Linamar Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 6, 2024

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to Linamar Q4 2023 Earnings Conference 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, March 6, 2024. I would now like to turn the conference over to Linda Hassenfratz, Executive Chair and CEO of Linamar.

Operator

Please go ahead.

Speaker 1

Thanks so much, and good afternoon, everyone. Welcome to our Q4 conference call. Joining me this afternoon are members of our senior team, Jim Jarrell, Mark Stotter, Dale Schneider, Elliot Berger and Kevin Callahan as well as the members of our corporate IR, marketing, finance and legal teams. Before I begin, I'll draw your attention to the disclaimer currently being broadcast. I'll start off with a high level review of the quarter.

Speaker 1

Q4 was an excellent quarter and a solid finish to an outstanding year. Financially, we saw record results for the year and double digit top and bottom line growth for both the quarter and the year. Strategically, we had some great progress in the quarter with our Mobex acquisition closed and our Bordeaux acquisition announced. Both are solid profitable businesses, which are immediately adding to earnings and both boost proprietary technology we're excited to bring to market and grow. Markets showed good growth last year with more modest growth expected for 2024.

Speaker 1

Market growth last year was amplified by record market share in our mobility business and excellent market share growth in our largest most important product families in our industrial businesses. And on the innovation and new business side, we saw another strong quarter with our strongest quarter of the year on new business and a balance of technology and propulsion areas as new innovations launching in each business. So So let's take a closer look at each of these areas starting with the financial results. Sales for the year hit a new record of 9.7 $3,000,000,000 up 23% last year on solid launches, market share growth, our 2 Mobility Group acquisitions as well as better pricing. Normalized EPS for the year was up 40% to $8.78 which is outstanding and market and margins expanded to 5.6%.

Speaker 1

For the quarter, we also saw double digit top and bottom line growth with sales up 19 percent to $2,450,000,000 and normalized EPS up 23% to $1.98 I think it was particularly notable to see the upward trend in the mobility segment with earnings and margins growing again after a challenging few quarters. Some of the key factors impacting results in the quarter were first an unusually strong quarter for the industrial segment, which normally sees a much bigger dial back in Q4. Normally, we would see Q4 sales drop 30% or more in comparison to Q3, whereas in 2023, we only saw a 10 percent reduction. OE can drop 40% or more Q4 to Q3, whereas this year we saw only an 18% decline to the Q3. MacDon, in particular, had a very strong 4th quarter, the strongest in their history, in fact, which is largely what was moving the dial in that segment.

Speaker 1

Other key factors included launching business in the mobility segment, where total launches for 2023 represented incremental sales of 700,000,000 Also key factors included our 2 Mobility Group acquisitions as well as better pricing to offset higher costs, which was all partially offset by higher SG and A and fixed costs that are supporting that growth. And again, unfavorable changes in FX rates since last year for the mobility segment, which was again a meaningful factor in comparison to prior year in terms of both earnings and margins, mainly related to another significant appreciation of the pay bills. Although Mobility segment earnings saw a solid 7% growth over prior year, if we were to do the analysis on a constant currency basis to last year, the growth would have been in the double digits and we would have seen margin growth prior year as well. It's great to see the continued positive trend in our financial results over the long term. We are back over pre COVID earnings levels and as a full year 2023, and we are on track for a new record level of earnings performance in 2024.

Speaker 1

Turning to balance sheet, we see a similarly positive performance. Our balance sheet has remained consistently strong despite higher acquisition activity and a resumption of more normal CapEx spending after a couple of light spending years during COVID. Net debt is sitting at $1,120,000,000 at the end of Q4, which is 0.85 times EBITDA. Our balance sheet has remained consistently strong and conservative for years. Our goal is to stay under 1.5 times EBITDA on net debt with only brief excursions above such for our various strategic opportunities such as an acquisition and only then if we have great line of sight to rapidly delever under 1.5.

Speaker 1

We do expect leverage to increase to the 1.5 level in Q1 due to the Forgo acquisition, but it is our expectation to be back under one time CBITDA within 12 to 18 months. We saw positive free cash flow in the quarter of 83,100,000 dollars to complete the year in a net positive position. This is our 11th consecutive year of generating positive free cash flow. 2024 will see a more significant level of positive free cash flow driving out of higher earnings and lower CapEx levels. CapEx has continued to run at an elevated level to the significant constraints that we put on spending during COVID.

Speaker 1

CapEx as a percentage of sales was 7.8%, right in line with the normal range of 6% to 8% to drive double digit growth. Turning to strategy and operations, it has certainly been a busy quarter. As noted, we closed one acquisition, our Mobex Casting and Machining business, and we announced another, our Borgo Seating business, complementing our existing short line agricultural equipment product portfolio perfectly. I'd like to take a minute to remind you of the powerful synergistic industrial. The mobility business is very large and global with excellent technology systems and a deep talent pool.

Speaker 1

There are significant growth opportunities for business, which is capital intensive. The industrial business is more regional with a stronger presence in North America and less purchasing power than our mobility segment. That said, they have low CapEx requirements, making them a good generator of cash. They also do an excellent job of managing their various brands of Skyjack, MacDon, Hawthorne and now Borgo and have excellent global growth potential. So here's how it works.

Speaker 1

The Mobility Group helps improve the performance of the industrial group by supplying talent, system expertise and then a global network to enable global growth and importantly, significant purchasing hours to improve profit and cash flow. The industrial group then provides much needed cash for investment to the mobility segment as well as knowledge around effective brand management. It's a unique model, but it works exceptionally well to help us drive strong and consistent profitable growth, positive free cash flow, all the while maintaining a strong balance sheet. Now you don't need to take my word for it that this model drives consistent sustainable results. You only need to look at our track record.

Speaker 1

Year in and year out with very few exceptions, we're delivering top to bottom line growth, the strong majority of those years in double digit as well as free cash flow and double digit returns on capital. Return on capital has actually been in double digits 93% of the last 14 years, every single year that one, that exception being 2020, the peak year of the pandemic. We've generated free cash flow 11 out of the last 14 years and every single year for the last 11 years and expect to again in 2024. That's more than $4,200,000,000 of free cash flow over the last 14 years. Our latest acquisition, Borgo, is a great next step in that diversification strategy.

Speaker 1

Borgo is a technology leader in seeding systems with patented technology that places the seed in the seed bed and fertilizer for soil nutrition adjacent to such to optimize seed performance and field yield. The business generates about $450,000,000 in sales annually and generating an OE level in line with our other industrial businesses. The acquisition, which closed on February 1, will be immediately accretive to earnings. 4th goal completes the picture in terms of our agricultural strategy, complementing our other agricultural businesses perfectly. We now have products that complete the full span of agricultural equipment from field preparation to seeding and planting, crop nutrition, harvest and post harvest.

Speaker 1

I feel like Bordeaux really checked the boxes for our growth strategy in the ag sector. It's another successful short line OEM that does not compete head to head with the big guns in the industry. It is differentiated through technology and has close customer connection. We are very excited to welcome the Borgo team to the Linamar family. Turning to markets and market share, I would say we have had a very successful quarter year once again.

Speaker 1

In the mobility business, we saw 9.5% growth in light vehicle market volumes in 2023 with an expectation of modest growth in North America this year and a flatter outlook globally. We saw solid content per vehicle growth in North America, both from launches and acquisitions and reached record levels of full year content per vehicle in North America and Europe. Markets are flat this year globally, but up in North America. However, our strong launch book is driving double digit sales growth for us in the mobility business. The access market saw high single digit growth in 2023 with more modest growth forecast for 2024 regionally in Europe and Asia and the rest of the world, and a flat global forecast for the market.

Speaker 1

We increased global market share in key products such as our scissor lifts, our largest product family at Skyjack. Despite flat markets, our strong order book is supporting double digit sales growth at Skyjack this year. The agricultural market saw flat market last year with a flat to down outlook this year. We saw excellent market share growth for key products here as well, notably our core combine Draper headers, which is the largest product family at Maxellant. Despite flat markets, our strong order book is supporting double digit sales growth in our Ag business this year.

Speaker 1

You can see here summarized market data for 2024, which again is looking at more modest growth performance in general and some areas of decline. On the mobility side, we're looking for flat production on days inventory at more normalized levels. The big shift this year in this business is the dial back on battery electric vehicles in favor of more traditional internal combustion and hybrid electric models. Linamar's flexible strategy of securing business in every type of propulsion and utilizing flexible equipment that can shift from one product to another is very helpful in this more volatile production environment. More on that in a minute.

Speaker 1

On the asset side, supply chains have allowed order backlogs to moderate, but they remain at historically elevated levels. Industry experts are predicting modest growth in the access market in Europe and Asia this year, but flat expectations globally. North America is expecting modest growth in some products such as the BOOM product, which is a key growth area for us. Our backlog at Skyjack is strong and ahead of historical norms. With stable markets and predicted market share growth, we feel confident we can again grow Skyjack sales in double digits this year.

Speaker 1

We're quite keeping a close eye on potentially shifting market conditions in the event of an economic slowdown. On the agricultural side, industry expectations are for large ag products to be down, but flat markets for the combined draperheader market this year in North America was declined in other parts of the world. The windrow market will also see fairly flat markets globally this year. Nevertheless, the order book remains strong for MacDon. Orders for Combine Breakers, our largest product family, are well ahead of orders at this point last year.

Speaker 1

Our current forecast is for mid to high single digit growth for MacDon this year on the top line. Tillage and crop equipment more aligned to the high horsepower tractor market is also seeing flat to down markets this year on a global basis. Nevertheless, Salford is also seeing solid orders and has had a strong start to the year on shipments, notably in core tillage products. We are also forecasting mid to high single digit growth for sulfur this year. Finally, the order book for our new Borgo business is consistent with historical levels and looking for a stable year in terms of performance.

Speaker 1

As a reminder, this business runs at about $450,000,000 in annual revenue and we acquired it as of February 1 this year. Overall, with the inclusion of Forgo in our ag business, we expect double digit sales growth in 2024 compared to last year. We saw another year of solid market share growth in our mobility business with global concept of vehicle up over last year. Both Europe and North America saw content per vehicle growth on launching business to new record levels for the year. We're also growing market share in key product segments and regions within our industrial segment businesses.

Speaker 1

Here you can see that MacDon's global draper header market share is on a solid upward trend reflecting the continued adoption of the MacDon's Flex Draper technology over legacy auger headers on a global basis. And Skyjack share of the North American boom market continues to progress as well. Many of the same features and advantages that Skyjack's well known scissors offer are carryover into the design of our BOOM product lines. The product reliability, ease of maintenance and total cost of ownership are hallmarks of Skyjack and it's showing in our market share results. Turning to innovation and new business, we've seen another strong quarter in wins for the mobility business.

Speaker 1

The wins are a great balance of product for hybrid electric vehicles, internal combustion and battery electric vehicles in alignment with our strategy to maintain strong content potential and sales exposure to each. In our Access business, our e drive program rollout continues to positive market reaction and in the Ag business, all of our businesses are launching new innovations. Q4 was our strongest quarter of the year for new business wins, topping off a very strong year overall for our mobility business. As noted, we saw wins in a good blend of technologies, propulsion agnostic, as well as powertrain for all of battery electric, hybrid electric and internal combustion vehicles. Some interesting wins in the quarter were for more propulsion agnostic structural components and great wins on the hybrid side as well as differential assembly.

Speaker 1

With respect to our launch book, we are now seeing ramping volumes on launching programs, which are predicted to reach 35% to 45% of mature levels this year, generating incremental sales of $700,000,000 to $900,000,000 Sales of these launching programs last year were 682,000,000 dollars These programs will peak at nearly $3,700,000,000 in sales. Nearly $250,000,000 of programs moved from launch to production last quarter, more than offset by business wins in the quarter. You can see here the split of Linamar's business once we get out to the 20 28 timeframe as a result of those launches was a great blend of propulsion agnostic, which is basically anything for the driveline body and chassis systems, EV powertrain and ICE powertrain driving out of this good mix of business wins. I think this is a good position to be in to weather potentially shifting market adoption of different technologies, have a solid chunk of propulsion agnostic business and a good blend of powertrain for different forms of propulsion. As time goes on, the proportion that is EV powertrain will naturally grow as these vehicles become more prominent.

Speaker 1

In 2028, there will still be plenty of ICE vehicles being produced, hence the heavier ICE powertrain focus in sales at that time. That will shrink over the ensuing 5 years to become more and more hybrid and battery electric and ultimately fuel cell electric powertrain concentration in alignment with the market. Flexibility and a wide range of platform coverage is the name of the game during the next decade as the mobility market transitions. In fact, flexibility is really the key to managing any major transition of technology. No technology adoption will be a straight line.

Speaker 1

There's always going to be ups and downs just as we're seeing now on the EV side with the dial back in the market. At Linamar, we've always believed that our level of flexibility should directly correlate to levels of uncertainty. There will be uncertainty with respect to timing and volumes of different vehicle platforms over the coming years. That means we must be as flexible as possible. We've done that in a few really important ways.

Speaker 1

1st, we've created a product portfolio with equal potential for any type of vehicle propulsion. Next, we've tried to ensure we have content across a wide variety of platforms to optimize sales potential based on market demand. And finally, we've maximized the use of flexible equipment wherever possible to shift capacities between programs based on market demand. We can, in many cases, use the very same equipment for components we're making for electric vehicles as those that we use to make ICE vehicle components and vice versa. This flexibility is key to ensuring we minimize underutilization of assets.

Speaker 1

Also key are the commercial terms we agree to with customers. We must be more commercially astute in terms of contract commitments and expectations than suppliers have typically been in the past with their OEM customers. Be assured that we're doing all of this in order to successfully navigate the coming transition years in the mobility industry. And of course, our growing industrial business continues to help insulate us as well from being true to anyone industry. On the innovation side in mobility, we recently exhibited at the Eurogust Advanced Casting Show in Germany, where we had the chance to really showcase our extensive structural and chassis and propulsion agnostic capabilities and innovations from digit casting to structural and chassis components to battery drain.

Speaker 1

The technology was very well received at the show. Turning to innovations on the industrial side, I'd like to first highlight Skydeck's continued rollout of its new e drive electric scissors. The system eliminates the traditional hydraulic drive units and replaces them with direct drive electric drive motors, offering an eco friendly product with significantly reduced possibilities of hydraulic leaks, ideal for use in indoor settings. As we've outlined in the past, electrification across Skyjack's fleet will be an R and D focus in the coming years. Skyjack now has a total of 10 models that utilize the new eDrive system.

Speaker 1

Next, we see a new product introduction at MacDon, The new FC Series Flex Corn Header was introduced this past December. Recall that corn headers were a legacy Linamar product designed and manufactured in our European facility prior to our MacDon acquisition. The MacDon team has now been able to take the corn header product to the next level by integrating the same flex and ground following capability that MacDon's Flex Draper Head Runner has become famous for. This new FC series demonstrates our ability to continuously innovate in the harvesting segment. And at sulfur, the application portfolio continues to expand with the introduction of its newest chassis mounted spinner spreader.

Speaker 1

The spreader leverages technology and knowledge from current full type designs and can distribute both fertilizer and lime up to 120 feet accurately at variable rates for enhanced crop nutrition. The new models offer a solution to both commercial applicators as well as growers and can be installed on the OEM chassis platform of choice. And lastly, you can get a sense for the kind of advanced seeding technology GORVA was bringing to the agricultural market. The recently announced XP Duo Metering System is an exciting feature that can deliver seed to either 1 or 2 row units, greatly reducing the complexity and cost of a planter. XP Duo is targeted to farmers who operate regions where they primarily feed small grains, but also plant some roll crops.

Speaker 1

They can now use a single piece of Orville equipment in the 3820 Fairlane Coulter drill and frames mounted seeders to not only seed wheat or canola, but also plant row crops like corn and soybean. This is something that traditionally required both the cedar drill and a corn planter and now it can be accomplished with just one implement, a truly innovative solution from GoPro and an example of why their technology leadership is such a great addition to Linamar's agricultural portfolio. Okay, let's turn to a summary of our outlook. As I have already noted, we expect to see double digit top line growth in both our agricultural business and Skyjack and therefore the industrial segment applicable in 2024. We're also expecting to see double digit top line growth in our mobility segment for 2024 based on launches of $700,000,000 to $900,000,000 and current market production expectations.

Speaker 1

Growth in both segments will lead to double digit top line growth for Linamar overall this year. Net margins will expand again in 2024 on growing sales driving mainly out of margin expansion in the mobility business. The Industrial segment will continue to perform in its normal 14% to 18% range, remaining in the top half of that range as we saw in 2023. This will mean strong double digit growth in mobility segment operating earnings this year and another year of double digit operating earnings growth in the industrial segment as well, which of course will drive double digit EPS growth for us overall as well. CapEx will be down in dollars from a very robust twenty 23 level of spending and at the low end of our normal 6% to 8% of sales spending.

Speaker 1

We expect strongly positive free cash flow this year, leaving us in an excellent position from which to drive further growth. Looking specifically at Q1, you should expect double digit top and bottom line growth in comparison to prior year with operating earning margins up versus prior year as well as sequentially. The Mobility segment will see double digit operating earnings growth to prior year and sequentially, thanks to a full quarter for our Mobility Group acquisition, normal seasonal upticks in North America and Europe, launching business and continued improvements in cost and recoveries. I'll note that the EV dial back known today has been considered in this guidance, but is of course the fluid situation that we are keeping an eye on. The industrial segment will see double digit OE growth to prior year and mid to high single digit growth to Q4, thanks to 2 months of forego coupled with some modest growth in our other businesses after that exceptionally strong Q4 modest growth to Q4, I mean.

Speaker 1

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

Operator

Now, we'll go to you, Dale.

Speaker 2

Thank you, Linda, and good afternoon, everyone. As Linda noted, Q4 was an exceptional quarter as we achieved diluted sales and earnings growth. Mobility margins expanded and grew from Q3 levels as expected. Q4 was also another positive quarter for cash generation with strong liquidity coming in at $1,300,000,000 For the quarter, sales increased 19.1 percent to $2,500,000,000 Earnings are normalized for 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 losses to the revaluation of the balance sheet, which impacted EPS by $0.29 per share.

Speaker 2

Normalized operating earnings for the quarter were $191,900,000 This compares to $140,900,000 in Q4 last year, an increase of $51,000,000 or 36.2%. Normalized net earnings increased $22,700,000 or 22.8 percent in the quarter to $122,200,000 Fully diluted normalized EPS increased by 0 point 37 reach $1.98 Including in earnings for the quarter was a foreign exchange loss of $24,800,000 which resulted from a $22,300,000 loss related to the revaluation of operating balances and a $2,500,000 loss due to the revaluation of financing balances. As I mentioned, the net FX impact on the quarter was on EPS was $0.29 From a business segment perspective, the Q4 FX loss of $22,300,000 related to revaluation of operating balances was a result of a $14,700,000 loss in Industrial and a $7,600,000 loss in Mobility. Further looking at the segments, Sodexo sales increased by 19.8 percent or $100,300,000 to reach $607,400,000 in Q4. The sales increase for the quarter was due to the substantial increase in agricultural sales driven by global market share growth on Drapers, which is our primary product family in the ag market.

Speaker 2

A considerable increase in access equipment sales, driven also by global market share growth on our main product of scissors. And finally, we had a positive impact on changes in FX rates since last year. Normalized industrial operating earnings in Q4 increased $45,000,000 or 81.1 percent over last year to reach $100,500,000 dollars The primary drivers impacting industrial earnings were the increased contribution from the significant increase in agricultural volumes and increased contribution from the strong increases in access equipment volumes. These were partially offset by increased SG and A costs that were supporting the growth in the segment. Turning to mobility, sales increased by $293,600,000 or 18 point 9 percent over Q4 last year to $1,800,000,000 The sales increase in the 4th quarter was primarily driven by the additional sales from our Linamar Structures acquisitions in 2023, the increasing volumes on launching in certain mature programs, the positive impact from changes in FX rates from last year and cost recoveries achieved from our customers, which these were partially offset by lower volumes on certain programs that are winding down to end of life.

Speaker 2

Q4 normalized operating earnings for mobility were up over last year at 91,400,000 dollars In the quarter, mobility earnings were impacted by the increased contribution from the higher volumes on both launching and mature programs. The sales related to the acquisitions in 2023, which were partially offset by lower volumes on lending programs, the increased SG and A costs that are supporting the segment's growth and an unfavorable impact at the OE level from changes in FX rates this last year. Returning to the overall LENR results. The company's gross margin was $320,200,000 an increase of $71,400,000 compared to last year, and this is due to the same factors that drove the segment's results. Cost of goods sold and amortization expense for the 4th quarter increased to $135,800,000 compared to Q4 last year, mainly due to the Linamar Structures acquisitions in addition to launching programs.

Speaker 2

COGS amortization as a percent of sales though remained flat 5.5%. Selling, general and administration costs increased in the quarter to 131 $500,000 from $110,100,000 last year. This increase is primarily the result of the increased management sales costs supporting the overall growth in addition to the incremental SG and A costs from the Lindmer Structures acquisition. Financing expenses increased $13,300,000 since last year, primarily due to the private placement notes issued in June 20 23 to fund the Linamar Structures acquisition and additional interest expense due to the Bank of Canada and the U. S.

Speaker 2

Fed rates that increased since last year. These were partially offset though by decreased average bank debt levels since Q4 last year. The consolidated effective interest rate for Q4 was 4.6%. Effective tax rate for the Q4 increased to 28% compared to last year. This is due to a decreased benefit from the utilization of unrecorded deferred assets compared to last year, a less favorable mix of foreign tax rates, which were partially offset by a decrease in non deductible expenses compared to last year.

Speaker 2

The 2023 full year effective tax rate excluding the net withholding tax in Q1 and Q2 related to the dividends received from our China operations, was 25.6% and was within our expected range of 24% to 26%. For 2024, the full year effective tax rate is expected to be in the same range of 24% to 26% and is currently expected to be less than our full year 2023 rate. Lennar Mar's cash position was $653,300,000 as of December 31, a decrease of $207,200,000 compared to last year. The 4th quarter generated $276,400,000 in cash from operating activities being used primarily to fund the Q4 CapEx and the Q4 acquisition of MobEx. As a result, net debt to EBITDA increased slightly to 0.85x in the quarter from a year ago, mainly due to the acquisitions in 2023.

Speaker 2

Based on our current estimates, we're expecting 2024 to maintain our strong balance sheet and leverage is expected to remain low. The amount of available credit on our credit facilities was 600 $68,400,000 at the end of the quarter. Our available liquidity at the end of Q4 remained strong at the 1,300,000,000 dollars As a result, we currently believe we have sufficient liquidity to satisfy our financial obligations throughout 2024. To recap, sales and earnings for the quarter was a story of improving markets and increasing market share in both segments, which drove double digit sales growth and EPS growth. The adjusted segment grew market share and sales significantly.

Speaker 2

Mobility results were solid with double digit sales growth over last year in addition to expanding margins since Q3 as we planned. Additionally, Q4 had solid free cash flow generation, and we will still be able to maintain our strong liquidity at $1,300,000,000 despite the acquisition. It was a great quarter for sales growth, earnings performance and cash generation. That concludes my commentary, and I'd now like to open up for questions.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Your first question comes from Krista Friesen from CIBC. Your line is now open.

Speaker 3

Hi, thanks for taking my question and congrats on the good quarter. I was wondering if you could just expand a little bit more on the Industrial division, very solid performance out of both the Access Equipment and ag, it sounds like. Even if you can just speak about the market share gains, where those are happening geographically and if you're also seeing gains kind of as you expand your product lines as well?

Speaker 1

Yes, sure. We did have quite a strong quarter. As I was mentioning in my formal comments, we would normally see Q4 dialing back from Q3 in a fairly significant way. It is the lowest quarter seasonally for all of our businesses. We would often see as much as 30% decline, but we actually only saw about a 10% decline in sales compared to the Q3.

Speaker 1

We are seeing global market share growth in our combined Draper product, which is great to see. That has been a big driver of MacDon's performance.

Speaker 3

Thanks. And I was just wondering if you can just touch on the CapEx for this year. I believe previously you had been guiding to the normal range And now you're guiding to the low end of normal range. Has something changed there in your CapEx expectation?

Speaker 1

No, I was guiding to normal range. I'm still guiding to normal range. I'm just giving you a little more granularity to say it will be a little more closer to the bottom end of that range. And it will be down dollar wise from this year, but still in that 6% to 8%.

Speaker 4

I think as well just what Linda said in her comments is some of the EV dial back, right, is also we're watching that and obviously not spending where we don't need to.

Speaker 1

Yes. Good point.

Speaker 3

Okay, great. And if I can just ask one last one. How are the conversations going with the OEMs this year in terms of pricing? Obviously, they have some pressures with some of their labor contracts that they signed. How are you finding your conversations with them?

Speaker 4

Well, I would say that we have very good relationships with our customers, but certainly their view as you just cited is the labor hits them pretty big and they're looking to try and go back to times where you're giving annual productivity and really working on those sides. But I think each customer is unique in what we're dealing with. But certainly, the conversations go on. And any areas that we need to mitigate, we're asking for the cost impact to get relief as well.

Speaker 3

Thanks. Congrats on the quarter. I'll jump back in the queue.

Speaker 1

Thank you.

Operator

Your next question comes from Tammy Chen from BMO. Your line is now open.

Speaker 1

Good afternoon.

Speaker 5

Sorry, can you hear me now?

Speaker 1

Yes, that's better. Thanks.

Speaker 5

Okay, perfect. So my first question is for the Mobility segment, as I recall in Q3, there happened this unusual negative FX impact. And Linda, I think you said without it, based on your commentary describing that, I think the Q3 margin for mobility might have been closer to 5%. And I think for this quarter, right, you've reported just under 5%, so flattish sequentially. Is that the right way to think about it, stripping out the unusual items?

Speaker 5

Or is that not the way to think about

Speaker 1

it? It's not the way to think about it because when I'm citing constant currency, it's in comparison to the prior year quarter. So if you're looking at Q3 'twenty three compared to Q3 'twenty two, that's got a different comparison in terms of currency changes than looking at Q4 'twenty three compared to Q4 'twenty two. So if you're adjusting out that to get back to a constant currency to Q3 'twenty 2, then you can't now be comparing that to Q4 'twenty three, if you know what I mean. Okay.

Speaker 1

I think I know

Speaker 5

what you mean. What I'm trying to get at is the underlying business did see some good margin improvement, I guess, sequentially. Is that fair to say?

Speaker 1

Yes. I would say that in both Q3 and Q4, our margins were well under stated based on the currency impact in comparison to prior year. So we did see sort of unusual currency fluctuations like this quarter we saw the peso appreciate pretty significantly against both the Canadian dollar and the U. S. Dollar.

Speaker 1

So that impacted us considerably from a margin perspective. So you're absolutely right. The underlying business is performing more strongly than the margins would suggest.

Speaker 5

Okay. And for 2024, I noticed for your guidance on mobility, you've raised the OE dollar growth commentary. But I'm curious about margin, because there's just some puts and takes, right? Because as you had alluded to, industry production is expected to be fairly flat this year. There's the EV dynamic.

Speaker 5

In terms of margin expansion, because that's what you're guiding for, I'm just curious now versus before in the context of production and EV expectations where they are, like has that expectation of margin expansion this year come down a bit or still the same? Thanks.

Speaker 1

Yes. I mean, obviously, it's going to fluctuate around a little bit, but honestly, it's not totally different to what we were forecasting before. And I think importantly, dramatically higher than what we saw in 2023. So we are expecting to see some good margin expansion in our mobility business in 2024 compared to 2023, and I think that's the key takeaway.

Speaker 5

Which is impressive considering the industry backdrop. And so are you attributing that to this maturing of a number of your new program launches?

Speaker 1

That's part of it for sure. I mean, we're continuing to launch a pretty significant book of business. So that is certainly helping. Continued improvements on the cost side is helping as well. So it's a few different factors.

Speaker 5

Okay. Thank you.

Operator

Your next question comes from Brian Morrison from TD Cowen. Your line is now open.

Speaker 6

Yes, thanks very much. And I echo the good quarter comments. I wanted to

Operator

just dive down. If FX

Speaker 6

is still a headwind in Q4, what was the operational improvements that drove the sequential margin improvement? And I guess to take it one step further, I hear you that you're going improve operating margins next year. What does it take to get back to 7% to 10%? Is it volumes? Is it maturing launches, maturing acquisitions, cost recovery?

Speaker 6

What drives you back there and when can that happen?

Speaker 1

Yes. I mean, it's all of those things that you've talked about. So maturing business from the launch side, continued cost improvement, the mix of business that we see coming, we absolutely believe we'll be back in our normal 7% to 10% range within the next couple of years.

Speaker 4

I would also, Brian, say, like supplier stabilization globally, it's still fragile in a lot of areas. And certainly labor instability is another factor. And of course, the cost recovery side is always critical because this instability is driving cost and uncertainty and risk.

Speaker 6

Right. And sorry, just to go back. So what did drive outside of FX? What drove the 50 basis points of margin improvement this quarter then sequentially?

Speaker 1

I mean, more of the same, right? I mean, just more programs coming online. We had our acquisition come into play for a small portion of the quarter and continued improvements on the cost side.

Speaker 6

Okay. The acquisitions were margin accretive then?

Speaker 1

Yes.

Speaker 6

Okay. Can you just run through Linda, maybe on that note, can you just run through through Girish Shiloh, MobEx and I realize it's early, but the initial finding with Virgo, how they're performing relative to your pre acquisition expectations?

Speaker 4

Well, I can walk you through for sure, Brian. So the MOVEX, I would say, is performing right around where we had anticipated. The Dura acquisition from a performance operational side is excellent, but the volumes are dialed back just based off the EV nature of that business. And Bordeaux from February 1 to today, excellent so far, but we're right into it. But again, excellent technology, excellent management team there.

Speaker 4

The transition has gone very well. As you know, when we do an acquisition, we set up a very detailed integration plan with a group of people. And at Borgo, that's well underway. And I think the other thing for those overall businesses, we've created inside Linamar Linamar Ag Operating Group, which basically is the group that sort of controls and operates those 3 businesses separately because we have customer facing brands. So I would say in each case with the Borco right on track with MobEx right on track and with the Dura side, probably the volumes is the key issue.

Operator

Okay.

Speaker 6

And Jim, maybe just one follow-up to that. I realize you guys have been very successful being flexible to utilize your equipment for different programs. With the threat of EV volumes coming down, should we be a little bit cautious with respect to margin improvement if volumes come down substantially? Or are you able to be quite seamless with your flexibility?

Speaker 4

It's going to it's I think it's pretty seamless for us just because what Linda said, right, if we're not doing EV, we're doing ICE. And as you guys know, we've been very, very bullish on being agnostic and flexible like a lot of companies baked in and said, let's go all in on EV. I think we've been really clear in the market, really clear with our customers. You've got to do both. Couple of good examples too, Brian, flexible equipment, Linda mentioned it.

Speaker 4

So in the last 2 months, we've seen EV dial back on certain customers. We've been able to take gear equipment and cross it over into a hybrid production side, so utilization. And the other thing that was really excellent as well, which you'll see in mobility to industrial is there is some dial back on some EV and we had welders, seamers and things like that that we're able to move from the mobility side over into the industrial side to do fabrication type work. So again, I think our way, I think, and just being sort of agnostic and flexible and nimble is key for the next few years.

Speaker 1

Yes, I totally agree. And I would say that like two factors there, right, the flexibility of the equipment, as Jim just described, which is really important, but also the fact that we have content in a variety of platforms. And I think that was a really important thing that Jim just mentioned as well that your EV is softening up, but at the same time, your ICE projects and hybrid projects are getting more volume. So we're certainly seeing that with some pretty robust volumes on more traditional technology.

Speaker 2

Yes. I would also add to that is as the mix shifts, you're moving, launching equipment from launching EV programs most likely to mature powertrain programs, which are more profitable through that mature margin.

Speaker 1

Yes. Good point.

Speaker 6

Yes. Good point, Dale. Dale, is the pro form a Virgo leverage, is it 1.3 times at year end? And I think you said 25 times as your leverage. Is it 1.3 pro form a Virgo?

Speaker 2

We're expecting by end of Q3 to be our Q1 to be at 1.5 versus where we are today. But like Linda commented, we should quickly delever Plata under 1 in the next 12 to 18 months. So just like all the other acquisitions like Acton and Montipe before that quickly delever.

Speaker 6

All right. Well done. Thanks for the color.

Operator

There are no further questions at this time. Linda, please continue.

Speaker 1

Great. Thank you so much. Well, to conclude this evening, I'd like to leave you as always with 3 key messages. First, we're thrilled to deliver another quarter and another year of double digit top and bottom line growth as well as margin expansion. Secondly, and we didn't talk much about this, but it's great to see both return on equity and return on capital employed increasing, a continued positive trend since lows that we saw in 2020.

Speaker 1

And finally, we're excited to welcome another acquisition to the Linamar family with Bordeaux and its solid seeding technology completing our full line of agricultural short line equipment. Thanks everybody and have a great evening.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.

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Earnings Conference Call
Linamar Q4 2023
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