be right now?

Speaker 1

I wouldn't have an estimate on that.

Speaker 3

Okay. Okay, thanks.

Operator

There are no further questions at this time. I'll turn it back to Linda for closing remarks.

Speaker 1

Okay. Super, thank you. Well, to conclude this evening, I'd like to leave you with 3 key messages. First, we are thrilled To deliver earnings almost double the level of last year, a great shout out to the success of our diversification strategy strategy to allow us to deliver consistent sustainable growth in earnings. Secondly, we're very excited about the investment in Welland for our state of the art Gigacasting Structural Component Facility Critical TO the Future of Electrified Vehicles.

Speaker 1

As the 1st supplier to invest in this equipment in North America, Lindamar will naturally take a market leadership position in this technology. And finally, it's great to see continued gradual improvements in the Supply chain, labor and energy cost challenges that we've been experiencing for some time. Thanks very much everybody and have a great evening.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your

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Earnings Conference Call
Linamar Q1 2023
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